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

It seems the demand from independent restaurant for specialty food in US market has been strong and growing in the past several years as indicated by our data of case volumes (increased at annual rate 5-10%) and 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 presents downward trend in the past three years and plays less important roles in generating profits for companies since they provide usually smaller gross margins compared with serving for local independent restaurants.

A typical gross margin for companies in this sector is around 25% with around 22% SG&A spending as percentage of sales. The operating margin usually is around 3-4%.

According our analysis, the typical companies’ enterprise price/adjusted EBI is 46 with interest/EBITDA ratio of 37%. 

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