How Consolidations are Affecting the Food & Beverage Industry

In late 2019, Performance Food Group completed its $2 billion acquisition of Reinhart Foodservice, consolidating the largest foodservice distributors in the U.S. to five.  Most recently, PFG announced its intention to acquire Core-Mark, adding approximately $17B in net sales annually.  These are the latest such moves in an industry that once consisted of hundreds of small, family-owned food distributors but has become increasingly dominated by a few large, national players over the past 40 years.

In the wake of the COVID-19 pandemic, the trend toward consolidation continues at a rapid pace. And while consolidation is not new for food and beverage distribution, the pandemic revealed how the trend affects the industry in both positive and negative ways.

“Early in the pandemic, we saw some supply chain disruption due to pantry loading and production stalling from government restrictions and plants closing,” says Michael Bromfield, Senior Vice President of Corporate Banking at Old National Bank. “But food and beverage are necessary. The government did its best to keep these businesses and the industry going. Now that supply is back to pre-COVID levels and the market continues to open up, we’re seeing greater attention and focus on mergers and acquisitions in the industry.  Most notably, the tier behind giants Sysco and U.S. Foods are chasing scale and geographies to remain relevant and compete.”

Benefits of Consolidation

As the food distribution industry has consolidated among a few big players, these large companies are able to develop greater efficiencies and drive progress toward fulfilling consumer demands. For instance, many large food companies are moving toward an increase in offering more fresh, wholesome ingredients and healthy choices.

“Consumers are positively affected by the consolidation because the large companies can create competition among very capable, efficient providers,” Bromfield says. “It keeps distribution companies focused on consumer needs, such as healthier foods.”

Also, as a big entity, a company can create efficiency. The very large companies must source from a lot of different suppliers, and that diversity is positive for the food industry, helping to ensure that demand will be satisfied. “Consolidating and growing bigger has required these large companies to diversify their supply chains and to constantly innovate,” Bromfield says.

For example, many beverage companies, including The Coca Cola Co., outsource the production and distribution of its products to focus on its brand. By outsourcing, the company has multiple entities focused on producing and distributing its products, which drives improvements, innovation and efficiency, Bromfield says. 

Negative Effects of Consolidation

Despite larger companies’ collective focus on meeting consumer demands for fresher, healthier ingredients, consumers are paying the price when it comes to food costs. Food prices have risen about 4 percent since the pandemic hit, Bromfield says. “While there was disruption in food distribution early in the pandemic, it would not have caused the price increase we’re seeing,” he says. “Large distributors can influence and control pricing, and they are currently driving prices upward.”

While consolidation in the food distribution space has affected prices, “it’s not a terrible thing because consumers are getting what they need and want,” Bromfield says. “Larger companies have a greater ability to source the fresh items consumers want, while smaller companies don’t have the network, relationships and buying power to do the same.”

Looking Ahead

Many smaller food distribution companies are owned by second- or third-generation family owners. As the population ages, many of these owners are looking for a way to exit their businesses, Bromfield says. With the economy recovering, those owners will continue to look for buyers for their businesses—and they make attractive targets for large food companies interested in expanding.

While private equity firms have shown interest in entering the food distribution industry, they face some challenges in getting up to speed. “When large food companies buy smaller companies that are similar to them, they’re able to add products or add geographies without building new strategies,” Bromfield says.

However, although the U.S. food distribution industry is concentrated among large companies, the government has taken steps to protect the industry from becoming too centralized and to “make sure there’s a measure of diversity,” Bromfield says. For instance, the government blocked a merger between U.S. Foods and Sysco because it would have resulted in a company that would be too large and have too much influence.

“The government has sent a message that these big companies don’t need to come together,” Bromfield says. “As attractive as it may be to stockholders, it’s not attractive to consumers.”

Even if the four large companies remain separate, acquisitions of smaller food distributors are expected to continue. “Smaller companies can’t compete against huge entities when it comes to technology, resources and talent,” Bromfield says. “I think we’ll see the pace of mergers and acquisitions increase as rising fuel costs and other pressures make it increasingly difficult for small companies to compete.”

For mid-size and larger companies that want to increase market share, acquiring smaller food distributors is a viable solution. Undertaking an acquisition often requires a capital need and a strong financial partner who can provide quick decisions, resourcefulness and thought leadership, Bromfield says. 

The Old National Commercial Lending Team's bankers are actively involved in the Food and Beverage industry and our market knowledge will guide you in growing your business. Talk with Michael Bromfield to discuss financing options for your business at Michael.Bromfield@OldNational.com. 

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