For some restaurant operators, independent or corporate, foodservice distributors, food manufacturers, stock analysts, and many stockholders the Federal Trade Commission’s opposition the the proposed marriage of Sysco and US Foods has drawn some attention but does it really matter to consumers?
According to the FTC it does and over the course of the past week lawyers from both sides argued before a judge in U.S. District Court of the District of Columbia in what a reporter from the the National Law Review described as “Standing Room Only” or as Frank Pentangeli would say, “there are more people here than a ballgame” as the FTC is seeking to block the merger of Sysco and U.S. Foods.
The hearing this week is pivotal to the FTC’s efforts to stop the merger as they are asking a judge to grant an injunction, if they are not successful it is highly likely that they will not be able to prevail in a suit filed by the FTC that is scheduled to go to trial in July 2015.
In the brief article the NLR reported that Richard Parker of O’Melveny & Myers lawyer for Sysco and US Foods, (not the same Richard Parker from the movie Life of Pi) in his opening statement got a big laugh when he said, “You know you’re in Washington when an antitrust trial draws a crowd. If this was Minneapolis, no one would care,”
The fact is that more consumers could tell you that Richard Parker was the tiger in the movie than could tell you where the food comes from at their local restaurant. The fact is that Sysco, US Foods nor any distributor completely controls the price that consumers pay for food at their favorite restaurant. Another fact is that food is not sold on restaurant menus at fair market value, (food is acquired by restaurants at fair market value) menu pricing is constructed by restaurants on perceived value based on a number of factors not the least of which are presentation, service, quality, descriptions, ambience, location, cleanliness, and cost.
So what does the FTC have to do with the price of pickles in Peoria, flounder in Fairfax, bourbon baked beans in Boise, salmon in Salem, or melba sauce in Minneapolis? Answer, about as much as they have to do with the price of tea in China.
The FTC lead by Deborah “Skywalker” Feinstein and her band of political loyalists are fighting against the proposed merger. Their opposition is largely predicated on the premise that if the merger were allowed to go forward there would be no national footprint distributor which would remove competition in “local markets” and thereby allow the combined Sysco/US Foods to raise prices which would ultimately be passed on to consumers. In the opinion of many, that is the core of their opposition and is essentially stated in the 24 page complaint that the FTC filed earlier this year.
The FTC argues that as a matter of law that the merger should be blocked. In this hearing the judge will decide based on the facts presented in court support the FTC’s contention. The FTC in it’s complaint has presented the facts that it intends to support through testimony, documents, and expert witnesses that it is justified as a matter of law in blocking the merger. The FTC will probably have a very difficult time proving the facts that they assert in their actions against Sysco and US Foods.
Sysco, US Foods, and their attorneys will work to prove through testimony and evidence that the FTC’s assertions about the “local market” and the “highly competitive landscape” remains intact. Sysco will also probably show it’s own financial statements which prove it’s assertions that mergers, consolidations, and acquisitions are more likely to lower costs and actually lower prices in the market and conceivably the lower prices are more likely the result of competitive pressures than reduced operational costs. Sysco’s published financials actually show that it consistently reduces its own operational costs but continues to feel the effects of shrinking margins. US Food has reported a net loss in each of the last five years as reported in financial reports filed with the Security and Exchange Commission.
The FTC reportedly has presented at least one economist to support it’s premise and Sysco will likely present an economist as well. Economists essentially collect data, analyze trends and predict the future although few if any forecasted the greatest economic collapse in U.S. history and fewer are likely to predict the future of the hyper local market that exists in all of the markets the FTC lists in it’s complaint.
In my opinion, the FTC is presenting and apples vs. oranges comparison. The FTC bases the majority of it’s complaint on a “national market” analysis that it attempts to conflate with a “local market” analysis. Ironically, those in the industry will likely remember that prior to the year 2000 there was only 1 distributor that was considered a “national distributor” until subsequent mergers and acquisitions created what is now US Foods. In some ways it is as if the evil empire (Sysco) is attempting to acquire it’s equally evil rival (US Foods) to achieve national dominance of the GMO corn and potato market, empirical control of the antibiotic inoculated beef, pork, and poultry markets, and diabolical supremacy of the insecticide laden leafy greens market in order to force restaurants to pay more for the privilege of buying those and other food and food related supplies from US Foods when it is acquired by Sysco.
After the the proposed merger was announced, the FTC signaled that unless the two companies offered some form of divestiture it would likely oppose the merger. Subsequently, Sysco and US Foods announced they had come to an agreement to sell 11 distribution centers to Performance Foodservice. The 11 distribution facilities support over $5 billion in sales and are largely geographically located in the midwest which would in effect give Performance Foodservice a national footprint.
Despite hundreds of hours of due diligence, discussions, and negotiations the FTC filed a suit against the merger. According to published reports, George Holm, CEO of Performance Foodservice testified as a witness this week and FTC lawyers apparently attempted to make an issue out of previous statements whereby Mr. Holm was apparently against the merger before he was for it and requested to treat him as a “hostile witness”. Mr. Holm and his company worked diligently to gain an agreement on a $5 Billion dollar acquisition for the company he leads in an acquisition that was precipitated by the FTC’s advise to Sysco to create divestitures now gets labeled as a “hostile witness”.
So meanwhile on a galaxy far, far, away (Washington, DC) the future of foodservice is likely to be decided by a judge who may or may not be a Jedi Master, a Godfather, or a Hindu Deity.
Presumably, the lawyers could “make an offer they can’t refuse” and essentially settle ending these proceedings and allow the companies involved to get back to their businesses and take care of their customers and employees. Stay Tuned
Disclaimer: I do own (4) shares of Sysco as a result of a (1) share purchase in 1992 in which the stock split twice. I also own a PFG umbrella that I recently used to get into a restaurant that purchases from all three distributors, (6) specialty suppliers, (4) internet companies, Restaurant Depot, Costco, and a guy named Fred that sells tomatoes and oysters he picks up on the way back from the tomato farms on the Eastern Shore. In the interest of full disclosure, one of my most useful items is an insulated bag with a US Foods logo that I use to carry beer and sandwiches to Virginia Beach where US Foods closed a distributor that previously employed 156 incredible people before US Foods decided to buy a distributor in a cornfield in Iowa.