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.
The 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.
There 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.
GM 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.
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.”