U.S. Foodservice

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U.S. Foodservice

9755 Patuxent Woods Drive
Columbia, Maryland 21046
U.S.A.
(410) 312-7110
Fax: (410) 312-7591
Web site: http://www.usfoodservice.com

Public Company
Incorporated: 1989 as JPF Holdings, Inc.
Employees: 12,500
Sales: $5.5 billion (fiscal year ended June 28, 1998)
Stock Exchanges: New York
Ticker Symbol: UFS
SICs: 5140 Groceries & Related Products

U.S. Foodservice is the second largest distributor of food and related products in the United States, serving an area containing 85 percent of the nation’s population. The company markets more than 40,000 items to over 130,000 restaurants, hotels, hospitals, school cafeterias, and other facilities, including Fenway Park and the U.S. Senate. Formerly JP Foodservice, Inc., the company changed its name in 1998 following its acquisition of Rykoff-Sexton, Inc.

Early 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.

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-Murdock Co., a Dubuque, Iowa, company founded in 1853 to provision wagon trains heading west. 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.

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.

Sowing the Seeds of an Industry: 1940-70

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 customcut 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.

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.

National Distributors: 1971-89

The decade of the 1970s saw the move to breadline, multibranch 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, PY A/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.

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. PY A/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—seven 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 PY A/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, PY A/Monarch was serving some 70,000 foodservice operators, and its 22 distribution centers blanketed 60 percent of the United States.

PY A/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. P Y A/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, PY A/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.

Creation of JP Foodservice, 1989

By April 1989, Sara Lee Corporation had decided to sell off the northern division of PY A/Monarch, citing dissatisfaction with its performance. Although the southeast division was the top food distributor in its region, overall PY A/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 PY A/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 PY A/Monarch Inc. Under the terms of the leveraged buyout, Sara Lee retained ownership of PY A/Monarch, now operating in the southeast, as well as 47 percent of the shares in JP Foodservice.

Company Perspectives:

The key to our continuing success in the future, as in the past, is our people. It’s their skills, dedication and professionalism on behalf of our customers and shareholders that have enabled us to accomplish so much as a company up until now and that will allow us to accomplish even more in the years ahead.

Headed by James L. Miller, who had been executive vicepresident of PY A/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.

Growing a New Company: 1990-96

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.

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.

Mergers and acquisitions were also continuing in the industry as a whole: early in 1995, Rykoff-Sexton merged with US Foodservice and acquired Continental Foods of Baltimore. 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.

1997 On

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 company credited its internal growth to sales training and promotions and to the expansion of its private and signature brands. During 1997, JP introduced Harbor Banks, a seafood line.

Then, in December 1997, the company jumped into second place among foodservice distributors with the purchase of rival Rykoff-Sexton Inc. for $1.4 billion. Unlike its previous acquisitions, Rykoff-Sexton was much bigger than JP. Sales were expected to triple, to $5.2 billion, and the number of JP customers ballooned from 35,000 to 130,000. As a result, Standard & Poor’s added JP to the S&P MidCap 400 Index. The merger also changed JP from a major distributor in the East and Midwest to one operating coast to coast. New territories included the Southeast, the Sun Belt, and the West Coast.

Acquisitions continued even as JP worked to assimilate the Rykoff-Sexton operations, adding Sorrento Food Service, Inc., of Buffalo, and Westlund, a Minnesota custom cut meat specialist. In February, the company changed its corporate name to U.S. Foodservice and its trading symbol to UFS, having already introduced a new logo.

Sales for the 1998 fiscal year that ended in June, were better than expected, totalling $5.5 billion, an increase of seven percent from 1997. 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.” A few days later, the company announced it was selling the assets of its Rykoff-Sexton manufacturing division as part of its plan to shed its non-core operations.

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. In the $141 billion industry, according to a July 1998 article in Baltimore Business Journal, the top 50 companies accounted for only 28 percent of sales, and most of those sales, 23.7 percent, were by the ten biggest companies. 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.