Sysco and US Foods are two of the top food suppliers for restaurants and other institutional buyers in the United States. Several years ago, the government accused US Foods of padding its invoices and many restaurants switched to Sysco. However, recently, Sysco announced its plans to purchase US Foods. This acquisition would create a giant food distributor with over $65 billion in annual revenue, and very few competitors. This worries many restaurant owners as they fear they will have fewer options and less negotiating power.
US Foods and Sysco are not household names as they don’t sell directly to consumers. These organizations make money as middlemen buying meat, produce, and grocery items, selling them in bulk, and delivering the items to restaurants, schools, and other institutional buyers with markups between 10% to 50%. Sysco believes that the merger will give the company more leverage and buying power, allowing them to offer lower prices.
Competitors, like Restaurant Depot, have been able to compete with Sysco by pressuring Sysco to be more forthcoming about its markups. Sysco’s profit margins are already squeezed. Its margins are tightest with restaurant chains that are able to negotiate deals to making the pricing more transparent.
However, critics argue that the industry can still “mark or muddy their actual costs.” Distributors buy from other middlemen. These middlemen can pump up the price (which is shown to buyers) and then return the difference to the distributor as a rebate. Distributors can also negotiate year-end rebates from manufacturers and rarely pass these rebates onto customers. Lawyers, however, argue that distributors are typically protected and that rebates are legal and don’t violate a distributor’s contractual obligations. There have been several lawsuits and class action lawsuits against both US Foods and Sysco.
What are the advantages and disadvantages of a Sysco/US Foods merger from the perspective of Sysco/US Foods, its retail customers, and consumers?
Source: Annie Gasparro and Jesse Newman, Wall Street Journal, January 6, 2014