The Truth About Sysco, Private Equity and Why Some Restaurants Suck Now Ft. Alec Opperman

0:00Have you gone out to eat lately and thought, man, this tastes like something that I ate at a different restaurant. recently. Or maybe you got a quick bite at one of your favorite fast casual joints for breakfast and thought, man, this just isn't as good as I remembered. Last week, we talked about the inshittification of digital technology and the internet. This week, we're talking the inshittification of food or how America turned into one giant mediocre restaurant. This country was stone cold dead. Good day from Newsweek headquarters at the top of the World Trade Center in New York City. I am Carlo Versano.

0:32And this is the 1600. So as promised today, we're talking food like any good story idea. This one really started when I was at Dunkin Donuts with my daughter recently. I took her to Dunkin as a treat. We don't usually go there. And I got to admit, I hadn't been to Dunkin Donuts in a long time. I would probably I'm one of those more elite latte sipping Starbucks drinkers, I guess you could say. But I remember going there as a kid and thinking that, you know, Now, Dunkin' was one of those perfectly fine, sort of like middle brow purveyors of tasty donuts and decent coffee. The meal that I had there was neither of those things.

1:07It was, in fact, it was quite bad. So this led me to wonder about other ways in which the general quality of the food we eat has been getting worse. We talked about in shitification, like I said last week. This has become a real hobby horse of mine in the newsletter about just kind of how everything in life seems to just be getting a little bit worse as time goes on. Whether it's a fast casual chain or a sit down restaurant, I think all of us would agree that it's not really what it used to be. So I went down a big rabbit hole on this last week. It started with having my suspicions confirmed about why Dunkin sort of went off the rails.

1:38The answer, of course, it was acquired by private equity recently. And the rabbit hole ended with this great piece of investigative journalism from the nonprofit advocacy group More Perfect Union. So this piece attempts to answer the question, why so much restaurant food isn't necessarily worse, but just kind of tastes the same wherever you go. Take a look. Are we trapped into eating the same mediocre food? And if so, why? And who's behind it? If you're a restaurant owner, you might just have one or two distributors to choose from. There's a good chance one of them is a company called Cisco. They've acquired over 150 companies to become really one of the only national broadline distributors for restaurants.

2:22Cisco's dominance means the food on that plate is increasingly the same and increasingly worse. The point is, in this giant food system, something is being lost. So I have the reporter of that piece with me here today, Alec Opperman of More Perfect Union. Alec, thanks so much for joining us, man. Thank you for having me. So I want to talk about the private equity thing in a minute. The piece that you worked on is not about private equity. But first, I want you to tell me about the reporting process in this video. You did a lot of reporting. You were out there eating a lot of reheated food. Tell me about it.

2:56Yeah. So a lot of the backbone of that piece is great research and reporting that the two people I interview have done. Austin Furick wrote a book called Barron's and has a specific chapter about Cisco, which really inspired the piece. Sinclair Kelway is the sort of food wonk talking about consolidation and competition in the food world. The biggest lifting I did was trying to do this experiment of, can I get the same fried appetizer across the country? Now, More Perfect Union, we have people in Alaska and Philadelphia and New York, all over the place, and Iowa as well. Uh, so I harassed my coworkers incessantly to be like, hey, I need you to go to this restaurant and order these fried pickles and these jalapeno poppers and film it and then sort of figure out where these are coming from.

3:49So the piece is about Cisco. So Cisco is one of those companies, I think a lot of people sort of like know it because they see the brand, you know, its trucks are everywhere. I remember that, you know, I would see the Cisco trucks unloading in my high school in the morning. But I don't think a lot of people really understand what the company is. So it's known as a broad line distributor of food. It's not a food producer necessarily, but tell me what is a broad line distributor? Yeah, a broad line is this innovation in the food world where it's the one stop shop. So restaurants back in the day, they'd have an egg person.

4:21They would have a place they would get their ketchup from. They would have an onion person and these little tiny pockets. And it was really, to be honest, annoying, right? You have to manage all these inventories and all these orders with all these different people. And Cisco really, truly did innovate in the sense that says, hey, we can get your onions, your ketchup, your paper products, everything at one place. You'll only have to deal with one sales rep, one invoice system. And so it's this huge boon originally to restaurants. Of course, Cisco is not the only one. Their largest competitors are U.S.

