FTC Issues Administrative Complaint to Block Whole Foods/Wild Oats Deal

This posting was written by Darius Sturmer, editor of CCH Trade Regulation Reporter, and John W. Arden.

The Federal Trade Commission has issued an administrative complaint challenging Whole Foods Market Inc.’s approximately $670 million acquisition of Wild Oats Markets Inc.

The June 27 issuance of the administrative complaint follows the June 6 filing of a similar complaint in the federal district court for the District of Columbia.

According to the complaint, the transaction would violate federal antitrust laws by eliminating the substantial competition between these two uniquely close competitors in the operation of premium natural organic supermarkets nationwide.

The FTC contends that the acquisition would give Whole Foods the ability to raise prices and reduce quality and services.

In the federal court proceeding, the judge issued a temporary restraining order on June 7, under which the parties may not consummate the deal until after a preliminary injunction hearing, which is scheduled for July 31 and August 1, 2007.

Controversial Challenge

The FTC challenge to this acquisition is one of the more controversial in recent years, attracting criticism from the general media in addition to the antitrust bar. Much of the commentary focuses on the relevant market definition.

The FTC is alleging that the acquisition would injure competition in the market for “premium natural and organic food supermarkets,” which are differentiated from conventional supermarkets by (1) the breadth and quality of their perishables; (2) the wide array of natural and organic products and services and amenities they offer; and (3) the customer’s shopping experience “where environment can matter as much as price.”

Criticism of Market Definition

Critics (and the two supermarket chains) have asserted that this market definition is far too narrow, since Whole Foods competes with a growing number of natural and organic food stores and farmers markets, in addition to more traditional supermarket chains, which are adding natural and organic food brands—and even departments.

The Wall Street Journal Law Blog cites a statistic that 74 percent of natural and organic foods “are now sold through conventional supermarkets and the like.” Daniel Gross, on Slate.com (“Bush’s War on Whole Foods”), contends that “[i]t’s hard to see how permitting Whole Foods to convert existing Wild Oats into Whole Foods outlets and perhaps close a few dozen redundant stores will deprive foodies of a unique retail experience.”

On his blog, Whole Oats CEO John Mackey writes that the company has “vigorous competition from a number of alternatives—Trader Joe’s, Wegman’s, Safeway, Giant, Balducci’s, farmers’ markets, and food co-ops.” He maintains that Whole Foods considers Trader Joe’s, rather than Wild Oats, to be the national company it has “the most difficulty competing against” and against which it prices most aggressively.

However, Wild Oats does appear to be the key competitor for Whole Foods in some markets. The FTC’s court complaint includes a statement from Mr. Mackey that buying Wild Oats would allow Whole Foods to avoid “nasty price wars” in some cities (such as Portland, Boulder, and Nashville) and to “eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing national natural/organic food chain to rival us.”

Administrative Complaint

The issuance of the administrative complaint, fast on the heels of the court complaint, is not the normal procedure for the FTC. Filing duplicative complaints on parallel judicial and administrative paths may be an attempt to preserve legal options, while betraying a lack of confidence in the court challenge.

Further information on the administrative complaint, including a news release, appears on the FTC web site and at CCH Trade Regulation Reporter ¶16,025.