U.S. Foodservice
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U.S. Foodservice, based in Rosemont, Illinois, is the second largest broadline foodservice distributor in the United States. Only Sysco Corporation is larger. The company distributes food and related products to over 250,000 customers, including restaurants, healthcare facilities, lodging establishments, cafeterias, schools and colleges. U.S. Foodservice markets and distributes more than 43,000 national, private label, and signature brand items and employs more than 29,500 foodservice professionals.
U.S. Foodservice is currently a private company jointly owned by Clayton, Dubilier & Rice and Kohlberg Kravis Roberts after being sold by former parent Royal Ahold in mid-2007.[1]
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[edit] History
The history of U.S. Foodservice encompasses the story of how (and where) Americans purchase the food they eat. It reflects the development of an entire industry, shifting from small entrepreneurial wholesalers supplying retail grocery stores to large regional and national distributors offering a broad line of products to institutional clients.
[edit] Early history
Several of the entities that comprised what is now U.S. Foodservice started in the 19th century. Monarch Foods, for example, traced its roots to Reid-Murdoch Co., a Dubuque, Iowa, company founded in 1853 to provision wagon trains heading west. Reid-Murdoch was a major sponsor of the "The Teenie Weenies" comic strip.
John Sexton & Co. began as a tea and coffee merchant in Chicago in 1883. Sexton soon discovered hotels and restaurants were his biggest customers and he dropped his retail business altogether. Before the turn of the century, Sexton began manufacturing pickles, salad dressings, preserves, and jellies to guarantee a uniform high level of quality for his institutional customers.
L. H. Parke Company started in 1889 as a partnership of Louis H. Parke and William P. M. Irwin. The partnership took over the small provision-pushcart business of Samuel Irwin, a civil war vet. who had lost his arm in the Battle of Winchester, Virginia. Parke started as a seller of coffee, tea and spices. The company grew to be a major institutional wholesale seller of canned goods and had five locations (Philadelphia, Pittsburgh, Washington, DC, Albany, New York and Richmond, VA.) by the time it sold out to Consolidated Foods in 1962. Donald Irwin Jr., President of Parke became the first president of Monarch Institutional Foods at that time.
Los Angeles-based S.E. Rykoff & Co. was established in 1911, and the Mazo and Lerch families started their business in northern Virginia in 1927. Most of these wholesalers tended to specialize, selling items to local grocery stores. In the early 1930s, distributors, including Mazo-Lerch Company, began offering frozen foods, primarily frozen French fries and orange juice.
[edit] Post World War II
Foodservice distributors served institutional clients that provided food away from home, unlike retail distributors, who sold to grocery stores. The first distinction between the two groups came about in 1951, with the formation of the Association of Institutional Distributors. With fighting going on in Korea, the federal government reinstituted price controls, including a 16 percent ceiling on food distributors' gross profits. About a dozen companies met in Chicago to respond to that action. Because it cost more to distribute to their institutional customers than to grocery stores, the distributors wanted to be considered separately from grocery wholesalers and to have their ceiling raised to at least 21 percent. They were successful in their lobbying efforts.
The federal government also helped open up foodservice markets. Five years earlier, in 1946, the U.S. Congress passed the National School Lunch Act. Suddenly, large numbers of schoolchildren were eating cooked meals away from home, and school cafeterias became the first institutional mass market. One of the few distributors to focus on schools was the Pearce-Young-Angel Company (PYA) in the Carolinas. That same year, Consolidated Foods Corp., the precursor of Sara Lee Corporation, acquired Monarch Foods.
By the late 1950s, most distributors had added frozen foods to their product lines. In 1958, Mazo-Lerch held the first food show, and was one of the first distributors to offer both custom-cut meats and beverage dispenser programs. The diversification trend continued over the years, as foodservice distributors provided disposable items such as napkins and tablecloths, followed by china and glassware, then light and heavy equipment.
