By Samuel Fromartz
The Federal Trade Commission's complaint against Whole Food's merger with Wild Oats is getting hammered from all directions. The Wall Street Journal editorial page weighed in today, wondering why the FTC took on the case.
The FTC argued (pdf) the merger should be blocked because it would get rid of the only competitor in a "distinct" industry, leading to higher prices and crappier stores. I've blogged on the weakness of this argument before but the Journal – whose editorial page I don't often agree with, let alone quote - puts it nicely:
But this is where the FTC's story gets weird. It wants to argue both that the quality, selection and "experience" make Whole Foods unique among supermarkets and that without competition from Wild Oats (in the few markets in which they overlap), Whole Foods' quality, selection and experience will worsen. Which means, we guess, that Whole Foods would look more like an "ordinary" supermarket. Which would mean, more competition for Whole Foods. Or something. We admit the FTC lost us when it started arguing that Whole Foods' evil plan is to undermine the very uniqueness on which the FTC is basing its antitrust case.
Using the FTC's definition of uniqueness, you could argue that Nike was unique in the 1990s because it had Michael Jordon as its spokesman. There was only one Jordon, only one Nike swoosh logo, and therefore it had a monopoly. (Or was it just selling sneakers in a smart way?) Or you could argue that Apple Computer is a monopoly because it sells premium computers that are distinct from the mass market and appeals to certain customers. (But it only has 4.8 percent share of PC sales).
As the Journal points out:
The FTC is again playing 'pick your market' to justify a dubious antitrust action …The public-policy principle at work here is that if you define a market narrowly enough, you can find an industry monopolist anywhere.
The Hartman Group, a market research firm, also weighs in:
This is like suggesting that Starbucks must be monitored because they currently dominate the market in the "sophisticated" or "specialty" coffee experience, as if this were somehow an inherent right guaranteed to all. Never mind that Dunkin' Donuts sells a heck of a lot of coffee, should Starbucks ever offer to buy out Tulley's we can presume what the FTC's answer would be.
Let's consider another argument that escapes the FTC.
If Whole Foods and Wild Oats are so distinct why are supermarket companies rushing to sell organic and natural food in reformatted stores that look awfully similar to Whole Foods and Wild Oats? These supermarkets are getting into the segment for the same reason every other major food company is – because they are losing food sales to the new competition.
Despite the best efforts of food companies to simply get us to buy more food and get fat, we have limits. If we start buying a new product it usually means we are buying less of something else. Supermarkets know they can't just quit selling the slow-growing old line products, because a lot of people like them. But they would surely like to get a piece of fast-growing organic and natural food sales. They know if they don't get a piece of those sales, they will lose them to places like Whole Foods and Wild Oats. That's also the same reason Kraft, Kellogg, General Mills and all the rest of the mainstream food companies are selling organic food. It is a growth market.
Jon Ogg at Blogging Stocks writes:
Kroger used to be just another one of the many grocery stores out there. After years, the food retailer has finally figured out that not only could it carry many of the same organic and natural foods that Whole Foods does, but that it could also do it at a lower cost. To top it off, Kroger also figured out that the profit margins were better than the ones on other packaged goods of lower quality and price.
Over the last year, the Kroger closest to my house has expanded its offering of organic and natural foods, not just in selection, but in shelf space as well … it looks like a 300 percent jump.
John Mackey, Whole Food's CEO, is quoted in the FTC complaint as telling his board: "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] 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."
Mackey's worry was that if another company bought Wild Oats, then Whole Foods would face stiffer and well-capitalized competition. Now other companies will have to build competition from the ground up, as they have been doing. The merger, in other words, was a defensive move that would put Whole Foods one step ahead of its competitors who want to take back a share of food sales they lost to an upstart. Will it keep them out of the natural and organic food business entirely?
Not a chance.