Bidcorp’s ambitious growth strategy has seen it develop from humble beginnings in 1989 as a South African foodservice business, to the JSE-listed broadline foodservice group it is today – with a presence in more than 35 countries across five continents. We unpack Bidcorp’s journey to becoming one of the most profitable global foodservice companies and assess their prospects in this 3.5 trillion-dollar per annum industry.
Fulfilling a central role
“Foodservice” is an umbrella term for the wide range of products, services and businesses involved in the preparation and service of food outside the home. Bidcorp operates as a wholesale and contract distributor within the broader foodservice industry, essentially functioning as an intermediary between a range of local and specialty food producers and other business customers – the scope of which is indicated in the right chart below.
Across the group, Bidcorp warehouses an extensive range of over 350 000 products sourced from more than 24 000 suppliers. This includes shelf-stable items (eg sugar), refrigerated food (eg meats) and frozen products (eg ice-cream), along with non-food items such as napkins and sanitizers. The company’s multi-temperature delivery vehicle fleets transport products to a global customer base of more than 280 000 businesses and institutions. The left chart below illustrates Bidcorp’s geographical exposure, reflecting a well-balanced mix across the different territories.
Dining out dishes up potential
Covid-19 pandemic impact aside, the broader foodservice industry has enjoyed robust growth over time as dining habits have increasingly shifted in favour of the convenience of the Food-Away-From-Home (FAFH) market. The ever-improving value proposition of quick-service restaurants together with better standards of living have aided this trend, and distributors like Bidcorp have benefitted through supplying the businesses that cater to FAFH.
By 2010, FAFH expenditure had overtaken Food-At-Home expenditure in the US and it accounted for an estimated 53% of total food spend by 2019. Yet, in the UK and Australia – two key markets for Bidcorp – a deceleration in the growth rate for FAFH spending has been noted, indicating that this theme is reaching maturity in these markets (charted below). Bidcorp have subsequently sought a different approach for growth and profitability across these markets, through solutions-based innovation and service excellence.
Standing out from the crowd
Foodservice distribution is typically characterised by a high level of commoditisation among the products on offer. Pricing competition is fierce and, similarly to food retailers, distributors price their products as a basket of goods with some items being loss-leaders and others earning higher margins. Clients can change suppliers with relative ease and, while there are benefits to having scale, the barriers to entry for new competitors remains low for these reasons.
To combat this, Bidcorp has focused on increasing their client offering. The company owns and operates processing facilities which are used to make value-add products including, for example, ready-to-fry potato chips, pre-cut vegetables and frozen ready-made meals. Not only does this present a greater range and save customers preparation time, these value-add products earn a higher profit margin for the group.
Additionally, Bidcorp has sought to further differentiate themselves from competitors through building client loyalty by offering bespoke menu development, recipe costing and operational guidance to their client base. They run “Customer Experience Centers” in certain countries, where clients can learn about new products and how best to use them via tutorials given by professional chefs. Their sophisticated online ordering platform also enables clients to access real-time stock levels, prices and scheduled arrival times for deliveries.
Strategically building profitability
Bidcorp’s most notable achievement has not necessarily been growing the group’s revenue base, but rather transforming the profitability of the business – the evolution of their trading profit margin shows successful strategic execution. This is evidenced by the Australasian business, which (upon reaching scale) opted to refine their customer mix, tailor the business to cater to high-margin (low volume) independent restauranteurs and rationalise their low-margin (high volume) clients (ie large national chain restaurants).
Independent customers typically do not have the same bargaining power as national chains and therefore pay up to 20% more for items. However, focusing on independent restauranteurs comes with an increased level of complexity as the need to cater for many different clients – each with potentially different requirements – demands a high level of service and attention to detail. Consequently, Bidcorp rolled out a network of decentralised depots across key transport nodes to position themselves closer to their clients. The high capital outlay and greater associated costs of doing business has been more than offset by the increased financial rewards, with the depots offering a competitive advantage over other distributors in the region.
Pre-Covid-19, this strategy led to Bidcorp delivering a trading profit margin of 6.9% in Australasia (chart below) – notably the highest within the group.
This success has led to Bidcorp signaling an intention to emulate a similar strategy in other regions. While we see merit in this, we believe it is unlikely that other regions will reach the same levels of profitability as Australasia. Each market has its own culture and hospitality-related nuances, with the Australasian market characterised by a strong mix of cafes and independent restaurants relative to national chains – compared to the profile of most other markets in which they operate. There will therefore likely be challenges in fully replicating this strategy elsewhere with the same expectations.
However, we do see further opportunities for Bidcorp to increase profitability by downscaling or disposing of underperforming business units within the group – as they did with their loss-making UK Logistics division in 2017.
An interesting market exposure mix
Bidcorp have built up a meaningful presence in China – the world’s largest foodservice market – and have established a foothold in regions across South America and other Asian markets including Hong Kong, Malaysia, Singapore and Vietnam. Unlike the UK and Australasia, many of these foodservice markets are still in the early stages of maturity, where the rise in more formal dining out (FAFH) is a more recent development.
There is a clear and positive correlation between individuals dining out more as income levels increase. With Asia estimated to be home to 90% of the next billion middle-class consumers, the long-term opportunity is particularly evident for Bidcorp.
Notably, emerging markets have proven themselves as challenging and often volatile territories in which to do business. While we see potential in Bidcorp’s growing exposure to these territories, we are cognisant of the fact that strong execution will be required for these opportunities to be fully realised.
Eat or be eaten
The complexity and size of the industry and low barriers to entry have led to a high level of fragmentation among foodservice distributors. Consequently, opportunities to achieve growth through acquisitions has been a long-standing theme within the industry, with larger players like Bidcorp regularly acquiring smaller distributors. Bidcorp have indicated that they intend to continue acting as a consolidator in the sector, buoyed by a strong balance sheet and robust cash generation. Given the scale of their operations in key regions, the business serves as a solid platform to integrate bolt-on acquisitions. Done right, most of the target’s revenue can be retained while cutting out the majority of their cost base – adding value to the acquirer relatively quickly. Bidcorp have had reasonable success with this strategy to date.
We view Bidcorp as a world-class, well-managed company that has consistently delivered returns exceeding its cost of capital. While we find the share price high relative to its prospects at present, we remain alert to opportunities to add this quality company to client portfolios.