Merger plan of giant food distributors divides Triangle restaurateurs
04/04/2015 4:00 PM
04/05/2015 5:20 AM
US Foods delivery driver Reggie Rollock unloads several large boxes of frozen foods Thursday morning, April 2, 2105 for his client 18 Seaboard restaurant during his twice a week delivery stop in downtown Raleigh. A proposed merger of Sysco and US Foods is causing much commotion and uncertainty among Triangle restaurant owners. HARRY LYNCH HLYNCH@NEWSOBSERVER.COM
A deal that would combine the nation’s two largest food distributors, Sysco and US Foods, has divided Triangle restaurant owners that depend on the companies to put bread on their tables and paper towels in their dispensers.
Many Triangle restaurant owners worry that combining the two businesses would stifle competition and push prices higher, a view shared by the Federal Trade Commission.
Others believe that the competition will remain intense and that the deal could even produce benefits for local restaurants.
“Any time you’ve got too much power in one person’s hands, you run the risk that they could raise prices and there isn’t much you could do about it,” said Tyler Huntington, co-owner of four Tyler’s Restaurant & Taproom locations, who opposes the deal. “The counterargument is, well, if they do this and they have greater purchasing power, they could possibly lower prices.”
How the transaction might affect the Triangle has emerged as an issue that could affect whether it goes forward. On Feb. 19, the FTC took legal steps to block the deal on antitrust grounds, arguing that restaurants, hospitals, hotels and schools are likely to pay higher prices and at the same time receive lesser service. The agency also contends that would mean higher prices for consumers.
The FTC says that the Triangle and Charlotte markets are among the metropolitan areas nationwide that would especially be hurt by the merger.
Sysco, which announced in December 2013 that it had agreed to acquire US Foods in a deal valued at $8.2 billion, contends the FTC is misguided.
“In the Raleigh-Durham marketplace and across the U.S., customers have enormous choice,” said Charley Wilson, vice president of corporate communications at Sysco. “We believe that the FTC’s analysis of the competitive dynamics and the foodservice industry as a whole is flawed. We believe it’s just wrong.”
But Huntington, who uses US Foods as his primary supplier, says if the combined company chose to go with higher prices, he’s not sure he could find lower prices elsewhere.
“One of the reasons we’re already with (US Foods) is their prices are better than the alternative,” he said.
“I would prefer to see it stopped,” he said of the merger. “I’m not doom-and-gloom about it. I know I have talked to a few other restaurateurs who are dead set against it and stressing out up one side and down the other.”
At the other end of the spectrum is Andrew Seagle, co-owner of The Big Easy restaurant in downtown Raleigh.
Seagle anticipates that his restaurant would benefit from the economies of scale and increased buying power of a Sysco-US Foods combination.
“Their prices are going to get better,” he said.
And if he should be proven wrong about that, he’s confident he would be able to find good prices elsewhere.
“There are plenty of (companies) out there, and they are constantly coming in here trying to get my business,” he said.
‘Presumptively illegal’
The FTC complaint contends a combined Sysco and US Foods would dominate the industry, controlling about 75 percent of the national market for “broadline food service distribution.” Broadline food distributors carry a wide range of food and ancillary products, such as paper products and cleaning supplies, and aim to be a one-stop shop for customers.
“The next largest competitor would possess only about 11 percent of the market,” the FTC complaint states.
Hotel chains and food service companies with a footprint that stretches across the country are “most effectively served by a broadline foodservice distributor that has the capability to provide nationwide coverage,” the FTC contends. Indeed, some of those national customers consider Sysco and US Foods “the only viable options for their broadline distribution needs.”
In addition, the FTC cites 32 local markets where smaller customers would be impacted because the combined business would control more than 50 percent of the broadline market. The FTC contends that makes the merger “presumptively illegal.”
The Triangle is on that list, with the combined businesses having a 74 percent share of the market, in the FTC’s estimation – greater than all but 13 markets nationwide. In Charlotte, the two companies account for 62 percent of the market.
Attorneys general from 10 states and the District of Columbia have joined the FTC’s efforts to block the merger. North Carolina’s attorney general, Roy Cooper, also plans to join the anti-merger bloc, said spokeswoman Noelle Talley.
But Sysco’s Wilson countered that combining the two companies is expected to generate $600 million in annual cost savings that would result in a wider assortment of products and “competitive, if not better, pricing for our customers.”
Wilson said if Sysco and US Foods combine, they would account for 25.5 percent of the $235 billion food service market – not the 75 percent the FTC cites.
Nationally, “more than 15,000 competitors are in this space trying to attract the eyes of these restaurant and food service operators,” Wilson said.
That includes not only broadline distributors but specialty companies that focus on niches, such as seafood, cheese or paper goods. It also includes companies such as Costco, Sam’s Club and Restaurant Depot that don’t make deliveries; instead, restaurants and other customers must go to their outlets.
