Sysco’s Cost Advantage and Growth Strategy Are Driving Impressive Market Share Gains

Business Strategy & Outlook

The Sysco possesses a narrow moat, rooted in its cost advantages. The firm benefits from lower distribution cost given its closer proximity to customers, complemented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding pracademic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (3% of pracademic sales) and a 10% increase in independent restaurant customers.

In 2021, Sysco laid out its three-year road map, termed “recipe for growth” which will be funded by the elimination of $750 million in operating expenses between fiscals 2021 and 2024. The plan should allow Sysco to grow 1.5 times faster than the overall food-service market by fiscal 2024. Sysco is investing to eliminate customer pain points by removing customer minimum order sizes while maintaining delivery frequency and lengthening payment terms. It improved its CRM tool, which now uses data analytics to enhance prospecting, rolled out new sales incentives and sales leadership, and is launching an automated pricing tool, which should sharpen its competitive pricing while freeing up time for sales reps to pursue more value-added activities, such as securing new business. Sysco also developed the industry’s first customized marketing tool, harnessing its significant customer data to generate tailored messaging that should resonate with each customer, a tool that has been increasing Sysco’s share of wallet. Further, Sysco has switched to a team-based sales approach, with product specialists that should help drive increased adoption of Sysco’s specialized product categories such as produce, fresh meats, and seafood. Lastly, Sysco is launching teams that specialize in various cuisines (Italian, Asian, Mexican) that should drive market share gains in ethnic restaurants. Looking abroad, Sysco has a new leadership team in place for its international operations, increasing the confidence that execution will improve.

Financial Strengths

The Sysco’s solid balance sheet, with $4 billion of cash and available liquidity (as of March) relative to $11 billion in total debt, positions the firm well to endure the pandemic. Sysco has a consistent track record of annual dividend increases, even during the 2008-09 recession and the pandemic. A 5%-10% annual increases each year the forecast, maintaining its target of a 50%-60% payout ratio.

Sysco has historically operated with low leverage, generally reporting net debt/adjusted EBITDA of less than 2 times. Leverage increased to 2.3 times after the fiscal 2017 $3.1 billion Brakes acquisition, and above 3 times in fiscals 2020 and 2021, given the pandemic. But the leverage will fall back below 2 times by fiscal 2024, given debt paydown and recovering EBITDA. Calls for free cash flow averaging 3% of sales annually over the next five years. In May 2021, Sysco shifted its priorities for cash in order to support its new Recipe for Growth strategy. It’s new priorities are capital expenditures, acquisitions, debt reduction when leverage is above 2 times, dividends, and opportunistic share repurchase. Its previous priorities were capital expenditures, dividend growth, acquisitions, debt reduction, and share repurchases. In fiscal 2023-24, as it invests to support accelerated growth, Sysco should spend 1.4% of revenue on capital expenditures, falling to 1.1% thereafter. In fiscal 2021 Sysco completed the $714 million acquisition of Greco and Sons and the $500 million acquisition of The Coastal Companies.To invest about $100 million to $200 million annually on acquisitions thereafter. Finally, the model $500 million-$600 million in annual expenditures to buyback about 1% of outstanding shares annually. A prudent use of cash when shares trade below the assessment of intrinsic value.

Bulls Say

As Sysco’s competitive advantage centers on its position as the low-cost leader, Sysco should be able to increase market share in its home turf over time.

Sysco has gained material market share during the pandemic, allowing it to emerge a stronger competitor.

The company is performing well under the leadership of CEO Kevin Hourican (in place since 2020), with his Recipe for Growth strategy driving improved sales growth and profit margins.

Company Description

Sysco is the largest U.S. food-service distributor, boasting 17% market share of the highly fragmented food-service distribution industry. Sysco distributes over 400,000 food and nonfood products to restaurants (66% of revenue), healthcare facilities (9%), education and government buildings (8%), travel and leisure (5%), and other locations (14%) where individuals consume away-from-home meals. In fiscal 2021, 83% of the firm’s revenue was U.S.-based, with 8% from Canada, 3% from the U.K., 2% from France, and 4% other.

(Source: Morningstar)

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