On February 21, 2007, Whole Foods and Wild Oats and entered into an agreement under which Whole Foods would acquire Wild Oats for a price of approximately $670 million.  On June 6, 2007, the FTC filed a Complaint in the United States District Court for the District of Columbia seeking to block this transaction.  According to the FTC, the proposed Whole Foods/Wild Oats transaction would constitute an anticompetitive merger of the top two competitors in the highly concentrated market for "premium natural and organic supermarkets."

n its Complaint, the FTC contends that several characteristics distinguish premium natural and organic supermarkets from conventional supermarkets.  Premium natural and organic supermarkets focus on high-quality perishable products such as high quality fresh fruits and vegetables and target a specific sub-segment of supermarket consumers – namely, affluent, well educated, health conscious and environmentally concerned people.  These supermarkets also offer more amenities, higher levels of service and more knowledgeable personnel than conventional supermarkets, promote healthy lifestyles, emphasize the natural and organic nature of their food, expend substantial resources on brand identity and charge premium prices.  Finally, apart from the products they sell, these stores seek to provide a dynamic shopping experience where customers come not only to shop but also to "gather, interact, and learn."  Because of these distinguishing and unique characteristics, shoppers with preferences for premium natural and organic supermarkets are not likely to switch to other retailers in response to price increases.  As such, according the FTC, premium natural and organic supermarkets’ primary competitors are other premium natural and organic supermarkets, not conventional supermarkets, and comprise their own distinct market.  The FTC Complaint concludes that the Whole Foods/Wild Oats merger would reduce the number of premium natural and organic supermarkets from three to two or two to one in many geographic markets and thus raise prices and reduce service and choice for consumers in these already highly concentrated markets.

n support of its theory that this merger is anticompetitive, the FTC makes extensive use of statements by Whole Foods CEO John Mackey that, from an antitrust perspective, are problematic.  The most problematic among these is Mr. Mackey’ statement to his Board of Directors that

By buying [Wild Oats] we will…avoid nasty price wars in Portland (both Oregon and Maine), Boulder, Nashville, and several other cities which will harm [Whole Foods’] gross margins and profitability.  By buying [Wild Oats]…we eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing natural organic food chain to rival us…[Wild Oats] may not be able to defeat us but they can still hurt us….[Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space.  Eliminating them means eliminating this threat forever, or almost forever.

he FTC prominently featured this statement in its Complaint to bolster its contentions that the premium natural and organic food market is a separate market, that one purpose and effect of this merger would be to thwart entry into the premium natural and organic food market, and that Whole Foods intended to and would unilaterally raise prices after the merger.

his merger challenge is analogous to the FTC’s 2003 challenge to the merger between Nestle Holdings, Inc. and Dreyer’s Grand Ice Cream, Inc.  In that action, the FTC alleged that the parties were among the few participants in the market for "super premium" ice cream apart from premium and economy ice cream. The FTC’s alleged market ultimately did not prevail.

he FTC’s efforts to block this merger has stirred passions.  On the Whole Foods website, Mr. Mackey opined, "It is Whole Foods’ opinion that the FTC had already decided to try to prevent this merger before they even began their investigation!" and attacked the FTC for "consistently behav[ing] in a biased, adversarial, and arrogant manner, while engaging in bullying tactics again and again and again."  Holman Jenkins of the Wall Street Journal contends, "The FTC’s Complaint was shoddy and sophomoric."  To complicate matters, Mr. Mackey has recently admitted to posting statements to internet stock forums deprecating Wild Oats and saying its stock was overpriced under an anonymous psuedonym.  For example, Mr. Mackey posted  the statement, quot;The writing is on the wall. The end game is now underway for (Wild Oats) …. Whole Foods is systematically destroying their viability as a business — market by market, city by city."  The FTC is also making use of these anonymous postings by Mr. Mackey in its case against the merger.  Despite the rancor surrounding this merger, the key issue in this merger remains unresolved at this point:  whether premium natural and organic supermarkets constitute a separate market in which conventional supermarkets do not compete.

Authored by:

Anik Banerjee

(213) 617-4124