Sysco’s Adapting to New Realities – Will it Work?

Sysco, as we all know, is a food distribution company, with a major market share in hot food restaurant industry. In year 2008, it earned $1.1 billion on sales of $37 billion, a record in its history. Contrastingly, the first three quarters of this year seems to indicate that this will be down year of Sysco. This will be first down year for Sysco since its inception. Time will tell how the end market of Sysco evolves. At this point in time, I do not know whether it’s an inflection point for demand of its services, or peak of growth in restaurant industry, or it’s an indicator that North American restaurant industry will shrink. However, I am certain that Sysco is at a cross road.

I am long term dividend growth investor in Sysco. Therefore, I need to review to ensure that company is (and will be) capable of paying me growing dividends.

I believe Sysco’s management has recognized this and hence, we can see some new initiatives or re-invigorating some of the existing strategies. My observation is that Sysco’s management recognizes the fact that continued optimization or increase in efficiency or volume growth will not bring in additional profits. There is only so much one can do in these areas.

After reading an article in BUSINESSWEEK, I went and did some reading to understand how Sysco is adapting itself. Since 2000, Sysco has been providing free Business Review Service to its customers. The purpose of this service is to provide consultation to the restaurants on how to save cost, how to increase menu choice, how to market their business in local communities, new recipes, or modifying existing ones to reduce cost. The expectation is that as the restaurants succeed and get benefits from this consultancy services, they will stick to Sysco’s distribution services.

Sysco employees close to 49000 employees. Of these, 200 are professional chefs (for recipes, modification, cost cutting in preparations), quite a few graphic designers (for menu design and recipe placements), and operations staff (for improving the functioning of waitstaff and pantries). Not only that, Sysco has teamed up with insurance companies to provide insurance, PR, and marketing services at discounted rates for its clients.

For now this service appears to be free. I could not find how much impact it has made on its bottom line. In this industry, very percentage counts. It would be interesting to see how Sysco recovers its investment in this service.

According Kenneth Spitler, the hot food restaurant industry is about $230 billion industry. This includes North America, Europe, and hotel associated restaurants in Asia. At present, it only has 16% of this market share. Therefore, there is certainly room for growth.

The question is “Is Sysco willing to evolve?” For now, I believe Sysco has recognized the constraints and wants to evolve. All we can do is wait and watch for the results.

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