Tuesday, June 5, 2007
The Federal Trade Commission on a 5-0 vote yesterday authorized its staff to challenge and seek a temporary restraining order and preliminary injunction in federal district court to halt the Whole Foods Market, Inc.’s approximately $670 million acquisition of Wild Oats Markets, Inc. The Commission's action is based on its view that the deal would violate federal antitrust laws, a position itself premised on a narrow view of the market for natural and organic foods. According to the Commission:
In defining the relevant markets, the Commission found that premium natural and organic supermarkets, such as Whole Foods and Wild Oats, are differentiated from conventional retail supermarkets in several critical respects. These include the breadth and quality of their perishables – produce, meats, fish, bakery items, and prepared foods – and the wide array of natural and organic products and services and amenities they offer. In addition, premium natural and organic supermarkets seek a different customer than do traditional grocery stores. Whole Foods’ and Wild Oats’ customers are buying something more than just the food product – they are seeking a shopping “experience,” where environment can matter as much as price.
The Commission's position here is similar to the one it took when it successfully blocked the merger of Staples and Office Depot. I am no antitrust expert but I am bit skeptical of the Commission's view of this market as an "experience" rather than a simple opportunity to buy higher quality natural or organic food which can otherwise be available elsewhere. This is particularly true since it would appear that barriers to entry are low and there are many other prospective and real competitors even in a narrowly defined organic and natural foods market. According to a piece in the Wall Street Journal yesterday:
J.P. Morgan Securities Inc. estimates the size of the natural-foods market last year was $46 billion and Whole Foods had about 12% of that, with sales of $5.61 billion for the fiscal year ended Sept. 24, 2006. It doesn't hold a significant share of food sales in any of the major U.S. food markets measured; its largest share last year was 5.5% of overall food sales in San Francisco. In contrast, Wal-Mart accounts for at least 10% of supermarket sales in 81 of the top 100 markets in the U.S., J.P. Morgan said.
Between them, Whole Foods and Wild Oats own a bit more than 300 stores in the U.S., Canada and the United Kingdom. By comparison, Kroger, the second-largest supermarket chain behind Wal-Mart, owns about 2,500 grocery stores in 31 states. Wal-Mart, with about 3,000 stores in the U.S. that sell groceries, held a 19% share of overall U.S. retail-food sales last year, according to J.P. Morgan Securities. The world's largest retailer doesn't disclose its natural-foods sales.
At first blush this would appear to establish the foundations of a competitive market -- though maybe not an "experience". And Whole Foods chairman John Mackey echoed my observation in Whole Foods' response to the Commission action:
The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic and fresh products, renovate their stores and open stores with new banners and formats resembling Whole Foods Market.
Thus, although I have little sympathy for Whole Paycheck -- as my friends refer to it -- the Commission action here may be a bit agressive. Moreover, It also appears that the Commission action caught the parties by surprise. Whole Food's acquisition of Wild Oats is structured as a tender offer which likely means that the attorneys thought that they could complete the acquisition in the twenty business day minimum period for a tender offer. If they parties had thought that antitrust review was likely, they would almost certainly have used a merger structure to accommodate the extended time period for such a review. Moreover, a quick scan of the merger agreement shows no unusual provisions dealing with antitrust concerns although the parties do agree therein that Whole Foods will not be required to make any dispositions in connection with using its reasonable best efforts to obtain antitrust clearance. This is a fairly boilerplate provision when no antitrust scrutiny is expected.
Whole Foods announced today that it would challenge the Commission action and its definition of the relevant market, so expect more in the next few days as the federal court considers the Commission's application for a temporary restraining order and preliminary injunction.