4:52Foods and PFG. So a broadliner is just a place. It's a distributor where you can get the broad gamut of everything a restaurant needs. I think it's hard for people also to just get around how big Cisco is. So you talked about it has a couple of competitors. It's not a monopoly, but there are only a few of these companies. But one of the reasons why it's so big is its acquisition. strategy, which was a big part of your video. So tell me a little bit, walk me through sort of like the Cisco business model of acquisitions. Cisco has bought over 150 different companies. Some of those are regional distributors doing similar things to what Cisco is doing, but they're also vertically integrating.

5:31So they're buying food manufacturing and food processors, maybe not the people who farm the chicken, but maybe shred it and package it and send it somewhere else. And so they've become this like huge behemoth on the broadliner side And this information is a little bit out of date, but they had a 35 percent market share years ago when compared to other broadliners. And again, in certain areas, that could be much higher. You could be in a rural area where is Cisco competing with U.S. Foods? Are they competing with PFG? Or are people sort of stuck into maybe Restaurant Depot or going to Cisco? So when you get that big, when you make all of these acquisitions, what does that do for the bargaining power of your local farmer or your local ketchup guy or your onion guy?

6:17Right. I mean, Cisco would argue that, well, it opens up a whole new market to them. Is that actually what happens? I think what I've heard from the people I've spoken to is that small producers have an increasingly hard time getting into a place like Cisco, because when you are a national distributor, you want uniformity and you want scale. Would you rather buy all of your chicken from a single place like Tyson that can give you millions and millions of pounds of beef? Or would you rather have to deal with, you know, 800 different beef producers? So in this consolidated space, someone said a great line that I have now stolen and say again and again is scale begets scale.

6:59So if you have highly consolidated, scaled up food distributors, it kind of necessitates scaled up food manufacturing and food producers, right? Because if not, if you are the little person, either Cisco may not care about you, it might be harder, but also you become a price taker, right? You have no negotiating power. If you have a small dairy and you want to sell your cheese to Cisco, the only way that you could probably get a better deal is if you were bargaining. as part of a giant cheese conglomerate, if you will. Right. One of the another examples that you you used was Driscoll's, which makes basically all the berries.

7:37So if I'm if you know, if I'm if I have a, you know, Carlos Raspberry Farm, it's going to be very hard for me to compete with a national company that is making millions and producing millions and millions of berries. Obviously, Cisco would rather go with them than my little raspberry farm. Right. Yeah, absolutely. And it's not to say that's impossible for these companies to get in. There are things through the system that they can do to try to get into a Cisco. But again, it's not easy. And we see the kind of foods we're eating. We're not eating a ton of food from a small strawberry farmer. We're eating a ton of berries from Driscoll and Tyson and these huge mega conglomerates.

8:13Right. So, I mean, the acquisition strategy, right? Again, Cisco is not a monopoly, but I think you could probably make an antitrust case that this and people have made this antitrust case that this is the kind of company that should be broken up. There's probably no chance of that happening, at least in the Trump administration. They have a very laissez-faire attitude to say the least when it comes to antitrust. But it does seem to me that you could make sort of a MAGA argument for the breakup of a company like Cisco, right? Because you could argue that it would be good for farmers. And there's also this health conscious argument, right?

8:45A big part of the MAGA movement now is this make America healthy again. Maha, you know, eat local. It's kind of funny because this was always like when I was growing up, this was always what the hippies said, right? Like my mom was always like, yeah, eat local, like farm to table. You don't want to eat from these big companies. And now somehow that has become sort of a rallying cry on the right. So I guess my question is, are there people out there that are saying from the right, a company like Cisco should be broken up? Yeah, when you go to states that voted for Trump in overwhelming numbers, their farm politics is really interesting.

9:21And I don't report on a bunch, but there is a tension between the giant cattle companies and the pig companies whose CAFOs are poisoning people's water in Iowa and the small farmers who are fighting against them for clean water for their own livelihoods. So there's that consolidation angle where it's these massively consolidated food producers are hurting small farmers, rural people. That's on the sort of working front. And on the eating front, you know, a lot of the Make America Healthy Again crowd cares about what's in our food. I would say some of their concerns are very well founded and some of them a little less so.

