Leading Grocer: SYY

Sysco Corporation (SYY) is the leading grocer to restaurants. "Eating out" (foodservice) and "eating in" (retail) now make up roughly equal shares of the total U.S. food dollar with each grossing (a word derived from grosse, meaning twelve dozen, that also led to the word grocery) about $500 billion.

Eating out is a broad category, including schools, hospitals and supermarket services. For years foodservice was gaining share from retail, but has levelled out since 1998. Excluding supermarket and fast food categories, SYY has roughly 15% market share of selling groceries to foodservice, a $200 billion category.

SYY gets slightly over 50% of its revenues and most of its profits from "street customers," a term it uses to describe independent restaurants. The independent restauranteur is declining in the take out category, but is thriving in the full-service arena. SYY is a valuable ally to these customers, equipping them with the benefits of technology that would normally be available only to large scale buyers such as McDonalds.

Viewed in these terms, SYY is similar to Wal-Mart (WMT), another "leading grocer" with over 24% market share. Just as SYY expands the purchasing power of these "street customers" with scale and technology, so does WMT expand the purchasing power of its customers with scale and technology. However, SYY's customers use the expanded power for competitive purposes in business, while WMT's customers use that power to enjoy a wider range of products and services.

Based on this comparison, I tried to compare the long term stock price performance of the two companies. This graph shows the result:

Through 2003, these two stocks had similar performance, but have diverged since then. Looking at their financials, I saw they had similar results. However, the market gives SYY a P/E of 24 that is significantly higher than WMT's P/E of 18. In fact, past divergences in price are also mostly caused by P/E (market value) differences, not operating ones. (Here it appears that WMT has compelling value versus SYY.)

Interesting to me, SYY has almost 9,000 trucks while WMT has about 7,000 trucks, even though the gross revenues of WMT (in the U.S.) are almost eight times greater. This difference indicates that SYY could have some real improvements in the distribution area with its much anticipated redistribution centers (RDC). Look at the following graph the company has supplied:

If trucking times improve as indicated, either less trucks will be required or a greater volume will be moved with the same number of trucks. In either case, SYY will have moved another step towards helping its customers compete.