How the Sysco-US Foods merger could impact restaurantsHow the Sysco-US Foods merger could impact restaurants

Industry observers said last week’s announcement of an $8.2 billion merger between Sysco Corp. and US Foods surely was the biggest deal in the history of foodservice distribution, but experts and restaurant operators are far less certain about what the pending marriage of the nation’s two largest broadline distributors would mean for prices and service.

Sysco and US Foods arguably are the only two distributors on a national scale, and the possible loss of their competition might weaken the negotiating power of a restaurant chain with national aspirations of its own, said Anthony Carron, founder and co-owner of 800 Degrees, a fast-casual pizza chain.

“I think it could be bad for prices and for consumers; it seems inevitable that prices would rise in this scenario,” Carron said. “In terms of negotiating nationwide contracts, there won’t be anybody to pit against Sysco.”

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Los Angeles-based 800 Degrees has two restaurants open and will open a third unit on New Year’s Eve in Santa Monica, Calif., Carron said. But next year, the brand plans to expand with four more Southern California locations, two units in Las Vegas, and has tentative plans to open a restaurant in New York City at the end of the year.

“My concern is more hypothetical than immediate,” Carron said. “For a company like 800 Degrees trying to branch out into new markets, finding a partner to do that with is important. Now, with less ability to negotiate, we don’t know how that will play a role.”

Houston-based Sysco announced Dec. 9 with Rosemont, Ill.-based US Foods that the former would offer $3 billion of its common stock and $500 million in cash to purchase the equity of US Foods. Sysco also agreed to assume or refinance $4.7 billion of US Foods’ debt.

In a statement, Sysco president and chief executive Bill DeLaney said the transaction would accelerate Sysco’s goal to be “our customers’ most valued and trusted business partner.”

“Sysco and US Foods have highly complementary core strengths, including a broad product portfolio and passionate food people deeply committed to customer service, quality-assured products and safety,” he said. “Together we will strive to enhance shareholder value by providing our customers with highly differentiated products and services.”

Smaller choices remain

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The transaction is expected to close in the third quarter of 2014, Sysco and US Foods said. According to data from Technomic Inc. cited in The Wall Street Journal and other reports, the two distributors combined would account for more than $65 billion in annual revenue, for 27 percent of the market share for the industry.

While a single national player of that size would have a stronger hand in negotiating prices with restaurant operators, it might not increase its prices severely in an environment where brands remain as price-sensitive as ever, said Bob Goldin, executive vice president of Chicago-based Technomic.

He surmised that the Sysco-US Foods merger might not squeeze operators severely given that restaurants can — and often do — move their business around among multiple local, regional and national distributors.

“It’s not game over for the independent distributor or the street customer,” Goldin said. “Operators have been fragmenting their purchasing for years, and not just because of price. They contract with multiple distributors for the selection of specialty items they need, or their [distributor sales rep, or DSR] relationships, or maybe a philosophical need to diversify and spread their business around.”

In most markets, he continued, restaurants will have lots of choices besides the bigger Sysco.

“If operators are not satisfied with any aspect of the new Sysco, they’ll go with another distributor or distributors,” he said, “and those smaller players would be ready to capitalize on any customer dissatisfaction. No one has a gun to any customer’s head.”

Distribution industry expert Caroline Perkins, the co-chief executive of SPEAK Foodservice, speculated that the merger could results in layoffs of DSRs, most likely from former US Foods reps who opt not to join the new Sysco. Such an exodus could cause restaurants to increase the rate at which they already shift their business among distributors, she said.

“If a DSR leaves the company, he or she will probably go with a strong regional or a smaller distributor in the area, and if they have good relationships with their accounts, those operators likely will follow the DSR,” Perkins said. “Those other companies are just as service-oriented and have most of the products operators need. So there could be some attrition for Sysco.”

Another unknown effect of the merger that could indirectly affect restaurant owners is what the considerable increase in Sysco’s buying power could mean for food suppliers, she said, noting that its bigger volume of purchases could force suppliers to discount their products heavily.

Carron has no plans to start looking for new distributors for 800 Degrees, even though he and his executive team are uncertain about what the Sysco-US Foods merger means for them.

“We have about 10 distributors right now, including broadliners,” he said. “We use Sysco now and are happy with them and with our DSR with them. We’re just concerned long-term with a lack of competition. Maybe it’s purely an academic concern, but we’ll see. It’s hard to fathom prices not going up.”

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN