Will the Sysco and US Foods Merger Lead to Higher Prices?
Will the Sysco and US Foods Merger Lead to Higher Prices?
Why is the government concerned with the Sysco and US Foods merger? Well, these are the two largest companies in the food distribution industry, and after the merger Sysco is estimated to have a 27% market share.
Due to US antitrust laws the government needs to regulate mergers like this as they want to avoid monopolization in any industry. Although a 27% market share is not necessarily a monopoly, it is significant in industry pricing power, especially considering that the next largest competitor in the market only has a 4% share (Brodie, http://www.cnbc.com/id/101367271).
This merger would make the current industry leader, Sysco, even more of a giant in food distribution, which has a lot of Sysco’s customers very concerned about what it potentially means for their operating costs.
Why is Sysco going to Court?
Anti-trust laws make it difficult for two large companies to merge. Once Sysco announced plans to buy out their closest competitor, US Foods, the government stepped in to review this merger in order to make sure that no laws are being violated and that competition in the industry will not be stifled by this merger.
According to the Federal Trade Commission’s website, “These (antitrust) laws promote vigorous competition and protect consumers from anticompetitive mergers ….” When two large players in an industry unite, it could cause a monopoly effect and harm the smaller firms from trying to compete. Will the merger substantially lessen the competitive nature in the food distribution market? That is for the FTC to decide and if they believe it will do enough harm to this industry they will not allow the merger to happen. The Federal Trade Commission will begin to oversee this review and Sysco representatives say they expect this process to take 9-12 months.
Do Mergers Harm Consumers?
In the case of the Sysco and US Foods merger, this could mean a change in pricing for Sysco customers as Sysco intends on buying up their biggest competitor—thus eliminating some of the pricing competition. Sysco’s products are commonly considered a commodity to the customers buying them and therefore the pricing wars between Sysco and US Foods are likely highly competitive.
According to CNBC’s Jim Cramer, Sysco will pretty much be the only national food distributor if this merger successfully takes place, leaving large chains no other option if they want one service provider for all of their locations. This definitely gives Sysco a monopoly like pricing advantage and it’s easy to see why this has the FTC reviewing the facts.
A spokesman for Sysco claims that this deal with help cut costs and make the company more competitive (ibj.com). It is not very likely that Sysco’s customers will see these cost savings being passed down to them. What is likely is that the customers will see their prices increased because Sysco will be a food distributing monopolist as far as national chains are concerned.
What Is the Likely Outcome?
If the FTC approves the merger, I would expect Sysco to raise prices because it can get away with it. This is not good news for Sysco’s direct customers (restaurants, schools, hospitals, et cetera) and it is also not good news for the indirect customers (patrons of restaurants, schools, hospitals).
If restaurant have to pay more for their food and kitchen supplies they will have to reflect these cost increases on the menu. I would not think that the smaller, more localized competitors would be lowering prices to attract more business, as they already aren’t really competing with Sysco. I would expect a Sysco/US Foods merger to lead to increased prices across the food distribution industry. I ultimately, however, suspect the FTC will not approve of the merger, as it would lead to a dramatic reduction in industry competition.
References
http://www.cnbc.com/id/101367271 Don’t wait too long for this stock: Cramer by Lee Brodie
http://www.ibj.com/indiana-joins-feds-in-reviewing-merger-of-sysco-us-foods/PARAMS/article/45664
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Unless you are in the business then i dont see where you are coming from? I am in the business and dont really consider US Foods a huge threat to my business unless you consider the fact that they buy their business from me at unprofitable margins and by giving bags of cash to the customer. This practice led to their demise. I have read reports that say that they are our largest “competitor”. Well, if you consider doing business at an unprofitable level, “compettiton”, then i assume you are correct. They are riddled with debt that they cant make good on. That is the main reason for the merger I believe. There are 15000 distributors across the nation. I compete daily with these companies and we are all priced competively. what will change with our pricing structure by buying US Foods? Surely we cant raise pricing because we are still in a competitive marketplace. If we raise prices then we lose business and we arent in it to lose business. There will always be choices out there for the consumer. We will NOT be the only company around. It just baffles me when I hear these statements. Had they truely ran their business in a fair manner then they would be a competitor still and this merger would not be an issue because it wouldnt have happened.
As a 25 year veteran of foodservice and as a competitor to Sysco for all 25 of them, I think the prognostications about the proposed merger and it’s effect on pricing is getting a little redundant. To be precise, the margins at this time between US Foods and Sysco are virtually identical, the overlap in customers is also minimal, and the combined marketshare of the combined company is 27% of the total foodservice distribution market not the restaurant segment. There are over 15,000 entities in foodservice distribution and none of them will allow Sysco to operate in a vacuum.
Currently, the top ten super regionals are growing at a higher percentage rate than Sysco or US Foods and are anxiously expecting to continue that growth before, during, and after the merger.
can’t figure it out!! Like your comment.
Sysco Arkansas (Non Union) started this year not paying a guaranty of 40 hour work weeks to Drivers. They now pay actual time worked so if they miss schedule you. You’re just out of luck and get that pay some are at 27 – 30 hours a week. They did away with our pension plan (saved company 50 million at the expense of the employees) changed to 401K. Vacations are now not 13 week averaged now 40 hours only. We have lost pay and benefits for the last 4 years. While Corp. can’t get the 212 rollout fixed should have been compiled last year. But only maybe 5 to 8 Sysco companies have made the change with a high lost in sales because the on time deliveries and quality control go down. Because no one can control anything it is all from corporate and they seem to have other things on their minds than our customers and least of all our employees. While our leader and CEO has doubled his annual pay in the last year. Sysco bought Western Foods 8 to 10 years ago and put them in management the over the Sysco house so we might as well be called Western Foods. Because they seem to have not read the Sysco ethics hand book. Maybe if the US Foods deal works this may fix some of the problems, because they seem to at least have a better reputation with our customers than Western Foods ever had.