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These Food Distributors Are Trying To Convince A Judge To Let Them Form A Monopoly

CREDIT: AP
CREDIT: AP

The price of eating anywhere other than your own kitchen could go up significantly, depending on a federal judge’s decision in a week-long hearing that begins Tuesday.

The Federal Trade Commission (FTC) is blocking a proposed merger between two rival companies that buy food from producers and sell it to schools, hotels, corporate cafeterias, and restaurants. The agency spent a year studying the proposed union after the deal was announced in 2013 before ultimately deciding to reject it this February. Over the coming week, the companies will try to convince Judge Amit Mehta that the FTC’s analysis was wrong and that their merger would actually drive prices down for customers.

After years of acquiring smaller competitors, US Foods and Sysco, Inc. are the last two large companies in the food distribution industry. If the FTC bid to stop the merger fails, the resulting firm would be five times larger than it’s nearest competitor. The private equity bigwigs who currently own US Foods would see a big payout if Sysco is allowed to buy their firm. Union officials predict that as many as 2,500 workers would get laid off from the resulting consolidation, but everyone in America who pays someone else to cook their food would feel the effects of the merger in some way.

“These two companies are the only nationwide broadline food distributors, period,” antitrust attorney Allen Grunes told ThinkProgress. Grunes works on antitrust issues for the International Brotherhood of Teamsters, who oppose the merger but have not participated in the court case, and previously spent a dozen years working on antitrust issues for the Department of Justice. “If you have the two closest competitors and you take one of them away, the customer loses the ability to play those two companies off each other and loses the ability to negotiate a better price,” he said, calling it “bread-and-butter stuff” for antitrust enforcement agencies.

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The merged company would control more than a quarter of the overall food service market, according to the American Antitrust Institute (AAI). It would control more than half of all sales in the so-called “broadline” segment of the industry that handles the widest variety of customers and products, and a full 100 percent of broadline sales to clients with a national presence rather than just a local or regional one. Such a monopoly in the business of selling food products to national brands and institutional vendors like Aramark, if it in fact arose, would exacerbate an existing problem.

Mergers and increased corporate control elsewhere in the food industry already means that “the consumer has higher prices, potentially greater food safety problems, and less choice” than twenty years ago, AAI’s report notes. Food distribution is but one industry within the larger interlocking set of companies and markets involved in bringing stuff to eat to people with appetites. Lots of different people and companies grow things and slaughter things, but every other stage of the country’s food supply chain is highly concentrated.

It’s a bit like an arms race, where countries respond to an increase in enemy military power with matching investments. Consolidation in the grocery store business has given grocery stores greater negotiating power with food suppliers. Suppliers have responded with mergers of their own to try to restore the previous balance of power with grocers.

The link between the places where people buy food and the places where workers make food is the distribution industry. That position makes competition between distributors especially important to the prices customers will ultimately pay for food, since the rest of the supply chain is so consolidated already.

The case beginning Tuesday will therefore hinge on whether or not the food distribution industry would become so concentrated after a Sysco/US Food merger that customers would see those problems exacerbated. If the companies persuade the judge that its much smaller competitors who don’t have the same kind of coast-to-coast footprint would be able to prevent it from charging more to the jails, schools, cafeterias, and restaurant chains it sells to, they will win.

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The government, AAI, Food and Water Watch, and the Teamsters union all argue that the companies already control the market, and would represent a monopoly if merged. The evidence in favor of those arguments was strong enough to conjure a rare cross-the-aisle moment last fall, when Sens. Amy Klobuchar (D-MN) and Mike Lee (R-UT) jointly asked the FTC to take a hard look at the proposed merger.

The companies counter that prices would actually fall for customers because the merged firm could squeeze better prices out of its own suppliers and would then pass those savings on to customers. The distribution industry’s trade association did not respond to a request for comment on the case.

Sysco argues that unhappy customers would simply turn to one of its thousands of tiny competitors, but it’s not clear that would in fact be feasible. Individual restaurants or small chains might find such a vendor switch practical and effective, but they are only a piece of the market. Large institutional purchasers such as food service companies that run school cafeterias in multiple states have little incentive to forgo the bottom-line benefits that come from a single, national contract relationship. Such companies have little natural incentive to drop Sysco and sign seven new contracts with seven smaller companies in seven different states.

Those smaller competitors have about as much ability to substitute for Sysco and US Foods’ offerings as a bicycle has to replace an airplane, Grunes said.

“You could say that a bicycle is a form of transportation just like an airline, and therefore if an airline merger results in higher prices people have lots of choices including bicycles,” he said. But nobody’s going to bike from Charlotte to Phoenix if the carrier that controls that flight route jacks up prices.