Performance Food Group Company – December 22, 2022

With a population of over 300 million people, and faring highly in rankings of consumption per capita, the U.S. requires a lot of food. One player that has been helping to service this enormous need for decades is Performance Food Group Company. PFGC controls a massive network consisting of scores of distribution centers delivering more than a quarter of a million food and food-related products to over 300,000 customer locations across the United States and Canada. These customers include everything from restaurants to schools, businesses, hospitals, vending distributors, and much more. In addition to food products, the company also offers value-added services that seek to leverage its industry expertise and influence.

PFGC operates across three segments – Food Service, Vistar, and Convenience. Foodservice offers a broad line of products, including custom-cut meat and seafood, as well as products that are specific to customers’ menu requirements. Vistar is a leading national distributor of candy, snacks, and beverages to vending and office coffee service distributors, retailers, theaters, and hospitality providers. While the Convenience segment is one of the largest foodservice and wholesaler-distributors in the convenience retail industry, offering a wide range of merchandise including cigarettes and tobacco, food, groceries, and health and beauty care products.

In recent years, the company has achieved an impressive record of growth despite challenging macroeconomic circumstances, as it employs a broad-based strategy for growth that seeks to increase sales, grow segments and markets, improve operating efficiencies and actively pursue some critical strategic acquisitions. For the most recent of which, post-integration activities continue to unlock incremental value as the company emerges strongly from the covid pandemic.

PFCG roots go back to 1885 when James Capers began peddling groceries for a wholesaler in Richmond, Virginia. Fast forward almost a century, as the U.S. food distribution industry saw larger members acquiring smaller distributors to secure a greater share of the market, Capers business grew into Pocahontas Foods, which distributed branded products to restaurants and foodservice outlets across the U.S.

The business continued to grow and evolve through the mid-1980s as its leaders had a vision for a new company that would bring together a network of distributors with the corporate support to become an industry giant.

Performance Food Group was born in 1987 and subsequently debuted on the NASDAQ in 1993. Although it was acquired by Wellspring Capital Management and Blackstone Group for $1.3 billion in 2008, the company ultimately went public again on the NYSE in 2015. Along the way, it grew with acquisitions and mergers including snack food distributor, Vistar, and Italian foodservice company, Roma Foods, among others, which has taken the organization to 112th position in the Fortune 500 rankings.

PFGC’s leadership team includes several foodservice industry experts that are innovators in procurement, warehousing, supply chain management, customer service, and delivery.

Company veteran and chairman of the board of directors, George Holm, has been with the group since its merger with Vistar Corporation in 2008, when he became president and chief executive officer of PFGC. Prior to that, he served as president and CEO of Vistar, which he founded in 2002. Holm grew Vistar, a multi-channel food, snack and beverage distributor, into a $3.5-billion company that was purchased by the Blackstone Group in 2007. During his 40-year career in the foodservice distribution industry, he has also held leadership positions with Alliant Foodservice, US Foods, and Sysco Corporation.

Holm is joined by fellow company veterans Craig Hoskins and Pat Hagerty, who currently serve as PFG president and chief operating officer, and executive VP and chief commercial officer, respectively. The pair also have origins with Vistar going back to 2008 and 1994, having held various senior positions through the company, along with extensive careers in the food service industry.

Across its Food Service, Vistar, and Convenience segments, PFGC has an enormously broad range of customers covering independent and chain restaurants, schools, business and industry locations, hospitals, vending distributors, retailers, convenience stores, and theaters, among others. Utilizing its huge network of more than 150 distribution centers, the company provides more than 250,000 products. These products are sourced from various suppliers for which PFGC serve as a key partner by providing them access to its vast customer base. In addition to the products it offers, the company provides value-added services which allow customers to benefit from its industry knowledge, scale, and expertise in the areas of product selection and procurement, menu development, and operational strategy.

The Foodservice segment markets and distributes food and food-related products to restaurants and other institutional “food-away-from-home” locations. It offers customers an assortment that ranges from “center-of-the-plate” items such as beef, pork, poultry and seafood, along with dry, fridge, and frozen products, as well as cleaning and kitchen supplies. Independent customers, predominantly include family dining, bar and grill, pizza and Italian, and fast-casual restaurants. Whilst chain customers are multi-unit restaurants with five or more locations and include fine and casual dining quick-serve restaurants, as well as hotels and healthcare facilities.

In the Vistar business, vending operators comprise the segment’s largest channel, where a broad selection of vending machine products is distributed nationally. Additionally, Vistar is a leading distributor of products to theater chains and the office coffee service channel. The platform now also includes hospitality venues, concessionaires, airport gift shops, college bookstores, corrections facilities, and impulse locations in various brick-and-mortar big-box retailers. The company also provides Merchant’s Mart locations which are cash-and-carry operators where customers generally pick up orders rather than having them delivered.

