10 Reasons why the food industry should stop harassing Sysco/US Foods about their merger.

****DISCLAIMER**** This material is merely an analysis and opinions of the situation by the author.  The author does not work for Sysco, is not any sort of financial expert, nor does the author gather information from inside Sysco.  This material is not to be construed as assertions from any individual or member of Sysco.

Its no doubt that Sysco and US Foods are some of the top players in the food industry within the U.S.A.  Sysco has potential lawsuits, hate mail, and probably petitions going on trying to prevent them from attaining US Foods. Seriously though, just let it happen.  The fact is, there is much more going on that makes this M&A not to be feared.

1) It is a short term (maybe even medium term) solution to gain more volume rather than greater shares.  Of course the CEO’s goal is to attempt to please shareholders.  Nothing wrong with that.  It’s likely that this will also impact the medium term and long term as well, but will not eliminate certain difficulties in the long term.

In the short term, sales will increase.  But not how those suing Sysco probably think.  Sysco won’t be buying (mostly) new “customers.”  They’re basically buying sales on products they already have from the same customers they already have.  Chances are if a restaurant is buying from Sysco, they probably have US Foods on the side as a way to save on certain foods when Sysco’s prices may be too high. It’s not like they will buy US Foods, then suddenly have new restaurants at their front door buying all their products from them.  It’s more like Sysco already has all the restaurants at their front door, who are also buying US foods, but instead of just selling beef and chicken, they will also add sporks to the list of items sold to that restaurant, but the US foods salesman just happened to be good at selling sporks.

2) Much better off buying an ethnic food company or multiple.  With #1 said, there are plenty of other potentially more dangeous M&A’s.  For example, if Sysco wants a large share of NEW customers who will ultimately buy a great new line of products from them they should buy up a company like Wismettac Trading, and expand their product line to unique Asian goods (or other ethnic ones) rather than just stuff they already sell.  Let’s pretend Sysco already sells to all the American and Asian restaurants in a city, and so does US Foods.  Well if Sysco buys US Foods, they’re basically only getting a few more items, but if Sysco buys up an Asian goods company, they can also grab a huge share of the grocery stores as well, and there are LOTs of Asian food companies.  However Asian food companies still deal with the same issues amongst other Asian food companies.

Basically the tradeoff is whether they want to increase their product line to tons of items they already have and determine which ones they want to cut (see number 8), or increase their product lines to have unique products but need to figure out how to compete in those markets.  But Sysco is a pretty diverse company, it’s not something they would have difficulty in.

3) Still doesn’t change the underlying issue of restaurant owner behavior.  The food industry is difficult to compete in.  The greatest sales come from new restaurants opening up, or getting sales from new restaurants, and the “fad period” when every new restaurant has lines of people.  However this isn’t even reliable because customers lining up for one restaurant basically only means that the other restaurants are doing worse.  Basically if you’re already doing business with a restaurant, the best you can do is MAYBE get a share of sporks, or ketchup here and there increasing your overall sales but barely touching profits.  Not saying the profit doesn’t add up, but a competing company can just take those shares back a few months later anyways.

4) Other industries don’t worry about this.  Watson + Actavis dominating Pharmaceuticals with specialty and generic brands, Facebook and whatsapp dominating social networking, Blizzard and Activision dominating video games.  Seriously those M&As made those companies powerhouses.  I didn’t see lawsuits about that.  I’m sure there was controversy, but they still happened.

5) Better investments out there that would benefit long term.  Perhaps both companies should save their money, and invest in a long term solution that benefits the whole industry.  The huge reason for price competition is because the average restaurant customer doesn’t really care what they’re eating.  They don’t realize that they’re probably eating the same quality meat in their local dive hole in the wall paying 2.50$ for something that their “date night” restaurant sells for 6$.  The goal should be to invest in raising awareness of the general population.  Make a marketing strategy to get the general population to question what they’re eating.  Then maybe the purchasers at the restaurant may stop skimping, and focus more on quality.  This way the battle between vendors will be more about quality rather than pricing.  Of course this doesn’t stand true for ALL restaurants.  The fact is, companies that truly care about quality are probably buying from specialty vendors for products you can’t easily obtain.

6) Jobs will be eliminated creating fierce(r) competitors.  It goes without saying, no business needs two salespeople from the same company unless the restaurant is really THAT huge, and they need two people to handle different categories of products. Those are farrrrrrrrrrr and few between. Salespeople and managers, and drivers, and warehouse workers will undoubtedly be fired.  They will move over to other competitors and create more fierce competition for Sysco + US Foods.  Or they will change industries decreasing overall competition anyways which ultimately benefits the entire industry.

