Wholesale distributors work behind the scenes, occupying a vital space in the supply chain between manufacturers and retailers. They purchase a wide variety of products from manufacturers and then distribute them to retailers or other bulk buyers such as offices, businesses, and schools. Wholesale distributors eliminate the hassle of ordering from dozens of accounts and make delivery easy.
When you do business with a restaurant or supermarket or a retailer such as a hardware store, your merchandise likely came from a wholesaler. Many wholesalers are small businesses, but some are publicly traded.
Wholesale distribution refers to a business model rather than an industry, and the performance of these stocks -- especially during the COVID-19 pandemic -- depends on the kinds of products they sell. Restaurant suppliers, for example, have struggled. Supermarket wholesalers have thrived as spending on food shifted to fewer restaurants and more grocery stores. A pandemic recovery should provide a tailwind for the sector by eliminating additional safety costs and mitigating some of the supply chain challenges that have been affecting businesses around the world.
Top wholesale distributor stocks in 2023
|Fastenal||(NYSE:FAST)||Distributor of industrial and construction supplies.|
|Sysco||(NYSE:SYY)||Largest food distributor in the U.S.|
|United Natural Foods||(NASDAQ:UNFI)||Distributor and retailer of organic and natural foods.|
|J&J Snack Foods||(NASDAQ:JJSF)||Manufacturer and distributor of snack foods and frozen beverages.|
|US Foods||(NASDAQ:USFD)||Food distributor to U.S. food service businesses.|
You might be surprised to learn that an under-the-radar industrial supplier has been one of the best-performing stocks on the market over its history, but that describes Fastenal perfectly. The company has increased its share price by more than 81,000% since its 1987 initial public offering (IPO) and has consistently generated high earnings per share in a low-growth industry.
In addition to operating as a leading wholesaler, the company has its own retail stores, which give Fastenal a unique distribution network. Fastenal's 3,200 stores include locations open to the general public and on-site locations at its customers’ properties. Fastenal's economies of scale and scope have helped the company to steadily add stores, but it is shifting its focus from public stores to on-site locations, with plans to add as many as 400 annually. Meanwhile, it was on pace through the second quarter of 2021 to add between 300 and 350 new on-site stores.
Since most of Fastenal's customers are manufacturers and construction companies, fast and convenient service is key. The company is also adding product vending machines and increasing its digital presence.
Fastenal's operating profit margin in 2020 was an attractive 20.2%, even as it faced a number of pandemic-related challenges. The company is likely to continue to improve its performance in the post-pandemic recovery.
Sysco is the world’s largest food distributor, with more than 600,000 customers around the world and a U.S. foodservice market share of about 16%. Most of the company’s sales are made to restaurants, but it also supplies hospitals, schools, government offices, and hotels, among other businesses.
Sysco's vast network of relationships with customers and suppliers provides economies of scale and serves as a competitive advantage. So does its ability to provide value-added services such as menu analyses for its restaurant customers. The company has also created significant barriers to entry with its investment of billions of dollars in warehouses and delivery infrastructure.
The COVID-19 pandemic caused Sysco’s sales performance to decline in its most recent fiscal year, but the company is set to capitalize on the economic reopening as restaurants are already starting to experience a boom. Sysco is also a Dividend Aristocrat, having increased its dividend every year for 44 years.
3. United Natural Foods
United Natural Foods (UNFI) is the country’s largest dedicated wholesaler of organic and natural foods, which is one of the fastest-growing segments in the $800 billion supermarket industry. The company counts Whole Foods as its biggest customer; it’s also Whole Foods’ biggest supplier. Whole Foods made up 19% of its sales in fiscal 2021, or roughly $5 billion. The relationship is at times perceived as a risk for the company, but it’s also been a source of strength as Whole Foods has outgrown the broader supermarket industry through most of its 20-plus-year relationship with UNFI. In March, the wholesaler extended its contract with Whole Foods through 2027.
UNFI’s stock has soared during the pandemic. The company has posted strong profits and successfully integrated SuperValu, a supermarket wholesaler and retailer it bought in 2018. Historically, UNFI has grown both organically and through acquisitions. As the premier natural foods wholesaler, the company is likely to target more acquisitions in that area.
In his first earnings report as CEO, Sandy Douglas told investors, “I see significant opportunity to accelerate the value we create with and for our customers, as well as the opportunity to make our operations more effective and efficient, both leading to continued profitable growth within our estimated $140 billion addressable market.” If he’s successful, the value stocks’ rally should continue.
4. J&J Snack Foods
J&J Snack Foods isn’t a household name among investors, but the distributor of soft pretzels and frozen beverages has been a consistent winner in the stock market. Since its 1985 IPO, J&J has increased its share price by more than 9,000%. It’s also consistently hiked its dividend payout over the past decade and currently offers a dividend yield of around 1.6%.
The company isn’t exclusively a wholesale distributor. It manufactures some of the products that it sells, such as soft pretzels, and it also sells products under well-known brands such as Minute Maid, Auntie Anne’s, and Sour Patch Kids.
As the only national distributor of soft pretzels, J&J has a reach that makes it attractive to national chains. Its product selection is well-suited to venues such as sports arenas, theme parks, and movie theaters.
Prior to the pandemic, J&J consistently increased its revenue, and its profit margins were close to 10%. In its Q3 2021 earnings report for the period ending June 26, sales returned to pre-pandemic levels. With the economy reopening and most events now allowed to reach full capacity, the snack food purveyor could be well-positioned to capitalize on pent-up demand for large gatherings.
5. US Foods
US Foods is one of the largest food distributors in the country, with 300,000 customers in the U.S. and more than 400,000 stock keeping units (SKUs).
The company leverages technology to gain a competitive advantage. Its mobile platform provides a personalized e-commerce experience and helpful business analytics tools to solve problems related to food waste and customer traffic.
US Foods has grown both organically and through acquisitions. With its April 2020 acquisition of Smart Foodservice, it entered the cash-and-carry business, enabling customers to order and pick up supplies. US Foods Direct is a new sales feature that allows customers to order products that ship directly from the supplier. It also introduced US Foods Pronto, which delivers smaller orders more frequently.
US Foods’ history as a publicly traded company is more limited than its peers since the company had its IPO in 2016. The stock had matched the performance of the S&P 500 (SNPINDEX:^GSPC) prior to the pandemic, and revenue and operating income were steadily rising as well.
After gaining market share during the pandemic, the company is well-positioned to capitalize on the economic recovery. As restaurants increasingly come back to life, so should US Foods.
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Should you buy wholesale distributor stocks?
Wholesale distributor stocks are ideal for investors looking for consistent and reliable stock performance. Because these companies distribute essential products such as food and industrial supplies, they tend to be recession-proof -- the unique challenges of the pandemic notwithstanding.
Wholesale distributors rarely deliver the impressive growth that investors can find in some other sectors. Competitive advantages can be difficult to establish and maintain because these are essentially commodity businesses with thin profit margins. Since wholesale distributors generally aren’t consumer-focused, brand also plays a less important role, meaning that companies mostly compete on price.
If you choose to invest in the wholesale distribution sector, it’s best to focus on the companies that are industry leaders. The top wholesale distribution companies have demonstrated proven and effective growth strategies.