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Investing in Wholesale Distributors

Updated: March 18, 2021, 3:36 p.m.

Wholesale distributors work behind the scenes. These companies occupy a vital space in the supply chain between manufacturers and retailers. They purchase a wide variety of products from manufacturers and then distribute them directly to retailers or other bulk-buyers such as offices, businesses, and schools, saving them the hassle of ordering from dozens of accounts and making delivery easy.

When you do business with a restaurant or supermarket, or a retailer like a hardware store, the merchandise you are buying likely came from a wholesaler.

Many of these wholesalers are small businesses, but some wholesale distributors are publicly traded. Let’s take a look at some of the best wholesale distributor stocks you can buy today.

Top wholesale distributor stocks

Company Ticker Description
Fastenal (NYSE:FAST) Distributor of industrial and construction supplies.
Sysco (NYSE:SYY) Largest food distributor in the U.S.
Performance Food Group (NYSE:PFGC) Distributor of food and related products like paper, cleaning supplies, and cigarettes.

1. Fastenal

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 exactly describes Fastenal. The company's share price has increased by nearly 72,000% since its 1987 initial public offering (IPO) and has consistently earned a high earnings multiple in a low-growth industry, in part due to its market dominance.

In addition to operating as a wholesaler, the company has its own retail stores, which give Fastenal a unique distribution network. Fastenal's 3,000 stores include locations open to the general public and onsite locations at its customers’ properties. Its economies of scale and scope have helped the company to steadily add stores over its history, but more recently the company is shifting its focus from public stores to onsite locations. It aims to add as many as 400 onsite locations in 2021.

Since most of Fastenal's customers are manufacturers and construction companies, speed and convenience are key. The company therefore is also expanding by 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.

2. Sysco

Sysco is the world’s largest food distributor, with more than 600,000 customers around the world and a market share of about 16% -- worth $310 billion -- of the U.S. foodservice market. Most of the company’s sales are from restaurants, but it also supplies hospitals, schools, government offices, and hotels, among other businesses.

Its vast network of customer and supplier relationships give Sysco economies of scale and act as a competitive advantage, as does its ability to provide value-added services like menu analyses for its restaurant customers. The company also creates significant barriers to entry since Sysco has already invested billions of dollars in warehouses and delivery infrastructure.

The COVID-19 pandemic caused Sysco’s sales performance to decline in its most recent year, but the company should perform well in the economic reopening as restaurants are likely to experience a boom.

Finally, Sysco is also a Dividend Aristocrat, having increased its dividend every year for 44 years, which is a sign of the strength of its business model.

3. Performance Food Group

Performance Food Group has grown rapidly over the years due to an aggressive acquisition strategy, which has boosted sales numbers by nearly 50% in three years -- an impressive rate for a slow-growth industry. At the end of 2019, the company closed on its acquisition of Reinhart Foodservice, a $2 billion deal that put the company on track to generate $30 billion in annual revenue once the pandemic subsides.

Like Sysco, Performance Food Group serves a wide variety of customers, including independent restaurants and fast-food chains, plus channels such as vending machines and movie theaters. The company has a number of proprietary, branded products that it considers to be a source of competitive advantage, and it enjoys economies of scale that give it an edge over smaller competitors.

Despite generating steady profits, Performance Food Group does not pay a dividend. Its acquisition strategy likely compels the company to save its cash for future deals rather than return it to investors.

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What to know about wholesale distributor stocks

Wholesale distributor stocks are ideal for investors looking for consistent and reliable 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.

However, wholesale distributors rarely deliver the kind of strong growth that investors can find in some other sectors. Competitive advantages can be difficult to come by because these are mostly commodity businesses that usually offer thin profit margins. Since these generally aren’t consumer-focused businesses, brand also plays a less important role, meaning that competitors are left to mostly compete on price. Or, in the case of Fastenal, a unique business model.

If you choose to invest in the wholesale distribution sector, then it’s best to focus on stocks that are leaders in their particular subsectors. Prioritize companies such as those discussed above that have proven growth strategies.

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