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Food Distributor Thesis Points:
- The Cycle: We are very bearish in the current restaurant environment. The Foodservice distributors have seen a rather long rebound from the effects of the COVID pandemic. The rebound in volume occurred in CY2Q21, and now five quarters later, the industry seems to be back on track to continue with pre-pandemic expectations. Except. While restaurant industry sales trends and employment data have been resilient in Sep/Oct, as have the employment data. As we head into 2023, the industry is at risk of a significant slowdown in volume.
- Deflation: Deflation is not in anyone’s current vocabulary, but that will change. As we move from a significant inflationary environment to a deflationary one, the stocks will underperform. As the deflation story takes hold, the industry’s ability to generate gross margin dollars growth will be impacted.
- Challenged Biz Models That Have Not Recovered From The Pandemic: While not new to most investors, the food service industry business models are challenged. They have meager margins and returns. As we have seen with SYY labor union issues in New England, employees want more pay and benefits, and the business models can’t afford it. Industry operating margins are below pre-pandemic levels, making the next downturn even more challenging.
