As Covid-19 sends panic buyers to supermarkets, the shelves have quickly become empty of non-perishable essentials. Grains, beans, canned food and toilet paper are among the most difficult-to-find items amidst the switch to isolation-friendly foods. Even fresh fruits, vegetables and meats are being cleared off the shelves in some areas, which may create the illusion that the grocery stores are running out of food.
However, this is not the case, at least not in the U.S. As the government has rushed to reassure consumers, “There is still plenty of food in the country.” The problem is diverting a good portion of it from its normal supply routes.
On March 22, Food Related, a wholesaler that supplies food for a group of restaurants in San Antonio, gave away around 4,000 pounds of free food to some of the city’s former restaurant workers who lost their jobs due to quarantine efforts. CEO Luciano Ciorciari commented the following in an interview with the San Antonio Express News:
“They have put food on our table for all these years. They opened up their doors to us. We had a huge warehouse stacked to the brim with means to help them. So we felt called to do all possible to put food on their families’ tables.”
Food Related is far from the only restaurant wholesaler with a warehouse of food and its normal buyers missing in action. For smaller wholesalers that do not have established supply lines to grocery stores or individual consumers, giving their food away may be the best solution. Some are looking into giving to charity, while others are developing apps to sell groceries directly to individuals.
This does not mean there will be less food in the country, but it does mean that both buyers and sellers may need to look beyond their typical habits in order to secure resources. For example, toilet paper may not be in stock at Walmart (WMT, Financial), but janitorial supply stores are stuck with an excess of it as their retail and foodservice buyers close their doors or move to online/takeout only.
In light of this, let’s take a look at how three large-scale wholesale food companies are shifting to meet rapidly changing demand.
Sysco
With a network of over 125 distribution centers, Sysco Corp. (SYY, Financial) is the largest wholesale food distributor in the U.S. Based in Houston, it sells food products, kitchen equipment and tabletop items to restaurants, hospitals, hotels, schools and other food service businesses.
On March 23, Sysco traded around $35.63 per share for a market cap of $17.8 billion and a price-earnings ratio of 10.12. GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10.
Since the U.S. stock market peaked on Feb. 19, shares are down 52%, making the stock undervalued according to the Peter Lynch chart.
About two-thirds of the company’s revenue comes from restaurants, half of which are chain restaurants and the other half of which are local independents. The following is an excerpt from CEO Kevin Hourican’s note to shareholders:
“We are increasing our support of these customers in two important areas: restaurant cleaning and enablement of take-out business. We have enabled our large sales force to rapidly provide our customers with cleaning supplies and take-out supplies, such as to-go containers and utensils, as activity ramps up in this area. Also, we are actively engaging our customers who don’t normally utilize a take-out or third-party delivery model to help them develop these capabilities. Sysco is helping enable small businesses pivot their business model.”
The other third of business comes from less volatile customers such as hospitals and government facilities. In fact, Sysco expects demand for its food and janitorial products to increase in these types of businesses.
Sysco’s market-leading position, as well as its presence in less volatile sectors, its diversification with janitorial supplies and its ability to store pre-packaged food for longer terms than smaller suppliers, means that it has not found it necessary to seek out new types of customers. Instead, it is adjusting where it can in order to meet the needs of existing customers.
Performance Food Group
Performance Food Group Co. (PFGC, Financial) is a wholesale food distributor based in Richmond, Virginia. From its 25 distribution centers, the company operates through three divisions: foodservice, vending machines and customized food products.
As of March 23, shares of Performance Food traded around $18.57 apiece for a market cap of $2.18 billion and a price-earnings ratio of 11.33. GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 6 out of 10.
Since the U.S. stock market peaked on Feb. 19, shares are down 64%. According to the Peter Lynch chart, this pushes the stock into value territory, especially considering its historical price at median price-earnings ratio.
“We are closely monitoring the current market and positioning our business for the long term as all of us in the country are responding to the threat of COVID-19," President, Chairman and CEO George Holm said in an earnings outlook update. "Our first priority is ensuring the health and welfare of our associates and helping our customers through this period of disruption. We continue to assess additional customer opportunities to leverage our scale and assets."
In other words, like Sysco, Performance Food is confident in its ability to avoid bankruptcy despite the interruption to the normal business of its customers. This means that its earnings are all but certain to take a hit in the short term, and in order for individuals to purchase their food, they will still need to order from restaurants (albeit online for takeout).
Tyson Foods
Tyson Foods Inc. (TSN, Financial) doesn’t completely fit in with the companies above, as it sells to grocery stores as well as restaurant chains. Focusing on protein, the company produces approximately 20% of the beef, pork and chicken in the U.S. As of the latest full-year results from 2019, 45% of Tyson products are distributed to individual consumers through grocery chains, while 31% are distributed to foodservice companies and the rest is distributed either internationally or to other end users.
As of March 23, Tyson shares traded around $57.60 apiece for a market cap of $21.03 billion and a price-earnings ratio of 10.4. GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10.
Since Feb. 19, when the U.S. stock market peaked, the price of Tyson shares has fallen 26% to trade at a discount, according to the Peter Lynch chart.
Tyson’s scale and its significant presence in both retail and wholesale food distribution put it in a unique position to pivot its operations to meet rapid changes in demand. Below is an excerpt of a post regarding this topic from the company’s president and director, Dean Banks:
“We are working closely with our retailer partners to ensure our products are on their shelves, so that you have what you need to feed your family.
With more than 100 food production plants in the U.S., our unique scale allows us to quickly adjust and meet the current demand at grocery and other retail stores. We’re working collaboratively with our customers to fill and ship orders as rapidly as possible. In some cases, our capability to shift processes in individual plants is allowing us to quickly pivot to producing retail items. For example, changing packaging from a foodservice product to a retail product can occur quickly because of the built-in flexibility of our operations.
While we’ve made moves like this before, this is the most significant shift we’ve ever initiated.”
With increasing numbers of people visiting food banks, the company has also allocated more of its products to food banks, community pantries and its own employees.
Conclusion
From the above examples, it is clear that food providers are responding to demand changes in different ways according to their own business circumstances. Wholesale-only companies are mostly preparing to weather the storm if they have a secure enough market position, though smaller providers will likely need to seek alternate ways of selling their food. Meanwhile, companies such as Tyson, which have established wholesale and retail sales, are in a better position to change up supply according to demand.
Thus, it seems likely to me that Sysco and Performance Food Group will likely see heavier losses in the short term compared to Tyson, a sentiment which has been factored in by Mr. Market.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.
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