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Sysco Looks to Adapt to Rising Costs

Sysco Corp.’s operating expenses were up 3.9% in fiscal 2018, due in large part to rising food and transportation costs, reported Houston Chronicle (Aug. 13). Dairy, frozen potato and vegetable costs were up, while meat and poultry costs were down.

To help offset transportation costs, the company is looking to expand its small-vehicle fleet over the coming year and improve warehouse productivity to help delivery drivers in the field.

Transportation costs continue to climb amid rising fuel prices and new regulations requiring electronic logging devices in commercial trucks, and an ongoing commercial driver shortage drove wages up.

“The freight challenges out there are real, and every industry moving freight is dealing with them,” president and CEO Tom Bené said on a fourth-quarter earnings call Aug. 13. “We have more headwinds than we’ve had in a few years, mostly driven by a tight labor market and fuel increases.”

Sprinter-type vehicles could help the company deal with these issues, as they use less fuel than semi-trailer trucks, and there is a larger pool of drivers who can operate the smaller vehicles. They enable drivers to get around with smaller drops to customers to improve Sysco’s service level, Bené said.

Sysco has been testing its small-vehicle fleet in metro urban markets as well as more standard operating companies. The company is seeing different benefits from each market. However, Sysco doesn’t anticipate the smaller vehicles to open up a new market. The goal for the company is just to be more efficient, and perhaps access some places that may be a little harder to deliver to.

“These are not fill-in, these are not recovery-type vehicles, meaning if we have something that’s missed or a product comes in late that we get it out to the customer; this is actually part of our everyday delivery and routing,” Bené said.

While the driver shortage had an impact in certain markets, the increased transportation costs prompted Sysco to examine new ways to manage the issue.

“We do have challenges filling driver roles in certain markets where the labor market’s just very tight,” Bené said. “We regularly see drivers being offered significant upfront incentives to join a company, and we’re having to do the same thing.”

Dairy, frozen potato and vegetable costs will still likely prove challenging, primarily in the UK, depending upon the variability of the pound, says CFO Joel Grade.

“Probably half their product is procured from outside of the UK,” Grade said. “They’re working hard to do things to manage that more effectively, but we anticipate that to carry forward a bit.”

Despite these concerns, Sysco expects demand for its food products to grow. The company’s food delivery category has seen 40% to 50% growth. It is concentrating on building its private label sales as well, having success with its Cutting Edge Solutions product line, the majority of which are Sysco Brand items. 

For the full story, go to this week’s Food Institute Report.