Sysco: Squeezed by a Changing Climate in Consumer Demand
Trends in Consumption
Let’s start with a few basic observations. Climate change is happening. As a result, consumers are increasingly aware about the impact that their consumption choices are having on the climate. In the context of food, one outcome of this trend is increasing demand for locally and sustainably sourced food. The National Restaurant Association annually conducts a survey asking 2,000 chefs to rank 198 items based on popularity in the food industry in the oncoming year: two out of the top three trends in 2016 are locally sourced meats and locally sourced produce. Locally sourced food has been in the top three since 2010 driven by a perception[i] that it is better for the environment.[ii]
What Does this Mean for Sysco?
Supply Chain Management: Sysco’s food distribution operation is a low margin, high volume, and high-risk business. Climate change will add significant variability to the supply side of Sysco’s business and thereby expound the company’s risk profile. In order to meet growing demand for local food, Sysco would need to work closer with local producers in order to help them scale their operations to meet increased demand while also enabling them to smooth out increased variability in their yield.[iii]
As shown above, most local food, as measured by $ sales, gets to consumers via food distributors. This is in large part due to major investments by distributors such as Sysco to meet customers’ growing demand. In 2009, Sysco launched its Local Food Initiative in an attempt to meet growing demand for these products. The initiative focused on improving supply chain management through investing in “Good Agricultural Practice (GAP) workshops, educating more than 900 small farmers about how to integrate GAP requirements into their operations”[iv]. This initiative will increase the number of farms certified to supply goods to Sysco and its ability to meet new levels of demand.
In its 10-K, Sysco currently lists climate change as one of the “Conditions beyond our control can interrupt our supplies and increase our product costs”[v]. However, there a number of operational changes Sysco might consider in order to reduce its exposure to the risk of climate change while also meeting consumers’ growing demand for local food. First, Sysco might consider partnering with companies such as Monsanto or Indigo Agriculture to promote the use of GMO or micro-biome enhanced seeds that have higher resistance to changing climate conditions. Their buying relationship with growers could prove to be a strong distribution channel for these companies. Second, Sysco’s current business model focuses on leveraging fewer, larger distribution hubs from which they can aggregate and distribute goods. In addition to this owned infrastructure (~186 distribution centers[vi]), Sysco should consider leveraging and investing in local food hubs, currently estimated at ~329[vii], which serve as independent local food aggregation and distribution centers. Through leveraging the growing network of food hubs, Sysco would diversify its product exposure across farms and manage the risk of lower yields in a particular area.
Meeting Customer Demand: While effective supply chain management will help to ensure that Sysco has the inventory to meet growing demand, Sysco also needs to be able to demonstrate to its customers that it has committed to buying locally and sustainably. Sysco offers suppliers with a number of solutions to streamline ordering and better track items as they move through the distribution chain; however, in the future Sysco will need to look down-market to work with more mid-sized local producers. It is likely that these producers have less experience with technology and integrated inventory management systems, and Sysco will likely need to invest in more user-friendly versions of its eSupplier solutions.
Deeply examining how climate change will shift consumer demand enables us to see how a singular shift in preferences implies a multitude of changes in Sysco’s operational model. It is important to note, however, that this is just one of the many ways in which climate change will effect Sysco’s operations.
[i] Opinions are divided on the environmental impact of local food systems. This post addresses the trend and perception that local food economies are more environmentally friendly than today’s traditional food system.
[ii] National Restaurant Association, “What’s Hot 2016 Culinary Forecast,” http://www.restaurant.org/Restaurant/media/Restaurant/SiteImages/News%20and%20Research/Whats%20Hot/WhatsHot2016_Top20Food_1200x1200.jpg, accessed November 3, 2016.
[iii] Henderson, Rebecca, Sophus Reinert, Polina Dekhtyar, and Aram Migdal. “Climate Change in 2016: Implications for Business.”
[iv] Sysco 2015, “Local Sourcing,” http://sustainability.sysco.com/, accessed November 3, 2016.
[v] Sysco 2015, “Form 10-K,” http://www.sysco.com/aboutus/OnlineAnnual2015/pdf/SYY007_10K_HD.pdf, accessed November 3, 2016.
[vi] Sysco. (2016). The Sysco Story. Retrieved from http://www.sysco.com/about-sysco.html.
[vii] National Good Food Network, “US Food Hubs – Full List,” http://ngfn.org/resources/food-hubs/food-hubs, accessed November 3, 2016.
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