9:59But, you know, when you're going to a restaurant, I don't think anyone thinks a jalapeno popper is healthy. It's deep fried. You're telling me they don't grow in the ground? They don't. Well, the jalapenos do. But I think there's another angle here, which is a lot of this food is also ultra processed, right? And so I think when you go out to eat, you may be well aware that you're eating something deep fried and you maybe take that into account. But do you also know that these things are manufactured with all kinds of kind of franken chemicals? Right, preservatives. Yeah, that researchers are increasingly starting to ask a lot of questions about their effect on our endocrine system, cancer rates and that sort of thing.

10:39Right. If it's coming from Cisco more or one of the any of these broad liners, it's going to be ultra processed almost by definition because how it has to be for their supply chains to work. I mean, again, one of the things that I thought was really interesting in your video was sort of you talk about the innovation in frozen food. Talk to me a little bit about that, because without these the ability to freeze this stuff, Cisco wouldn't be able to have such a complex supply chain. Right. Yeah. And to be fair to Cisco, you can get so many different things from Cisco. You can get a restaurant that's ordering onions and maybe beef patties or raw beef from them and turning that into delicious food.

11:18Cheesecake Factory uses Cisco and they still make everything from scratch, as an example. But you can also go to a bar or brewery where everything's in a freezer bag from Cisco. And even among those, there's different quality levels. But I think when we're thinking about frozen food, to your point, they allow really complex supply chains. And I think ultimately the question, the issue with really long and complicated supply chains is you lose sight of any accountability for human rights and labor standards. It is very hard for us to police when forced labor and slavery ends up in the seafood supply chain, as Cisco has learned, because they've had to cut off relationships with suppliers.

12:01You're often freezing food that is grown in places like Baja, California, where indigenous people did a massive strike and was put down by the military. That's, you know, in the case of Driscoll's. So, you know, it's not that, oh, poor us, our food comes from abroad, but it's these complex systems that allow us to get the cheapest possible deal with very questionable standards and very little oversight. And also to the ultra process point, you know, that's when you start making kind of frankenfoods that have all the different chemicals, emulsifiers, preservatives, stuff like that, that scientists are asking lots of questions about.

12:42Right. So the other thing that so Cisco and the rest of these broad liners. So they, you know, they they supply restaurants. They also supply, like I said, my high school cafeteria was a Cisco cafeteria, hospitals, prisons. But there's there's different levels. Right. Are we eating are we all eating prison food? That's my question. We're not eating prison food. Again, they have different levels of quality of food. You can get the cheapest of the cheap. And of course, you can get very expensive things. You've probably been to a very good restaurant that gets some or all of their raw ingredients from Cisco.

13:18And you've also been to some very bad ones. So, no, you're not necessarily eating prison food. But I want to get back to – because again, Cisco's response to this – we'll get to their response because I spoke to them at length actually for this last night. But their argument would be I think – let's say you're a local pizzeria, right? You've got a proprietary recipe. Like you're in Brooklyn. You're flipping pies. You're spinning pies. You have a core product that's yours that's getting people in the door. But nowadays, consumers want you to offer wings and they want you to offer fries. Maybe they want you to offer jalapeno poppers.

13:55Isn't it easier for you as that local pizza guy to just say, I'm going to leave the sourcing of all of that to Cisco or U.S. Foods or one of these guys? Because what I mean, I don't have the I don't have the kitchen space. I don't have the the space downstairs to freeze stuff. I don't need I don't want to find my own jalapeno popper guy. I want Cisco to do it for me. Right. In Cisco's defense, they market these things to restaurants as labor savers and running a restaurant is incredibly hard. I try not to single out specific restaurants in the piece because I know how hard it is to run that business.

14:25Extremely, yeah. So, yes, can you save costs on labor and maybe cut a person in the kitchen to use the frozen food? Do people like to eat jalapeno poppers and mass-produced wings? Probably. The point of my video is more to say, look at the consolidation of our food supply system, and this is what that means for jobs, for the quality of food, and things like that. Oversight, which I think is another important point. So I'm going to read here. I asked Cisco what they made of your video. They sent me back a very lengthy statement I'm going to read from here just to give them the opportunity to respond.

