Blog: Dean BestUS regulator blocks Sysco, US Foods foodservice mega-deal

Dean Best | 23 February 2015

The US competition watchdog has shown its teeth and moved to block Sysco's takeover of fellow US foodservice distributor US Foods.

The deal, announced back in December 2013, sought to combine the two largest foodservice distributors in the US. At the time, Sysco said the transaction, if approved, would create a business generating annual sales of around US$65bn.

However, the Federal Trade Commission has decided to seek a court order temporarily preventing the two sides from completing the deal, arguing it would hit competition.

It has also brushed off Sysco's announcement earlier this month it would sell 11 US Foods distribution centres to distributor Performance Foods Group. It was a transaction Sysco believed would address the FTC's concerns. For its part, Sysco has said it would "contest" the FTC's decision to block its move for US Foods.

The FTC was withering in its assessment of the deal. "This proposed merger would eliminate significant competition in the marketplace and create a dominant national broadline foodservice distributor," Debbie Feinstein, director of the FTC’s bureau of competition, insisted. "Consumers across the country, and the businesses that serve them, benefit from the healthy competition between Sysco and US Foods, whether they eat at a restaurant, hotel, or a hospital."

Sysco's largest customers include quick service restaurant chains like McDonald's and Wendy's but it has around 425,000 clients across the US.

Both Sysco and US Foods serve a wide range of customers, including restaurants and hotels but also healthcare and educational establishments.

According to the FTC complaint, a combined Sysco/US Foods would account for 75% of the national market for broadline distribution services.

"Sysco and US Foods are the only broadline distributors with a truly national footprint, and compete vigorously with each other to meet the needs of customers with foodservice locations dispersed nationwide or across multiple regions of the country," the FTC said. "Sysco and US Foods are the only broadline distributors with numerous distribution centres spread throughout the country. Many hotel chains, foodservice management companies, and group purchasing organisations, for example, consider Sysco and US Foods to be each other’s closest competitor, and in some cases those customers’ only meaningful alternatives, for national broadline distribution services."

The FTC also argues the companies would also high shares in a number of local markets. "Sysco and US Foods also compete aggressively for the broadline business of independent restaurants and other local customers that operate in a local area or region. The merger is likely to harm competition in 32 local markets," the watchdog said.

Sysco's move to sell a clutch of centres to Performance Food Group would not sufficiently boost competition in the channel, the FTC added. "PFG would not approach the scale or competitiveness of US Foods today, and therefore would not restore the competition eliminated by this merger," it said.

Sysco believes that the FTC's decision is based on "an erroneous view of the competitive dynamics of the foodservice distribution industry".

"The facts are strongly in our favour and we look forward to making our case in court," Sysco president and CEO Bill DeLaney said. "Those of us who work in this industry every day know it is fiercely competitive. Customers of all types have access to food distribution services from a wide variety of companies and any number of channels. In fact, the overwhelming majority of restaurants and food operators choose their foodservice distributor locally, where they have choices among many excellent companies."

"For example, the FTC claims that Sysco and US Foods combined have a 75 percent market share in an ill-defined 'national broadline market,' ignoring the fact that the vast majority of 'national customers' use multiple regional or local distributors. Additionally, the FTC claims the merger would harm competition in 32 local markets, ignoring the existence of myriad local suppliers, including broadline companies, specialty companies, cash-and-carry, and club stores with whom Sysco and US Foods compete on a daily basis."

An administrative trial on Sysco's move for US Foods will take place in July.

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