Why Sysco’s Acquisition of US Foods Feels Like Orwell’s Nineteen Eighty-Four

Sysco and US Foods have been buying smaller food distributors and manufacturers to expand national reach and grow revenue for years. When news broke last week on Sysco’s $3.5B acquisition of top rival US Foods, I, like many others in the food industry, was quite surprised.  

MonopolyJPMorganThe two largest rival food distribution companies have pretty much competed for the same customers, and their competition empowered customers to negotiate for the best deal. Customers often use one broad line distributor as a primary supplier and another as a back up to keep their primary honest and on their toes. The acquisition will severely limit their system of checks and balances.

According to the NASDAQ press release, the deal “brings together the best of both companies to do more for customers and invest in accelerating the transformation of Sysco and the industry.” What the press release doesn’t say of course is that the combination of these two mega broad line distributors limits customer choices to a one-size-fits-all model – conformity to the company’s terms of standardized product sets and service methodology.  

Do As I Say, Not As I Do

This union makes me think of George Orwell’s classic novel Nineteen Eighty-Four, where society succumbs to the control of “Big Brother” in an environment where individualism and independent thinking are persecuted as thought crimes. ‘Big Brother’ justifies oppressive rule under the auspices of greater good for society.

1984There is no doubt that Sysco and US Foods provide value to their customers with a wide array of products and vast distribution capabilities. However, the two combined, portends to limit customer choices and access to competitive products. One glaring example of this can be found in the offering of private label brands.

Sysco and US Foods make higher profits selling their own in-house private label brands, compared to selling name brand items for condiments, hot sauces, ketchup, poultry, desserts and other foods. The companies can source the cheapest ingredients from multiple suppliers and keep the customer’s purchase price the same for private label brands. Suppliers of private label brands are also often required to pay a “marketing allowance” or rebate, which goes straight to the broad liner’s bottom line.Sales reps are  encouraged and incentivized at higher rates for selling private label house brands to their customers.  

This isn’t anything new. Back in 2009, Sysco’s President and COO publicly declared an emphasis on private brands. (US Foods sells their private label brands under catchy names like, Patuxent Farms® and Chef’s Line®.) There’s absolutely nothing wrong with this practice and I’m sure the private label brands offer value to their customers.  However, with US Foods folding into Sysco, customers will have fewer brands to choose from and will likely be forced into a Sysco dictated one-brand-fits-all purchase setting. 

History (Does) Repeat Itself

General Motors grew to one of the world’s largest automobile companies by buying up independent car companies Buick, Olds, Pontiac and Cadillac. These once unique brands were eventually commoditized  to share the same standardized GM platform with cosmetic differentials only. Innovation and creativity waned in favor of conformity, standardized production and distribution. 

monopoly boardGM was very successful, earning millions of dollars on billions in revenues. Yet, over time, the one-size-fits-all model ultimately drove customers away. Lack of innovation opened the doors for foreign car companies who offered value by listening to customers’ needs and designing cars that were unique and innovative – a tidal wave of foreign imports ensued. GM remained steadfast in their thinking and ultimately faced bankruptcy before being bailed out by U.S. taxpayers in recent years.

Ironically, this merger comes at a time when the retail grocery market is trending opposite the one-size-fits-all supermarket model. Specialized local grocers, fresh markets and butcher shops are fast becoming the preferred customer choice due largely in part to the personalized service and diversity of products they offer. An example of this can be made with the demise of the Midwest grocery chain, Dominick’s.

Originally an independent family run grocer which catered to local neighborhoods, Dominick’s was acquired by Safeway in 1998.  Safeway ingratiated their corporate culture onto Dominick’s and changed the brand into a “me too” supermarket. Dominick’s struggled while other local grocers took away their market share using the same approach the company had originated. Last October, Safeway announced it would sell or close all 72 Dominick’s stores in the Chicago area and exit the market.

Wrap Up

Will the Sysco/US Foods merger face the same challenges down the road as GM and Safeway did?  Only time will tell.

My opinion is it’s a bad deal for the customer. There are many food service operators that simply buy on price with less or no regard for the quality or personalized service. The Sysco/US Foods merger limits price competition for them. There are many food service operators that value quality and personalized service first and are willing to pay the commensurate price for it. The Sysco/US Foods merger will limit their options as well.

When there is less competition, there is less choice. Fewer choices mean limited options; limited options drives standardization and conformity which restrict differentiation.

This is a merger where Big Brother Sysco will ultimately tell customers what’s best for them. I say, “Rise up, speak with your dollars and support your local independent food service companies who take great care in listening and responding to what you say is best for you.”

From the desk of  John Cecala   @BuedelFineMeats   Fan Page   Slideshare

 

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30 thoughts on “Why Sysco’s Acquisition of US Foods Feels Like Orwell’s Nineteen Eighty-Four

  1. Spot on article, and the last paragraph was the first thing I thought when I heard of the merger – what a wonderful opportunity this presents independent distributors. Hope they step up to the plate! (pun intended)

  2. Great article to read. As the current GM at a family owned (3rd generation) food manufacturer and butcher and distributor in PA, this acquisition should bode well for companies like us. Customers are asking if we are scared because if this new mega distributor. We are not. In fact we are excited for many reasons. One big one is like you stated in your article. We go that extra step in caring about the customer.
    Thanks again for writting this as I will be sharing with my sales team.

  3. Great article….spot on, but you need to address the stifling effect it will have on GPO,s which create outstanding value and savings within the school and healthcare industry…..but need national distribution to achieve these values. Premier one of the largest…used US Food exclusively …while leveraging best deals and distribution/reporting platforms from US with threat of moving to Sysco. The same was happening at Sysco with GPO’S they partnered with….now the National delivery capability combined with reporting (essential to GPO’S) has just become one. It’s really a step back in time for all involved.

