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Some independents eager to take bite out of Sysco

by William McConnell In Washington  |  Published April 3, 2014 at 3:34 PM

Some customers and more than a dozen state attorneys general have raised competition concerns with Federal Trade Commission officials about Sysco Corp.'s $8.2 billion planned acquisition of its next-largest food distribution rival, U.S. Foods Inc. But a number of independent distributors have told the FTC, which is conducting the antitrust review of the deal, that they have no competitive concerns about the merger because there's plenty of competition in the business for supplying restaurants, universities, military installations, prisons and other institutions.

Many independents said they view the deal as an opportunity to pick up business from U.S. Foods customers that dislike doing business with Sysco, the nation's largest food distributor.

Critics, who also include some public interest groups, argue that combining the top two food distributors will harm competition for food distribution to institutional users. The companies said the combined entity would have 25% of the U.S. food distribution market, but other estimates range as high as 35%.

The merger's critics are pushing the FTC to view the deal not just as one that affects numerous local markets across the country, but also as one that would harm competition to a national market. Sysco officials have insisted they do not compete on a national basis to win customers, that even clients such as food service giant Aramark Corp. enter contracts on a local basis and that plenty of competition exists at the local level.

Many independent think they can take market share from the combined company because a fair share of U.S. Foods customers do not like doing business with Sysco.

"Many independents are family-owned and well-run, which is why they have not been bought out already," said Dan Cox, CEO of Distribution Market Advantage Inc., a co-op of regional distributors. "They can add capacity when opportunities arise." DMA has 95 distribution centers across North America. Ten more will be coming online as part of an ongoing expansion. DMA's primary niche is serving the top 250 national restaurant chains.

Cox challenged the notion of some deal critics that DMA isn't a reliable national competitor that can provide an alternative to the merged Sysco for national customers. "DMA has grown 150% since 2008. Our compound annual growth rate is double digit, we have growth three times faster than either U.S. Foods, Sysco or the industry," he said. Cox also noted that Performance Food Group is another competitor for national distribution.

Another person involved with independent distributors predicted that post-merger Sysco will have no more than 20% of the total market. U.S. Foods customers "are running as fast as they can so they don't have to do business with Sysco," said the source, who asked not to be identified.

Independents are also booming because of other trends in the business, the person said. Independents benefited after media reports of Sysco storing perishable foods in unrefrigerated sheds. The smaller companies seized on the episode as an opportunity to market themselves as more nimble suppliers that can deliver perishables with a much quicker turnaround than the big national distributors.

Another company, Restaurant Depot LLC, a cash-and-carry operation in business since 1990, requires customers to pickup food supplies at its locations in 27 states and does not offer credit. The lack of need for refrigerated delivery trucks or a financing operation allows it to keep prices low.

"The media reports about Sysco changed the industry and all of a sudden small guys were going from $5 million in business annually to $15 million, like flowers in spring time," the source said.

The merger will only complicate matters for Sysco, said the source, who predicted that senior managers and sales reps at both companies will look for new jobs now rather than wait to see who survives the inevitable layoffs. In a business where personal relationships with customers is critical, he said he expects some clients to walk out Sysco's doors with them.

Said the source: "If you interviewed some of the big regional distributors, they would say the sale is greatest thing to happen to their business. The logistics of the merger will keep Sysco clocked out for three years."

Tags: Aramark Corp. | Dan Cox | Distribution Market Advantage Inc. | DMA | FTC | Restaurant Depot LLC | Sysco Corp. | U.S. Foods Inc.

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William McConnell

Assistant Managing Editor: Regulatory & Arbitrage

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