Over the weekend, Sysco proposed to divest 11 US Foods facilities in a bid to secure approval from the FTC for their pending merger. Located in the western US, these facilities represent annual volume of $4.6B and would be acquired by PFG for $850M.
If approved, the merger still adds a significant $14B in sales to Sysco’s treasure chest and the gap in size grows wider between the top two national broadliners.
This afternoon, an unnamed source said that Sysco and the FTC remain at a standoff as antitrust regulators balk at the proposed settlement.
Manufacturer executives wonder what these developments and delays mean for their business. Strategies, program funds, capital and other resource investments must return better revenues this year. Decisions that guide growth and where to place bets are in limbo.
Blueberry believes CEOs must get more involved in aggressively addressing matters at hand. Before getting to that, we offer the following observations and opinions on recent announcements.
- Divesting $4.6B in sales appears to bring competitive balance nationally, but does not address monopoly concerns at local levels and in major overlapping markets such as Chicago, Metro NY, Carolinas, Florida.
- We don’t know who the FTC subpoenaed last week relative to the merger or the basis for doing so. We know the recipient was not PFG.
- If the deal fails to go through, PFG could still acquire the 11 USF facilities. The remainder of USF could be picked up by other regional broadliners. Or PFG could step in to acquire all of USF with FTC approval. It would be important to consider strategic interest from other regional broadliners to expand west or east as well.
- Achieving post-acquisition value is predicated on top line revenue for both entities. PFG as a newcomer to western markets would work hard to secure and grow the current base. It is unlikely that in the near term they would take supplier actions that adversely affect operator wants or purchasing patterns.
- It is unknown whether a Transaction Service Agreement between Sysco and PFG would include a non-compete clause.
With all this said, consolidation is a natural occurrence in a mature industry. It is not a disruptor in the defined sense to foodservice.
The real disruptor? New purchasing behaviors. Yes, consolidation is the headline-grabber–but also a distraction. Purchasing behaviors and new supplier selection criteria–not the merger–are transforming the way manufacturers must do business.
As often as we beat this drum, many remain stuck in long-standing business practices, thinking and operating models.
As keeper of the margin, it is the operator–not the manufacturer or the distributor–who determines the value of transactions in the supply system. And operators have proven very willing to experiment with new sources of value in a system that has exploded with options.
For manufacturer executives, we offer the following recommendations:
- Addressing the environment resides in the CEO’s wheelhouse as the Defender and Builder of their organization’s value. This is not a sales and marketing issue.
- Get solid in reviewing scenarios with corresponding counter measures. As radical as it sounds, mindsets must assume zero market share in new paradigms.
- Organizational assessments should take place in the context of markets in transition and along four dimensions: Demand Creation, Executive Team capability, Operations and quality of Internal Communications for execution.
- Become students of today’s supply system economics. This requires facts on how money is made and lost in the end-to-end stream, then re-configuring value propositions along new preferred supplier criteria and as a cost-effective trading partner.
- Many excellent suppliers will not make the cut in strategic sourcing and category management due to factors such as cost and margin constraints, and data and analytic requirements. These suppliers must be equipped with a plan to manage the business contraction–including their own M&A options.
- Events will back up hard on manufacturer margins. Strategic freedom on where to compete comes first by way of operational efficiency and excellence. This area of the organization requires fresh scrutiny for survival and growth.
Blueberry has an extraordinary handle on current events and their impacts on your business. We invite you to contact us to help insure your company is on the right path for best outcomes as developments continue to evolve.