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Amazon may want to dive into food service distribution, potentially shaking up an industry now dominated by three large players, according to a report.
"The risk has increased that AMZN becomes a disruptor to food service distribution models," said JPMorgan analyst John Ivankoe in a research note published Friday. It said Amazon could do it through building its own operation or through an acquisition of an existing player in the industry.
The report is sparking a sell-off in food service distribution stocks as some investors worry Amazon's entry would squeeze profit margins in an industry already known for stiff competition and tight margins. And it comes just a week after Amazon announced plans to pay $13.7 billion for Whole Foods, the major organic and natural foods grocery chain.
On Friday, JPMorgan also removed Sysco stock from the firm's focus list, citing added risk within the space. JPMorgan pointed out that since the Amazon-Whole Foods deal was announced, Sysco and US Foods shares have been under pressure.
Sysco and US Foods declined to comment. CNBC also reached out to Performance Food Group and Amazon but didn't hear back at deadline.
"We think Amazon will pivot their focus on the at-home consumer and include independent restaurants in their customer set," JPMorgan said. "They buy larger pack sizes, demand larger sizes and are highly repetitive in terms of what they buy as menu inertia is true for most independent restaurants."
JPMorgan estimates the small/independent restaurant market in the U.S. is a roughly $256 billion market opportunity and represents more than 300,000 outlets.
Joe Pawlak, managing principal at food service research firm Technomic, estimates that margins for typical food service distributors are in the low single digits after adjusting for warehousing, trucks and sales forces. But he said the independent restaurant operator side, or "street business," is a sweeter spot of the market and growing.
Pawlak said the independent restaurant operators are always looking for more options for purchasing because they realize many of the food service distributors charge higher prices to the independents so they can pass on lower prices to the larger customers, including major restaurants chains.
"Many of the independent restaurant operators are going to club stores where they can get lower prices," said Pawlak.
Indeed, Amazon could go after mom-and-pop restaurant operators that now buy from warehouse chains such as Costco Wholesale and Wal-Mart Stores' Sams Club. And Technomic is looking for the sales at independent restaurants to grow about 5 percent through 2020, outpacing the 3 percent forecast for the larger chain restaurants.
Sysco and US Foods are the two largest players in the food service distribution industry (together they represent almost one quarter of the market), although there are thousands of smaller companies that compete for business. It estimates that both Sysco and US Foods each derive at least 30 percent of revenue serving the independent restaurant category.
Performance Food Group, meantime, controls about 5 percent of the food service distribution market and it serves corporate-owned and franchisee locations of large chains such as Burger King, Subway and Church's and others.
According to JPMorgan, Amazon Prime's demographic fits well into the typical independent restaurant owner. Moreover, it said Amazon presently has ties to restaurants as a prepared food delivery service in more than 25 markets and could "bundle services and offer better pricing" by perhaps adding food service supply.
As for possible acquisitions in the space, JPMorgan said the firm "would rule out no one but believe USFD is the most likely to combine." It pointed out that US Foods proposed merger with Sysco a few years back ended up getting blocked by the Obama administration's Federal Trade Commission and the courts.
"Should this merger process be restarted, these political obstacles likely drop," JPMorgan said. "Further, we believe AMZN itself could benefit from the national distribution of USFD and a head start in technology."