Whole Foods Wins

I could lie to you and tell you that I was waiting to blog about the FTC-Whole Foods lawsuit until the case was for all intents and purposes over, but the truth is that I didn't notice that the Federal district court ruled last week on the FTC's request for an injunction to prevent Whole Foods from buying Wild Oats on the grounds that the FTC had a substantial likelihood of proving that the acquisition would be a violation of the Clayton Antitrust Act; and when I did notice it a couple of days ago, I was too lazy to write anything about it. Well, the virtue of my laziness is that the case appears to be over now.

A three-judge panel in Washington yesterday rejected the Federal Trade Commission's request for a delay of a lower-court judge's ruling in favor of the acquisition, which the commission opposed on antitrust grounds. The agency last week sought the delay pending the outcome of an appeal.
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The appellate court ruled that, while the commission "has raised some questions about the district court's decision," it failed to make a strong case it could win on appeal. ("Court Clears Whole Foods Deal" by David Kesmodel, Wall Street Journal, p. A2)

The decision by Judge Paul L. Friedman that the FTC was seeking to overturn makes interesting reading. Although Judge Friedman did not adopt Whole Foods' arguments completely, he unequivocally rejected the FTC's case. The basis of that case was the claim that Whole Foods is a member of a market called "premium natural and organic supermarkets," which market includes only Whole Foods, Wild Oats, and two or three small regional chains. Because there are so few market players, argued the FTC, and because Whole Foods and Whole Oats are by far the largest of those players, it was extremely likely that Whole Foods' purchase of Wild Oats would give Whole Foods the ability to impose a "small but significant non-transitory increase in price," which, apparently, is one of the primary criteria by which the FTC is to judge the potential monopolistic implications of any proposed merger or acquisition. Whole Foods, and Judge Friedman, countered that "premium natural and organic supermarkets" market was a figment of the FTC's imagination, that in reality Whole Foods' most significant and dangerous competitors like Safeway and other mainline grocery store chains, which, in recent years, have been expanding their selection of Whole Foods-like items and altering their formats to be more like Whole Foods. To me, the most telling fact that was mentioned in the decision was that Whole Foods, which obsessively comparison shops all of its significant competitors, has not comparison shopped Wild Oats in years. Wild Oats is not significant competition to Whole Foods. Randall's and Kroger and Central Market are. If Wild Oats isn't even a viable competitor to Whole Foods, how can the combination of the two be monopolistic? I'm pleased to see that Judge Friedman and the Court of Appeals have agreed with me.

As Whole Foods Turns

Yesterday's Wall Street Journal reported on the opening of the hearing in a US District Court on the Federal Trade Commission's motion for a preliminary injunction blocking Whole Foods' proposed merger with Wild Oats, another organic supermarket chain ("Court Hears Two Sides To Whole Foods Deal", p. A4). As expected, the principal bone of contention is what the definition of the market that Whole Foods and Wild Oats compete in. The FTC contends that it should be upscale organic supermarkets, while Whole Foods believes that it should be all grocery stores and farmers' markets. Also at issue are the effect on prices that the merger would have on the markets where Whole Foods directly competes with Wild Oats.

I am very sympathetic to Whole Foods in its fight with the FTC. As I have previously written, to argue that Whole Foods only competes with other upscale organic markets ignores the reality that mainline grocery stores are increasingly copying the type of product that Whole Foods sells and the way it sells it. Were I Whole Foods management, I would be much more afraid of what Kroger and Safeway can do with their deep pockets than a competitor like Wild Oats. For those who are interested in an articulate and powerful defense of Whole Foods' position, see this blog post by John Mackey, Whole Foods' CEO. He comprehensively lays out the reasons why Whole Foods wants to buy Wild Oats and why the FTC's complaint does not make a very good argument. Among other things, he points out that Whole Foods doesn't even regard Wild Oats as its principal competitor: that distinction belongs to Trader Joe's, Central Market, and Wegman's; and the competition that these chains offer constrain Whole Foods' prices more than Wild Oats ever could. There's a ton of good stuff there, and not just about the competition angle of the suit.

And thanks to Sara for her links to stories in the Austin American Statesman about Trader Joe's and John Mackey.

And in Whole Foods News...

