Performance Food Group Company History

Address:

6800 Paragon Place, Suite 500
Richmond, Virginia 23230
U.S.A.

Telephone: (804) 285-7340
Fax: (804) 285-5360

Website: www.pfgc.com

Public Company
Incorporated: 1987 as Pocahontas Food Group
Employees: 3,200
Sales: $1.62 billion (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: PFGC
NAIC: 42241 General Line Grocery Wholesalers

Company Perspectives:

Performance Food Group serves an integral role in the movement of food from the nation's farms to our dining tables. At the heart of the company's success is a focus on delivering exceptional customer service throughout its operations. Key Dates:

Key Dates:

1987:: Founding distributor, Caro Produce and Institutional Foods, is acquired.
1988:: K.O. Lester Co. is acquired; Kenneth O. Lester is named chairman.
1993:: Performance Food Group debuts on the NASDAQ Exchange.
1998:: Acquisitions and internal growth lift sales to $1.6 billion, a more than threefold increase in three years.

Company History:

Performance Food Group Company (PFG) distributes food and food-related products to institutional customers, such as hotels, schools, and health care facilities, and to restaurants, primarily casual dining restaurant chains and fast food chains. PFG also operates a pre-cut produce division that distributes produce to fast food chains and controls two distributor buying groups, Pocahontas Foods USA and Affiliated Paper Companies, Inc. Together, the company's operating companies distribute more than 25,000 products to approximately 20,000 customers in the southern, southwestern, central, and northeastern United States.

Origins

During the mid-1980s, the U.S. food distribution industry was in flux. With increasing frequency, the larger members of the industry were acquiring smaller distributors, hoping to take advantage of a highly fragmented industry by swallowing up as many companies as feasible and secure a greater share of the market. Two industry participants who were watching the consolidation surrounding them--and growing increasingly anxious--were Robert Sledd and Michael Gray. Sledd was president of Taylor & Sledd, a family food marketing company that owned a distributor buying group named Pocahontas Foods USA. Gray served as president of Pocahontas Foods USA. As the two executives surveyed the developments affecting their industry, noting that in one energetic fit Kraft Foodservice had acquired eight of the 50 largest distributors in the country in 1986 alone, they grew alarmed. 'There was a lot of consolidation going on in the industry at the time,' Sledd reflected in September 1998 in the periodical ID, 'and we were looking for ways to protect our distributor base from being acquired.' Sledd and Gray decided to ward off predator companies by merging several companies together under the corporate shield of a holding company, an entity that would enable them eventually to go public and pursue their own aggressive growth strategy. They named the holding company Pocahontas Food Group, under which Pocahontas Foods USA, the distributor group, would operate as a wholly owned subsidiary. Deciding upon a name was the easy part of the solution, but to make Pocahontas Food Group more than a mere fa&ccedile, Sledd and Gray needed distributors willing to operate beneath their corporate umbrella. Sledd and Gray faced the difficult challenge of convincing distributors that their best interests would be served with the newly christened Pocahontas Food Group rather than with established distributor conglomerates.

To turn Pocahontas Food Group into a reality, Sledd and Gray approached three Pocahontas Foods USA members in 1987. As they discovered, their fears of potentially losing a portion of their distributor base were not unfounded. Caro Produce and Institutional Foods, a family-run distribution company based in Houma, Louisiana, had an offer from a suitor. I. Feldman Co., based in Washington, D.C., had been approached as well. Lebanon, Tennessee-based K.O. Lester Co. was entertaining a bid from a larger concern. Sledd and Gray asked each distributor to ally itself with the newly formed Pocahontas Food Group, promising that each would be allowed to retain its management. The two executives also argued that, as part of a greater whole, each distributor would benefit from the advantages of a larger capital base. For evidence to support the implied threat that the Pocahontas Foods USA distributors risked losing control of their companies, Sledd and Gray could point to ample cases within the industry. Frequently, the acquiring companies replaced family and other long-time executives with their own employees, effecting what was referred to as a 'new broom.' The fear of being swept aside after being acquired may have struck a chord with the management of Caro Produce, I. Feldman, and K.O. Lester, but the prospect of risking their businesses in a new venture was less enticing. I. Feldman opted to accept an offer to sell to the fast growing Kraft Foodservice. Kenneth O. Lester, head of the eponymic distributor, balked at Sledd and Gray's proposal, while he weighed the merits of an offer by Kraft Foodservice. The fledgling consortium appeared destined for failure, but Jerry Caro, head of Caro Produce, decided to take the risk and ally his company with Pocahontas Food Group. Caro's decision represented a seminal moment in Pocahontas Food Group's history, its importance not lost on Sledd. 'If Jerry hadn't taken that step,' Sledd remarked to ID in September 1998, 'there would be no PFG (Performance Food Group) today.'

