FTC out on a limb

Whole Foods + Wild Oats = Monopoly?

By Jonathan Weber , 6-06-07

Shopping at a Whole Foods store - like shopping at the Good Food Store here in Missoula - is a very different kind of supermarket experience: it smells good, the food is fresh, and you can buy a terrific take-out dinner. I’ve always hated the sterile, neon-lit atmosphere of the Safeways of the world, and while Whole Foods, aka Whole Paycheck, certainly earns its reputation for high prices, if you’re careful the cost of a lot of things is not all that much higher. This kind of grocery store, I’ve thought for a long time, is the way of the future. People want good, fresh food, and they’ll be willing to pay more for it; it’s still cheaper than the convenience store.

Based on all of that, a few years ago I put a little of my IRA money into Whole Foods stock, and later I also bought a few shares of its much weaker rival, Boulder-based Wild Oats (which I have since sold). When Whole Foods agreed in February to acquire Wild Oats for $670 million, it seemed like a logical move; I’m not generally a fan of bigness for its own sake, but Wal-Mart and Kroger and the other huge supermarket chains are rushing headlong into the natural foods business, and even a combined Whole Foods/ Wild Oats would be just a fraction of their size.

But now the Federal Trade Commission has decided that the combination of the two “super-naturals,” as they’re known in the trade, would be anti-competitive and has sued to block the deal. The head of the FTC said the two companies “are engaged in intense head-to-head competition in markets across the country” and that the combination would result in “higher prices, reduced quality and fewer choices for consumers.”

Whole Foods vowed to fight the decision in court, and while I may be biased it sure seems like the company has a good case. Competition from Wild Oats is hardly what keeps Whole Foods executives or Wall Street analysts awake at night. Rather, it’s the threat posed by Wal-Mart and the other big supermarket chains. Safeway now has its own line of organic foods. Wal-Mart has made a big push into organics. In this part of the country, an organics chain called Huckleberry’s Market is setting up shop inside established supermarkets. At the same time, as Whole Foods gets bigger, it also faces challenges from below: increasingly popular farmers’ markets, boutique organic stores and the like. The risk is that the company will be caught in the middle, and that the concept of the “super-natural” will prove to be a contradiction in terms.

There is no doubt in my mind that trends toward more natural, organic foods, as well as locally-produced foods, will prove to be long-lasting and powerful. Sure, there are efficiencies in a food production and distribution system based on highly packaged and preserved products that can be easily shipped over long distances. But for a long time, in this country, people didn’t have any alternatives to that, and now that they do they will be voting with their dollars. None of this is lost on the people who run traditional supermarkets.

I’ve remained bullish on Whole Foods because I think old-style supermarkets will have a difficult time creating as pleasant and compelling a shopping experience as Whole Foods, even if they are carrying similar products. Whole Foods CEO John Mackey, who started with one store in Austin and built it into a relative giant, has proven to be a visionary retailer, and one who treats his employees pretty well too. Wild Oats, by contrast, was earlier to the party but has suffered from uneven management and found it tough to compete. Selling to Whole Foods certainly looks like a smart choice.

Stern anti-trust enforcement has hardly been a hallmark of the Bush Administration, and thus the FTC’s decision to go after this particular merger is something of a head-scratcher. Government agencies generally don’t file lawsuits that they don’t think they will win, and companies usually scrap their mergers in the face of government lawsuits. This one, I reckon, will come out differently, and I think that will be good for shoppers, not to mention shareholders. Hopefully, my status as one of the latter isn’t clouding my view of what’s good for the former.

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