“While Sysco and US Foods may own distribution centers in a certain area, it doesn’t mean they are the only competition and competitors in that market,” Wilson said. “That is where the FTC gets it wrong.”
Split vote
Both companies have distribution centers in the Triangle – Sysco has one in Selma that employs 370 workers, and US Foods has a distribution center in Zebulon.
Sysco estimates there are approximately 33 other companies that sell to Raleigh-Durham restaurants and other food operators, including eight broadline distributors.
Sysco also points out that the FTC was split, by a 3-2 vote, on whether to fight the merger with the two Republican commissioners opposing the action.
US Foods officials didn’t respond to requests for comment.
At least one company that competes with Sysco and US Foods seems undaunted by the possibility of competing with a much larger combined company.
Gordon Food Service, which has more than 20 distribution centers across North America, announced in October that it planned to open a distribution center in the Western North Carolina town of Kannapolis. That facility, scheduled to be completed this fall, is expected to employ 275 workers within five years.
“Gordon Food Service is currently serving a growing number of customers in the Raleigh-Durham market from our Douglasville, Ga., facility,” spokeswoman Deb Abraham wrote in an email. “We look forward to continuing to expand our capabilities in the Raleigh-Durham market.”
But she declined to address the merger and how it might impact the competitive landscape.
Another competitor in the Raleigh-Durham market, Pate Dawson, a food distributor based in Goldsboro, also declined to comment on the merger.
‘Plenty of options’
Wil O’Neal, co-owner of Winston’s Grille in North Raleigh, buys seafood, produce and some beef from local suppliers but relies on US Foods for 90 percent of what he calls grocery items.
“If you think about going to the grocery store, that’s about what we get from them,” he said. “Everything from ketchup to paper goods.”
O’Neal figures that, even if the companies merge, there are enough alternative suppliers that the combined company won’t be able to dictate prices.
“I don’t think I’ll see a difference,” he said.
David Brigham, co-creator of the BrigsRestaurants franchise and co-owner of two of the five Brigs Restaurants, agrees.
“I just don’t see a lot of changes, other than they say it may bring down prices,” he said. And he, too, sees “plenty of options” to shop around for the best price.
But other restaurant owners worry what will happen when US Foods and Sysco no longer have to compete against each other.
Raleigh-based LM Restaurants is a family-owned business that manages 14 Carolina Ale House restaurants plus a half-dozen other eateries; it also handles purchasing for 11 Carolina Ale Houses that have licensed the brand.
Amber Moshakos, vice president of corporate affairs, said LM has “a fantastic relationship” with US Foods but is nonetheless checking out alternative suppliers that it could turn to if it becomes prudent to do so.
“We’re keeping all of our options open,” Moshakos said. “We have concerns over what is going to happen and how we will be impacted.”
Jason Smith, who owns 18 Seaboard and Cantina 18 in Raleigh and Harvest 18 in Durham, was interviewed by the FTC about the merger and subsequently was subpoenaed to give a deposition by Sysco and US Foods. He’s against the merger.
Sysco and US Foods are among Smith’s larger suppliers.
“I currently have the best of both worlds,” he said. “I have two passionate reps that work for two different companies that are very good at their job and are very competitive at their job.”
With either company, he said, “I can call at 3:45 in the afternoon and order 70 random items and expect them to be delivered to my door at 10:30 the next morning. I can’t think of many businesses that do that. It’s kind of crazy. And not only that, they are very, very inexpensive.”
Smith declined to speculate about how the merger might affect prices and service but stressed that he’s delighted with the status quo.
“I can’t imagine it being any better,” he said. “It’s the best.”
Ultimately, however, it will be up to the courts to determine whether Sysco and US Foods will get to combine forces.
The next step in the legal battle is set for May 5, when the two sides will face off in a Washington, D.C., federal district court. The FTC is seeking a court order that would prevent Sysco and US Foods from consummating their merger while the agency pursues its efforts to block the deal.
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THE PLAYERS
SYSCO
Headquarters: Houston
CEO: Bill DeLaney
Ownership structure: Publicly traded
Employees: More than 50,000
Annual revenue: $46 billion
US FOODS
Headquarters: Rosemont, Ill.
CEO: John Lederer
Ownership: Private equity firms Clayton, Dubilier & Rice and Kohlberg Kravis Roberts
Employees: 25,000
Annual revenue: $22 billion
The deal
Sysco announced Dec. 9, 2013, that it had reached an agreement to acquire US Foods.
Sysco agreed to pay $3 billion in stock, $500 million in cash and assume $4.7 billion in debt, valuing the deal at $8.2 billion.
The Federal Trade Commission announced on Feb. 19 that it was taking legal steps to block the deal, charging that it violates antitrust laws. The commission filed an administrative complaint and also sought a federal court order to prevent Sysco and US Foods from consummating the merger pending the outcome of the administrative proceeding.
The legal action followed a 3-2 vote of FTC commissioners, with three Democrats in favor of the challenge and two Republicans opposing it.
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