We believe the merger should be kept in perspective.
- Transformative for the industry with the potential for big wins and losses in the supplier community, the merger is not disruptive in the defined sense.
- We see it as a consolidation of two major, often overlapping, forces operating in a mature industry undergoing a slow recovery with no real innovation.
- Look to the airline industry for how this deal could shake out with the FTC.
Amazon, not the merger, is the real industry disrupter.
According to USA Today, Bernstein Research estimates that the CPG opportunity for e-commerce is worth about $470 billion a year. Amazon could profitably capture at least $222 billion of such spending annually. (Amazon’s total revenue was just over $61 billion in 2012.)
Cash flow is still at the center of operator constraints. Many independents and LLOs that represent higher margin for distributors struggle to meet minimum orders and payment terms. Restaurant Depot, Cash & Carry, Costco and Sam’s are good options but pose other challenges associated with product selection, handling, logistics and transportation issues.
More commonly associated with consumer purchasing behaviors, e-commerce–particularly Amazon Pantry–is the emerging 24/7 enabler of better foodservice operator cash and inventory management along with a host of other benefits.
For suppliers, the e-commerce distribution network as part of a diversified business model could neutralize administrative and low-return investments associated with trade spending, over-reliance on brokers and required manpower for face-to-face transactions.
Amazon, not a major merger, will disrupt industry supply chain practices. In turn, we can expect re-constructed distributor services to emerge in an evolutionary versus quantum leap way.
Our near-term predictions
Last week’s announcement will test the strategic capabilities of all industry suppliers. Blueberry cautions against “business as usual” mindsets.
- Industry reaction will be swift. Sysco and US Foods will take steps to secure their operator base while regional distributors move to grow new business and market share amid heightened operator and supplier concerns over the merger.
- Distributor consolidation will continue; supplier interest in acquisitions will increase.
- Deep discounting could get deeper in the short term, putting more pressure on supplier trade spending.
- Exclusive brands will continue to outpace growth of manufacturer brands.
Our recommendations for suppliers
- 2014 scenario planning using impact/uncertainly grids. Two possibilities, each with positive and negative outcomes over the next 3, 6 or 9 months. Assemble shadow plans with industry-expert input based on evolving conditions. Plot contingencies.
- Draft a spare 2014 forecast based on volume shifts and other unknowns. Factor volume fluctuations between distributors jockeying for operator business. Monitor performance against committed trade funds.
- Strategically select distributor partners that complement your foodservice objectives. Make sure resources align with your choices.
- Update operator database; undertake an outreach campaign to secure end-user volume. Keep your brokers in the loop.
- Assemble a capital, operations, strategy and human resource team to evaluate your acquisition capacity; identify a pool of companies likely impacted by the merger as potential targets who add value in combination with yours.
- Revisit and elevate your manufacturer brand plan. If applicable, simulate the financial impact on your organization’s profits as EB grows in increments of 10%, 20% or 30%.
- Estimate impact, opportunities or risks associated with expansion of US Foods’ Chef’store concept under new ownership.
- Mandate an updated, accurate understanding of new purchasing objectives and drivers throughout the supply chain: distributors, segments and end-users, including chains. Refresh your value proposition accordingly.
As c-level advisors, Blueberry Business Group helps suppliers navigate the uncertain challenges facing our fast changing industry.