A Piece of the Pie: Specialty Food Distribution Growth Opportunities

Key Takeaways

  • Consumer demand remains strong for fresh, high quality food offerings, and retailers and foodservice operators rely on distributor partners to meet this demand.
  • This is particularly true of the growing independent and specialty retailer and foodservice segments, with these players focused on serving both the growing ethnic demographic and broader consumer demand for specialty product assortments.
  • Specialty food distributors of scale have established themselves as major players within the food supply chain by offering a unique value proposition that enables them to provide a broad variety of specialty items and brands that are in-demand and priced competitively. This is made possible by their scale and expertise managing complex supply chains.

As consumer demand for fresh foods, higher quality, and unique specialty items grows, the need for specialty food distributors is increasing. In fact, today’s $161.5 billion specialty food market is set to reach $247.2 billion by 2025, growing at a CAGR of 16.4%. Worldwide, North America is the largest slice of this fast-growing pie.1

Two major factors are driving the growth: a preference for healthy, freshly prepared meals and shifts in consumer demographics. While specialty distributors with scale are taking advantage of these market dynamics, attractive investment opportunities remain in this fragmented marketplace with thousands of independent operators.

An Opportunity for Specialists

Today’s retailers are highly focused on developing their perimeter departments and stocking them with premium and specialty items to drive incremental store traffic. This is particularly true for independent and specialty retailers which increasingly satisfy a growing demand by consumers for unique and fresh products that larger chains and on-line grocers cannot adequately supply. Meat, seafood, deli, bakery, and produce managers are focused on driving sales growth in their departments and rely on specialty distributors for their expertise and broad product offerings. While COVID impacted these perimeter departments to varying degrees, consumers have returned to more normal shopping behaviors, once again demonstrating their appetite for perimeter departments. Retail sales in 2021 are showing double-digit growth in almost all perimeter departments as compared to 2019 (Figure 1).2

Figure 1: Surging Sales in Perimeter Departments
hw-specialtyfooddistributiongraphs-0610_1v2.png

Source: IRI Integrated Fresh, Total U.S., MULO, % change vs. YA, fixed and random weight items combined into department views

“Delivering on this demand can be challenging,” says Tim Alexander, a managing director in the Harris Williams Consumer Group. “Food distribution is far more complex than other industries in which, for instance, parts can sit on a shelf for an indeterminate amount of time. In the specialty foods market, items typically have shorter and varying shelf lives. They may have very specific shipping needs, whether frozen, chilled, or ambient.”

As such, specialty food distributors must navigate a complex supply chain to meet market demand while making sure that the product remains fresh. “Both scale and personal relationships are critical to making this business work. Leading specialty distributors have mastered this balance and developed unparalleled last mile expertise to service retail and foodservice customers,” notes Alexander.

And while large broadline and wholesale distributors excel at delivering mainstays, they are simply not set up to handle the unique demands of many retailers and restaurants.

An Increasingly Diverse Population Drives Growth in Specialty Foods

Demographic shifts are also altering food demand as people bring their culinary cultures with them when they emigrate. From cuts of meat to produce and deli products, they often seek items only available in specialty and ethnic grocery stores. As shown in Figure 2, by 2028, the U.S. will have a higher percentage of foreign-born residents than it has had since 1850.3

Figure 2: Growing Diversity in U.S. Population
hw-specialtyfooddistributiongraphs-0610_2v2.png

Source: U.S. Census Bureau, 1850-2000 Decennial Censuses, American Community Survey 2010, 2017 National Population Projections for 2020-2060.

These are areas where specialty distributors can really differentiate themselves. “Specialty food distributors source from a broad variety of vendors both domestically and globally to meet the unique and diverse product needs of their customers. As an example, protein distributors like Quirch are able to source specialty items such as oxtail, bacalao, and other ethnic proteins, simplifying the path from supplier to the Hispanic grocer. That path is often long, multilingual, and subject to strict quality, safety, and speed requirements,” says Brant Cash, a managing director in the Harris Williams Consumer Group. 

As such, adds Cash, partnering with a distributor who can simplify their supply chain becomes paramount to retailers’ and restaurants’ operations. These specialty distributors act as the point of contact between all players in the food chain: Farmer, processor, importer, retailer, and restaurant. They can source the freshest products year-round—whether hyper-local or global—and streamline these otherwise complex supply chains.

In sum, specialty food distributors are the critical link between producers and consumers in the global food chain. It’s an enviable spot for players that can make the most of it.

Differentiating Distributors

In recent years, Harris Williams has worked with many leading companies in the specialty food distribution space, including Bakemark, DPI, Lancaster, Lipari, and Quirch. This diverse set of companies each represented different ways of winning.

Overall, the most successful specialty food distributors do more than connect their clients to products. They understand what each customer needs and how to increase traffic and profitability by responding to consumer demands. Beyond access to specialty products, best-in-class distributors offer services like merchandising, menu planning, consumer insights and marketing, and access to attractive brand offerings.

Quirch, for example, is a specialist in protein distribution that started out by focusing on ethnic grocers. Over time, it has expanded geographically and leveraged its scale to create industry-leading brands that work in ethnic and mainstream retail. As the company has realized benefits from gaining scale, its focus on service, access to unique specialty items, and brands have helped create strong relationships with meat and seafood departments across its footprint.

