Rykoff-Sexton Match Pays Off : But L.A. Firm's Smaller Acquisitions Less Successful

Times Staff Writer

One February morning in 1983, Roger Coleman was reading through his three-newspaper quota when a thought hit him that would drastically change S. E. Rykoff & Co., the regional food-service company that Coleman had headed since 1967.

Coleman read that Beatrice Cos. wanted to divest itself of 50 businesses, and he wondered if Beatrice was selling its John Sexton & Co. institutional food service division. The Chicago-based company would be a big bite for Los Angeles-based Rykoff, which had a history of much smaller acquisitions, but the operations would mesh nicely, he thought.

The answer was "no"--Beatrice wasn't interested in selling Sexton. But with the somewhat reluctant approval of Rykoff's board of directors, Coleman went after what he saw as a "once-in-a-lifetime opportunity."

Persuaded Beatrice to Sell

Beatrice eventually was persuaded to unload the operation, and in December, 1983, S. E. Rykoff & Co. bought John Sexton & Co. for $84 million.

To reflect the equal importance of the S. E. Rykoff and John Sexton divisions, the company changed its name to Rykoff-Sexton in September, 1984.

"So now we had a truly national company with the Sexton name very well known in the East, Northeast, Midwest and South," Coleman said. "The Rykoff name was very well known in the West."

With that one move, Rykoff became a major national player in the fragmented food service business populated by small, often family-operated companies. And in the fast-changing industry, analysts said, it is the large companies that will survive because they offer buyers one-stop shopping and have the financial muscle to make the large capital investments needed to stay competitive.

The company has made several acquisitions since then--none so big and not yet as well integrated--and hasn't discounted the possibility of future acquisitions.

The recent fiscal year shows some of the rough edges of those acquisitions: Income increased only marginally during the first six months of the year. Nonetheless, analysts give the company high marks for improved performance and its potential for growth.

To the general public, Rykoff-Sexton is a low-profile company, perhaps best known in the West for the green-on-green trucks of the S. E. Rykoff division that proclaim: "Enjoy Life, Eat Out More Often." But anyone who has eaten away from home has probably tasted Rykoff-Sexton products or wadded up a cocktail napkin that was custom-printed at the company's downtown Los Angeles facilities.

"The Rykoff labels and the Sexton labels are as well known to restaurants and chefs and to people in the hospitality industry as Heinz and Campbell's Soup are to the consuming public," Coleman said. Rykoff-Sexton products aren't sold in retail stores; the only way the public can buy the products is through the company's mail-order catalogue--a sideline that the company projects will grow to $10 million in annual sales over the next few years.

More Than 30,000 Products

Rykoff-Sexton distributes more than 30,000 products under its own labels as well as those of other firms, both foreign and domestic.

Those items range from food products (except fresh meat, dairy products, produce, baked goods and liquor) to such non-food, higher-margin products as paper and plastic goods, dishes, low-temperature dishwashers, cleaning compounds and even paper chefs' hats. Rykoff-Sexton also provides restaurant design and engineering services. The company defines its market as any place where food is prepared and eaten outside the home, primarily restaurants but also hospitals and nursing homes, schools, hotels, airlines and cruise ships.

Rykoff-Sexton is the second-largest publicly held institutional food service company after Houston-based Sysco Corp. and is fourth in the industry when the larger institutional divisions of other companies--Chicago-based CFS Continental, a division of Staley Continental, and PYA-Monarch, a part of Chicago-based Sara Lee--are taken into account, Coleman said.

"We're in a wonderful industry," Coleman said. "The demographics of society are working in our favor" as the growing number of working women opt to eat out more and as the 20- to 40-year-old age group--which was raised on fast food--turns to finer dining.

"We just feel that the growth of eating out will continue," he said. "They're now having business breakfasts, dinners and lunches."

Food industry analyst Paul Weiss of San Francisco-based Sutro & Co. said: "As a company, I think very highly of them, in part because I think very highly of the industry as a whole." Rykoff-Sexton focuses more strongly on restaurants than do its competitors, which is a strength, he said.

The restaurant industry has been going through considerable turmoil as new eating trends are born and then quickly die, Weiss said.

"But Rykoff benefits as long as people are still eating out," he said. "They're serving a segment that's bound to have all kinds of exciting growth."

Rykoff-Sexton "should get the award for the most-improved company," said Clinton O. Mayer III, an analyst with Bear, Stearns & Co. "They have done an extremely good job from a small base a few years ago toward making this a better company."

