Saturday, December 13, 2008

Retail Memo - Analysis & Commentary: More On FTC v. Whole Foods Market, Inc. and Whole Foods Market, Inc. v. FTC

Whole Foods' CEO John Mackey announces the natural grocery chain's lawsuit against the FTC at a press conference on Capital Hill in Washington, D.C. on Tuesday. [Photo credit: Mark Wilson/Getty Images.]

Natural~Specialty Foods Memo (NSFM) has been arguing in our writing and analysis about the U.S. Federal Trade Commission's (FTC) legal case against Whole Foods Market, Inc.'s friendly acquisition last summer of rival Wild Oats Market, Inc. that the regulator's argument that a combined Whole Foods-Wild Oats constitutes a monopoly in what the agency calls the "premium organic retailing segment" in the U.S. is folly because current and growing marketplace realities as they pertain to the retailing of natural, organic and premium food and grocery products demonstrate the exact opposite to be the case.

Those market realities are that when it comes to the retail selling of natural and organic food and grocery products in the U.S., it no longer makes any sense to talk about retailing segments such as "the premium organic retailing segment" because in America there today exists a multi-format retailing explosion when it comes to sellers of natural and organic products, either of basic items or premium ones.

Gone are the days of thinking about natural and organic products' retailing as something that's done primarily by natural foods retailers in the U.S. Today, the format explosion of retailers selling category items in a deep and serious way includes huge mass merchandisers like Wal-Mart, Costco, Target and BJ's Wholesale, mega-supermarket chains like Kroger Co., Safeway Stores, Inc. and Supervalu, along with hundreds of regional supermarket chains and multi and single-store independents.

Don't believe us? Ask any organic products' marketer of significance if he or she thinks only or primarily about the natural foods retailing class of trade when preparing to launch a new product into the organic food and grocery market. If they do, the company is either a small, niche marketer, or the marketer doesn't understand today's multi-retail channel industry.

Add to this list of players in the organic products' multi-format explosion online grocers like and others, and of course the popular 300-plus store national specialty grocer Trader Joe's, which sells natural, organic, specialty and premium foods and groceries at a discount.

On top of all this, we've argued, contrary to the FTC's central argument that in about 29 U.S. markets the combined Whole Foods-Wild Oats is monopolistic, that within the natural foods retailing segment itself, never before in recent history have so many smaller but fast-growing players challenged Whole Foods dominance of that particular class of trade.

In fact, as we've argued since last summer, it's our analysis that the Whole Foods-Wild Oats merger actually has resulted in what we term "creative deconstruction" in the natural foods retailing industry and has thus opened the door for more innovative, aggressive players like Sunflower Farmers Market and Sprouts Farmers Market, for example, to take on Whole Foods Market, Inc. in numerous U.S. markets, particularly in the Western U.S. This includes in Texas, where both Sunflower and Sprouts are opening stores, right in the heart of Austin, Texas-based Whole Foods' backyard.

By "creative deconstruction" vis-a-vis the acquisition, what we mean is that for many years the natural products industry looked at Whole Foods and Wild Oats as the "supernatural foods segment" giants and rivals, both fighting over dominance of that what in our analysis is today a fictitious category; the supernatural foods retailing category. It's an irrelevant classification today, just like the classification "premium organic retailing segment" the FTC has created in order to have a premise for basing its case that a combined Whole Foods-Wild Oats constitutes a "segment monopoly" in those some 29 markets as defined by the lawyers and regulators, is

Once Whole Foods merged Wild Oats into Whole Foods Market, Inc., a process that's essentially completed, it created a breath of fresh air and fresh new competitive thinking in natural foods retailing. Players like Sunflower Farmers Market; Sprouts; Canada's Planet Organic, which bought the New York-based Mrs. Green's natural foods chain earlier this year; Seattle-based PCC Natural Markets, Henry's, which Whole Foods sold to Smart & Final, Inc.; and many others -- all that are growing their store counts and businesses despite this so called Whole Foods monopoly -- looked at the combined Whole Foods-Wild Oats and essentially said: "So what. We can compete." And compete they are.