[edit] The 1960s
In 1965, Americans spent just 20 cents of every food dollar for food away from home. Total distributor sales that year were an estimated $9 billion, and the average institutional distributor had an annual volume of $1.5-$2 billion. Institutional Distributor, in its first survey of the foodservice distribution industry, found that the average order size of respondents was $80.40, and the average number of customers was 572. The survey also found that nearly half of the respondents sold to both grocery and institutional customers.
[edit] The 1970s
The decade of the 1970s saw the move to broadline, multi-branch organizations. Consolidated Foods bought the old Pearce-Young-Angel distribution network in 1971 and merged it with its Monarch Foods subsidiary to form PYA/Monarch, which would eventually become the foundation of US Foodservice. Within a few years, PYA/Monarch had linked data processing operations in its branches with the computer in its headquarters. S.E. Rykoff went public in 1972, one of the few foodservice distributors to do so.
[edit] The 1980s
The distribution industry went through a difficult period during the early 1980s, with companies under pressure as a result of inflation and economic slowdown. However, people still needed to eat, and much of the pressure was from competition. Speakers at national conferences focused on customer service, productivity, and professional development. Computers were playing a greater role in the business, enabling a distributor to provide customers with information to help control inventory, determine menu costs, and analyze profitability. As distributors became more professional, restaurant chains such as Marriott and Howard Johnson folded or reduced their self-distribution activities and focused on their restaurant operations.
By 1982, the foodservice distribution was a $69 billion industry. Five companies were considered "national distributors," with a total of 168 distribution centers covering major portions of the country. PYA/Monarch and John Sexton & Co. were two of the five, joined by Sysco Corporation of Houston, CFS Continental, Inc., and Kraft Foodservice. Despite their dominance geographically, these multi-branch distributors reported combined sales in 1982 of $4.8 billion – 7 percent of the industry.
Over the next several years, the big distributors made major acquisitions. S.E. Rykoff bought Sexton & Co. in 1983, in what was then the largest acquisition in the industry. The renamed Rykoff-Sexton took fourth place among foodservice distributors with $800 million in sales. CFS Continental's purchase of Publix Fruit and Produce moved it into third place, with sales in the $1.1 billion range. Number one Sysco acquired B.A. Railton along with Pegler, increasing its volume to over $2 billion. Meanwhile, in Greenville, South Carolina, number two PYA/Monarch bought Fleming Foodservice of Austin, Texas, raising its 1984 sales volume to an estimated $1.3 billion. By the end of its fiscal year in June 1984, PYA/Monarch was serving some 70,000 foodservice operators, and its 22 distribution centers blanketed 60 percent of the United States.
PYA/Monarch was one of the first distributors to compete as a provider of services as well as products. "The day of the distributor who merely warehouses, delivers, and takes orders for products a customer wants is over," company management told Institutional Distribution in a 1984 article. PYA/Monarch's mission statement revealed its goal: "... to be a premier company in every area of operations, providing products and services that can enable a customer to run a more efficient and profitable business."
Using the largest computer in the industry, PYA/Monarch phased in a new state-of-the-art data processing system. Totally centralized, the system made it possible for headquarters to carry out data processing for each of the 22 branches, whose computers now gathered data.
The 1980s saw a tremendous change in the eating habits in the United States. By 1986, Americans were spending one-third of every food dollar outside the supermarket, and the foodservice distribution had grown to a $78 billion industry.
By April 1989, Sara Lee Corporation had decided to sell off the northern division of PYA/Monarch, citing dissatisfaction with its performance. Although the southeast division was the top food distributor in its region, overall PYA/Monarch ranked third behind Sysco and Kraft, and Sara Lee was committed to being first or second in each of its businesses.
In June 1989, members of PYA/Monarch management incorporated a new entity, JPF Holdings, Inc. Two weeks later, on July 3, JPF Holdings acquired all the capital stock of the Sara Lee subsidiary, JP Foodservice Distributors Inc, including the mid-Atlantic and northeastern operations of PYA/Monarch Inc. Under the terms of the leveraged buyout, Sara Lee retained ownership of PYA/Monarch, now operating in the southeast, as well as 47 percent of the shares in JP Foodservice.
