Merger Controversy

Bryan Miller - July/August 2014

Washington, D.C.—Sysco Corp., the nation’s largest food distributor, wants to gobble up its biggest rival, US Foods, for $8.2 billion. The move is being criticized by some industry players and watchdog groups. Such a move, they warn, would concentrate too much power in one company, allowing it to put the squeeze on suppliers for discounts. The Federal Trade Commission has been reviewing the applications for months, and a decision is expected by the fall.

While the new Sysco would undoubtedly cast a heavy footprint in the food distribution business, it would hardly comprise a monopoly: at the moment, the two companies account for about 27 percent of the market. Houston-based Sysco, which had $44 billion in sales last year, maintains that the business is too large and diverse—there are more than 15,000 food distributors in the U.S.—for any one company to dominate. Attorneys general from nearly a dozen states have met with Federal Trade Commission officials to oppose the purchase.

US Foods, in Rosemont, Illinois, had sales of over $20 billion in 2013. Both sell primarily to restaurants, healthcare and hospitality facilities, government operations, and educational institutions.

Among those dissenting is the American Antitrust Institute, which earlier this year sent a letter to the FTC stating that a larger Sysco “would likely result in higher prices, lower quality and reliability, diminished food safety, and less innovation.” Sysco has kept a low profile during the application process, positing that the new company’s economies of scale would be beneficial to suppliers and buyers alike. It has asserted in a written statement: “We continually work hard to bring our customers better products and services at competitive prices. This proposed merger will allow us to take meaningful cost out of the system and thereby make Sysco more competitive, more innovative, and better differentiated—all with the goal of helping our customers.”

No one can predict how this will pan out, and the industry appears split concerning the merger. “My initial response as a former operator is that this could be bad for the industry,” says Joel Feigenheimer, a former buyer for China Grill Management, which owns more than 20 restaurants in the United States and abroad. In the same breath, he adds: “Then again, this actually could turn out to be an opportunity for the small-scale producers to create relationships with smaller companies.”

This observation is echoed by Mark Dorian, vice president for purchasing at Lettuce Entertain You Enterprises, based in Chicago, which owns more than 90 restaurants nationwide.

“It’s not entirely clear how this will shake down. Yes, a lot of smaller producers may be squeezed because of redundancy, or because they can’t meet the terms of the new Sysco.” He explained that consolidation will lead to overlap in markets where both companies now sell similar products. Such overlap would likely lead to layoffs.

“Let’s say the new Sysco finds itself with 10 brands of peanuts. They may phase out half of them, which obviously is not good for the producers who are dropped. This may result in lower prices, but then I may not be able to get the peanuts I want. It’s all a trade-off.”