FTC Challenge Halts Sysco US Foods Merger

The U.S. District Court granted the FTC’s request for a preliminary injunction to stop the proposed merger of Sysco Corporation (Sysco) and US Foods Inc. (US Foods), the two largest national broadline foodservice distributors. The FTC argued that for customers with a national presence, the combined company would have 75 percent of the relevant market. In addition, the new firm would have 50 percent or more of 32 local markets. The newly merged firm would be able to raise prices and reduce choice and services for customers in the national market and specified local markets. Sysco responded to the injunction by abandoning the merger.

The court agreed with the FTC that for customers with geographically dispersed locations across the country, the market is for national, not local, foodservice distributors. The relevant product market for these customers is distributors who can offer them national contracts for all of the broad array of products that they need, that can be delivered to any of their locations nationwide, who carry private label products offered at lower cost, and who can provide a high level of customer service. The FTC argued that system distributors, who cannot provide as wide a range of products, specialty food distributors and cash-and-carry stores are not in the relevant product market and cannot competitively constrain Sysco and US Foods. In addition, the FTC argued that local foodservice distributors are not in the market because customers with a national footprint are not interested in negotiating individual local contracts for separate locations.

The court also agreed with the FTC that local regions are relevant geographic markets. Many customers want foodservice distributors that are nearby. Moreover, Sysco and US Foods can price discriminate based on customer location. In many local markets, Sysco and US Foods are each other’s closest competitors.

The judge found the FTC made a prima facie case based on increases in concentration in a market for national customers and several local markets. That case was strengthened by evidence of unilateral anticompetitive effects and by a simulation model presented by the FTC’s economic expert. Event studies that expert presented of the effects of entry into local markets were not found to be persuasive.

Sysco offered to divest assets to PFG, currently the fourth- largest broadline food distributor with a 5% national market share. The FTC and the court rejected this offer, because it would not remedy the loss of competition due to the merger.

The court also rejected other arguments that Sysco made in favor of the merger. The court found that the expansion of smaller competitors and the entry of new competitors would not be timely, likely, or sufficient to prevent anticompetitive effects. Moreover, the court found that many efficiencies claimed by Sysco were not merger-specific, and that the claimed efficiencies were not large enough to outweigh the evidence of anticompetitive effects.

Economist Allison I. Holt, an empirical microeconomist, specializes in quantitative analysis and assessment of damages in antitrust and class action matters.