Headed by James L. Miller, who had been executive vice-president of PYA/Monarch's northern division, the new company immediately sold three of its branches – Los Angeles, Little Rock, and Paducah – to Kraft Foodservice. The result was a major regional operation with nine distribution centers serving a territory from Virginia north to Maine and west to Nebraska.
JP Foodservice Distributors passed the $1 billion mark in its first year, with sales for fiscal 1990 of $1.02 billion. That was a jump of more than 12 percent from the division's sales in fiscal 1989, and made the new company number five among the top 50 distributors selected by Institutional Distributor. But Miller and the other managers had borrowed over 95 percent of the $317 million they paid for the company. With that amount of debt, and with a soft economy, JP concentrated on building the lowest cost structure in the industry. The company invested primarily in improving facilities, adding a new $15 million replacement center between Washington, D.C., and Baltimore and building an addition at its Allentown, Pennsylvania warehouse that doubled freezer and cooler capacity. It also used technology to cut costs and provide greater service to its customers. For example, a hand-held electronic device allowed JP customers to monitor their inventory and send information to the company.
[edit] The 1990s
In November 1994, five years after it was created, the company adopted the name JP Foodservice, Inc. and went public in November, listed on the NASDAQ under the symbol JPFS. Sara Lee Corporation now held 37 percent of JP common stock. The public offering raised $86 million, and JP restructured and paid off much of its debt.
JP Foodservice had more than 21,000 customers in 25 states in the Mid-Atlantic, Midwest, and Northeast regions of the country and was the sixth largest food distributor. It provided customers with a broad line of products, including canned, dry, frozen, and fresh foods, paper products, detergents, and light restaurant equipment. With its debt problems resolved, the company set a new growth strategy which, in addition to increasing internal growth, included acquiring smaller distributors. Its first purchases were Tri River Foods, Inc. and Rotelle Inc., two Pennsylvania distributors. JP's strategy also called for increasing its line of private label products, which included Hilltop Hearth breads, Cattlemen's Choice meats, and Roseli Italian foods.
Foodservice distribution had grown to become a $124 billion industry, and the ten largest distributors accounted for 18 percent of the business. JP's business, which for fiscal 1995 reached $1.12 billion, was about 55 percent independent (hospital cafeterias, family-owned restaurants) and 45 percent chains. The increasing product demands and bigger menus of the chains and large restaurants were important factors fueling consolidation among distributors.
Toward the end of 1995, the company and its former parent, Sara Lee Corporation, began talks about exchanging PYA/Monarch, Sara Lee's southeastern foodservice subsidiary, for JP stock worth about $946 million. Yet the two companies failed to reach agreement on several factors, including valuation (JP's stock price had gone up in expectation of the merger), structure, and dilution of earnings to existing shareholders, and the deal fell through in February 1996. The experience left both sides bitter, and JP was expected to find a way to reduce Sara Lee's presence or end its investment in the company all together.
That separation occurred before the end of 1996, when JP held a public offering involving the sale of all the common stock held by [Sara Lee]. On December 31, 1996, JP Foodservice moved to the New York Stock Exchange, trading under the symbol JPF.
JP continued buying smaller companies, paying for them with $66 million raised by another stock offering. Acquisitions included Valley Industries of Las Vegas, Arrow Paper and Supply Company, based in Connecticut, Squeri Food Service of Cincinnati, and Mazo-Lerch Company, Inc., the 70-year-old food distributor based in northern Virginia that had held the first food fair in 1953. By the end of the fiscal year in June, net sales were up 17 percent to $1.7 billion, with acquisitions accounting for about six percent of the increase and the remaining 11 percent from internal growth. JP's growth was significantly higher than the three percent for the foodservice distribution industry. The JP Foodservice company credited its internal growth to sales training and promotions and to the expansion of its private and signature brands.
