US Foods' Prudent Investments in Service and Technology Support Its Scale-Based Cost Edge

Despite operating in the highly fragmented and fiercely competitive foodservice distribution vertical, we believe US Foods remains a staunch competitor. The firm has honed its cost structure by reducing complexity, modernizing its infrastructure, and flexing its negotiating clout with suppliers, all while beefing up investment in value-added services, its salesforce, and proprietary products to win over lucrative independent restaurants and customers in the healthcare and hospitality sectors. We posit that US Foods’ ability to leverage its scale has paid dividends, as independent restaurant case growth (on an organic basis) has averaged 3.5% over the last seven years, outpacing the industry’s roughly flat transaction growth, according to Euromonitor. And we don’t think management will siphon investment away from its capabilities, as we expect capital expenditures to approximate 1.1% of sales ($2.4 billion in aggregate) over the next five years, ahead of the 0.9% ($1.6 billion) historically expended.