  4. This is a Great time for the regional companies to pick up good talent. With the up coming consolidation, there will be a lot of good people looking for a home. Now is the time to be network with the good guys in your area. Plan, plan and plan!!

  5. Well written John, the national exodus away from “standardized” fare from places like Applebee’s and the like will continue to gain momentum as people get smarter and make better choices about what they put in their mouths. The local/regional food movement gets stronger everyday because of food safety issues in the news and customers wanting to know where their food comes from and how it was produced. I hope Sysco see’s the forest for the trees.

  6. Well written John, the national exodus away from the “standardized” fare at places like Applebee’s and the like will continue to gain momentum as people continue to get educated about what they put in their mouths. The local/regional movement only gets stronger with mergers like this; hopefully Sysco sees the writing on the wall. After this there are no more “buy your way to a better bottom line” deals out there.

  7. Sysco and U.S. Foods MERGER: Competitive Pricing Severely Compromised, Restaurant Bottom Line Affected, Ensuing Dissatisfaction Guaranteed.
    RESULT: A wide open playing field for those who can and will compete agressively for regional markets to become the preferred supplier. I forsee a lot of food supply millionaires being made in multiple market arenas within the next few years. Thank You, Thank You, Thank You.
    Get busy ramping up your game, regional suppliers! Your day has arrived!

  8. John,

    Extremely well constructed article. Many points I try to convey to my customers and prospects. I wish I had a way of conveying these thoughts without sounding petty. Once again great article. I think this opens up alot of opportunities for smaller independents we just have to remain diligent.

  9. Great article. As a distributor sales rep for a regional family owned distributor, this will bring a great opportunity for the independent distributor and the independent restaurants. Bigger is not necessarily better in the foodservice distribution business.

  10. What great insight in this masterfully written article – well done! I especially like the point about Dominick’s competitors coming in and taking share by doing exactly what Dominick’s did originally – catering to specific target segments. Pricing is important, but it’s not everything. There are always customers who look to their suppliers for new ideas, collaborative efforts and personalized service. Giants are not well known for their “soft touch.”

  11. John,

    I nice piece; and it appears it has “gone viral” in the internet foodservice world and beyond. Well done.

    What was left unmentioned, though, is the fact that as the distributor community has concentrated through mergers and acquisitions, so also has the restaurant business. The eating-out world is fast morphing into multi-unit, one-size-fits-all eateries which off a dining experience about as exciting as the cars General Motors offered in its worst days. Everything’s the same except the badge, be they restaurants or Chevrolets.

    Sysco/USF has the capability to sell standardized food to standarized restaurants, no matter where they are; precisely what the bean counting restaurant execs like.

    I sincerely hope the remaining indy food distributors will survive in a changing restaurant business climate. They have a story to tell, for sure.

    • Bob, very good comments. I think you summed it up nicely with “standardized food to standardized restaurants”. I’m confident that there will always be a market for the lowest common denominator offering of food/quality/price/service. A one-size-fits-all eatery would seem to be a good customer for a one-size-fits-all foodservice distributor until their customers (us) vote with their dollars to eat elsewhere. Similar to what happened to General Motors with car buyers.

      Thanks for reading!

      John

      • Just so you are aware, the big guys don’t like selling to chains. It traditionally doesn’t generate much margin. The independent restaurant is where they see dollar signs. Do not focus on large chains, but rather on the mom and pops. You must be their mom and pop.

      • Hats off to all the comments here on your article John.
        As a producer distributor of a niche meat product using Sysco through our private label was a uphill battle, proving your readers comments true,
        If can say while wearing my niche producers hat, is to ask all you independents to think creatively in the face of a plate.
        Our chefs are creative by nature!

  12. So well written. Your article was sent to me through a former Sexton employee that sent to all former Sexton employees in our network — couple of hundred if memory serves me correctly; some with Sysco and some with US and some now with independents; definitely a “viral” piece. The independent distributors will and can fill that void that will most unquestionably surface.
    Sue Dorsey

  13. I will echo those who see this as a huge opportunity of Gordon’s, PFG, Rinehart and all the smaller distributors. A sales rep from one of these need only master the pitch of “We are different, independant, under-dog…” to win new business from either USF or Sysco current customers, especially with the real event a year or so away. Sysco will downsize it’s sales force and the indy sales rep will double his business because Sysco/USF already have a few dissatisfied customers on the edge – the merger will just tip the cart.

  14. Might be an interesting time , Mediocre merge with reject , all the food will have one standard , one flavor one price , this will lead to SEC investigation and like all large corporation will eventually be forced to break up .
    In the mean time for the good purveyor it might very well be the golden age because the larger the company the less flexibility to adapt to customer demand , it will result in a company somewhat similar as an Hybrid between the DMV and social security …..What a monster. Worked without Sysco and US Food for 40 years and can very well go another with neither one of them.

  15. I’ve worked for Sysco and the precursor of US Foods, Holleb Foods, in Chicago. I have purchased food from both companies in large and small facilities. I also bought from specialty distributors for meat, produce and special gourmet and dietary requirements. This is going to reduce the variety, quality, and competition for service levels and will certainly increase the cost at some point. As competition goes away, choice, quality, variety and price comparison will be effected within a year. I hope specialty providers have the staying power to continue to educate buyers on how to make profits from an educated purchaser. SO SAD.

  16. Spot on, John! Very similar to the Walmartization of American retail industry which, as you well know, has impacted the food industry massively.

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