The food retail and distribution segment has been growing due to the increased preference of consumers towards take out foods. The foodservice market in the United States and Canada is ~$225 billion. According to industry sources, the foodservice, or food-away-from-home, market represents approximately 46% of the total dollars spent on food purchases made at the consumer level in US. This segment is highly fragmented, and is comprised of ~15,000 companies. This sector is characterized by high inventory turnovers with relatively low profit margins and is susceptible to changes in economic activity. During the recent economic recession, many companies faced declining sales and lower margins as consumers preferred to stay at home rather at eat out. (Source: company annual report)
SYSCO Corporation (NYSE:SYY) is the largest North American distributor of food and related products primarily to the foodservice or food-away-from-home industry. It serves ~17.5% of this market (as per company’s annual report). The company provides products and related services to approximately 400,000 customers, including restaurants (63% of FY11 sales), healthcare and educational facilities (16%), lodging establishments (5%) and other foodservice customers (16%).
Just like its motto “Good things come from SYSCO Corporation (NYSE:SYY),” in comparison with its competitors the company does provide a good investment opportunity. Let us take a look at Sysco vs. its two competitors United Natural Foods, Inc. (NASDAQ:UNFI) and Core-Mark Holding Company, Inc. (NASDAQ:CORE)
- United Natural Foods, Inc. (NASDAQ:UNFI) is a distributor of natural, organic and specialty foods and non-food products in the United States and Canada, and operates 26 distribution centers.
- Core-Mark Holding Company, Inc. (NASDAQ:CORE) is a marketer of fresh and supply solutions to the convenience retail industry in North America, providing sales and marketing, distribution, and logistics services to customer locations across the United States and Canada
Sysco is the larger food service distribution company, with average annual sales of $39 billion, vs. its peers United Natural Foods, Inc. (NASDAQ:UNFI) and Core-Mark Holding Company, Inc. (NASDAQ:CORE) with sales of $4 billion and $7 billion, respectively. However, Sysco’s sales have been slowing down vs. its competitors. From 2007-2011, SYSCO Corporation (NYSE:SYY) posted sales CAGR of only 3%, vs. 9% at United Natural Foods and 8% at Core-Mark.
But, on the operating margin front, Sysco scores with a 4.5%, vs. 3% from United Natural Foods, Inc. (NASDAQ:UNFI) and 0.56% by Core-Mark Holding Company, Inc. (NASDAQ:CORE). Sysco also gains when it comes to its size, which gives it a huge advantage when negotiating with its suppliers. Furthermore, it is largely diversified, as it doesn’t supply only to restaurants but also to schools and hospitals. On the other hand, United Natural Foods face product concentration as it supplies organic and specialty food products.
As an investor, my primary parameter for an investment would be a company’s dividend policy. Here again, Sysco wins. Sysco started paying out dividends in 1965, and since then has slowly but certainly increased it. Sysco has a dividend yield of 3.3% (5-year average dividend yield is 3.6%), with a payout ratio of 59%.