Our argument all along, since the summer of 2007, has essentially been comprised of these key elements:

1. Looking at natural and organic foods retailing in the way the FTC is defies marketplace reality. In the U.S. today natural products retailing is a multi-format business, which is getting more multi-format and more diverse, rather than contracting. Monopolists contract markets, not expand them. Therefore we see no Whole Foods' monopoly.

2. If Whole Foods holds monopoly status in 18-29 U.S. markets, it not only should be thriving -- it isn't -- but it should not have had to reduce prices across the board in all its U.S. stores. It has. And the chain is going to half to do so even more in order to survive in the recession, as well as to compete against all the multi-format players, including the natural foods class of trade fighting tigers like Sunflower, Sprouts and a number of others. Monopolist retailers don't have to reduce retail prices, and thus margin, in order to compete.

3. If Whole Foods had anything even close to monopoly status you would not see natural foods retailers taking the retailer on directly. Sunflower and Sprouts are doing this in Colorado, Texas, Arizona, Southern California and other Western U.S. states, for example. Henry's is doing so in Southern California, PCC in Washington state, Mrs. Green's in New York, and others elsewhere in the U.S. are doing the same. Colorado-based Natural Grocers also is taking on Whole Foods in Texas, as we wrote about in this piece in October.

4. The blurring of class of trade. Safeway's Lifestyle format, Kroger's Fresh format, United Supermarkets' Market Street format in Texas, H-E-B (also in Texas), Wegmans in the east, Publix in Florida, Raley's in Northern California, Fresh Market in the south: What do they, and numerous other supermarket banners, have in common? Many of these stores look just like a Whole Foods market store in terms of design and product offerings in the natural, organic, specialty and premium product categories. They are more than "premium organic retailers." But they also are "premium organic retailers." Get it?

5. The organic deep discounters. Walk into one of Wal-Mart's Sam's Club stores, or Costco, or BJ's Wholesale. What will you see? Lots and lots of fresh and shelf-stable natural, organic and premium foods items priced at a discount.

You also will see sustainable, "cruelty free" and fair trade goods and more, categories that just a decade ago were generally sold only in natural foods markets. Not any more. Even more interesting, many of these premium organic and fair trade items in these club stores are of the respective chain's own store brands.

Wal-Mart for example is rolling out more an more organic and fair trade premium organic items and using its Sam's Club stores as the premiere venue for testing these items.

Wal-Mart is now the top seller of food and groceries in America. Costco is number three, after Kroger. Does anybody think all this customer traffic isn't taken organic category share away from Whole Foods?

When you roll all of or key arguments up into a logic ball, and we've made others over the last 16 or so months, the empirical evidence is overwhelming in our analysis that the FTC's argument against the Whole Foods-Wild Oats merger not only is incorrect, it's irrelevant.

The marketplace has and is moving so fast that such artificial categories like the FTC's "premium organic retailing segment" make no sense at all.

For example, in just the last 18 or so months since Whole Foods acquired Wild Oats, Tesco's Fresh & Easy Neighborhood Market has opened over 100 of its small-format combination grocery and fresh foods markets in Southern California, Nevada and Arizona. These stores sell lots of organic fresh food and grocery items along with basic groceries. The organic items are priced far below similar items in Whole Foods stores.

Fresh & Easy isn't a supermarket. It isn't a natural foods store. It isn't a convenience store. What it is is a combination of all three of these formats -- a small-format, neighborhood grocery/fresh foods/natural foods market that puts an emphasis on convenience.

Additionally, look at Trader Joe's. The chain is widely popular and sells natural, organic and specialty fresh food and grocery items. It's neither a traditional supermarket nor is it a traditional natural foods store. It's a hybrid. The hybrid is the primary shopping venue for millions throughout the U.S. for their natural and organic food and grocery needs.

Wal-Mart opened its first four small-format (15,000-20,000 square feet) Marketside stores in Arizona in October. The stores are a combination basic grocery/in-store premium fresh, prepared foods/natural-organic-specialty food market. Not so easy to classify, are they? Basic grocery, yet premium. Fresh foods, yet shelf-stable too.