[edit] U.S. Foodservice
The name "US Foodservice" comes from US Foodservice Inc, a broadline distributor based in Wilkes-Barre, PA. US Foodservice Inc was formed in March 1992 by Unifax Inc specifically to acquire the White Swan Inc, a Dallas-based distributor.[2] The merger with White Swan Inc was completed in October 1993. Via a share exchange (shares of White Swan were swapped for shares of US Foodservice), it created one of the largest broadline distributors in the country.
The resulting combined entity had five operating subsidiaries: White Swan, Bevaco Food Service, Kings Foodservice Inc., Roanoke Restaurant Service and Biggers Brothers Inc, thus operating foodservice distribution centers in Pennsylvania, North Carolina, Tennessee, Virginia, Texas, Ohio, West Virginia, Oklahoma and Florida. Merrill Lynch Capital Partners, a wholly owned subsidiary of Merrill Lynch & Co., owned a controlling ownership in both White Swan and US Foodservice, by virtue of its funding each company's leveraged buyouts – White Swan in 1988 and Unifax Inc in 1992. The US Foodservice management team will include Frank Bevevino, president and chief executive; Thomas G. McMullen and Peter Smith, vice presidents; David F. McAnally, vice president and chief financial officer; and William Griffin, vice president of administration.
In 1995, US Foodservice of Wilkes Barre, PA was the 4th largest broadline foodservice distributor, according to Institutional Distributor Magazine, behind Sysco (#1), S.E. Rykoff/John Sexton (d.b.a. Rykoff-Sexton) (#2), and Kraft Foodservice (#3), and just ahead of JP Foodservice (#5), and PYA/Monarch (#6).
Within the next 12–24 months, S.E. Rykoff/John Sexton would establish a solid hold of this #2 spot by acquiring Continental Foods of Baltimore, MD, H&O Foods of Las Vegas, NV, and U.S. Foodservice. Rykoff-Sexton management created the Rykoff-Sexton Funding Corporation to finance the acquisition of their near competitor U.S. Foodservice, and by the end of 1996 the newly renamed and much larger corporation was now trading on the New York Exchange as Rykoff-Sexton Inc.
U.S. Foodservice had now become a division of Rykoff-Sexton Inc. The Rykoff-Sexton Inc. parent corporation was now operating a handful of divisions, a broadline foodservice distribution division (d.b.a. "U.S. Foodservice" after combining with the S.E. Rykoff and John Sexton & Co distribution divisions), a private label manufacturing division (historical foodservice brands like John Sexton and SERCO), a foodservice contract and design division (historically known as Finegolds), and foodservice equipment and supply (2nd in size at the time to only Edward Don & Company).
Rykoff-Sexton Inc management was not done yet, negotiations were already underway in 1997 to combine with JP Foodservice. Mark Van Stekelenburg, then Chairman of the Board and Chief Executive Officer of Rykoff-Sexton Inc, and the former President and Chief Executive Officer of G.V.A., Inc, the largest food service distributor in the Netherlands and a subsidiary of Royal Ahold N.V., had led the 2nd largest food distributor Rykoff-Sexton Inc. into the combination of the industry's #2, #4, and #5 largest corporations in less than 24 months. In early 1997, Mark Van Stekelenburg said, "Rykoff-Sexton Inc./U.S. Foodservice will be the number 1, number 2, or number 3 player in every market in which it serves the broadline foodservice distribution business."
In late 1997, JP Foodservice ($1.7 billion in revenues) jumped into second place among foodservice distributors with the consummation of a merger with rival Rykoff-Sexton Inc (with just under $5 billion in revenues) for $1.4 billion. Unlike previous acquisitions that JP Foodservice had undertaken, the merger with Rykoff-Sexton was much bigger. Sales were expected to triple, to $6 billion, and the number of JP Foodservice customers ballooned to 130,000. As a result, Standard & Poor's added JPF to the S&P MidCap 400 Index. The merger also changed JP Foodservice from a major distributor in the East and Midwest into one operating coast to coast. New territories included the Southeast, the Sun Belt, and the West Coast.
