Sysco 2010 Annual Report Download - page 29
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Please find page 29 of the 2010 Sysco annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Item 1A. Risk Factors
Periods of Difficult Economic Conditions and Heightened Uncertainty in the Financial Markets Affect Consumer Confidence, which Can Adversely Impact
our Business
The foodservice distribution industry is characterized by relatively high inventory turnover with relatively low profit margins and the foodservice
industry is sensitive to national and regional economic conditions. From late in fiscal 2008 through the beginning of fiscal 2010, deteriorating
economic conditions and heightened uncertainty in the financial markets negatively affected consumer confidence and discretionary spending.This
led to reductions in the frequency of dining out and the amount spent by consumers for food-away-from-home purchases.These conditions, in turn,
negatively impacted our sales, as noted by our declining sequential sales trend each quarter from a positive 8.5% in the first quarter of fiscal 2008 to
a negative 8.1% in the first quarter of fiscal 2010. The development of similar economic conditions in the future or permanent changes in consumer
dining habits as a result of such conditions would likely negatively impact our operating results. Although economic conditions appear to have
improved since the first quarter of fiscal 2010, the perceived improvement may not continue or may not result in consumers returning to their prior
dining habits.
Periods of Significant or Prolonged Inflation or Deflation Affect our Product Costs and Profitability
Volatile food costs have a direct impact on our industry. Prolonged periods of product cost inflation may have a negative impact on our profit
margins and earnings to the extent that we are unable to pass on all or a portion of such product cost increases to our customers, which may have a
negative impact on our business and our profitability. In addition, product cost inflation may negatively impact consumer spending decisions, which
could adversely impact our sales. Conversely, our business may be adversely impacted by periods of prolonged product cost deflation because we
make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage markup. As a result, our profit levels
may be negatively impacted during periods of product cost deflation, even though our gross profit percentage may remain relatively constant. Our
estimate for the deflation in Sysco’s cost of goods was 1.5% in fiscal 2010, compared to inflation of 4.7% in fiscal 2009 and 6.0% in fiscal 2008.
Our Enterprise-wide Software Integration Project Could Experience Implementation Problems, Scheduling Delays or Cost Overages and May Not Prove
to Be Cost Effective or Result in the Benefits We Anticipate, Negatively Impacting our Business, Results of Operations and Liquidity
In fiscal 2009, we commenced the design of an enterprise-wide project to implement an integrated software system, commonly referred to as
an Enterprise Resource Planning (ERP) system, to support a majority of our business processes and further streamline our operations. We are
currently testing the ERP system and processes that have been designed and built and believe that implementation will occur across the majority of
our Broadline and SYGMA operating companies beginning in fiscal 2011 and ending in fiscal 2013. ERP implementations are complex and time-
consuming projects that involve substantial investments in system software and implementation activities over a multi-year timeframe. As is the
case in most ERP implementations, we expect that the implementation of our ERP system will require transformation of business and financial
processes in order to realize the full benefits of the project. Although we expect the investment in the Business Transformation Project to provide
meaningful benefits to the company over the long-term, the costs will exceed the benefits during the early stages of implementation, including fiscal
2011. The expected costs of the project in fiscal 2011 may be greater or less than currently expected because as we begin implementation of the
project, we may encounter the need for changes in design or revisions of the project calendar and budget, including the incurrence of expenses at an
earlier or later time than currently anticipated. Our business and results of operations may be adversely affected if we experience operating
problems, scheduling delays, cost overages or limitations on the extent of the business transformation during the ERP implementation process. In
addition, because the implementation is expected to involve a significant capital commitment, our business, results of operations and liquidity may
also be adversely affected if the ERP system, and the associated process changes, do not prove to be cost effective or do not result in the cost savings
and other benefits that we anticipate.
We May Not Be Able to Fully Compensate for Increases in Fuel Costs
Volatile fuel prices have a direct impact on our industry.The cost of fuel affects the price paid by us for products as well as the costs incurred by
us to deliver products to our customers. Although we have been able to pass along a portion of increased fuel costs to our customers in the past,
there is no guarantee that we can do so again if another period of high fuel costs occurs. If fuel costs increase again in the future, we may experience
difficulties in passing all or a portion of these costs along to our customers, which may have a negative impact on our business and our profitability.
From time to time, we enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements at prices equal to
the then-current market price for diesel. If fuel prices decrease significantly, these forward purchases may prove ineffective and result in us paying
higher than market costs for a portion of our diesel fuel.
Conditions Beyond our Control can Interrupt our Supplies and Increase our Product Costs
We obtain substantially all of our foodservice and related products from third party suppliers. For the most part, we do not have long-term
contracts with our suppliers committing them to provide products to us. Although our purchasing volume can provide leverage when dealing with
suppliers, suppliers may not provide the foodservice products and supplies needed by us in the quantities and at the prices requested. We are also
subject to delays caused by interruption in production and increases in product costs based on conditions outside of our control. These conditions
include work slowdowns, work interruptions, strikes or other job actions by employees of suppliers, short-term weather conditions or more
prolonged climate change, crop conditions, product recalls, water shortages, transportation interruptions, unavailability of fuel or increases in fuel
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