Things just get curiouser and curiouser in Whole Foods' attempted acquisition of Whole Oats and the FTC's lawsuit to prevent it. The Wall Street Journal has a front-page article about posts that Whole Foods CEO John Mackey made on the Yahoo message board for Whole Foods' stock ("Whole Foods is Hot, Wild Oats a Dud -- So Said 'Rahodeb'", p. A1). This would be strange and probably unwise if he had done it under his own name, but what can you say about him doing it with a pseudonym? How about the fact that he trashed Wild Oats repeatedly and talked up Whole Foods?

In January 2005, someone using the name "Rahodeb" went online to a Yahoo stock-market forum and posted this opinion: No company would want to buy Wild Oats Markets Inc., a natural-foods grocer, at its price then of about $8 a share.

"Would Whole Foods buy OATS?" Rahodeb asked, using Wild Oats' stock symbol. "Almost surely not at current prices. What would they gain? OATS locations are too small." Rahodeb speculated that Wild Oats eventually would be sold after sliding into bankruptcy or when its stock fell below $5. A month later, Rahodeb wrote that Wild Oats management "clearly doesn't know what it is doing .... OATS has no value and no future."

This is so bizarre that I can't think of anything better to say about it than Harvey Pitt, former chairman of the SEC, did in a quote in this article:

For an executive to use a pseudonym to praise his company and stock "isn't per se unlawful, but it's dicey," said Harvey Pitt, a former Securities and Exchange Commission chairman. Told of the Mackey posts, Mr. Pitt said, "It's clear that he is trying to influence people's views and the stock price, and if anything is inaccurate or selectively disclosed he would indeed be violating the law." He added that "at a minimum, it's bizarre and ill-advised, even if it isn't illegal."

This Week's Grocery Store News

Wednesday's Wall Street Journal contained a couple of interesting articles about the grocery business. Unfortunately for this post, the WSJ's website isn't free, so I can't link to them. But I won't let that stop me! (As an aside, the WSJ is just about the only newspaper I know of that has been successful at charging for access to their website. There really is no "across the street" from the Wall Street Journal.)

The first story, starting on the first page of the Marketplace section, is entitled "Not Copying Wal-Mart Pays Off for Grocers."

Earlier this decade, the hidebound supermarket business was expected to fall before Wal-Mart's aggressive supercenter rollout and the rise of membership clubs like Costco Wholesale Corp. and high-end specialty chains like Whole Foods Market, Inc. Many chains did collapse -- 26 filed for bankruptcy earlier this decade, unable to match the falling prices of their better-run rivals -- and a wave of consolidation swept the business. But the survivors rallied by redesigning stores, introducing a more relaxed shopping experience and marrying low-priced staples with higher-margin breads, meats and wine. ow, the stronger chains like Kroger Co. and SuperValu, Inc. are taking market share from weaker, often regional grocers.

Well, of course. It may be possible to compete with Wal-Mart on the basis of price, but it's not likely that such a strategy will succeed. Wal-Mart is more efficient than any of its rivals, often by a wide margin. They have been squeezing efficiencies out of their processes for years, and they are very, very good at it. Competing with them on price plays to their strength. Instead, the smart competitors compete with Wal-Mart on the basis of things that Wal-Mart isn't good at, like offering clean, non-claustrophobic stores that have many unusual items.

The second article, entitled "FTC Deals Setback to Whole Foods", says on page A3 that

[t]he Federal Trade Commission, which said yesterday it plans to file a lawsuit as soon as today in a Wachington federal court to block Whole Foods from purchasing Whole Oats [Markets Inc., a Colorado-based organic food market chain] for $565 million, said the combination would reduce competition and quality and raise prices. It is taking the position that the natural- and organic-foods market is distinct from the wider grocery market.

This strikes me as being an unsound argument. In the first place, it's not the case that Whole Foods is a "natural- and organic-foods market." It is true that they like to portray themselves as being such and that they carry lots of natural and organic foods. But it would be more accurate to call them a high-end specialty market that carries significantly more natural and organic products than a typical grocery store. There are too many non-natural and non-organic on the shelves to argue otherwise with a straight face. In the second place, has anybody at the FTC been to main-stream grocery store in an affluent neighborhood? Have they seen the mountain of natural and organic products that can be had at a Super Kroger. Whole Foods is not fundamentally different from Super Kroger. The difference between them is a matter of degrees. Wild Oats isn't Whole Foods' real competition. Super Kroger is. Whole Foods buying Wild Oats does very little to alter the competitive landscape.