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Pundit’s Mailbag — 
Max Yeater Of Pro*Act Speaks Out:
Much Of The Distribution Sector 'Heavily Invested'
But How Will A Judge See The Barriers To Entry?

Our piece — 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 — brought an objection from a most knowledgeable reader:

I always enjoy reading your articles and find them both insightful and opinionated.  Quite refreshing these days given the environment we live in. 

I did, however, come across something in your May 18th article, “What the FTC Doesn’t Know May Hurt Us”, that made me initiate this response. 

When speaking about “this being a business with low barriers to entry”, I’m confounded as to how you can make this generalized statement. 

Of course, there will always be entrants that cut corners to be low cost providers, but there are many, including Pro*Act Distributors, Sysco, US Foods, Fresh Point, Markon Affiliates, large independent broadliners, etc., that invest heavily to ensure customers get safe, valuable products every day. 

Reputable companies are investing in warehouse management systems, state-of-the-art (energy efficient) transportation solutions, costly ERP systems to provide customers with world-class reporting services, management teams and on and on, but I’m sure you get my point. 

To say “of course, there are complications but, at base, you need a warehouse and a truck to do this business” is, in my opinion, selling the heavily invested distributor short. 

—Max Yeater

Pro*Act LLC
Monterey, California

OK, the Pundit deserves three strikes with a wet noodle for being flippant on this one. Having grown up in the produce distribution business, keynoted many a distribution firm’s annual meetings and facilitating several share groups related to produce distribution, we knew better than to make it seem so easy.

In fact, it is very difficult. Organizing procurement, ensuring food safety and many of the things Max mentions in his letter are exceedingly difficult to do well.

Yet, to some extent the very existence of an organization such as Pro*Act lends credence to our point.

The FTC’s basic claim is that a merger of Sysco and US Foods would allow the merged company to dramatically raise prices and pocket the profits. In order for that to work, there would have to be a long period in which others could not enter the business.

For example, if Airbus and Boeing were to merge, they could, theoretically, raise prices on large passenger jets. It would take many years, possibly decades, before anyone else could design new airplanes. The Airbus A-380, for example, began development work in 1988 and finally made its first commercial flight in 2007! So that is almost two decades for an established aircraft manufacturer.

We doubt that Sysco/US Foods is a monopoly at all, precisely because regional or specialty distributors such as Pro*Act members are there to compete right now.

But if, in fact, Sysco was able to make these incredible profits in a particular city, another distributor would start serving the area, with Sysco’s high profits serving as an umbrella that justifies bringing in product from a more distant location than would usually make sense.

So to give an example, normally San Diego distributors price their products so that Los Angeles distributors cannot compete economically. The high gas cost and extra driver time make the LA distributors uncompetitive. But if Sysco raises prices in San Diego because it has a monopoly due to the merger, then a Los Angeles distributor can compete.

Yet, under the worst possible circumstances, where there are no nearby facilities, the barriers to entry are still not very great precisely because a new firm sensing opportunity could join Pro*Act and compete with Sysco!

In other words, one doesn’t have to build a direct procurement organization; one doesn’t have to start from scratch with a food safety program; one doesn’t need to guess what technological platforms to use. Pro*Act and other member-supported distribution groups are there to help!

In addition, because the foodservice distribution business is regional, one doesn’t have to have the capital, the labor etc., necessary to serve the whole world at once, as a wide-body aircraft manufacturer has to do.

So, while we apologize for making the food distribution business look too easy — from the court’s point of view, the industry has far lower barriers to entry than industries such as a wide-body jet manufacturing.

Nothing is easy in life, and the people who work hard to make food distribution work are the lifeblood that connects producers and consumers. Hats off to every person involved.

Many thanks to Max Yeater for pointing out the Pundit’s failure to make the difficulty of world class distribution crystal clear. 

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