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FTC out to lunch on Whole Foods


With the ’08 presidential campaign starting to heat up, the dialogue that’s coming out of the race is one of vastly differing viewpoints. That’s why every American who’s eligible to vote is likely to face a host of divisive issues. Are you pro-war or anti-war? Pro-choice or pro-life? Pro-business or pro-consumer? To say the very least, the debate during the next year and a half will either change one’s perceptions or galvanize them for good.

It’s perhaps because of this atmosphere that issues under the current retail microscope also are eliciting very disparate reactions. A case in point is the proposed merger between Whole Foods and Wild Oats, two of the nation’s leading specialty grocers whose market positions have earned them the distinction of gourmet/organic/health food chains. Like any large-scale retail acquisition, this one (which was announced by Whole Foods back in February) has gone through the obligatory round of anti-competitive analysis by the Federal Trade Commission.

Yet unlike the mega-mergers that have defined the retail and grocery sectors over the last several years—think Sears/Kmart, Federated/May and Supervalu/Albertsons—The Whole Foods/Wild Oats deal is being perceived by the FTC as a violation of federal antitrust laws because of the assumption it would “[eliminate] the substantial competition between these two uniquely close competitors.”

In a statement issued by the FTC last week announcing its intention to block the merger (pending an administrative trial) the director of the FTC’s Bureau of Competition, Jeffrey Schmidt, argues, “If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality and fewer choices for consumers.”

In the interest of contributing to this atmosphere of debate, here’s what I would say about the FTC’s decision: Jeffrey Schmidt needs to get out of the office more often.

In the last decade, nearly every major food retailer has added natural and organic food offerings to varying degrees. This includes the big guys (such as Kroger, Supervalu and Safeway) the regional and specialty players (such as Trader Joe’s, Bristol Farms, Publix, HEB and Wegmans) and the mom-and-pop “health food” stores. What’s more, what thousands of mass market shoppers recently have come to realize is that many of these same products—natural and organic produce and groceries—are making their way into popular nameplates the likes of Meijer, Target, Costco and, yes, even Wal-Mart. (As the launch last year of Wal-Mart’s much-heralded Plano, Texas, supercenter can attest, reserve wine and organic produce is no longer the exclusive domain of what the FTC calls “premium” supermarkets.)

And I’m not the only person to notice this development. In a statement by none other than Bruce Hoffman, former FTC deputy director for the Bureau of Competition and currently a partner in the Global Competition Practice Group at Hunton & Williams LLP, he explains, “Retail mergers present challenging market definition…issues. Tough questions in this case include: Does the relevant market include supermarkets, supercenters and similar stores? If not in total, does it include sales from those stores in the organic category?” The presumption, of course, is that it does.

And therein lies the crux of the matter. Even if you could delineate between retail channels (a task most would agree gets harder every year) you still have to address the issue of what I call the “new consumer,” in this case the grocery shopper whose decisions are no longer guided by channel alone, but rather by a price/quality equation (also known as perceived value) for which ALL store formats are fighting for share.

If Jeffrey Schmidt doesn’t know who I’m talking about, I’d be happy to point her out—she’s the one buying gourmet cheese and lobster tail at Costco; she’s the one who swears by the exotic sauces and swordfish steaks at Trader Joe’s; and when she’s not buying designer fashions at Target (even if only for her kids), she’s in their meat department picking up “steakhouse-quality” premium Angus beef under the company’s label Sutton & Dodge.

The irony, of course, is that while Whole Foods undoubtedly wants this merger to go through, they’re probably secretly gloating that the FTC would put them on a pedestal as “the largest premium natural and organic supermarket.” The reality, all the same, is that competition for natural foods spending has never been tighter. So to the FTC’s contentions that this merger will harm competition, I’d say get a cart and go food shopping.

What they’re sure to see is at least a dozen major players just waiting for the chance to step in and eat Whole Foods’ “natural and organic” lunch.

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