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RETAIL VIEW: Whole Foods and Wild Oats conclude merger deal

The U.S. Federal Trade Commission's efforts to stymie the merger of Whole Foods Markets Inc. and Wild Oats Markets Inc. were thwarted in late August when the U.S. Court of Appeals for the District of Columbia denied the FTC's request for a stay to delay the closing of the deal.

The FTC had announced its opposition to the merger soon after it was announced earlier this year. On Feb. 21, Whole Foods agreed to purchase all outstanding shares of Wild Oats at a purchase price of $18.50 per share in cash. On June 6, the FTC filed a suit in the federal district court to block the proposed acquisition on antitrust grounds. It sought and received a temporary restraining order and preliminary injunction pending a trial on the merits. Whole Foods Market and Wild Oats consented to a temporary restraining order pending a hearing on the preliminary injunction, which concluded on Aug. 1. Legal wrangling continued through August, but finally, on Aug. 20, the court ended the stay, which allowed the merger to go through. By close of business on Aug. 27, Whole Foods had purchased 84 percent of the outstanding stock and announced that the $565 million deal would be completed by the following day.

Whole Foods operates 197 stores in the United States, Canada and the United Kingdom, while Wild Oats Markets currently operates 109 natural food stores in 23 states and British Columbia, Canada. The company's markets are Wild Oats Marketplace, Henry's Farmers Market, Sun Harvest and Capers Community Markets. As part of the merger deal, the Southern California- based Henry's Farmers Markets and the Texas-based Sun Harvest were sold to Apollo Management LP, a private equity firm that operates 255 warehouse stores under the Smart & Final and Smart Foodservice Cash & Carry banners. In addition, Apollo Management acquired Wild Oats' distribution center in Riverside, CA.

While the FTC was investigating the merger, numerous documents from Whole Foods Chairman of the Board John Mackey and others indicated what Whole Foods plans to do with Wild Oats, including closing about 30 of the chain's stores. This would leave Whole Foods with about 270 stores throughout the United States and a handful in Canada and the United Kingdom. Whole Foods now also owns four Capers Community Markets in the Vancouver area and five Fresh & Wild Stores in England.

Retail consultant Dick Spezzano of Spezzano Consulting Services in Monrovia, CA, said that the merger will affect the produce industry -- especially suppliers that specialize in organics. "You hate to lose a buyer out of your Rolodex, and that is what's going to happen," he said.

There were two different national chains that bought a significant amount of organic produce, and now there is only one, he noted. While organic offerings from conventional retailers are on the rise, Mr. Spezzano said that the sheer volume of organic produce moving through most of these organic-specific stores is much greater. Natural and organic food stores tend to build the store around the produce department, and so produce sales are typically much higher than in an average supermarket. He estimated that an average Whole Foods Markets does about $100,000 per week in produce sales to consumers. Most of the Wild Oats locations might have been only half of that, but they still were a significant buyer of organic produce. And of course, they also sold a lot of conventional produce, so those suppliers are also losing a potential buyer.

Mr. Spezzano said that the purchase of the 29 Henry's Markets and the California distribution center by Apollo Management should offer somewhat of a substitute opportunity for some produce sellers, especially for the Southern California produce community. Smart & Final does offer some produce items -- about 45 SKUs, according to Mr. Spezzano -- and he suspects that the Riverside distribution center will be used for both of Apollo's chains. The Henry's Markets do not specialize in organic produce like Whole Foods and Wild Oats, but they do sell a lot of produce, according to Mr. Spezzano.

Just as interesting, according to this longtime retailer, is how Whole Foods manages its operations now that it has grown by a significant percentage. Currently, he said, Whole Foods has not switched to the centralized produce- buying system used by many large retailers. Mr. Spezzano said that centralized buying can be efficient and thus cost-effective for many items, especially for the produce items that operate more like center-store products. That list would include many of the fresh-cut packaged products and commodities that are dominated by few suppliers. But, he said, more localized buying offers its own advantages with regard to quality and the ability to react quickly to changing markets.

Proponents of centralized buying might point to the bottom-line efficiencies that the nation's largest chains have realized in going that route. Mr. Spezzano said that the bottom line may be a big advantage, but that some of the smaller regional chains, such as Wegmans, H.E.B. and Stater Bros., have shown that they can compete very well against their larger competitors, and their produce departments are a top advantage. "When your buyer is on-site and he can go down to the warehouse and look at the produce that he is buying and selling, that's a big advantage."