First Acquisition Campaign Launched During the Late 1980s

Although Pocahontas Food Group did not get off to a roaring start, the company did have a founding distributor company, the $67-million-in-sales Caro Produce, and a founding chairman, Jerry Caro. The holding company's constituency would soon increase, however. Before the end of 1987, the company completed its first acquisition, purchasing a distributor based in Gainesville, Florida named Hi Neighbor Wholesale. The acquisition was subsequently renamed Pocahontas Foodservice. Kenneth O. Lester, meanwhile, was still considering Kraft Foodservice's offer, but by July 1988 he had decided to bring his $58-million-in-sales company into the Pocahontas Food Group fold. After the acquisition of his company, Lester took over as chairman of Pocahontas Food Group and Caro took on the title of vice-chairman, concurrent with the relocation of corporate headquarters from Richmond, Virginia to Nashville, Tennessee.

As the company set out to pursue its own growth strategy, two decisions made during its first few months of existence were intrinsic to its later success. First was the decision in 1988 to create an employee stock ownership plan that gave the companies operating within the holding company an ownership stake in Pocahontas Food Group. With a personal stake in the holding company's fortunes, the managers of the subsidiary companies adopted an entrepreneurial approach to running their businesses, infusing the entire organization with a healthy combination of ambitious drive and accountability. The second decision, which complemented the employee stock ownership plan, centered on the corporate structure of Pocahontas Food Group. 'When we were formed,' Sledd explained in September 1998 to ID, 'there were two ways we could go: decentralized or centralized.' The company chose to operate in a decentralized manner, preferring to let the distributors manage their businesses as independent subsidiaries. 'We didn't believe that by sitting in some ivory tower we would make better decisions than the guys in the operating companies,' Sledd continued, 'so we gave them a lot of autonomy to run their business.' Decentralized management and an employee stock ownership plan bred the entrepreneurial spirit Sledd and Gray wanted to cultivate, giving Pocahontas Food Group the corporate culture it needed to succeed.

Pocahontas Food Group had the mindset of a successful organization from the start, but during the late 1980s its progress was constrained by a glaring shortcoming. Pocahontas Food Group lacked sufficient financial resources to embark on an aggressive acquisition spree, forcing its senior executives to develop an initial strategy for growth that conformed to the realities of the company's financial might. The company had to restrict its purchases to a limited number of acquisitions and it could entertain the acquisition of only troubled companies that subsequently could be turned into profitable enterprises. Accordingly, Pocahontas Food Group earned its initial recognition as a turnaround artist, applying its restorative touch to the companies it acquired after Kenneth O. Lester assumed the chairmanship. In 1989 the company acquired Hale Brothers, a Morristown, Tennessee-based distributor, followed by the acquisition of Tampa, Florida-based B & R Foods in 1991 and New Orleans-based Loubat-L. Frank, Inc. the following year.

Although the company was unable to burst from the starting block with a spate of acquisitions, the purchases it did make served as tangible evidence of its talents. Sound management had led to the revitalization of the acquired properties and to impressive financial growth, to which the company could point when it offered itself to the investing public. Sales in 1992 were up more than 20 percent to $325 million and profits rose 25 percent, reaching $51 million. The rising financial totals provided the record of accomplishment Pocahontas Food Group needed for its initial public offering (IPO), a debut to be made under a new corporate banner. In 1992 the company changed its name to Performance Food Group (PFG). The company's performance during the first half of 1993--highlighted by a 15 percent increase in sales&mdash′ovided the final impetus for PFG's bid to become a public concern. The company filed with the Securities and Exchange Commission for the sale of 2.075 million shares at $14 per share, structuring its IPO to raise $20.4 million.

1993 IPO Fuels Expansion

The August 1993 IPO on the NASDAQ Exchange raised exactly what PFG had been hoping for, enabling the company to reduce its debt and to secure the financial wherewithal to assume a more ambitious and aggressive acquisitive posture. Before the company renewed its acquisition campaign, however, it suffered through a difficult 1994. PFG was beset by operational inefficiencies late in the year, a difficult period that company officials shrugged aside by attributing the problems to 'growing pains.' A more disruptive blow occurred at the end of 1994, when the company lost its leader. Lester died of a massive heart attack in December, causing a sudden management shake-up. Sledd retained his title as chief executive officer, but moved from his position as president to assume the chairmanship. Gray, meanwhile, took over as president and chief operating officer.

Following the tragedy that affected the company's progress in 1994, PFG entered 1995 ready to acquire, but the second phase of the company's acquisition campaign followed a strategy different from the first. Forced to acquire only ailing companies during the late 1980s and early 1990s, PFG reversed its criteria during the latter half of the 1990s, buoyed by its new-found financial strength. 'We don't have time to do turnarounds now,' Sledd declared to ID, auguring an ambitious start to the second half of the decade. In 1995, when headquarters were relocated back to Richmond, the company acquired Milton's Foodservice, based outside of Atlanta, and Cannon Foodservice, a distributor based in Asheville, North Carolina. The year these two acquisitions were completed also marked the last year Caro Produce and K.O. Lester reported their revenue independently. When the sales generated by the two subsidiaries became part of PFG's annual financial statement, the result was a prolific jump in the holding company's stature. In 1995 the company did not appear on the list of the 50 largest distributors in the country, as ranked by ID. In 1996 PFG catapulted to the number nine position, propelled by its $664 million sales volume.

