Porter Novelli

A recent webinar on the pending merger of Sysco and US Foods, hosted by the former President of Sysco Food Services, Len Pentracosta, took a hard look at the two major industry giants. In 2014, Sysco will buy US Foods for $3.5B while taking on $4.7B of US Food’s debt, uniting two central players in the foodservice distribution world.

With the merger, Sysco hopes to combine similar customer bases, diminish secondary resourcing and keep its current customers. However, there is a risk; it could mean fewer ingredient choices and fewer products to choose from – two major worries of restaurant operators.

A Margin Frenzy

To give some background, margin erosion is the loss of margin dollars that occurs once a sale for an item with less-than-expected margin has been recorded on the books. More simply, it is a gradual reduction in gross profits over time. There has been huge margin erosion in foodservice distribution since 2009. The merge is expected to generate at least $600 million after three-to-four years, partially from cutting administrative overlap.

If a restaurateur has been comfortable ordering with US Foods for many years, for example, the merger could result in less competition. However, restaurateurs should keep in mind that while the merge will cause sourcing from other lines, there are positives to it in that once the distribution chains are streamlined, the resulting company’s costs would be reduced, putting less pressure on margins and prices.

Effect on Restaurants and Smaller Distributors

Pentracosta says he’s confident that the multi-unit, national chains will not make sudden moves to find secondary, smaller sources. These restaurants will proceed with caution before making any major decisions once the merger is announced. They will take time to adjust to the change, hoping that themerger will be a smooth transition with few bumps. The acquisition has potential benefits for smaller distributors because restaurants simply might not want to deal with a firm that’s growing in size, and therefore stay put in their comfort zone with smaller distributors, giving them more business.

Regional players and chains that source from smaller distributors will actually benefit because costs will decrease due to the merge. There is also opportunity to go coast-to-coast and these players have a chance to come up with a national distribution model. So, while there may be an initial push back with these restaurants, they will see over time that they do have a great opportunity in front of them.

PN Perspective: We should keep a close eye on how these major giants coming together will affect the foodservice industry in the coming years and council our clients accordingly.