Filed Under:
Tickers in this Article: SYY
There isn't much good news to digest in the battered food retailers and wholesalers industry. High agricultural commodity prices, tight budgets and plummeting consumer confidence have been wreaking havoc on sector profits. Tough times have a way of separating the leaders from the also-rans, though, and one leader I like in the current climate is Sysco (NYSE:SYY).

Sysco is the No.1 provider of multi-temperature food and related products to the food services industry. Basically it's a middleman, shipping food to restaurants hospitals and schools. The Texas-based company has spent several years optimizing its end-to-end supply chain operations - a dull-sounding proposition to be sure, but a critical one in an industry where every penny must be pinched, squeezed and then re-squeezed.

Home Away from Home
Food services, also known as the "food-prepared-away-from-home" industry, comprises a long supply chain that starts with the raw materials for preparation of food and ends with traditional and chain restaurants, hospitals, schools, hotels, industrial caterers and other out-of-home dining environments. Broad-line distributors like Sysco sit in the middle of this supply chain and make their money through smart sourcing, logistics, marketing and selling operations.

Sysco is the market share leader in the $200 billion broad-line sector, accounting for about 45% of the total sales of the top-10 competitors according to 2006 data. Its top-line financial objective is for steady nominal sales growth in the 7-9% range, which it has consistently delivered over the past years. Sales for the 2007 fiscal year ended June 30, 2007, grew 7.4% from 2006 and 7.8% from 2005-2006. For the most recent half year ended December 31, 2007, sales increased 8.1%. The company's gross margins have been stable at just over 19% throughout this period. (To learn how to take a look at a company's profitability, read Analyzing Operating Margins and The Bottom Line On Margins.)

End-to-End Optimization
Supply chain optimization is a bit like a complex ballet move - it looks beautiful when executed by an expert but disastrous when bungled. Profit margins in this business depend on the detailed, active management of minute revenue and cost transactions for thousands of stock keeping units. Supply chain disruptions can be severe even for small variations and inaccuracies in demand forecasting and supply provisioning.

Sysco aims to provide the lowest total procurement cost for its customers. A key initiative to accomplish this, which commenced in 2002, has been the investment in a national supply chain to leverage the company's purchasing power through a single procurement system rather than numerous fragmented supplier negotiations at the retail level. (Learn more by reading Understanding Supply-Side Economics.)

On the demand side Sysco has been an active proponent of demand management strategies including technology-driven solutions for price and revenue optimization. End-to-end supply chain optimization occurs when the integration of these buy-side and sell-side operations is successful. Sysco's work here is not finished; the company is still in the process of rolling out the redistribution centers that are a key link to its procurement and sales strategies, but the company has largely managed to stay on track with benchmark initiatives and deadlines.

Conclusions
Every little bit counts in an environment where profits find themselves in the crosswinds of multiple negative economic forces. In the broad-line distribution business, the firms that make the most of each supplier and buyer transaction are the firms that win in the long run. End-to-end supply chain optimization is what Sysco does well, and that should provide some sustainable nourishment to its investors.

comments powered by Disqus

Trading Center