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Why Amazon Business Will Attack Food Service Distribution

  • As of 2015, there were an estimated 16,500 foodservice distribution companies generating annual revenues for the industry of an estimated $268BN.
  • Based off of 2016 revenue data, the top 8 foodservice distributors account for 41% of the market. Another 10% of the market is captured by wholesale outlets like Sam’s and Costco.
  • Small distributors dominate the foodservice distributor industry in terms of numbers. However, they generate a smaller percentage of the industry’s overall revenues.

There are approximately 16,500 companies in the food distribution industry, generating $268BN in annual revenue. Based off of 2016 revenue data, the top 8 foodservice distributors account for 41% of the market. Small distributors (staff of 10 or less) represented 66.5% of the total number of active firms in this sector.

With Amazon Business rapidly expanding into B2B distribution, food service distribution stands out as a likely target. Amazon has already invested heavily in the food and grocery category in B2C, and success in B2B food distribution is an equally large opportunity.

Given Amazon Business’s marketplace approach, industry fragmentation will heavily favor its success. So how fragmented is the food service distribution industry?

Food Distribution: A Big Pie with Many Slices

As of 2015, there were an estimated 16,500 companies generating annual revenues for the industry of an estimated $268BN. In 2016, Technomic reported annual revenues for the industry of $280BN.

The foodservice distribution market is quite fragmented. Because customers “know it’s risky to over-trust a distributor, they buy from many to ‘keep them honest,’ a system that costs independents dearly. To achieve a desired balance of selection, quality, and price, operators buy from 2-3 broadline and 6-7 (and often more) specialty distributors, meaning there are 15-25 orders to manage weekly.”

Many of today’s largest foodservice distributors are family owned companies that can trace their history back to “mom and pop” businesses that were started in the mid-1800s. Gordon Food Service is a prime example of this.

Many of the newer companies in the industry are “technology firms offering software that replicates in nanoseconds what would otherwise take hundreds of man-hours to figure out. Powerful algorithms scour price offers from competing distributors and calculate ‘optimum orders,’ the best possible order allocation to an operator’s distributor network that accommodates his/her preference for product brand, quality, and performance.” TradingTable is one such example. However, so far no single platform has achieved that scale that a marketplace like Amazon Business is capable of.

Additionally, as is true in many B2B distribution industries, small companies are the fiercest competition for larger distributors in any one region. For example, in its 2015 Annual Report Sysco says that they “compete primarily with local and regional distributors.”

Market Share Analysis

The top foodservice distribution companies (based on 2016 revenue) are Sysco, U.S. Foodservice, Performance Food Group, and Gordon Food Service according to SeekingAlpha. With a 2016 annual industry revenue of $280BN, below is the market share for each of these top companies (company annual revenue divided by industry annual revenue).

  • Sysco
    • 2016 Revenues: $50.4BN
    • Market Share: 18%
  • US Foodservice
    • 2016 Revenues: $23BN
    • Market Share: 8%
  • Performance Food Group
    • 2016 Revenues: $16.1BN
    • Market Share: 5.8%
  • Gordon Food Service
    • 2016 Revenues (Estimated): $12BN
    • Market Share: 4.3%
  • Ben E. Keith
    • 2016 Revenues (Estimated): $7.8BN
    • Market Share: 2.8%
  • Maines Paper & Foodservice
    • 2016 Revenues (Estimated): $3.4BN
    • Market Share: 1.2%
  • Shamrock Foods
    • 2016 Revenues (Estimated): $2.8BN
    • Market Share: 1%

Based off this information, we can say that the top 8 foodservice distributors account for $115.5BN, or 41% of the industry’s 2016 annual revenue of $280BN. Two other major players in the industry are Food Services of America (a part of Services Group of America) and Reinhart (a part of Reyes Holding). As they are both part of larger corporations who do not publish division specific revenue data, we are not able to calculate their share of the industry’s revenue.

Sysco says that the foodservice distribution industry faces competition from wholesale outlets (i.e. clubs stores like Sam’s Costco and BJs.) and online retailers. Technomic reports that this segment of the industry holds 10% of the market share with approximately $25BN in revenue, with a significant portion of the 500,000 users coming from independent restaurants.

Mom and Pop Distributors

If we define “mom and pop” companies as those with ten or fewer employees, these companies represented 66.5% of the total number of active firms in this sector, but made up only 5.9% of the sector’s revenue. This data is not exclusive to foodservice, as the NAICS category also includes retail distributors, but is serves to show how market share is divided across the industry.

Conclusion

To sum it up, there are approximately 16,500 companies in the industry, generating $280 BN in annual revenue. The top 8 foodservice distributors account for 41% of the market. Small distributors dominate the industry in numbers, which leaves a significant gap for a marketplace to attack the industry. By modernizing the industry – much of which still operates on outdated technology and sales methods – and consolidating this fragmented supply, Amazon Business could build a dominant marketplace.

Given Amazon’s interest in B2C food and grocery sales, a move into B2B distribution would have strong synergy with the company’s existing initiatives. While Amazon hasn’t yet moved strongly on food service distribution, it is still one of the fastest growing categories on Amazon Business.

Large, incumbent food service distributors should look to get ahead of this threat before it’s too late by building their own marketplace. Given their existing infrastructure, customers and industry knowledge, they would have a significant head start in building a platform business. However, if they wait too long, Amazon could make a big move into food distribution. By then, it might be too late.

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