Performance Foods
Sales process can matter more than customer industry
KEY TAKEAWAY: Performance Foods Group ("PFG") of Richmond has built a $13 billion market cap company as a food distributor to convenience stores and independent restaurants.
While its largest competitors need separate sales teams for local restaurants vs. national chains and institutional foodservice, PFG has added local convenience stores to the target list for its salespeople. PFG's lower cost structure creates a competitive moat that its competitors cannot match without restructuring their businesses.
___________________________________
All my Substack content is free. All subscription fees to to support my operating foundation, Veena Learning Institute which makes videos for secondary students describing how great companies are improving peoples’ lives. The first videos are on Kenya’s Twiga Foods, Poa Internet, Wasoko, SunCulture and Asante.
___________________________________
It has historically made intuitive sense for food distributors to sell to all types of foodservice companies, including chain restaurants, independent restaurants, schools, hospitals, nursing homes, and sports venues. It's the same food.
But it isn't the same sales process. Chain restaurants are a centralized national sale with a long lead time and a formal competition. Schools, hospitals, and nursing homes are price sensitive, and have a bureaucracy with multiple approval levels on a specific calendar.
Food distributors who equally emphasize all of these targets end up with siloed sales teams, each dealing with a different category of of customer. Industry gross margins are low. PFG's largest competitors, Sysco and US Foods, have gross margins in the 17%-18% range. Growth from new customers within this defined customer set is necessarily modest.
Independent restaurants usually have a single decision maker. They require rapid responsiveness and absolute guarantees in quality. PFG recognized that although convenience stores require different foods, they have the same decision process as independent restaurants.
Furthermore convenience stores are largely ignored by food distribution giants who also serve foodservice customers.
PFG's largest competitor sales are something like a 70%-75% to a variety of centralized formal bureaucracies, including outside USA and Canada, whereas PFG sales are something like 75%-80% to single decision maker customers with a short sales cycle.
By doubling the customer universe for local sales teams PFG has become able to reduce its gross margin to 11%-12% and grow its revenues 15% annually over the past decade.
It is somewhat concerning that PFG still manages a net margin of around 0.5%-0.6% and it's debt to equity ratio is in the 120% range, leaving it vulnerable to rising interest rates. This is somewhat mitigated by the fact that its debt to market cap ratio is in the 30%-40% range, meaning that it could probably pay down debt if it had to.
Next up, buy now pay later.