Summary
Foodservice distributor Sysco’s (NYSE: SYY) fourth quarter earnings results for its fiscal 2009 reflect the current challenging environment in the foodservice industry, as distributors battle negative bad debt trends and lower case volumes, forcing companies to focus intensively on improved productivity and strict control of operating expenses.
Analysis
Sysco’s recent announcement of its fourth quarter fiscal 2009 results (http://syy.client.shareholder.com/releasedetail.cfm?ReleaseID=402265) provide a snapshot view of the continuing challenging conditions in the restaurant/foodservice sector. As a result of the negative economic impacts on consumer spending trends, fewer American families are dining away from home compared to the prior year. According to an August 17, 2009 report in Nation’s Restaurant News, restaurant guest traffic counts have declined 7% for the total restaurant sector, with a 6% decline in the quick service segment, 12% decline in midscale dining, and a 13% decline in the casual dining segment.
As consumer participation in dining away from home remains under pressure, the direct impact on foodservice distributors amounts to lower volume in product case movement, increased competition with other foodservice distributors, and an overall need to reduce operating expenses by consolidating delivery routes, reducing transportation miles from the system, reducing headcount in the operation, and focusing heavily on improving overall labor productivity of warehouse workers, truck drivers, and the street sales force. Labor cost represents approximately 10% of sales for a typical foodservice distributor, with the majority of the expense comprised of warehouse workers, truck drivers, and sales staff, each of which is representative of the distributor’s variable costs that can move in direct correlation to product case movement in the operation.
During its August 10, 2009 conference call, Sysco noted that 2009 represented the most challenging sales year the company has experienced in 40 years, and outlined their efforts in controlling costs during the 2009 fiscal year by reducing transportation miles by 5%, reducing diesel fuel usage by 7%, improving warehouse cases per man hour by 4%, and increasing total sales per employee by 5%. As a further indication of the challenging environment for its restaurant customers, Sysco also commented that bad debt expense had doubled to $74 million in the fiscal year, and noted that credit management would likely remain a formidable challenge in its fiscal 2010.
Despite favorable year over year declines in gasoline prices, the consumer remains under pressure due to negative unemployment trends, a challenging housing market, and tight credit markets. As such, the foodservice industry is likely to remain under pressure until the underlying economic conditions begin to improve. Distributors must continue to focus on operational efficiency and improvements in labor productivity to protect profitability in the current environment.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
