Confronted by the economic slowdown and rising prices, foodservice distributors find themselves caught in the middle of the food system value chain—pressured by both suppliers and buyers.
Manufacturers increasingly are passing on higher commodity and product prices, while restaurant operators, responding to consumer demands, are adjusting their buying habits in favor of lower-priced food items. At the same time, foodservice distributors face increased competition from new and stronger distribution organizations.
In October, 2008, Chicago-based West Monroe Partners conducted an analysis of the foodservice distribution industry using publicly available research and information. The results spotlight the key trends affecting foodservice distributors’ operations today and the opportunities they have to cut costs, improve productivity, and increase competitiveness. In particular, foodservice distributors have a significant opportunity to counteract market pressures and improve operations by focusing on one of their largest expenditures—labor.
FOODSERVICE DISTRIBUTION INDUSTRY TODAY
Three primary types of organizations comprise the $225 billion foodservice distribution industry:
• Broadline foodservice distributors—companies that traditionally have purchased a wide range of food products from manufacturers. Most broadline distributors offer value-added services designed to meet the needs of single-store restaurants and small chains.
• Specialty distributors—companies that do not stock a wide range of products; instead, they operate in niche markets in which it is necessary to have specialized knowledge about the product(s) handled or the operator(s) served.
• System distributors—companies that serve a customer base consisting primarily of chain restaurants with centralized purchasing and menu development functions; thus, these customers typically don’t require specialized services.
The industry is relatively concentrated, with the top 20 organizations accounting for 34 percent of revenues in 2007.
Total foodservice distribution revenues declined in 2007, down three percent from the year before. Broadline distributors, however, have grown faster than the market, as depicted below. Supported by innovations and effective marketing efforts, leading broadline foodservice wholesalers/distributors—the 36 largest companies in this category—registered a consistently higher growth rate compared to the food services industry as a whole during the period from 2002 to 2006.
CHANGING ENVIRONMENT SQUEEZES MARGINS
West Monroe Partners’ analysis confirmed that a variety of trends—from shifting consumer tastes and value demands, to rising food prices, to increased competition from new and larger competitors—are forcing foodservice distributors to adapt their operations.
At the same time, the weakening economy has eroded consumer confidence, a factor that may interrupt what has been a positive trend for foodservice distributors—steady, long-term growth in consumer spending on food away from home. According to a Booz & Co. survey, more than one third of consumers have made substantial cutbacks in frequent purchases during 2008.
Altogether, these trends have had a marked effect on foodservice distributors’ margins. Some major industry players have witnessed double-digit declines in gross profit margin over the past several years.
Evolving consumer spending habits and tastes are driving new product and competitive strategies.
Food expenditures in the United States have increased steadily since 1990 along with growth in the country’s population; however, per capita food expenditures have grown at a much slower rate. While food spending is up, consumers are spending less of their disposable income on food. Food expenditure as a share of disposable personal income declined from 12.6 percent in 1990 to 11.4 percent in 2007.
Over the same period, consumers have shown a growing preference for eating out, effectively closing the gap between spending on food consumed in the home versus food consumed away from home.