Ranking as one of the industry's elite by the mid-1990s, PFG earned its lofty position by recording consistent and energetic growth during the decade. Sales more than doubled between 1990 and 1995, in large part because of the growth recorded by PFG's two largest customers, casual-dining chains Cracker Barrel and Outback Steakhouse. Together, the two restaurant chains accounted for approximately 35 percent of PFG's total sales. For these two chains, PFG supplied everything from steaks to the sugar packets on the tables, part of the company's customized division that distributed goods exclusively to large chains. During the first half of the 1990s, the customized division registered annual growth of more than 30 percent, with the majority of the increase in sales occurring when Outback Steakhouse became a PFG customer in 1993. Cracker Barrel had been a customer since the early days of Pocahontas Food Group (Lester had served as a director of the company from 1970 to 1986). The company's other major operating segment was its broadline division--so named because of the broad selection of goods it distributed--which averaged annual sales growth of eight percent during the first half of the 1990s. PFG's broadline division served more than 9,000 customers, supplying food and related products to particular outlets operated by Wendy's, Subway, McDonald's, Kentucky Fried Chicken, Burger King, and Taco Bell, as well as to institutional customers, such as hospitals, schools, nursing homes, and hotels. Two other smaller divisions operated under PFG's auspices, a pre-cut produce division that distributed lettuce and other produce to fast food restaurants and a merchandising services division. The merchandising services division comprised Pocahontas Foods USA, the buying unit for small, independent distributors. The subsidiary purchased more than 18,000 products, charging a fee to the 140 distributors it served for its buying services. Although the subsidiary accounted for less than one percent of PFG's revenue, it served a vital role as a provider of marketing and computer assistance services to its parent company and, by virtue of its association with independent distributors, figured as a useful go-between for acquisitions.

Combined, PFG's four divisions distributed more than 15,000 food and food-related products to more than 13,000 customers, but despite the company breadth and reach, there was ample room for further growth. The food distribution industry remained highly fragmented, with the ten largest concerns in the country controlling roughly 20 percent of the $125 billion in sales up for grabs each year. Beneath the short list of the industry's largest companies were more than 3,000 distributors who averaged well below $100 million in sales, providing PFG with legions of acquisition candidates from which to choose. Efforts to achieve growth through internal means--the company was in search of adding a third major restaurant chain to its fast growing customized division--were pursued, but during the late 1990s acquisitions figured heavily in PFG's growth strategy. Sledd was aiming to increase revenue to $1.5 billion or $2 billion by the end of the 1990s.

A second offering of stock was completed in March 1996 to fuel the company's acquisition campaign during the late 1990s, a buying binge that began in late 1996 when PFG acquired McLane Foodservice, a distributor to fast food chains, such as Kentucky Fried Chicken, Dairy Queen, and Dunkin' Donuts, and to vending customers. The acquisition of McLane increased PFG's annual sales by more than 20 percent, touching off an era in the company's history that saw its revenue increase exponentially. In 1997 the company completed acquisitions that pushed sales toward Sledd's projected total, purchasing W.J. Powell Company, Central Florida Finer Foods, Inc., Tenneva Foodservice, Inc., and AFI Food Service Distributors. By the end of 1997, sales towered at $1.2 billion, nearly doubling in two years' time.

As PFG prepared for the 21st century, the company was positioned as a formidable force in its industry, having achieved remarkable growth during its first decade of business. Moving past its tenth anniversary, PFG continued to add to the depth of its operations, acquiring Virginia Food Service Group, a $45 million distributor, in 1998. In 1998 the company also acquired Affiliated Paper Companies, Inc., a privately owned marketing organization that served as a paper and sanitation supplies buyer for independent distributors. In one of its last transactions in the 1990s, PFG nearly doubled the size of its pre-cut produce business with the August 1999 acquisition of Dixon Tom-A-Toe Cos. Inc. Based in Atlanta, Dixon processed fresh-cut produce, generating approximately $60 million in sales a year. As the company looked ahead, further acquisitions were in the offing. According to 1997 figures, 55 percent of the industry's $141 billion in annual sales was controlled by distributors one-tenth PFG's size, presenting the company with numerous opportunities to secure greater market share in the years ahead.

Principal Subsidiaries: Kenneth O. Lester Company, Inc.; Hale Brothers/Summit, Inc.; Milton's Foodservice, Inc.; Performance Food Group of Texas, LP; W.J. Powell Company, Inc.; AFI Food Service Distributors, Inc.; Virginia Foodservice Group, Inc.; Affiliated Paper Companies, Inc.; B & R Foods.

Principal Competitors: AmeriServe; SYSCO Corp.; U.S. Foodservice.

Performance Food Group Company History

Company Perspectives:

Key Dates:

Company History:

Further Reading: