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Half-baked objections: Why the FTC is wrong to block the Sysco-US Foods deal

May 14, 2015
Consumer Packaged Goods
Almost everything you eat in a restaurant — from the salmon entree to the flour in the chocolate cake — is delivered to the kitchen via food distributors and specialty purveyors.
 
In Chicago you drive past these big trucks and small vans every day. They are part of a $230 billion food service industry that plays a crucial role in every commercial dining establishment, even if you’ve never noticed: That cassoulet is on today’s menu only when the chef gets a good price on fancy French white beans.
 
The two biggest national distributors to restaurants, hotels and other kitchens, Sysco Corp. and Rosemont-based US Foods Inc., negotiated a merger in late 2013, but their deal still hasn’t closed and may collapse. That’s because the Federal Trade Commission suspects the combined firm would control such a large portion of the market it would be able to ram through price increases.
 
It sounds like an enticing argument, because who wants to pay more for cassoulet?
 
The FTC suspicion makes us … suspicious.
 
The FTC says the two companies would have about 75 percent of the national market for food and kitchen supplies, plus dominant shares in many individual cities. Attorneys general in 11 states, including Illinois, joined with the government in suing to block the $8 billion merger, claiming Sysco and US Foods together would have unfair pricing power in a business that’s difficult for new competitors to enter.
 
But what about all those trucks out there from different companies — the produce purveyors, the fishmongers, the specialty companies delivering truffles and mushrooms? They, along with many other large-scale regional and local competitors, are all part of this unseen world of suppliers.
 
Actually, it’s becoming more of a seen world. As diners crave more local, organic and exotic fare, chefs are going farther afield to source their ingredients and promote those relationships. So you may know who supplied your wagyu beef burger because the menu identifies the farm.
 
Sysco says if you take into account the thousands of distributors of all types, the company’s market share after acquiring US Foods would be about 25 percent, not 75 percent. Sysco also is offering to sell 11 distribution centers to a third player, Performance Food Group, effectively creating another national competitor.
 
The research for this piece seems to only go far enough to support the pre-determined opinion. The markets involved in the 11% offer aren’t nearly enough to turn PFG into another “national” competitor as you seem to think. PFG would simply become a “super-regional”…
 
But that hasn’t been enough to satisfy the regulators’ concerns. The FTC has gone to a federal judge seeking an injunction to block the merger pending an administrative trial. The merger hangs in the balance because if the judge grants the injunction, Sysco says it will call off the deal.
 
What strikes us about the government’s concern is the narrowness of the argument: Because the regulators can’t identify a national rival close in size to Sysco and US Foods, and can’t imagine another one developing, they want to scuttle the merger. As if that would hold all competition at a comfortable simmer. It won’t.
 
There’s reason to think Sysco and US Foods will face more challenges to their businesses over time, which is why they want to merge. Restaurateurs can already buy in bulk from Costco and other warehouses, in addition to using other traditional food service companies. Internet-based suppliers like WebstaurantStore also are growing fast.
 
“In most major markets there’s a staggering number of competitors and options for customers,” Bob Goldin of Technomic, a restaurant industry consultancy, told us. “If a restaurant doesn’t like the price Sysco or US Foods or others are charging, they will buy from someone else.”
 
Distribution, as unsexy as it sounds, is one of the hottest businesses around these days. Amazon is a digital-based distribution company and could break out in the food industry. So could Uber, the app-based taxi service start-up already worth an estimated $50 billion. Uber is expanding into meal delivery. How long before it begins contracting with refrigerator trucks?
 
To look at the food service industry and notice only two players seems like outdated thinking in a fast- moving world. The judge in the Sysco case should encourage the FTC to negotiate a divestiture deal agreeable to both sides and let the players compete. The recipe for innovation requires a free market, not government interference.
 

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