Finally, PFGC’s Convenience segment offers a comprehensive range of products, marketing programs, and technology solutions to approximately 50,000 customer locations in the U.S. and Canada. Customers include traditional convenience, drug, grocery, liquor, and other specialty and small format stores that carry convenience products.

Despite various macroeconomic factors including labor shortages and the covid pandemic having an enormous impact on the food service industry, PFGC has managed to not only perform resiliently, with the company returning to pre-pandemic sales by April 2021, it has also emerged with impressive growth since then, thanks to unwavering expansion efforts. The company continues to benefit from expanding sales and synergy improvements resulting from its most recent integrations of Eby-Brown, Reinhart, and Core-Mark over the last three years.

Initially announced in 2019, PFGC acquired Eby-Brown Company, a leading U.S. distributor of pre-packaged candy, snacks, specialty beverages, and tobacco products in the convenience industry. The addition to PFGC’s Vistar segment brought with it over $5 billion in sales and expanded its reach to 75,000 locations, making it the largest service in the country, along with the second largest in overall non-tobacco convenience volume.

At the same time, the acquisition of Reinhart Foodservice, positioned PFGC as one of the largest distributors in the U.S., adding approximately $30 billion in annual net revenue, while putting it on track to generate approximately $50 million of annual run-rate cost synergies across procurement, operations, and logistics, ultimately leading to low double-digit EPS accretion.

Finally, the addition of Core-Mark Holding Company brought one of the largest wholesale distributors to the convenience retail industry in North America also into PFGC’s Vistar segment, with close to $17 billion in net sales, a further $40 million of annual run-rate net cost synergies, and additional positive EPS accretion.

Whilst throughout and post the pandemic, PFGC’s strong focus on pizzerias provided revenue stability, the company has a diverse mix of products and services under both private and national branding. Giving it a compelling competitive advantage and differentiation, and creating a long runway for ongoing growth and the potential to further increase its profit margins.

Accordingly, the company’s key growth strategies continue to focus on increasing its mix of sales to street customers, such as independent restaurants, which typically use more value-added services, particularly in the areas of product selection and procurement, market trends, menu development, and operational strategy. Sales to these customers typically generate higher operating margins than sales to chain customers, therefore the company is continuing to invest in its street sales force across both hiring and utilization of technology.

This investment is also being applied to boosting the range and sales of PFGC’s already extensive list of proprietary-branded products including Bay Winds, Brilliance, Empire’s Treasure, First Mark, Guest House, and Heritage Ovens, along with many others, which are the company’s highest margin products.

Building on a stellar 2022 financial year which saw PFGC’s revenues increase over 60% year-on-year to $47.2 billion, the company has started 2023 strongly with net sales for the first quarter growing almost 42% to $14.7 billion compared to the prior year period. The increase was primarily attributable to the acquisition of Core-Mark which added over $3 billion, along with an increase in selling prices as a result of inflation.

Gross profit also grew almost 38% to $1.6 billion compared to the prior year period, thanks to procurement-related gains and growth in the higher-margin independent channel. As a result, despite a 26% increase in operating expenses to $1.4 billion, net income for the quarter increased $91 million year-over-year to $95.7 million.

Looking ahead, PFGC is encouraged by the latest results which put them on track to exceed their original forecast for 2023 and to hit the three-year outlook it provided at its Investor Day in June. The company now expects net sales to be in the range of $57 billion to $59 billion, aligning with consensus estimates and representing year-over-year growth of 14%. It also has a three-year target of $62 million to $64 billion in revenue, also in line with consensus estimates, and $1.5 billion to $1.7 billion of adjusted EBITDA in fiscal 2025. Furthermore, full-year earnings per share for 2023 are forecasted to improve by 42% to $3.70 per share, up from $2.60 in 2022.

The foodservice distribution industry is highly competitive and without exclusive service agreements, customers quickly switch to other distributors if they are sensitive to lower prices, differentiated products, or customer service that is perceived to be superior. In addition to two of the largest broad-line distributors, Sysco Corporation and US Foods, which have international and national footprints respectively, PFGC also competes with numerous regional, local, and specialty distributors. Yet, with the belief that most purchasing decisions in the foodservice business are based on the quality and price of the product and a distributor’s ability to fill orders accurately and with timely delivery, PFGC’s economies of scale in purchasing and logistics allow it to offer a broad variety of products at competitive prices, whilst offering extensive geographic coverage that allows customers to grow.

The industry continues to be influenced by several general macroeconomic factors, including inflation and interest rates, fuel prices, the ongoing COVID-19 pandemic, and related supply chain disruptions and labor shortages. Whilst operating conditions for PFGC improved significantly due to the declining adverse effects of the pandemic, it may continue to face challenges as the recovery continues.

Emerging strongly from the challenges of the last few years, PFGC has achieved impressive top-line growth which only looks set to continue along with margin improvements as it builds on share gains with independent customers, coupled with further synergies and cross-selling opportunities following the acquisition of Core-Mark.