Even the fast-growing, 1,000-store small-format Aldi USA hard-discount chain, with stores in the Midwest, Mid-Atlantic, southern and eastern regions of the U.S. (and is now moving into Texas) is increasingly selling natural, organic and premium food and grocery items, including many under its own various store brands. They are selling the category items at a steep discount over the prices at Whole Foods Market stores, by the way, as well as selling them for less than most supermarket chains are.

The independent food retailing sector, both supermarkets and natural foods markets, had one of its healthiest years in 2007-2008 in terms existing independents opening additional stores and new independents coming into the business by opening their first stores. Of course this was pre-recession. But it's hurting everybody.

At this year's National Grocers Association (NGA) convention, which we attended, the consensus was that the independent grocer is not just surviving in America -- but in the main thriving. One key factor for this situation mentioned throughout the convention was that many of the independents doing the best today are those who've moved significantly into the natural, organic, premium and specialty categories, Whole Foods' bread and butter.

These independent grocers and natural foods market operators are benefiting from another key trend in the U.S., which is a serious and significant "shop local" movement. This is especially strong in the natural foods sector. It's helping independents and hurting Whole Foods, which many "shop local" consumers have been tagged as the "natural foods Wal-Mart." The use of this term places emphasis on the negative aspects of Wal-Mart (attempting to dominate, ect.) and what those using it say are Whole Foods similar negatives in the natural foods retailing sphere.

Further, natural and organic product sales have proliferated into other classes of trade as well. Drug stores like Walgreens, Rite Aid, CVS and Long's offer lots of organic items in their respective stores, for example. Dollar and 99-cents stores are expanding their organic selections as well. Thousands of farmers' markets across the U.S. offer organic fresh produce. And the retail food cooperative movement, which in total has annual sales of billions in the hundreds of co-op stores throughout the U.S., is experiencing a resurgence.

Natural~Specialty Foods Memo has been one of the few, until recently, publications making this overall argument since last summer, when right after the Wild Oats acquisition by Whole Foods Market, Inc. the FTC challenged it in court.

Today, the FTC continues that challenge. And as we've reported, Whole Foods Market has now fought back, filing a lawsuit against the FTC, along with launching a major public relations and lobbying campaign in Washington D.C. and throughout the country calling for "Fair Play For Whole Foods by FTC."

Today however, the esteemed New York Times has agreed with our position in a piece by business staff writer Andrew Martin, who covers the supermarket industry, including Whole Foods market, Inc. for the paper. You can read the piece, "Wait. Why is the FTC after Whole Foods," here.

Martin even uses language, (eg: "marketplace realities") like we been using since last summer in describing the FTC legal case against Whole Foods.

While we don't seek nor need validation for our long-held position on the issue, we have our own extensive analysis of "marketplace realities" behind us after all, we welcome the New York Times' agreement with our long argued position in the form of the piece today by Andrew Martin, who does a very informed job in his coverage of the food and grocery retailing industry in the U.S.


Whole Foods Market, Inc. only began last week making an argument, and launching a real educational campaign, about the FTC's case, using many of the arguments Natural~Specialty Foods Memo started making last summer and has been making all year on the Blog.

We fault CEO John Mackey for waiting so long before doing so; before talking about the "marketplace realities" we've been describing, offering analysis on and writing about these many months.

We also respectfully suggest Mr. Mackey has become more a part of the problem rather than part of the solution to Whole Foods' winning over the FTC. We know first hand there are members of the FTC who let us say have serious differences with CEO Mackey's style and behavior involving the acquisition of Wild Oats. This includes his numerous postings leading up to the acquisition under a fictitious screen name on Yahoo Finance Message boards like this one he made in March of 2006: "The end game is now under way for OATS. Whole Foods is systematically destroying their viability as a business market by market, city by city." There were many more using similar language, as well as a number of posts that ridiculed Wild Oats' then CEO.

Think about it this way. It seems to us that instead of basing its case on marketplace realities, which our argument we believe demonstrates that the FTC is wrong in its case, its almost like the FTC is basing its case on John Mackey's written words, and perhaps his intent, which they conclude was to dominate the retail sales of "premium organic products."