As Alexander says, “These brands have true power in the marketplace and offer great margin profiles for both retailers and Quirch. The company developed a trust factor with specialty ethnic retailers, and it’s been interesting to see national retailers and foodservice chains start to see the benefits of working with a category expert like Quirch.”   

Other examples of value-added customer support can be found at Lancaster and DPI. Lancaster offers retailers a complete assortment of high-quality produce. The business stands out for its ability to offer fresh-cut in addition to wholesale produce, which reduces labor at the store. DPI’s ability to offer manufacturer-to-shelf supply chain expertise is a clear value driver for retail customers. Its unmatched breadth and depth of specialty products and high-touch in-store services drive value for retailers from a sales perspective and provide much needed labor savings. “As labor markets continue to tighten and wage costs go up, both retailers and foodservice providers are looking for ways to balance the customer experience with the bottom-line. This is where specialty distributors have found a place to win,” added Alexander.

This depth of support and hyper customer-centric model is what truly separates exceptional specialty food distributors from the pack. These companies can customize their offerings because of their unique understanding of the local markets and communities they serve. Leaders within the space have even found success in developing, marketing, and distributing proprietary branded products that offer both the distributor and customer great profitability. “Quirch provides a great example of the power that scale combined with a strong understanding of consumer demands can deliver. The ability to develop two separate proprietary brands that each generate over $100 million in sales demonstrates the unique capabilities that leading players can bring to bear,” says Alexander.

The importance that specialty food distributors, particularly those of scale, play within the food supply chain was made clear during the pandemic. Leaders within the space demonstrated their importance to suppliers, accessing product in times of unmatched disruption. This ability to secure supply played an instrumental role in helping independent retailers and restaurants continue to operate. Additionally, specialty food distributors of scale had the necessary infrastructure and capabilities to quickly and effectively meet the needs of their customers, further strengthening those relationships for generations to come.

For example, BakeMark has supplied independent bakeries for many years, and made sure its customers knew what was required to keep them in business through the government-imposed shutdowns. “These businesses are everything for the families that own and operate them. Specialty distributors have a true partnership with their customers, and the support provided by BakeMark through the pandemic will long be remembered,” noted Cash.

In addition, the quality of their sales team matters. Many retailers and foodservice providers focusing on specialty foods have an ethnic background based on the communities they serve. For example, a growing Latino immigrant base brings an increasing buyer power of $1.9 trillion, which is higher than the GDP of Australia and Mexico.4

Similarly, many operators within the space have built trusted supplier relationships over years, often passed down from generation to generation. Specialty food distributors have built these relationships not only via value-added services, but also through dedicated, multilingual sales teams.

Building the Power of Scale

Specialty food distributors are critical links within the food supply chain, uniquely positioned to serve independent grocers and foodservice providers, particularly those with an ethnic focus. “There are clear leaders in the space that stand out by offering the best of both worlds: scale and localization,” says Cash. “They bring the benefits of scale to their customers while delivering real value on a local basis.”

gettyimages-1194253536.jpgWinning distribution platforms have also developed multiple levers for growth, building out capabilities and playbooks to capture growth organically and inorganically. The foundation for success here is scale. Being bigger enables more control over pricing and margins, higher service levels, more efficiency, and a larger footprint with greater supplier and customer diversity.

The opportunity for further consolidation remains, says Alexander: “Large broadliners such as Sysco and U.S. Foods and wholesalers like C&S and UNFI make up a fraction of the food distribution industry. Around 15,000 players focusing on a variety of attractive niches comprise the lion’s share of the market.”

By purchasing several small, highly specialized distributors, investors can create procurement synergies, optimize warehousing, and increase route densities. “Plus, the multiples on these smaller players are typically lower than the multiple for the platform, creating a reliable arbitrage opportunity,” says Cash. “They also tend to be highly embedded with their customers because of the personal relationships they build.”

While M&A is certainly a way to accelerate growth into new markets or channels, there are several other examples where distributors expand organically. “Whether it’s expanding into adjacent geographies or leveraging a key relationship to establish a beachhead in a new geography, quality platforms have found ways to successfully expand,” concludes Alexander. “The demand is there, growth is strong, and the tailwinds are real. A platform driven by a clear vision could generate substantial value.”

The Harris Williams Consumer Group has completed transactions across a variety of verticals, including branded consumer products; consumer services; food, beverage and agribusiness; and restaurant and retail. For more information on the Harris Williams Consumer Group and recent transactions, visit the Consumer Group’s section of the Harris Williams website.

Select Relevant Food & Beverage Transactions

 
1. Specialty Foods Global Market Report 2021: COVID 19 Growth And Change to 2030; The Business Research Company, May 2021.
2. IRI Integrated Fresh, Total U.S., MULO, % change vs. YA, fixed and random weight items combined into department views
3. Source: U.S. Census Bureau, 1850-2000 Decennial Censuses, American Community Survey 2010, 2017 National Population Projections for 2020-2060
4. Direct Sellers Lag in Hispanic Market, Social Selling News, February 2020.
 
Published June 2021
Register to Download

All fields with an asterisk (*) are required.