Food service is a business model investors shouldn’t ignore. Feeding people is a good way to generate cash flows, and within the various ways to do that, helping people have a great time outside the home is a solid choice.
But instead of buying a specific restaurant group, you can be the shovel in the gold rush and rather own the food service companies, such as Bidcorp or global leader Sysco.
Over the past 10 years, Sysco has delivered a compound annual growth rate (CAGR) in the share price of 8% on the nose. That’s not as strong as the 10.1% CAGR in the S&P 500 over the same period, with the index helped along greatly by performance in the tech sector. The index performance over the past three years is almost identical to the 10-year view, whereas Sysco only managed a 4% CAGR over three years.
It’s not hard to see when the underperformance happened, as we need to remember that the pandemic was a wonderful time for tech companies (a major contributor to the index) and a horrible time for hospitality. If we look at the 10 years leading up to the pandemic, Sysco was good for a CAGR of 11.7% and the index managed 11%. The index returned a dividend yield of 1.9% and Sysco was 100 basis points higher at 2.9%. So, with dividends included, this business model was an index beater before the pandemic. That’s important, as the pandemic hasn’t done lasting damage to this model as it has done to so many others.
The trick here for the likes of Sysco and Bidcorp is that they fulfil a critical role in the value chain. A chef cannot go to five different stores every day to source ingredients or even napkins for the table. Restaurants must focus on execution of the menu, which means procurement must be efficient and completely reliable. Sysco calls itself a relationship business and it isn’t wrong, as the trust between restaurant owner and suppliers needs to be extremely strong. If a truck doesn’t arrive, customers can’t eat and they won’t come back. It’s that simple.
The performance in 2023 tells a very different story, up 36.4%. In stark contrast, Sysco is down 7.9%
There’s more to the relationship than just the logistics. The sales force is a big part of the story, as Sysco hires culinary experts and restaurant owners to work in sales. The value-added service is assistance with menu design, as most of the customers are mom-and-pop shops that greatly benefit from the expertise of a company like Sysco. Of course, if the restaurants do well, Sysco sells more food and groceries.
The strength in the model is that Sysco and Bidcorp have literally thousands of customers, so there’s no reliance on individual clients. This gives them supplier power, which in turn means pricing power if they build a relationship of trust. At the intersection of technology, sales strategies and great execution in the delivery network, we find successful food service companies like these that do a great job of growing over time.
To give you an idea of how huge Sysco is, the company services more than 725,000 customer locations from 330 distribution facilities. With a market cap of $35bn, it’s also more than four times the size of Bidcorp (R150bn) in terms of value. At a recent investor conference, the Sysco management team called its business “the only player at scale from a global perspective”, which is a bit like Americans calling their baseball competition the World Series because it includes Canada.
Leaving aside that rather narrow view of themselves, the reality is that Sysco is certainly the world leader, with a No 1 market position in most of the countries of operation and a No 2 position in the rest. Ignoring Bidcorp is foolish, though.
We don’t have many years of data for Bidcorp, as it was unbundled from Bidvest in May 2016. The IPO was expensive (as so many are), so a CAGR of 7% over that period is uninspiring. The performance in 2023 tells a very different story, up 36.4%. In stark contrast, Sysco is down 7.9%. Even in rand, Sysco is only up 2.7%. Perhaps Sysco does have competition, after all?
Sysco traded on a p:e of 24-25 before the pandemic. It’s now on 20. Bidcorp trades at fairly similar levels, which reflects the global nature of the business despite it being listed on the local market. The bigger story is operating margin, which has made Bidcorp pull miles ahead of Sysco. They had similar margins back in 2016. Today, Bidcorp has more than double the operating margin of Sysco.
Though both companies have strong prospects, local is lekker in this case. Bidcorp’s listing may be local, but the underlying revenue certainly isn’t. Sysco is looking for growth internationally and that’s where Bidcorp has always played.
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