020267 Sysco Cashes in On Fast Growth in Food Service

Chicago - Its executives say it's the biggest brand you never heard of, but distributor Sysco Corp. is the best-known name in food sales to restaurants, hotels and other institutional customers, which are growing at a faster rate than their retail counterparts.

Sysco, with 12% of the annual $190 billion in North American food service sales, is poised to cash in on the growing trend of away-from-home eating, an executive said. The food service industry is projected to grow 2% to 4% in the next 10 years.

“We are bullish about food service,” Sysco President and Chief Operating Officer Richard Schnieders told analysts at a presentation this week. “Sysco is in a huge and vibrant market.”

Houston-based Sysco's sales have historically grown at two to three times the food service industry's rate, well ahead of the average growth for big retail food makers that see roughly 1% gains annually.

Despite a blip in its fiscal second quarter following the Sept. 11 attacks on the United States, when travel-related sales softened, Sysco said recent trends were encouraging. The company has a long-term goal of reaching sales growth in the high single digits.

“We're beginning to see nice returns to a much better growth rate in all categories of our business,” Schnieders said. “We're encouraged by the trends at this point.”

For the first half of fiscal 2002, ended Dec. 29, Sysco's sales were up 7.2% to $11.4 billion and net earnings per share were up 14.3% to 48 cents.

At a time when many food manufacturers are posting year-on-year earnings declines, the company's fiscal 2002 earnings are expected to rise to $1.01 a share from 90 cents a year earlier, according to Thomson Financial/First Call.

Its stock, which closed up 43 cents at $29.34 on Friday, has risen nearly 8% in the past year, outpacing the Standard & Poor's 500 index, which has fallen 13%.

SHOPPING FOR ACQUISITIONS

Sysco carries some 30,000 items under its own brand as well as those of big name national suppliers such as General Mills Inc., Kellogg Co. and Kraft Foods Inc. Besides small regional providers, it competes with big names such as Performance Food Group and Alliant Exchange, part of Dutch supermarket chain Royal Ahold.

The company is shopping for acquisitions that improve its service offerings, especially to the independent restaurants that make up a large part of its customer base.

Sysco has made 13 acquisitions in the last 10 fiscal quarters, adding companies with combined yearly sales of $2.16 billion. In December, it agreed to buy Serca Foodservice Inc., Canada's largest food service provider, with annual sales of about $1.44 billion. The deal is expected to close in March.

Specialty companies such as those that carry fresh produce and high-quality meats have become increasingly important to Sysco, as fast-food and mid-scale restaurants look to diversify their menus to meet more sophisticated consumer tastes.

“We will certainly be looking to continue to expand our specialty businesses,” Schnieders said. “We would like to be able to cover all of our broadline companies with specialty capabilities.”

Its buyout candidates must have balance sheets solid enough not to dilute Sysco's earnings and management teams capable of staying in place once a deal is done.

Besides its food products, Sysco's customers depend increasingly on the company's consulting service in the areas of procurement, menu development and even staff selection, Schnieders said.

“We're in every market of the country,” he said. “It's just a matter of getting closer to the customer.”

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