FTC and Whole Foods Settle: For What?
Commentary by George Anderson
In a poll conducted by RetailWire in
June 2007, 80 percent of respondents said they believed the Federal Trade
Commission (FTC) was wrong in trying to block the merger of Whole Foods
and Wild Oats. The basic argument against the FTC action was that it was
taking too narrow a view of what constituted competition in natural/organic
foods and products business.
In July of the same year, a federal judge
ruled that he would not prevent the deal between the two chains. At that
time, 79 percent of those responding to another RetailWire poll
said the combined company would be somewhat or much stronger than as separate
entities. Consensus among respondents, however, was that Whole Foods would
not have a huge advantage with many much larger grocery chains including
Walmart, Kroger, Safeway and others looking to grab share of the natural/organic
market.
Nearly a year later, well after Whole Foods
and Wild Oats were deep into the merger, the FTC was successful in getting
a federal appeals court to overturn the previous ruling and requiring the
agency and retailer to go back to work something out or contest the case
in the courts.
Fast-forward to last week and Whole Foods
and the FTC have reached an agreement that will require the grocery chain
to divest 31 Wild Oats stores (19 that have already been shuttered) in
12 states along with one store operating under the Whole Foods banner.
In addition, Whole Foods will need to relinquish the rights to the Wild
Oats name, allowing it to be purchased by a potential competitor.
Discussion Questions: What exactly was accomplished
by the settlement between the FTC and Whole Foods? Was it all worth it
from the standpoints of taxpayers, consumers, competitors, vendors and
others with a stake in the outcome? What do you expect to happen with
the stores that have to be sold as well as the Wild Oats name?
[Author’s Commentary] Is it possible
that Jon Leibowitz, chairman of the FTC, could say the following with a
straight face? "As
a result of this settlement, American consumers will see more choices and
lower prices for organic and natural foods."
Most will agree this was a waste of time. I was surprised the FTC just didn’t drop the whole matter.
As for selling off 19 stores that are closed anyway and 12 that are still open, no big deal. What Whole Foods needs to do is to not sell the stores to the highest bidder, but to the most under-capitalized bidder. This way the stores will go out of business and are never a threat. Whole Foods could buy them back for pennies on the dollar later if they feel they are worth saving.
I doubt whoever buys these spun-off stores will be in business long. Honestly, I cannot think of any retailer who made good with acquired stores ordered to be spun off by the FTC.
This entire exercise was a waste of time and resources (time is money) on the part of the FTC. Unfortunately, Whole Foods surely absorbed a lot of legal and other costs too. I argued a year ago, along with most other panelists, that the FTC was defining the competitive landscape for Whole Foods too narrowly by focusing on market dominance in the “natural foods” category, while ignoring all the sales of organics being driven by traditional grocers, supercenters, and so on. To close the books on this incident by forcing Whole Foods to shutter another 12 stores (on top of the original 19 they closed anyway) may be a symbolic victory for the FTC, but surely they have better things to do with their time.
I think the FTC actions in this case represent a classic example of how government agencies can “goof up” the natural course of industry. Not that it should be a free-for-all but they need to ‘get real’. Given the economic forecast, and the potential for a lot more retailers to think about merging to merely survive, will the FTC continue to meddle in the middle, causing executives to have to focus on all types of non-core activities?
I don’t believe the FTC is really so stupid as they have come across. My personal belief is that the entire investigation was politically motivated and now those who were behind this mess are out of office. I have never heard anyone on Retailwire.com or anywhere else find any logic to having this investigation. Therefore I don’t believe it originated inside the FTC.
The Whole Foods/Wild Oats investigation by the FTC is an example of dysfunctional regulatory oversight. When the investigation of the merger started, there might have limited competition in the organic food retail space. But as the popularity of organics grew, traditional supermarkets and Wal-Mart entered the space so that Whole Foods was competing against many more food retailers than Wild Oats. At this point, the FTC should have dropped the investigation. (I guess the slap on the wrist settlement was a form of dropping the investigation and saving face but it came too late.) Another similar example was the FTC pursuit of Toys “R” Us well after its dominance in toy retailing disappeared.
While the FTC “penalty” is not significant, the investigation was a great time sink and distraction for Whole Foods that might have negatively affected its ability to compete effectively and might actually reduce competition in the organic food space.
The deal appears to be an attempt to save face for the FTC, which has looked really stupid on this one. Whole Foods didn’t give up much: I wonder if anyone will buy the stores they’re selling–it’s not like there’s a shortage of retail space on the market.
The Wild Oats name might be worth something, but I’ll bet it’s most likely to be picked up by another retailer for use as a private label.
This case was an example of government lawyers out of control. Why they came back for a second pass at this thing is just another example of extreme government waste. It’s little wonder most people in business have very little confidence in the government throwing large amounts of money at the current recession. Let the marketplace fix its own problems!
The FTC gained absolutely nothing from this case, nor did the American people. The fact is, there are thousands of grocery stores throughout the US, and the products that you can find at a Whole Foods or Wild Oats can be purchased by any of these other chains, if the consumer so chooses. Do we really need the government telling us where we should shop? As others have said, this is a great example of wasted taxpayer dollars, and a wasted effort on the part of one government agency.
The Wild Oats name still has some value. If I were Whole Foods, I would continue with the 365 label as a lower-priced private label brand. I would then use the Wild Oats label for an upscale PL brand, priced at or slightly higher than the brands. It would help WF’s margin, and customer wallet share.