Basically a Family Company

Rykoff, although public, was basically a family company and "to some extent we have seen that some of the management was not as good as it might have been," Mayer said.

Sales have risen steadily over the years but earnings declined in 1983, which the company attributed to the recession. Net income rebounded in fiscal 1984 to $6.49 million, only slightly above 1982's level.

But management has been bolstered and "maybe we have a new Roger Coleman, too," Mayer said. "I think we're seeing better managers coming in and more efficiencies coming in."

For the fiscal year ended April, 1985, the first full year in which Rykoff and Sexton operated as one, sales rose nearly 52% to $853 million and net income increased almost 73% to $11.2 million.

Analysts credit Coleman for the apparently happy marriage between the Rykoff and Sexton divisions. The integration of Rykoff and Sextonhas proceeded so smoothly that even Coleman terms it "almost scary."

"They were just a mirror image of us," Coleman said. "The cultures of the two companies were similar. We understood the business. We could speak very direct (each other's) language."

"We didn't lose a single key executive in that organization to this day," he said.

There was very little overlap between the two companies, and their combination created "one-stop shopping" for Rykoff-Sexton customers in a fragmented industry composed of small, privately held companies, analyst Weiss said.

"The Sexton fit is a good fit," he said. "It's like it was designed from above to happen."

Rykoff-Sexton's growth faltered in the second quarter of its current fiscal year, primarily because of costs associated with its four recent acquisitions. Since May, Rykoff-Sexton has paid a total of $50 million for four small food service firms with sales of $230 million.

In the quarter ended Oct. 26, Rykoff-Sexton's sales rose slightly to a quarterly record of $247 million. But net income fell to $2.5 million from $3.1 million in the same period last year.

Although second-quarter results were lower than Weiss had expected, "I really believe," he said, "that this earnings shortfall is just a little bit of indigestion because of these acquisitions." Weiss noted that Rykoff-Sexton "has very successfully identified acquisition candidates that make sense."

Despite the four purchases in a relatively short time, Rykoff-Sexton is not on an "acquisition binge," Coleman said. The companies simply became available in recent months and "we were fortunate enough to be in a position to take advantage of the opportunities," he said.

"We have not been making acquisitions for the sake of growth alone," he said. "We have been following a well-defined strategy," characterized by economies of scale and enhancement of market share.

Coleman said he expects the four new operations to begin contributing by the time the company's fiscal year ends in April.

Weiss estimated that net income will rise to $12.5 million this fiscal year from $11.2 million last year. Net income will reach about $17.5 million in the year ended April, 1987, he said.

Coleman said Rykoff-Sexton is now operating at a $1-billion annual sales level. The company is shooting for 12% to 15% annual growth in sales over the next few years, he said.

There is one notable exception to Rykoff's history of good acquisitions--its 1972 attempt to expand nationally by purchasing Louis Ender Inc., a Brooklyn, N.Y.-based food distributor. Rykoff expanded and modernized the operation but couldn't turn it around. Coleman blamed the failure on weak Ender management, a "stressful union situation" and an unfamiliar high-cost market.

Dates to 1911

The problems with the New York operation helped pull down earnings from 1976 through 1979, and Rykoff dumped the business in 1979, taking a $1.8-million write-off.

"We just couldn't put the pieces together from 3,000 miles away," Coleman said.

The S. E. Rykoff division traces its origins to 1911 when the Rykoff family--father Harry, mother Ida and nine children--opened a small grocery store near Union Station after moving to Los Angeles from Sioux City, Iowa.

Son Saul returned from World War I and proposed that the business switch to food wholesaling. The company adopted the name S. E. Rykoff & Co. (after Saul), and the slogan, "Home of Gallon Goods."

"He could never understand why they would be selling one pickle at a time when the other guy would be selling wagon loads," said Coleman, Rykoff's son-in-law who took over the posts of president and chief executive when Rykoff died in 1967.

John Sexton & Co. has a similar history. In 1883, John Sexton started a small retail and wholesale coffee and tea business, taking his wares to restaurants via horse and buggy.

The two companies crossed paths in 1962 when the Sexton family tried to buy S. E. Rykoff. But the deal fell through, and later that year S. E. Rykoff went public. The company moved to the American Stock Exchange in 1972.

"This is a conservative and quality company that's very proud of what they're doing," analyst Weiss said.

"They have this uncanny preoccupation with quality. I had always perceived institutional food to be a crappy kind of food . . . but that's not the case at all."

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