Sysco Pricing Spineometer: 5 of 5 Vertebrae

Sysco, a foodservice distributor, had a positive Q3 2024. Revenue rose 2.7% to $19.4 billion and earnings before interest and taxes rose 3.9% to $723 million over the same period last year.

A review of Sysco’s April 30 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Kevin Hourican, Chairperson and CEO of Sysco, expressed a clear strategy for growing profitability.

1. Buyer Power: Sysco is seeking the best possible costs from its suppliers, and given its market share of 17%, the highest in a foodservice distribution market, it holds significant buyer power to extract price concessions from suppliers.  “What we can control is the price we pay for the product we purchase and the prices that we offer that product to our customers, so that we can provide value to them, so they will choose Sysco and choose us at an increased rate over time.”
2. Displace branded items: Sysco branded items currently constitute 46.5% of sales in the local segment, up 3 basis points.  Sysco earns higher margins on Sysco branded items.  (Sysco describes itself as operating in two segments, national and local, wherein “national” implies a branded restaurant chain while “local” is not.  National customers tend to negotiate directly with suppliers while using Sysco to provide distribution.)
3. Increase overall value-chain efficiency: Sysco is selling more pre-cut and ready-now offerings to displace fast-rising restaurant labor costs with more efficient centralized food processing at an overall lower value-chain cost.  “We can do a lot of the back office cutting, preparing, staging a product, delivered to the restaurant, which takes labor out of the kitchen. Because while food costs have moderated, labor costs at restaurants have not moderated. And we’re seeing upticks from our customers ordering what we call value-added services products, which tend to come at a higher margin for Sysco.”
4. Returns to Market Share: As a distributor of perishable goods, Sysco can increase efficiencies by transporting more cases of product over a shorter distance by increasing market share within the countries it chooses to compete.  Management claims the market share is “highly fragmented”.

In alignment with his strategy, Kevin Hourican spoke of multiple actions his team is taking to improve sales, mix, and price capture.

1. He is hiring 400 new salespeople.
2. He has introduced a new incentive plan that aligns compensation to profit and loss goals. (Read Adopting Profit Based Sales KPI for a guide to best practices and implementation of profit-aligned sales incentives.)
3. He has recently upgraded his pricing software and is understanding the customer’s response to pricing much more focused. “Price elasticity, we’ve gotten much better at this over the last few years tied to our strategic pricing software.”
4. He has taken a strategy proven with other multi-SKU distributors and manufacturers such as Granger and Amazon or Parker Hannifin: velocity pricing. Velocity pricing focuses competitive pricing on high-velocity items and price capture on low-velocity items.  “The need for restaurant operators to lower their costs for those highest volume SKUs. … and we need to be right on price on those items. … There’s a long tail of product and the long tail product is more inelastic and we will never take advantage. But we have an opportunity to be a little higher in price, perhaps on some of those inelastic SKUs to fund sharper prices in the commodity space. And that’s something that we’re working on.”  See Understanding Velocity-Based Pricing for more details.)

On multiple occasions, Kevin Hourican expressed a need for restaurants to lower prices.  “I do want to be clear about that. I believe restaurants need to lower menu prices.”  And yet he also acknowledges that Sysco’s customers will run their businesses as they see fit.

Kenny Cheung, CFO of Sysco, echoed many of the same sentiments and goals.  At one point, he spoke of “incremental progress from our strategic sourcing efforts, disciplined and rational pricing, increased mix of specialty as well as improved penetration rates from Sysco brand products within local.”  Later he spoke of Sysco’s “centralized pricing tool.”

Given the scope of Sysco’s business, industry benchmarks would suggest 150 to 750 pricing professionals to be employed at Sysco with an expectation value near the center of this range.

1. With customers concentrated in North America and Western Europe, we would expect some pricing capability to be dispersed across Canada, U.S., Mexico, France, Ireland, United Kingdom, and Sweden.
2. A portion of their team would be focused on constantly improving the models and metrics that can come from a modern pricing software solution.
3. Other team members might focus on applying account specific pricing strategies for higher value customers, as has proven useful at other companies practicing velocity pricing.
4. Some pricing might inherently be dependent on volatile input costs, and herein a form of index pricing would be useful requiring yet another skill set.
5. Market research and competitive price intelligence would be necessary to ensure competitive pricing on high-volume items.
6. Contract pricing with the “national” segment would require a completely different capability than goods pricing to the “local” segment.
7. Macroeconomic changes, such as the disproportionate increases in restaurant labor costs and the reduced foot-traffic in restaurants despite revenues food-away from home overtaken by those food-at home with grocery buying, has a significant impact on Sysco’s performance. Moreover, the macroeconomic environment across Sysco’s geographies differ greatly.  As such, a team of economist or an economic advisory team would be useful for anticipating and managing economic turmoil.

Research into the investment by Sysco in pricing yielded encouraging results.

1. The number of professionals identified to be primarily engaged in pricing is well within industry benchmarks. Also aligned with expert expectations, pricing professionals at Sysco were found across North America and Europe.
2. Professionals engaged in pricing at Sysco held a broad range of responsibilities as would be suggested by our expert analysis. Many were focused on analytics, data science, and contract pricing. Some were more specialized with a focus of business intelligence or category and merchandising pricing.  One person was focused on pricing architecture.  Their team even sported an applied economist.
3. Pricing professionals ranged in seniority from analyst and manager to director and vice president with many other more nebulous titles in between such as coordinator, clerk, and head.

Given the importance and capability of pricing at Sysco as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of May 2024.

Sysco Pricing Spineometer: 5 out of 5 Vertebrae. While we are confident that challenges remain and improvement can be had at Sysco in pricing, Sysco’s pricing capability appears strong.

SYY (Sysco Corporation) was relatively unchanged at 77 the day prior to their earnings call and 76 one week later. FY 2023 revenue of $76.3 billion with a 4.0% operating margin and P/E ratio near 18.

For FY 2023, a 1% improvement in price would yield a 25.1% improvement in operating profits holding all else constant at Sysco.