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What The FTC Doesn’t Know May Hurt Us:

Sysco/US Foods Merger Is Pro-Consumer
Judge Has Opportunity To Let A Thousand Distributors Bloom

Jim Prevor’s Perishable Pundit, May 18, 2015

Federal court proceedings in which the Federal Trade Commission (FTC) is trying to persuade Judge Amit Mehta to issue a preliminary injunction to prevent the proposed merger of Sysco and U.S. Foods are going to be extended.

The issue?

What is the proper definition of the “market” served by Sysco and US Foods:

Judge Mehta interrupted the lawyers on several occasions, with questions and observations about the case. The judge noted the FTC’s case against the merger is built in part on distinguishing between different modes of distribution for food supplies. And he wondered how he was supposed to factor in wholesale cash-and-carry stores, such as Restaurant Depot, where restaurants and other businesses can go and buy the goods at competitive prices.

“Really that seems to me where the rubber meets the road,” he said.

This doesn’t surprise us. In fact, over a year ago, we wrote a piece titled, With FTC Now Reviewing Sysco/US Foods Merger, The Definition Of ‘Market' Becomes Crucial. In the piece we wrote:

The key question is likely to be how the FTC defines “the market.” When the government tried to block the merger of Whole Foods and Wild Oats, which we wrote about in a piece titled FTC May Block Whole Foods From Buying Wild Oats, it did so because it defined a market of natural food chains as distinct from food retailers.

We thought this was a mistake; consumers could get natural foods at Safeway, Kroger, Costco, Wal-Mart and Amazon.com, to name just a few. There was no basis for saying that just because there was consolidation between these two chains, consumers would be subject to monopoly pricing. Still the government saw things differently and fought the merger.

If the market is consolidation in food distribution, then the merger should sail through. After all, from the Hunts Point Market to self-distribution to a panoply of regional players, there are no shortages of ways to get food from place to place. The combined Sysco/US Foods sales would be about $65 billion a year — a big company indeed, but a fraction of the multi-trillion dollar food industry — and these distributors sell lots of non-food items, such as plates, napkins, forks, etc., as well. Even for the formal foodservice distributor sector, which has sales in excess of $200 billion, that is hardly a monopoly.  

However, if you were to look only at broadline distributors that are able to offer a multi-city network of their own facilities – the market shrinks fast. Then some government analyst could well see “the market” as small and becoming basically monopolized by a merger. The big challenge for this interpretation, though, is that only large operators with multiple locations in multiple cities care whether a company can offer national distribution.

So you wind up with a logic that says we have to prevent a merger so that Darden, Hilton and McDonald’s won’t be abused. Yet these companies have the heft to set up alternative distribution channels if Sysco tries to raise prices unduly. These big customers have not raised public objections to the merger, making one think that they see themselves as possible beneficiaries of greater efficiency by the new Sysco, rather than potential victims of price gouging.

In the end we wrote:

….the whole issue will come down to the FTC’s definition of the “relevant market,” and there the Administration’s general suspicion of business could throw things in favor of a narrow definition of the market, which could lead to another Wild Oats/Whole Foods-type battle.

*****

We have that now, and the government’s position borders on the bizarre.

First, the purpose of antitrust law is to benefit consumers. The distribution business depends heavily on efficiency, and numerous competitors working the same routes will not likely result in lower costs. Robert Bork, the most influential antitrust lawyer of the 20th century, wrote a famous sentence: “Congress enacted the Sherman act as a ‘consumer welfare prescription’.”

The Supreme Court was to adopt that sentence in 1979. That is the prescribed goal of antitrust law today. Robert Bork’s big insight was that the old antitrust regime, which focused on stopping companies from getting big, was protecting inefficient businesses and thus raising costs for consumers.

Second, this is a business with low barriers to entry. Let us imagine that, in fact, the new Sysco had such power that it could raise rates excessively. That would last about 30 minutes. The customers wouldn’t pay the price and would secure supplies from specialist vendors such as produce distributors and bring things in from nearby cities. To whatever minor extent Sysco was able to keep rates high, the high rates would simply function as an umbrella, protecting new entrants in the market. Of course, there are complications but, at base, you need a warehouse and a truck to do this business.

Third, this unique market the FTC is trying to define of those in need of national distributors is, by definition, composed of large national companies that can well fend for themselves. The key problem with the FTC is that it is incapable of imagining a world post-merger. We would think that there is a good investment opportunity in regional distributors because most large buyers will want to maintain connections with secondary distributors to keep prices down and to have a backup if something goes wrong in their primary vendor relationship.

This means a merger will let a thousand distributors bloom. And will lead to more competition, not less.

But the FTC just can’t see it — why should they? They are lawyers, not food experts.  Hopefully the judge will see more broadly.

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