OVERVIEWCompanies in this industry distribute food and related products on a wholesale basis. Major companies include C&S Wholesale Grocers, McLane Company, SUPERVALU, Sysco, and U.S. Foods (all based in the U.S.), as well as Loblaw (Canada), Kokubu & Co (Japan), and Metcash (Australia).

Rising global populations and demand for food are expected to drive growth in the food distribution industry, especially in emerging markets. Distributors are expected to benefit from a trend among food manufacturers toward outsourcing of logistics services, according to Frost & Sullivan.

The U.S. wholesale food distribution industry includes about 35,000 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $875 billion.

UPDATEFood wholesalers in the U.S. are benefiting from lower food costs as record output of pork, chicken, and beef has inflated meat supplies. Red meat and poultry production reached an all-time high through the first six months of 2016, and the USDA predicts that output will continue to rise through the second half of the year. Overall wholesale food prices were down about 3% through April compared to the same period last year, according to the National Restaurant Association. However, while meat prices are dipping, fresh produce is becoming more expensive. Drought conditions in

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California and other key agricultural regions are pushing vegetable prices up by double-digit percentages.

Food wholesalers may be able to widen their profit margins if meat prices decline through the rest of 2016 as expected. However, companies that specialize in salad and vegetable items could see margins shrink.

TRENDSThe Consumer Price Index for food, an indicator of food distributors’ product values, rose 0.2% in July 2016 compared to the same month in 2015. The average U.S. retail price for diesel and regular gas, a major operating cost for food distributor fleets, fell 11.7% and 20.9%, respectively, in the week ending August 15, 2016, compared to the same week in 2015.

U.S. retail sales for food services and drinking places, a potential measure of food demand, increased 6.5% in the first seven months of 2016 compared to the same period in 2015. U.S. tourism spending for food services and drinking places, an indicator for food distributor revenues, increased 6.1% in the first quarter of 2016 compared to the same period in 2015.

Total U.S. wholesale sales of nondurable goods, a potential measure of food products demand, fell 2.6% in June 2016 compared to the same month in 2015.

U.S. wholesale food prices are leveling off after increasing steadily for several years. The U.S. producer price index for

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food products was about 15% higher in 2015 compared to 2010, but about 5% lower than in 2014. Due to increasing production, the USDA predicts that wholesale prices of foods such as beef, pork, and poultry will decline over the next two years. However, drought conditions in California are likely to push fruit and vegetable prices higher in the short term.

To control rising operational and food costs, wholesalers have incorporated technology to improve efficiency and boost margins. Distributors are using advanced software to process receivables, integrate the supply chain, and analyze and forecast demand. Distributors with truck fleets use computerized routing systems and may have onboard computer systems to monitor driver performance. Technological advancements are extending to mobile handheld devices, improving communication between a driver and the central office.

CHALLENGESWholesaling is the business of transporting products, and fuel prices play an important role in a company’s overall profitability. The cost of diesel fuel can represent a significant portion of total wholesale operating costs. Many distributors pass this cost to suppliers in the form of fuel surcharges, but some smaller companies may not have this leverage. Cold storage and temperature-controlled facilities have high energy requirements, contributing significantly to operating costs. In times

of rising costs, facility managers investigate new, more affordable technologies to reduce consumption. Electricity costs can make up a significant portion of a cold storage building’s ongoing operating costs.

As consumers increasingly search for healthier food items, frozen foods have not been making grocery lists as frequently. Frozen food manufacturers have increased spending on marketing and product development in an effort to break out of a multiyear sales slump. Food wholesalers that carry a large percentage of frozen foods may be negatively impacted by slowing demand in the category. However, consumers are showing some interest in frozen foods with natural ingredients and no preservatives.

OPPORTUNITIESBig distributors such as Sysco and SUPERVALU receive higher margins on proprietary brands of products they sell to the food service industry.

These private-label brands are either manufactured for the distributor or processed in the distributor’s own plants. Customers often prefer to buy these brands because they can carry an implicit guarantee from the distributor.

Imports of fresh fruits and vegetables to the U.S. have increased significantly over the last 15 years, enabling food wholesalers to source more products from international suppliers.

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Industry Output Forecast

Domestic demand for food, an indicator for wholesalers, is forecasted to grow at an annual compounded rate of 4% between 2016 and 2020.

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The total value of imported fruits and vegetables tripled between 2000 and 2015; imports now make up more than half of the fruit and nut market and about 30% of the vegetable and melon market. The majority of imported produce comes from Central and South America, and trade volume from those regions is expected to continue growing in the years ahead. Distributors that operate in major port regions are investing in new cold-storage equipment and promoting services such as customs clearance assistance in an effort to win more business from foreign suppliers.

In addition to transporting products to grocery customers, many food wholesalers also offer various support services such as pricing analysis, shelf management, and merchandise planning. Some companies send sales reps to educate store employees about effective product display strategies, and some firms hire specialty buyers to introduce grocers to new items. Wholesalers may also offer customized marketing materials and advanced business intelligence tools for retail clients.

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Data for this newsletter was sourced from First Research® Industry Profile, 09-30-2016 First Research forecasts are based on INFO-RUM forecasts that are licensed from the Inter-industry Economic Research Fund, Inc.

FOOD WHOLESALERS