The FTC discovered it was Mackey making the posts using a fictitious screen name. There was an investigation and he was cleared in terms of breaking any laws in doing so. However, many of questioned the ethics of making the postings considering the nature of them in the run up to the Wild Oats Market, Inc. acquisition. Had CEO Mackey thought doing so was kosher, many ask why he simply didn't use his own name instead of making one up, for example.

However that behavior, as well as statements Mackey has made in the past -- along with pre-acquisition internal e-mails the FTC has seen in which the CEO wrote things like: Wild Oats stores are a "cash cow" and a "monopoly" in markets where Whole Foods don't exist, and that Whole Foods was waging "war" on prices in markets where the two compete -- has left a very bad taste in the mouths of some members of the FTC vis-a-vis John Mackey as CEO of Whole Foods, even though those of us who've worked in the industry know such language to not be that uncommon -- and perhaps even a bit fun.

The point is, despite the FTC's saying it ain't so, the regulator's case against Whole Foods is tainted by these personal feelings some agency members have regarding John Mackey. Therefore, in our analysis and opinion, it would be prudent for Whole Foods' and Mr. Mackey too dramatically decrease his public exposure regarding the FTC issue and make co-president Walter Robb, who already is involved in speaking out on the issue, the public face and executive spokesman for Whole Foods on the entire matter.

CEO Mackey already last week made some public statements, and statements to the press, that are personal in nature regarding the FTC. That really does no good, although we can understand his emotions. Robb is and has been the voice of reason at Whole Foods compared to Mackey's more emotional style. Both styles have there advantages, and are needed at different times depending on the situation. In this case, the FTC v. Whole Foods and Whole Foods v. the FTC, it's the public voice of reason (Robb) we believe is needed and that will be most beneficial to Whole Foods Market, Inc. in defeating the FTC.

Since we recently learned numerous members of the Whole Foods Market, Inc. senior administrative team have been following our analysis in Natural~Specialty Foods Memo, we know there's been much talk at corporate headquarters in Austin about when the natural foods chain should go on the attack against the FTC.

That attack by Whole Foods began last Monday (December 8) with its lawsuit filed against the FTC, as we reported here, followed the next day by a press conference on Capital Hill by CEO Mackey and the grocer's legal team, led by Lanny Davis, and comprised of top antitrust lawyers from three of Washington D.C.'s top law firms.

Along with this legal challenge, Whole Foods has hired one of Washington's most Democrat-connected lobbying firms, The Glover Park Group, to lobby Congress in Whole Foods' favor.

Additionally, thousands of Whole Foods Market store employees across the U.S. are being mobilized in a grass roots campaign, contacting their U.S. Senators and members of Congress, essentially asking them to back the grocer against the FTC.

Meanwhile the FTC has set a trial over the merger for February 16, 2008 in Washington, D.C. That trial or hearing, before an administrative law judge, will determine whether or not the merger holds. If Whole Foods loses, it can appeal the merger to a U.S. federal court. However, it will have to start taking apart the combined Whole Foods-Wild Oats following such a ruling unless a federal court stays the FTC administrative hearing administrative law judge's ruling should it be in favor of the FTC, pending Whole Foods' appeal.

The stakes are high for Whole Foods Market, Inc. in what some think are the closing years of the John Mackey era.

Of course, a new, Democratic President, Barack Obama, will take office in less than 40 days, on January 20, 2009.

President-elect Obama gets to name a new chairman of the FTC, as we wrote about in this recent piece. Currently three of the five members of the FTC are for overturning the merger. Should an Obama-appointed chairman be against doing so, as are two current members of the commission, there could be a political decision to drop the matter and legal case completely.

The stakes are high.

It's a political as well as legal issue, hence the political campaign by Whole Foods along with the lawsuit it filed against the FTC last Monday.

Meanwhile the current recession is going to be with us at least through the end of 2009 we believe. And as a result Whole Foods Market, Inc. isn't likely to see a reversal of its recent sad fortunes, which include the value of its stock dropping by 70% in the last year, record drops in net income, corporate employee layoffs and sagging sales, anytime soon. In other words, even if the FTC loses and the merger stays, Whole Foods is going to have a very tough 2009 and probably a near as tough 2010.

