FTC suit is hard to swallow
Several mega mergers have sailed right through federal regulators, but they have a bone to pick with Whole Foods.
By Mark Albright
Published June 20, 2007
Given the lollapaloozas already green-lighted, I wondered if regulators would ever find a merger that's a walking, talking antitrust violation.
Their choice of the Whole Foods Market Inc. purchase of Wild Oats Markets Inc. is a puzzler. The Federal Trade Commission sued to stop the union of the two biggest natural/organic food chains, claiming higher prices will result.
Sounds great. But this case is akin to protecting shoppers from Gucci pricing when the Italian fashion house bought equally luxe Yves Saint Laurent. And it underscores the wacky way the FTC and Justice Department enforce antitrust rules.
Regulators say Whole Foods will be too dominant in a niche that's only 2.5 percent of food sales. Yet after the sale, Whole Foods will be 11 percent of the whole niche.
The FTC often takes a narrow view of retail competition. In 1966, it killed a merger of the third and sixth biggest grocers in Los Angeles in fear they would control 7.5 percent of the market. In 1995, it zapped a merger of Staples and Office Depot based on the logic we only buy office supplies from three superstore chains. Now they stretched that to natural/organics.
Makes you wonder if folks behind this buy tofu, granola or organic milk anywhere else.
Fact is most organics are sold by independent stores, supermarkets, even Wal-Mart. And they all want to sell more in a big way.
Whole Foods, which generates $5.6-billion from 195 stores, wants Wild Oats, which generates $1.2-billion in 110 stores, to expand its footprint instantly rather than over six years. In Florida, eight Whole Foods stores would become 14 - including one in Tampa. The strategy behind the $670-million sale? Sell more gourmet foods and more high-profit produce and prepared meals. That's how Whole Foods generates sales of $919 a square foot versus Wild Oats' $459.
Typically, retail antitrust fights end by trimming the offending stores bought. Exxon Mobil, the merger of giants Exxon and Mobil, dropped 2, 400 of its 18, 000 U.S. gas stations. Rite Aid's acquisition of Brooks/Eckerd Drugs cost 23 of 5, 000 stores. Whole Foods has not publicly identified stores to be ditched in 21 markets where it competes with Wild Oats.
But the FTC says it's too few. They also released smoking gun quotes from Whole Foods chief executive John Mackey who allegedly boasted to his board that the sale would "eliminate forever" the chance of another nationwide competitor in the niche and "avoid nasty price wars" in places where the two compete.
The FTC found Staples had lower prices where it competed with Office Depot, higher ones where it did not. Adding credence was an FTC claim that office superstores only compared prices with superstores, not Kinkos, Best Buy or other retailers.
Whole Foods will, too, once Wild Oats is gone, the FTC insists, because it will have a tighter grip selling a "lifestyle experience" to environmental purists, food snobs and others willing to pay top dollar for gourmet grub. Ridiculed as "Whole Paycheck" by critics, Whole Foods assured it compares prices with supermarkets, not just niche rivals like Staples did.
Much of its produce meets the same specifications as what's at Publix and Sweetbay. It's just better presented, polished and priced higher. Just look at tomatoes that go for $1 more a pound.
Before the sale, however, struggling Wild Oats had been steering its recovery to mimic Whole Foods big spread of gourmet foods. So just keeping Wild Oats in business won't cap natural food prices. After all, Whole Foods had little trouble charging higher prices when Wild Oats was the big competition.
If you buy the FTC argument, watch broader market forces play out in the Tampa Bay natural/organics arena. Publix Super Markets Inc. is building its first local entry, a GreenWise natural/organics supermarket in South Tampa. Within three miles is a Wild Oats, a gourmet Fresh Market and Nature's Harvest, an independent with a loyal following.
"We want to be right where people buy these foods, " said Maria Brous, Publix spokeswoman.
Sounds competitive to me.
Mark Albright can be reached at (727) 893-8252 or albright@sptimes.com.
Fast Facts:
Questionable mergers
If these monster-sized deals were okay to the FTC, why balk now?
- They are the same federal antitrust folks who said the merger of oil giants Exxon and Mobil was fine.
- They made us wonder why Ma Bell was busted up after they let the two largest local phone companies, Verizon and SBC, buy the two largest long distance companies, AT&T and MCI.
- Boeing, which controlled 60 percent of commercial aviation, swallowed the 5 percent held by McDonnell Douglas.
- Smithfield Foods owns a third of the pork industry thanks to a merger.
If these monster-sized deals were okay, why balk now?
* They are the same federal antitrust folks who said the merger of oil giants Exxon and Mobil was fine.
* They made us wonder why Ma Bell was busted up after they let the two largest local phone companies, Verizon and SBC, buy the two largest long distance companies, AT&T and MCI.
* They didn't blink when Boeing, which controlled 60 percent of commercial aviation, swallowed the 5 percent held by McDonnell Douglas.
* They blessed Smithfield Foods' takeover of its biggest competitor to own a third of the pork industry.