Sysco stunned the restaurant world on Monday in announcing plans to pay just over $29 billion in cash and stock for Jetro Restaurant Depot, the chain of restaurant-focused warehouse retailers.
To Sysco, the move was simple: It wants access to the 725,000 or so restaurants that use Restaurant Depot to buy everything from large sacks of potatoes to mixing bowls.
Those customers are fundamentally more profitable than the larger foodservice providers that traditionally use Sysco, even though they pay lower rates. That’s because they do all the delivery themselves.
“The cash-and-carry channel in Restaurant Depot specifically serves a customer that is seeking low prices, buys in smaller quantities, and needs their product immediately,” Sysco CEO Kevin Hourican told investors on Monday. “This customer is very different from Sysco’s broadline customers that desire service with higher touch points, ordering larger quantities and prefer delivery to their business.”
“Together, we will become a nationwide omnichannel foodservice provider that grows our business profitably.”
Wall Street was not impressed. Sysco is largely using debt to finance the acquisition, which helped send its shares down more than 15% on Monday. An analyst with Morningstar suggested, however, that the market overreacted to the news, though he expressed skepticism of the benefits of Sysco’s omnichannel play.
Sysco is projecting that the combined company will be able to find $250 million in annual cost “synergies” within the first three years, or about 12.5% of the retailer’s operating income. Hourican also noted that the deal could drive more revenues over time.
Restaurant Depot operates 166 low-frills locations. Customers do not pay a fee to shop there, needing only a tax ID to prove they operate a restaurant. Its shops are open seven days a week, giving restaurants access to goods quickly—another key point, outside of lower prices.
Restaurant Depot owns 80% of its physical locations near metro markets, Hourican said, many of which were acquired decades ago, giving Sysco a real estate portfolio that it could not amass today. But Sysco believes that its national supply chain network will enable it to quickly open at least 125 more locations and potentially push into international markets.
Yet Restaurant Depot is fundamentally a more profitable business than the one that Sysco operates.
Restaurant Depot will give Sysco 1.5 times the number of local customers that it has now. And though such customers typically are smaller and pay lower prices for their goods, they are far more profitable.
Restaurant Depot will increase Sysco’s revenue by about 20%. But it will increase the company’s EBITDA, or earnings before interest, taxes, depreciation and amortization, by 45%.
“A restaurant owner who chooses to shop at Restaurant Depot drivers her own vehicle to the store, selects their products and brings those goods to the restaurant,” Hourican said. “In exchange, these restaurants save 15% to 20% on the purchase prices versus the cost would be to have those same products delivered.”
“Cash and carry is a large and growing business, and it is not a business segment that Sysco meaningfully participates in today,” he added. Cash and carry is a $60 to $70 billion business, he added, compared to the $300 billion broadline delivery business Sysco operates in now.
The two companies do not compete today, which should alleviate potential regulatory concerns.
Yet there remains a key question whether the deal will impact the prices those smaller customers pay when they visit one of the retail shops. Sysco is borrowing a lot of money to fund the Restaurant Depot deal and will need to pay that off. In theory, the expansion potential and those cost “synergies” should ease concerns that it could raise prices to pay for everything.
But Sysco is already the largest player in the broadline delivery market for restaurants. And now it will be the biggest player in the cash-and-carry market.
Members help make our journalism possible. Become a Restaurant Business member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.