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The Sysco-US Foods Acquisition

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Did the small independent restaurant just get smaller?
By John Davie January 2014 Expert Insights

The upcoming merger of the two biggest food distributors in the nation—Sysco and US Foods—has raised many questions regarding its effect on supply of goods, available choices, and pricing. Understandably, the merger has caused concern among independent restaurant operators and regional chains.

Sysco’s acquisition of US Foods is yet another sign that the industry is consolidating at all levels, not only the distributor level. Manufacturers are consolidating and so are the mid-size and large chain restaurants. Forty years ago, there were many, many more manufacturers and distributors; at that time a group purchasing organization would have been less critical to the profitability of operators. This merger will give Sysco a 35 percent share of the market, when you take liquor out of the equation. The question that independent restaurants need to ask themselves is: What will the industry look like in five years? What direction should they take to keep their costs down and the quality and variety of their foods and other supplies high?

With fewer options and much larger suppliers focusing on the larger buyers, having more buying leverage is going to become even more important to the local independent restaurateur. Competition and choices are so critical to keeping large companies honest and their pricing fair. The gap between the large and mid-size distributor just got larger.

Now, with fewer options for distributors and manufacturers, a smaller operator without the support of a group purchasing organization (GPO) has much less leverage, regardless of purchase volume. Where will these large companies sacrifice their margins? Or perhaps more importantly, where will they make up their margins? As always, it seems, the independents pay the price. The small independent restaurant just got smaller.

Every day, however, more independent restaurants are joining together to pool their purchasing through organizations such as Dining Alliance in order to leverage better deals and gain protection against price spikes and lack of or reduction of choice. Says one of our early members, Greg McDonald, owner and treasurer of Common Market Restaurants, a group of 10 restaurants in Quincy, Massachusetts, “The Sysco-US Foods merger is going to shift a lot of power in the industry, so Dining Alliance is more important to us than ever now. Their group purchasing controls our prices for one thing, but the real teeth of the program is in the auditing that Dining Alliance does to make sure we get the pricing that we negotiated.” The best thing small restaurants can do is band together. With a GPO, the restaurant owner has transparency and security in pricing.

Transparency is one of the most important aspects of controlling costs, and consolidation of the industry doesn't create more transparency. It creates less. There will be more layers of logistics and cost, making it harder to get to the bottom of what true cost is. More than ever, Dining Alliance will be working on our leveraged contracts and price verification software to create transparency in the entire supply chain. The operator needs to trust its distributor and Dining Alliance plays a major role in building this trust for its members.

The official merger will not fully take place until late 2014. Even now, they are still working to get past anti-trust laws, and this will take time. In the meantime, consider a GPO to protect the quality, availability, and pricing of your food and supplies.

The opinions of contributors are their own. Publication of their writing does not imply endorsement by FSR magazine or Journalistic Inc.