EUR 850.00 For Business Accounts Only

Morningstar | Despite Recent Case Volume Gains, Cost Pressures Stand to Weigh on Performance Foods' Profitability

Performance Food Group is the third-largest company in the potential $300 billion food-service distribution market, behind narrow-moat Sysco and no-moat US Foods. It holds around 6% of the market, having made its mark serving four of the 10 largest restaurant chains for two decades or more. This differentiated position (relative to Sysco and US Foods, which focus on smaller, independent chains) has enabled market share gains, but it has constrained profitability in the past, since these contracts carry razor-thin margins. And while we maintain a positive view of the firm’s increased focus on expanding its position with independent restaurants, which tend to be higher-margin sales than chain operators given the increased service requirements, we don’t expect these gains to come uncontested, as Sysco and US Foods target the same group.The firm pairs these traditional routes with its Vistar business (around 20% of sales), which includes the distribution of higher-margin immediate-consumption goods that are outside a typical food distributor’s scope. These vending machine and small-pack products could be replicated by larger rivals like Sysco and US Foods, but PFG holds a minor competitive advantage over smaller rivals because inventory requirements would be much harder for smaller firms to match.Like its larger rivals, PFG has grown by acquisition, which should support its scale and enhance its product offerings over time. The industry boasts some 15,000 smaller domestic distributors, setting the stage for the larger firms to serve as consolidators for years to come. As such, we forecast that acquisitions will boost PFG's annual sales by 0.5%-1%, similar to the level we expect for US Foods and Sysco. Further, we think that like its national peers, Performance will use value-added services like data analytics, consulting, and e-commerce as a way to expand its underlying sales base. We believe these services are increasing the technology curve in the industry, placing further strain on smaller rivals that lack the resources to invest. However, we view this more as a cost of doing business than as facilitating a competitive edge.