15:04So this is from a Cisco spokesperson. The video is an inaccurate and misleading depiction of Cisco and the critical services we provide to global communities. It's unfortunate that the more perfect union organization did not take the time or make the effort to learn more about Cisco and our industry before creating this video. Cisco takes great pride in offering our customer services, including chef consultants and sales teams that have years of personal experience in the food industry that help them succeed in a challenging and competitive market. And it goes on to talk about it offers a broad assortment of quality products at value, sourcing from the largest global suppliers to the farm around the corner.

15:40They offer above market median wages to our delivery partners. That's basically the gist. What would you respond to that? I think it's an incredibly vague statement. I don't know how responsive you think it is. There is, I think, two things in there that might be worth addressing. Yes, it is entirely possible that you live down the street from a Cisco, a farm that supplies Cisco, whether it's a CAFO or maybe, you know, they also sell some organic stuff. And then the above average wages for their truckers. If that is true, I think we should thank the Teamsters who represent the Cisco truck drivers.

16:19They've repeatedly had to authorize strikes, threaten to strike, or actually strike to get the sort of safety and wage concessions that they've been asking for. So yeah, if Cisco is paying truckers above average, I think that's great. But we've also seen truckers' wages decline by about 40%, if not more since the 1980s, largely because of, you know, deregulation in the trucking industry. Sure. So I don't want to stay on Cisco, and I don't want to really pick on them too much, because I think the more interesting sort of story, or at least an interesting part of the story, is private equity, what we were talking about earlier.

16:58You know, this is sort of like chapter infinity in this ongoing saga of how private equity tends to like ruin everything that it touches one of the big trends in food lately has been um these roll-ups of these big sort of fast food and fast casual chains right so i think it's probably first worth defining what we're talking about here right so when you're talking about fast casual that's kind of that's like your kava your sweet green chipotle uh casual dining that's kind of like Chili's, Applebee's, TGI Friday's, which is bankrupt. Cheesecake factory. Cheesecake factory, right. And then fast food.

17:35That's your Dunkin', your McDonald's. By the way, I actually, I reached out to Dunkin' about my bad experience because I wanted to know this rumor that I had heard that the reason why Dunkin' is bad now is because they used to make all their donuts on premises. And then when they were bought by private equity, they outsourced that to a sort of like, you know, everything gets shipped in. And that's why it's no good. They didn't respond to me. But anyway, I think I've heard that, too. I can't I can't verify. Yeah. Well, I mean, I wanted them to answer that on the record, but they wouldn't. So so here are just a couple of these recent private equity roll ups of these chains.

18:09So Dave's Hot Chicken was one of these by me. I've never been to it, but it was acquired by Rourke Capital for a billion dollars. Jersey Mike's, the big sandwich chain, acquired by Blackstone for eight billion dollars. Dunkin acquired by Inspire Brands in 2020 for 11 billion. That's the second time Dunkin Donuts has been acquired by private equity. It inspires owned by Rourke, isn't it? I think – let me double-check that. It might be. Rourke is definitely one of these companies that is doing a ton of these roll-ups. But, yeah, there's a million more. Subway, Jimmy John's, Qdoba, Arby's, Buffalo Wild Wings.

18:39These are all private equity – these companies have all been purchased by private equity. Some of them have gone bankrupt. We mentioned TGI Fridays. Red Lobster is the other one recently. That's not a rare thing. I read something in 2019. Researchers found that public companies that are bought out by private equity firms are 10 times as likely to go bankrupt as those that aren't. And that's not just the restaurant industry. Why do you think that is? Leveraged buyouts, which to give a very simple explanation is you say I want to buy your company for$2 billion. What if I borrow$1.5 billion of that, but when I buy it, I put that debt onto you.

