The demand from of food service industry for food has been strong and growing in the past three years attributable to increasing demand primarily from independent and local restaurants while the demand from chain restaurant may be recovering in 2018. Increased demand improved distributors’ profitability ( it is particularly true for bigger companies) benefiting from favourable changes in food service industry.

 

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Demand for food distribution from food service industry has increased. This is a more apparent trend as indicated by major food distributors in this sector, which present about 3-6% annual growth (volume counts) in the past four years while the growth may be slowing down.
• The most increase in demand from food service industry is from independent restaurants as indicated by data from distributors who focus on independent restaurants’ demand for speciality food. Demand from chain restaurants still keeps weak while the downward trend may be reverting.
• Benefiting from their economy of scale, high efficiency, and ability to provide value-added service in management of food to individual restaurants, bigger distributors in this sector seem to have better performance in terms of profitability and sales.
• It seems that companies of specialty food generally have had better performance in terms of growth in volume counts than broad line companies.

 

Causes behind the trend

• Macro economy and demographic factors are always behind the general growth in consumption of food and services that food services provide, factors including low unemployment and increasing disposal income.

  People’s taste and preference and the increasing purchasing power resulted from accumulated wealthy and increased disposable income play a role in the process of traffic shifting to independent restaurants from chain restaurants.

 

Industry Future

• The accelerating recovery of economy since recession will continue to drive the growth in food service industry in terms of newly added number of restaurants and volumes of food, which will bring more case volumes to distributors.

  Independent and more expensive restaurants may have an opportunity to grow faster than chain restaurants and may be able to contribute more in future increases in case volumes.

  More value added service and management to small customers may be the key for current distributors to win higher than average margins in the future.

General Financial Performance of Companies In the Sector

This is a sector with intensive competition and highly market concentration that enables companies to take advantage of economy of scales and supply chain efficiency.

It seems the demand from food service in US market has been strong and growing in the past four years as indicated by our data of case volumes (increased at annual average rate 3%) but there is a signal indicating that the growth may be slowing down since 2018. It seems the increase has been driven mainly by the recent recovery of independent local restaurants sector and its increased merger& acquisition activities. Data indicate that demand from chain restaurants presented downward trend in 2015-2017 and played less important roles in generating profits for companies since they provide usually smaller gross margins compared with serving for local independent restaurants.

Benefiting from strong demand from food services and improved gross margins, companies have experienced increase in their profits while the volatile supply price of food, which are not easy to be passed on to customers.

A typical gross margin for companies in this sector is around 19% with around 15% SG&A spending as percentage of sales. Some relatively smaller distributor has much lower gross margin ( around 13%) with less spending on SG&A as percentage of sales of 12%. It seems economy sales and the relative efficient matter in companies’ margins. Therefore, their operating margins usually vary from 1.5% (smaller company) to 4%.

According our analysis, there is a large span between companies’ enterprise price/adjusted EBI from 27with interest/EBITDA ratio of 15%. 

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