April 6, 2022

By:  Gary Karp, Barry Friends, Bob Goldin and Rob Veidenheimer

Situation

2022 foodservice distribution M&A has started with Ben E Keith acquiring Florida Foodservice and a merger of Troyer Foods and Stanz Foodservice.  These come on the heels of a very active 2021 with 30+ deals having been completed.

While still highly fragmented, foodservice distribution is becoming more and more concentrated at the top, with acquisition being a key growth and positioning driver.

In their recently released “M&A is Back”, Keiter Advisers identified the significant bounce back in the number of distributor acquisitions in 2021.

Strategic Drivers

The acquiring companies, which also include some private equity firms, are following one or more important major growth and enhancement strategic themes.

These strategic themes include geographic expansion, as was the case in the most recent Ben E Keith acquisition of Florida Foodservice and US Foods acquisition of five Food Service of America companies within Services Group of America. Another strategic driver is specialty category expansion as was the case with Sysco’s acquisition of Italian specialist Greco Foods.  Also, broadline distributors have long been strengthening their category penetration in center of the plate and produce, as was the case with Sysco’s acquisitions of produce distributors Coastal Foods and Paragon.  Interest in penetrating these categories is due to operator interest/importance and category dollar value. 

Still another strategy is segment penetration as was the case with Performance Food Group’s acquisitions of Eby-Brown and Core-Mark further strengthening their C-store and specialty segment penetration. 

Impact

Continued foodservice distributor M&A and the resulting sales and volume concentration has had and will have far reaching implications for distributors, operators and suppliers alike.  

Keeping in mind that independent operators are the “margin sweet spots” for distributors and suppliers alike, these growth strategies will benefit distributors in many ways including share growth, drop size economics (lest we forget the economics of the incremental” golden case”) and stronger relationships.

Operators will have the option to move closer to a one stop shop approach in an effort ensure more secure supply sources and potentially more attractive pricing.

Suppliers will likely seek to further refine/improve their strategic positioning on “go to market” efforts via updating key tactics such as branding, marketing, trade spend, sales and more.   

Group Purchasing Organizations (GPOs), which have agreements/contracts with distributors, will benefit by potentially having access to more operators in target segments.

Independent distributors in competition with those major distributors that are concentrating the industry will likely continue their efforts to identify their strategic counter-position by differentiating on one or more factors important to operators in their geographic markets such as service, specialty SKUs, drop size minimums or marketing.  They are also likely to increase their scale via M&A.

Expectations

As the industry continues to mature and supply chain issues “normalize”, Pentallect expects the pace of distributors acquisitions to increase.   Further, given the sector size and relative stability, Pentallect anticipates greater interest from private equity/financial firms.

 The big three public distributors, Sysco, Performance Food Group and US Foods will likely focus on “horizontal expansion” to increase target segment and category growth.

Regional/mid-size distributors will likely seek to get larger and the potential of larger regional distributors to create new alliances or tighten their existing alliances. Also, it is likely that independent distributors will take even greater advantage of services offered by the distributor co-ops to which they belong. 

Trading Partner Question 

How are you addressing the continuing pace of concentration?  Will you react day to day or seek an enhanced strategic approach to your market position and opportunities?

To discuss this or any other strategic topic please contact us.