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Morningstar | No-Moat US Foods Strives to Steady Its Footing, but Competitive Pressures Abound

US Foods is the second-largest company in the $300 billion target foodservice distribution industry, controlling 8% of the market. But despite its national scale, foodservice distribution is a locally competitive industry, where the firm 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 the number-one player Sysco and number-three Performance Foods), 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 also 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 up to 12 different suppliers, which we believe reflects the aggressive competitive landscape and could constrain profitability over the long term. Despite intense competition, we surmise that 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 its annual sales growth over our explicit forecast. From our vantage point, this consolidation serves as a way to bolster its scale and enhance its 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 Foods.Beyond inorganic growth, we also posit that 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 buoy the stickiness of its customer relationships and combat the low-margin industry trends. Within this framework, we see the firm protecting its margin profile over our forecast, but profits may be constrained if the firm lowers prices to offset competitive headwinds.