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Morningstar | Even in Face of Intense Competition, US Foods' Sales Truck Ahead

US Foods is the second-largest company in the $300 billion target food-service distribution industry, controlling 8% of the market. But despite the company's national scale, food-service distribution is a locally competitive industry, where US Foods is not always the leader. As such, we don’t believe it has amassed a competitive edge. For one, US Foods competes against other national operators (including number-one player Sysco and number-three Performance Food), as well as 15,000 smaller distributors that often bring a tailored experience with a local focus or specialized products. And in our view, the competitive landscape extends beyond traditional distributors to include club stores and the e-commerce channel. In light of the vast array of options, the average restaurant is estimated to source its wares from as many as 12 different suppliers, according to Technomic, which we believe reflects the aggressive competitive landscape and could constrain profitability over the long term.Despite intense competition, we this this fragmented market offers an opportunity for larger players like US Foods to strategically poach smaller rivals, the benefits of which we think will contribute around 50-100 basis points to the company's annual sales growth over our explicit forecast. In our view, this consolidation serves as a way to bolster scale and enhance the product set. However, while we believe its reach affords access to a deeper pipeline of potential targets than smaller peers, we don’t believe US Foods is privy to better deal flow than Sysco or Performance Food.Beyond inorganic growth, we think the firm is working to improve the customer experience via its e-commerce and business support tools (value-added services that are limited to the largest players in the industry), including transactional data, operational data, and consumer trends. We believe these offerings increase the stickiness of its customer relationships and combat low-margin industry trends. Within this framework, we see US Foods protecting its margin profile over our forecast, but profits may be constrained if the firm lowers prices to offset competitive headwinds.