Whole Foods to Acquire Wild Oats

Posted by D. Daniel Sokol

On the heels of a House subcommittee investigation on the supermarket industry (previously discussed on this blog) Whole Foods has announced the acquisition of competitor Wild Oats. I don’t foresee any significant antitrust problems in this merger. The two firms do not have a significant overlap in local geographic markets and even where they do, I suspect that the product market definition used to review the deal will be broader than "high end supermarkets that provide free samples and overcharge you on products readily available elsewhere" (hence the nickname “Whole Paycheck” for Whole Foods). This is a defensive move for Whole Foods, which is seeing its profitability erode as other players enter the higher end of the grocery market.

In light of the Congressional investigation by Congressman Kucinich, my own analysis on the supermarket industry is that it has become transformed in the last decade or so through increased consolidation and competition by retailers outside of traditional grocery stores. During this period, WalMart has become the largest supermarket in the United States. The United States has witnessed the rise of club stores (Sam’s Club, BJs, Costco), Dollar stores, and high end groceries (Whole Foods, Trader Joes). Traditional supermarkets are under attack from both value and premium stores. Increasingly, it seems as if the premium stores such as Whole Foods are under attack by everyone else, as other stores focus on higher end shoppers willing to pay higher premiums.

The Whole Foods/Wild Oats merger is not a long term fix for Whole Foods. The Wild Oats stores tend to be smaller than Whole Foods stores and many will need to be expanded and/or upgraded. In the short term, this may placate shareholders seeking greater revenues. However, Whole Foods needs to come up with a new strategy to address a highly competitive supermarket industry.