[edit] The reemergence of U.S. Foodservice
Mark Van Stekelenburg in early 1998, now a Director on the JP Foodservice Board, Vice Chairman of the JP Foodservice Board, and President of JP Foodservice, gave the reins of the corporation to Jim Miller, and returned to Royal Ahold N.V., (NYSE: AHO [ADR]), the leading international food provider with major operations in the US, Europe and Latin America. Before the departure of Mark Van Stekelenburg, JP Foodservice changed its name to U.S. Foodservice. Thus the reemergence of the U.S. Foodservice corporation, previously privately held in 1995, as of Monday, March 2, 1998, the trading symbol was changed from "JPF" to "UFS" and was now being traded publicly on the New York Stock Exchange.
Acquisitions continued even as the new U.S. Foodservice (NYSE: UFS) worked to assimilate the Rykoff-Sexton operations, adding Sorrento Food Service, Inc., of Buffalo, and Westlund, a Minnesota custom cut meat specialist.
By mid-1998, Chairman and CEO Jim Miller was justifiably proud of the accomplishments, telling the Baltimore Sun, "We not only successfully completed the largest merger ever in our industry, tripling the size of our company, we did so achieving record earnings and meeting or exceeding virtually every goal set out in our merger plan." In the 3rd quarter of the calendar year 1998, U.S. Foodservice announced it was selling the assets of its Rykoff-Sexton manufacturing division as part of its plan to shed its non-core operations.
The successful integration of the larger Rykoff-Sexton company made U.S. Foodservice a favorite among analysts, and the company itself indicated it was still on the lookout for purchases in the highly fragmented foodservice industry.
One year later, 1999, fiscal 2000, U.S. Foodservice is generating sales that exceed $7 billion and has caught the attention of Royal Ahold N.V. (NYSE: AHO [ADR]). Within the first quarter of calendar year 2000, Royal Ahold has filed a tender offer, filed by Ahold Acquisition, Inc. and Koninklijke Ahold N.V. with the U.S. Securities and Exchange Commission, to purchase all outstanding shares of U.S. Foodservice.
[edit] Post 2000
[edit] U.S. Foodservice becomes division of Royal Ahold NV
March 20, 2000, U.S. Foodservice agreed to be acquired by Royal Ahold for $26 per share or $3.6 billion.
To strengthen its presence in the southeastern United States, U.S. Foodservice acquired former sister company PYA/Monarch for $1.57 billion on December 5, 2000. The acquisition meant Ahold's sales would now reach $12 billion annually.
In November 2001, the US Foodservice division of Ahold, acquired Alliant Exchange Inc., parent company of Alliant Foodservice. This greatly expanded the geographical range of its activities. In fact, U.S. Foodservice said Alliant would give it access to 21 new U.S. markets. This $2.2 billion purchase gives U.S. Foodservice distribution centers and food processing facilities in areas that are serving 100,000 customers--including independent and multiunit restaurant operations, hotels, contract foodservice operations and healthcare facilities. In 2000, Alliant Foodservice reported revenues of $6.6 billion. (Kraft Foodservice became Alliant Foodservice in 1996 after Clayton, Dubilier & Rice, Inc. purchased the Kraft Foodservice division from the Philip Morris Corporation).
After the Alliant acquisition, U.S. Foodservice was now generating combined total revenues of approaching $14 billion. U.S. Foodservice growth was 600% over the last 6 years, from about $2 billion in revenues in 1995, to $14 billion in late 2001.
The making of U.S. Foodservice reflects the trends of its industry: from retail to institutional customers; from specific products to a broadline of offerings; from single distribution centers to multi-unit branches; increased professionalism and customer service; and, most pronounced, the continuing and aggressive expansion through acquisition.
[edit] U.S. Foodservice taken private by investment funds
During 2006 there was much speculation as to which equity firm would acquire U.S. Foodservice from Royal Ahold. Ahold had refused to consider a spinoff of the subsidiary to the capital markets, and appeared to be headed toward an auction that JP Morgan would manage.
