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The school market represents a challenge for distributors for a number of reasons.  Dealing with large numbers of small buyers—some rather unsophisticated in product knowledge and usage patterns—can be an administrative nightmare. Also, many schools want product delivered to each school site, which increases costs, while still demanding the lowest prices possible.

On the other hand, the school market also offers opportunity as the business tends to be “contra-cyclical” in that as the economy falters and negatively impacts commercial foodservice businesses, school meal business increases. Hence, as the economy soured after 2008, mainline distributors became more aggressive in pursuing school business to fill their trucks. Then, more recently, as the economy began to rebound (and as school meal counts began declining due to changes in federal regulations governing school meal programs), the business became less attractive and districts around the country have seen a decline in interest from the big distribution houses.

Distribution for schools varies considerably by location. If you look at geographically large states with low populations, like Wyoming and Idaho, they have very limited options, with the very large national companies like Sysco and US Foods dominating. So the merger of these two companies may have a significant impact in these markets and also on markets like the Mid-Atlantic and Tidewater regions, where the big nationals have a major market share despite the presence of some regional houses.

To alleviate this, the Securities & Exchange Commission may require the merged Sysco/US Foods organization, as a condition of regulatory approval, to find distributors to move into such regions to provide competitive balance. That of course would have potentially significant impact on these other distributors.

Prime candidates for this role include large regional distributors that have already developed divisions that support school sales. Gordon Food Service, originally operating only in the upper Midwest, has in the past few years expanded its operations into the Southeast.  Shamrock Foods, originally a dairy company, has become a major regional player in the Southwest. For both of these companies and others, the Sysco-US Foods merger might create opportunities to expand their footprint.

There are also local companies, many of which already support the school market.  However, the specialized product mix and the requirement in some areas to distribute USDA commodities—with the increased responsibility and record keeping that requires—may represent a bridge too far in terms of cost and complexity for some of these smaller firms.

Industry dynamics are currently in flux for schools. Declines in participation and increased costs related to changing regulations are putting pressure on the school foodservice business model. Congress is gearing up for another round of school meal legislation in the next year or so, which is adding more uncertainty to school programs.  

The increased costs of meeting federal meal regulations is putting pressure on schools to find cost savings at the same time demands for an increasingly special set of product needs are driving up costs. Distributors are being asked to do more for less, and the merger of the two biggest distributors may reduce competition and SKUs in some markets.

The upside of the school segment for both producers and distributors is that school meal programs are an important part of our society, and it is unlikely they will ever go away. And schools, while financially challenged, pay their bills. That means there is long-term security for distributors willing to embrace the channel, even if the margins are slimmer than other segments.

There are a lot of factors in play in the school distribution arena right now: mergers and consolidations, changes in school meal participation, shifting product demands and SKUs, pending changes in federal child nutrition laws. How this plays out over the next several years will have deep impacts on commercial and non-commercial channels throughout the supply chain.