19:20So I want to buy Dunkin' Donuts, and I don't know if this is true in the Dunkin' Donuts case, but I want to buy Dunkin' Donuts. Now Dunkin' Donuts owes$1.5 billion and now has to make huge monthly or yearly payments to service that debt. Also, private equity employs a ton of extractive fees, like a 2 % revenue fee that goes to them. So private equity is very good at buying places like Toys R Us and making their money back even if the business miserably fails. That's another great example. Toys R Us was destroyed by private equity. A lot of people, you know, there were arguments, I think, and I remember like the Wall Street Journal argued when that happened.

19:57Like, oh, no, it was just like changing marketplace. It's like I always thought, well, that doesn't make any sense. There's always kids. Kids love toys. Toy stores are awesome. Who doesn't like a toy store? It's like, no, that wasn't just like a market thing. That was private equity destroyed their company. So what is the private equity playbook? I mean, you kind of got into this. once they acquire one of these brands? They load them up with debt, then what? They load them up with debt. They're trying to expand. I mean, they buy these companies because they think they have potential to grow them.

20:26It depends. You know, I think in the fast food space, I'm not aware of some of the worst offenses, the Tours R Us model, if you will. But, you know, if you're private equity and you invest in something, there's a few ways you can make your money. One is, you know, maybe Roark Capital buys Dunkin' Donuts and says we can expand into all these markets and we can make more money that way. Another big one is cutting costs, which just means cutting labor. If you walk into a retail store and everything is a nightmare, there's that. They can cut costs on food. And the other one is just what I've been talking about with the extractive fees.

21:05private equity has lots of very inventive ways to get paid out bonuses, to get 2 % of every dollar some of their firms, some of their investments make, so that even when it goes bankrupt, they can still write themselves a nice trick. It's interesting because you always hear this sort of like truism that like restaurants are a bad investment, right? You don't want to, if your friend is like, you know, I think I might invest in a restaurant. You're like, Don't do that. That's not like half of restaurants, I think, fail in the first year or something like that. Obviously, there's something different about the private equity model.

21:40These companies wouldn't be investing in these restaurants if they didn't think that there was going to be money to be made. Right. Yeah. And I think if you want to look at the fast food model, there's also a few things going on. Work Capital has invested in a lot of, you know, very low wage work. They fought a federal minimum wage bill and bragged about it when it got killed. and also it's a franchise model. So I'm not too knowledgeable about the specifics, but they can make a lot of their money from the franchise fees and sort of offload the risk onto them. Right, exactly. That's a good point.

22:14So I spoke to a friend of mine who works for one of these big fast casual chains that was recently purchased by one of these private equity companies. And I just want to read this thing that he wrote to me because I thought it was useful for our conversation. So he writes, private equity doesn't just ruin restaurants. It ruins everything. When all you care about is short-term gains, it becomes hard to prioritize what's going to make you successful over the long-term slash what got you to the point of being bought by private equity in the first place. If there's something special that you're doing that is hard to quantify and prove ROI, return on investment on, it gets discounted very quickly.

22:48So I think that sort of speaks to what you're saying, right? Like the reason why some of these brands are successful to begin with is because of a, you know, whatever their magic dust is, right? Whether it's proprietary recipes or customer service model, right? And because private equity wants to scale these things, that's what gets lost, right? It's the quality or it's the customer service or the experience of being in these places, as you said. And also, think about Dunkin'. We're so in the habit or so many people are in the habit of where am I going to get coffee or where am I going to get a morning donut?

23:24It's a Dunkin'. And it takes a lot for consumers to sort of have to recalibrate. They need like a terrible experience. Maybe you had to say, oh, I should I should stop going here rather than looking at, you know, a local coffee shop or donut place where you can get something from. And I think that's really profitable for private equity because they can insidify things to an extent before people start to be like, hey, are the donuts good anymore? Right. Well, it's a good point about the cost, because, again, like, you know, I had a bad experience at Dunkin Donuts. But my bill was like nine dollars, right?

23:57It wasn't the end of the world You know, if i'm going to go to starbucks and get some version of the same thing I got it would be like Seventeen dollars so, you know We're talking in the midst of this big political sort of like pivot to affordability at least on the republican side, right? We're seeing president president trump actually did a I don't know if you saw this. Did you see this last night? He did this speech to uh, mcdonald's franchisees No, it's a mickey. Let's see. Can we pull that clip up? Because no matter who you are, everyone loves something at McDonald's. There's always something to have.