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RETAIL VIEW: Whole Foods president takes on FTC

A very public fight has erupted in the usually polite regulatory world as the president of Whole Foods Market has taken on the Federal Trade Commission because it opposes the acquisition of Wild Oats Markets by the country's largest natural foods retail chain.

Whole Foods, which has a policy against talking to the trade press and is typically quiet about its operations, has launched an all-out attack on the FTC through a blog written by President John Mackey and available on the company's web site (www.wholefoods.com).

The FTC recently received a temporary injunction stopping Whole Foods from continuing to acquire Wild Oats stock as it is attempting to purchase that 108-store chain. A hearing date of July 31 has been set by the district court in Washington, DC, to hear arguments on turning that temporary injunction into a permanent order. If successful, the completion of the merger may never happen - or at the very least could take years to litigate.

Produce industry experts and retail analysts believe that if the FTC prevails in court and is granted the permanent injunction, it probably makes economic sense for Whole Foods to abandon the merger effort.

"If this is going to take three or four years to complete, you have to question whether it is worth it," said retail industry expert Dick Spezzano of Spezzano Consulting Services. "At the very least, the FTC is going to make them divest 15 stores. That represents 15 percent of the deal. Whole Foods will have to decide if it is worth the time and money it is going to take or if it is better to spend that money to grow organically."

Mr. Spezzano said that a long drawn-out retail merger is problematic, as the employees of the company being acquired tend to get anxious and the better ones leave the firm. When the merger is finally completed, the acquiring company has often purchased a large number of underperforming stores.

Retail consultant Ron Pelger of RonProCon Power-Produce Consulting Services echoed those sentiments. "In my opinion, it's not going to happen. If the FTC is against it, it could take up to seven years and a lot of money to get it done. That's just too long a duration of time, and its puts too many people on hold."

Mr. Pelger, who lives in Reno, NV, said that there are signs in his community that Whole Foods and Wild Oats are moving forward without the merger. He said that before the merger was announced, Wild Oats was planning to move its Reno location to a larger store down the street and in direct competition with a Whole Foods store that was being built. The announced merger seemed to be accompanied by a halt in construction at the new location for Wild Oats.

"But they are working again and the sign still says 'Wild Oats -- Coming Soon'," Mr. Pelger said.

Ed Odron of Produce Marketing & Consulting in Stockton, CA, believes that the merger will go through because it makes sense. He agreed, however, that there will be a point in time when the cost doesn't justify the effort if the FTC continues to oppose the deal.

"But I have to say I don't understand the government's position on this one," he said. "They are taking the position that Wild Oats is Whole Foods' only competitor. That just isn't the way it works. Whole Foods is competing against Safeway, Albertson's, Kroger and everyone else. I just don't get it. Somebody at the FTC has to understand the way the retail industry works."

Mr. Odron is optimistic about the chances of this merger simply because he believes the Whole Foods' position is correct. "They have a good case, and if they have a good attorney, I believe they will eventually win. But there will come a point in time where the cost of making the deal will exceed the value of it."

That may well be the case, but Mr. Mackey of Whole Foods clearly has a lot of fight left in him. On Tuesday, June 19, his blog took direct aim at the FTC in a very confrontational way. In fact, a retail stock analyst questioned the strategy and wondered aloud if it would hurt the value of Whole Foods' stock. After all, Wall Street tends to shy away from notoriety.

Morgan Stanley analyst Mark Wiltamuth said that the blog deepens the divide with regulators and may hurt future deals. He was quoted in an AP story as saying, "Is this good for Whole Foods' stock price? We think not."

Mr. Mackey specifically attacked the main argument that the FTC presented to the court when it asked for and received the temporary injunction against the acquisition. The FTC believes Whole Foods is buying its only competitor in the natural foods arena. It has defined Whole Foods as a natural foods retailer competing in that very narrow category. In opposing the merger, the FTC pointed to a memo that Mr. Mackey sent to his board stating, "[Wild Oats] remains a relevant competitor. By buying them, we will greatly enhance our comps over the next few years and will avoid nasty price wars in Portland (both Oregon and Maine), Boulder, Nashville and several other cities, which will harm our gross margins and profitability. [Wild Oats] may not be able to defeat us, but they can still hurt us. Furthermore, we eliminate forever the possibility of Kroger, Supervalu or Safeway using their brand equity to launch a competing national natural/organic food chain to rival us."

While the FTC pointed to this as proof that the merger is in violation of antitrust laws, Mr. Mackey defended both the quote and the concepts behind it.

"Is Wild Oats a relevant competitor of Whole Foods? Of course they are," he wrote in his 14,000-word blog. "We have never claimed that we don't compete with Wild Oats. We do. Part of the reason to do almost any merger is to eliminate a competitor. This is so self-evident to me that I really can't understand why the FTC wants to make a big deal out of it. If the FTC is opposed to the elimination of all competition, then I don't understand why they approve any mergers."

Mr. Mackey said that Whole Foods has bought 18 other companies in 27 years to eliminate competitors, but it still faces more competition than ever because supermarkets now sell organic and natural food.

He also defended the desire to avoid "nasty price wars," stating that avoiding such wars is always part of a company's strategy. But he said that avoiding price wars and eliminating a competitor are not the key reasons a merger should be opposed.

He wrote: "The really relevant question is whether or not buying Wild Oats severely limits competition with Whole Foods in the larger marketplace. It clearly does not limit overall competition since we have more competition than ever before."

Mr. Mackey repeatedly argueed that virtually all supermarkets sell organic food and are competitors of Whole Foods.

Mr. Spezzano believes it is a compelling argument and agreed with its basic premise. He said that Whole Foods competes with all supermarkets in its marketing territories and opined that this might be one of the smaller mergers that the FTC has ever opposed.

Whole Foods and Wild Oats combined represent only $7 billion to $8 billion in business annually. To put that in perspective, $7 billion in sales represents less than a month of revenues for Wal-Mart supercenters and less than two months of sales for Kroger, Safeway or Supervalu.