This was consistent with many larger going concerns in the United States that appeared to be headed away from being publicly traded in what many believed was an attempt to avoid the requirements of the Sarbanes-Oxley Act of 2002. After the internal accounting controls and procedures struggles that U.S. Foodservice had gone through over the past 3 years--the very same that the Sarbanes-Oxley Act of 2002 was designed to address--one had to wonder if U.S. Foodservice being privately held was the proper path toward a transparent valuation of the company.
On May 2, 2007, Clayton, Dubilier & Rice, Inc. (CD&R) and Kohlberg Kravis Roberts & Co. L.P. (KKR) announced a definitive agreement to acquire U.S. Foodservice from Royal Ahold. Funds affiliated with CD&R and KKR are equal partners in the transaction, valued at $7.1 billion. The Washington Post quoted Robert S. Goldin, an executive vice president at Technomic, a food consulting firm in Chicago, as saying, "When Ahold acquired U.S. Foodservice, the industry consensus was that it overpaid." Industry analysts had previously estimated U.S. Foodservice could be worth $5.1 billion to $5.7 billion, the Post reported, adding that industry experts now agreed that Ahold got top dollar.
"For Ahold this is a reasonably good end to what's been a pretty unsuccessful foray into U.S. food distribution," Goldin continued. "It's been a sore spot for them. They overpaid for the business and never rationalized it. I would imagine they are pretty happy to put this one behind them."
The Post added that "Ahold was forced to restate more than $800 million in earnings after it came to light that U.S. Foodservice executives had inflated promotional rebates from suppliers to meet earnings targets. The scandal caused the parent company's shares to plunge."
"Ahold settled with the Securities and Exchange Commission two years ago and agreed to pay $1.1 billion to resolve shareholder lawsuits."
[edit] Speciality divisions and companies
[edit] North Star Foodservice
In May of 2006 U.S. Foodservice announced its chain restaurant division will operate under the name North Star Foodservice. North Star, which employs 2,100 associates in 11 locations throughout the U.S., serves high-profile regional and national chains. Support office is located in Greenville, South Carolina.
North Star Foodservice sales in 2005 were $2.8 billion, with the unit shipping more than 114 million cases of product to America's leading restaurant companies.
[edit] Next Day Gourmet
The company has a supply and equipment division Next Day Gourmet which offers direct order and online purchasing of S&E equipment. Next Day Gourmet provides restaurant startup equipment order fulfillemnt through the local distribution facility and sales representative.
[edit] Monarch Foods
To further boost sales growth in the broadline division, U.S. Foodservice will pare its portfolio of 60 private-label brands down to 20. A new unit within the broadline division, called Monarch Foods, will focus on these "power brands." Robert Aiken, currently working on marketing and supply chain efforts for U.S. Foodservice, will head Monarch Foods.
[edit] Alliant Logistics
US Foodservice is launching the formation of Alliant Logistics. This formation a "company within a company" is designed to allow US Foodservice to take full advantage of its logistics network, increase customer support and better leverage the organization's position in the market place. This model will incorporate the development of regional logistics centers in Rosemont, Illinois; Phoenix, Arizona and Ft. Mill, South Carolina.
[edit] Stock Yards
In February 2000, Stock Yards Packing was sold to U.S. Foodservice. U.S. Foodservice owned seven other custom meat cutters at the time and wanted to add a company with a solid reputation to its mix. Other pluses in acquiring Stock Yards were that company's strong management and labor force; their excellent customer service; reputation for high-quality products; and the fact that Stock Yards was a Certified Angus Beef distributor. Dan Pollack stated at the time of the acquisition that he hoped to use Stock Yards's expertise to streamline and standardize the meat cutting operations of U.S. Foodservice.
[edit] External links
- U.S. Foodservice website
- U.S. Foodservice locations
- North Star Foodservice
- Foodservice Advantage Club
- Next Day Gourmet
- PYA's - Roy Pearce
- US Foodservice Truck Pictures
- WEST VIRGINIA DIVISION A Brief History and the original "US Foodservice"
- U.S. Foodservice on Manta.com
