Tuesday, June 19, 2007

Red Handed at Whole Foods

I’ve stayed away from posting on the Whole Foods – Wild Oats merger and the FTC’s lawsuit to block the deal. For one thing, I’m a Whole Foods shareholder, having bought after their most recent quarter when WFMI stock finally dropped to attractive levels. For another, I’m in general agreement with the consensus that the FTC is out to lunch on its view that the relevant market in which Whole Foods competes is a narrowly-defined category of natural foods stores, and I haven’t had a whole lot to add.

However, I have a theory about why the FTC filed its lawsuit, and today's revelations bolster my view. I shop at Whole Foods, but I don’t care about getting organic carrots; I appreciate the food quality and the aesthetic of shopping there. Like most others jostling through the cheese aisle at the Redmond Whole Foods, I don’t shop there exclusively. Within a few miles there is competition on the low end from Albertson’s and Fred Meyer, at the mid-point from recently remodeled QFC and Safeway, and local stores like Larry’s and PCC (PCC, an 8-store Seattle chain, is, for all the world, like a mini Whole Foods). All of these grocers have expanded their organic and gourmet foods offerings while also enhancing the whole “shopping experience.” Just about everyone gets this – including, I believe, the FTC.

So who doesn’t get it? Whole Foods. As documents unsealed today show, WFMI’s CEO believed the merger with Wild Oats would prevent a price war. Huh? If Whole Foods competes with all groceries – as everyone believes, and Whole Foods is now trumpeting to all who will listen - what’s the rationale for buying Wild Oats in the first place? Does it really help them expand faster? How does acquiring smaller-formal stores that WFMI plans to close or relocate help them expand geographically? Why not just grow organically, as they’ve done so well for the last decade?

So, the merger never made a whole lot of sense to me, and my theory is that it didn’t make sense to the FTC, either – except as an attempt to take out a competitor (which is not, in itself, a reason to bar a merger). However, any such attempt doesn't even appear to be rational, given the widening of WFMI's competitive market. Three years ago, it might have cleared the field nationally for Whole Foods. Today, they're just buying up a second-tier competitor in a crowded marketplace.

Whole Foods is working off of yesterday’s playbook, and the FTC is probably going overboard because it found some unfortunately-worded documents. The ironic thing is that the antitrust authorities may well end up protecting Whole Foods from a value-destroying merger by killing the thing in court.

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