7) Turnover.  Let’s say through this acquisition, Sysco got every share of beef, chicken, and pork in the country, and beat out every local competitor.  Well how long is it before they run out of stock, and restaurants are forced to buy from companies selling at just pennies more?  Let’s say Sysco bought up ALL the local supplier inventories of pork beef and chicken.  What if consumers suddenly stopped eating pork?  Obviously they would lose the money they spent on all that pork.  There’s so much more to consider than just thinking “hey Sysco is going to be able to buy everything at the cheapest price possible.”  Just because they can doesn’t mean they will.  And just because they do doesn’t mean it’s a good idea.  If they did buy up all the pork, then other companies just would stop competing in pork, and find another item to compete in.

8) Sysco is really just increasing their product lines to products they already have ultimately cluttering their catalog.  While certain aspects of Sysco may become more efficient (like not having to keep up with market changes brought upon by US Foods), they’re still going to have to invest in cutting workers (see 6).  They may cut warehouses, driving jobs, salespeople, and product lines.  Of course things like selling warehouses and trucks is profit for them, but they had to pay for them with the merger so how much are they really gaining?  To get back to the point of #8, let’s say Sysco right now has 3 sources for chicken in a given area, with US Foods, they’ll have 5 good supplier relations.  Is this really necessary? Does Sysco really want to improve relations with more vendors, then have to worry about which ones to cut out?

They’ll be cluttering their catalogs and there will be costs associated with deciding which ones to get rid of or keep.  Unless they really want to deal with 5 suppliers of chicken.  Or whether they just want to have the ability to buy chicken at .05$ cheaper from their current 3 suppliers that were also supplying US Foods.

9) Sysco has already acquired a bunch of distributors.  Just look at their acquisitions in 2013: http://investors.sysco.com/press-releases/Press-Release-Details/2013/Sysco-Completes-Four-Acquisitions-in-December-Apperts-Foodservice-Buchy-Food-Service-Central-Seafood-Distagro/default.aspx This one will probably have the largest impact, but it’s really not so scary.

10) New competition will arise… It’s just a cycle, let it happen.  Performance foods will probably become number 2.  Then another company will start, and then in 5-10 years Sysco will probably acquire PFG, then another will be acquired, and then another.  Eventually either Sysco will own all food distributors in the world or entrepreneurs will continue to give them a run for their money.

Personally I think people should support the acquisition as it could possibly pave way for greater innovation should other competitors become frustrated and realize a need to do something different.  Now unless Sysco is suddenly acquiring some great new technology that US Foods came up with that made their trucks more energy efficient, or food produced better, or certain highly valuable vendor relations that couldn’t be accomplished in any other way, this deal shouldn’t be getting as much flak as it is.

2 thoughts on “10 Reasons why the food industry should stop harassing Sysco/US Foods about their merger.

  1. I definitely agree that the merger shouldn’t be stopped. The only rationale the feds really have is that it “Could allow for monopoly profits.” (Ugh! Horrors!)

    The problem with this proposition is that it can’t happen, unless the monopoly is granted by the government. If they do raise prices, then that will allow for higher profits, which in turn will draw in new entrants to the field (or expansion by the current competition).

    If they don’t raise prices, then what’s the big deal? In a Free Market, every single compaany that wants to continue in business MUST give a fair shake to each of its three natural constituencies: Owners, Employees, and Customers. These three groups necessarily share in the success of the company.

    If prices get too high (or quality or service nosedive), then the customers will buy elsewhere. If wages are too low, employees will leave and replacements won’t want to work there. And, if profits for the owners is too low, they’ll close up shop and look for better investment opportunities.

    Dom Amentano, in his 1970s book, “The Myths of Antitrust” did a good job of explaining why monopolies don’t hurt anyone. (http://www.amazon.com/The-Myths-Antitrust-Economic-Theory/dp/0870001590)

    Bob – http://www.US-Issues.com

    Like

    1. Monopolies are an interesting topic that I havent explored much. Im not saying monopolies are good or bad, I havent read up on the arguments enough for both sides, but I mean just the idea of a monopoly sounds bad to me. One company owning all the production and goods in a particular industry?

      Im not saying Sysco should be allowed to monopolize. Theyre very far from being a monopoly considering all the factors involved, and the companies still in play. I just think this specific situation isnt really that terrifying.

      Like

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