JPMorgan sees food distributors facing competition from Amazon

Noting that Amazon's (AMZN) acquisition of Whole Foods (WFM) has shown that it's open to expensive, "transformative" acquisitions, JPMorgan believes that there is a greater chance that the e-commerce behemoth will disrupt the business models of food service distributors. As a result, the firm removed food distributor Sysco (SYY) from its Analyst Focus List. AMAZON'S INDEPENDENT RESTAURANT OPPORTUNITY: There is now a greater chance that Amazon will begin looking to deliver food to independent restaurants, either by building such a business on its own or by making an acquisition, wrote JPMorgan analysts John Ivankoe and Alex Morgard. Such a move would be "logical" for the e-commerce giant, wrote the analysts, who noted that independent restaurants "buy larger pack sizes, demand larger delivery sizes, and are highly repetitive in terms of what they buy." Independent restaurants will appreciate Amazon's "digital engagement," and "price transparency," as well as its ability to customize offers based on the restaurants ordering habits, Ivankoe and Morgard believe. Moreover, Amazon already delivers prepared restaurant food to consumers through its Amazon Now offering, they noted. DISTRIBUTORS' EXPOSURE: Sysco has approximately 40% exposure to independent restaurants, while US Foods (USFD) has exposure of about 30% and Performance Food Group (PFGC) has about 26% exposure, the analyst stated. However, the independent restaurants probably contribute a higher proportion of the companies' operating income, given the restaurants' "favorable economics," according to Ivankoe and Morgard. PRICE ACTION: In morning trading, Sysco fell 4.7% to $50.30, Performance Food retreated 5% to $25.90, and US Foods slumped 5.6% to $26.05.