If the FTC wins, and Whole Foods fails in winning an appeal of that decision and the merger is overturned, it's our analysis that taking apart a combined Whole Foods-Wild Oats will probably send the value of Whole Foods (it's stock already is at an all time low of about $10 share) stock down so low that the natural grocer might never recover from the blow.

The best case scenario is that the FTC would force Whole Foods to sell off a certain number of the Wild Oats stores in these 18-29 or so markets where the regulator says the natural grocery chain holds a monopoly in the "premium organic retailing segment." Depending on how many stores Whole Foods would be forced to sell off, that is a scenario we think the natural grocer could emerge in decent shape from.

The problem with this though is that Whole Foods still has so much debt from the Wild oats acquisition -- it took on about $150 million in debt when it bought the company -- that if it's forced to divest too many of the stores, which there isn't a market for anyway in the main right now, that could demenish its future sales so much that paying off that debt would be very difficult without further diluting the value of Whole Foods Market, Inc. significantly.

Therefore, under either scenario -- win or lose with the FTC -- the next couple years will be difficult ones for Whole Foods Market, Inc.

The empirical reality though is having to fight the FTC, both in spending the millions on outside legal and related talent, as well as the time consumption doing so takes, is making it much more difficult for the natural grocery chain to focus on improving sales and profits during this serious economic recession.

There is a sad irony to this in that while industry after industry is asking for and getting bailouts from the U.S. government (ie: the taxpayer), Whole Foods is only asking to be freed from fighting the FTC so it can build the business and bring back shareholder value.

We have no professional or personal dog in the FTC-Whole Foods fight -- don't own Whole Foods stock, don't do any business with Whole Foods -- but we do know marketplace realities and wrong-headed government regulation when we see them.

In the case of the FTC v. Whole Foods Market, Inc., the regulator is wrong. It's argument, that Whole Foods' holds a monopoly in those 18-29 U.S. markets is premised on the false analysis by the FTC that the category "premium organic retailing" has any real meaning. Therefore the FTC's entire legal argument in our analysis is based on a false premise.

It's all about that marketplace reality we discussed earlier -- that the retailing of natural, organic and premium foods in the U.S. today has become a multi-format, competitive business in which neither Whole Foods or any other U.S. retailer which sells natural and organic products currently has anything approaching a monopoly. Because this is the empirical reality of the market, the FTC case against Whole Foods Market, Inc. is pure folly, in our analysis.

FTC v. Whole Foods - Whole Foods v. FTC: Recent Natural-Specialty Foods Memo linkage:

FTC v. Whole Foods: Linkage from the Natural~Specialty Foods Memo archives:

Click here, here and here for stories about the FTC-Whole Foods issue from our archives.


Anonymous said...

This is a good piece, I am suprised at how severely you think WF is going to be impacted, one way or another.
If the merger is struck down, and WF has to write down the whole Wild Oats adventure, that is a large hit.
What happens to the value and viability of Wild Oats if the merger is struck down?
Wild Oats is toast, I don't believe any management miracles could resurrect them in this climate.
So, at least WF will have Wild Oats out of the way, but what an expensive way to wipe out a competitor.
And what about the independent stand-alones or local small chains, or a Sprouts or Sunflower or somebody like that might pick up a Wild Oats location, go low-cost or hyper-local, and do very well.
The other thing is, 98% of the buying public's only negatives towards WF, as always, is the prices, and that negative is growing. Nobody knows who John Mackey is. Except us in the industry.
WFs' ace in the "whole" was always the perceived "more excellent" shopping experience, and merchandising and marketing illusions of higher quality and locality.
"Whole Fraud" is more like it.

The game is potentially up on that playing field, as you suggest, there are just too many "super premium" local and organic players now, and good on them, and the local economies and multiplier dollar effects that come with.

Anonymous Seattle

Anonymous said...

Whole Foods is designed for spending money at. It's mostly impulse. The lavish cheese sections. The wine cellar and craft beer coolers. The restaurants. The fancy body care departments. And on and one. The stores are designed not to sell organic groceries but to sell all the food as lifestyle stuff in the perimeter.

In this recession, few are living the Whole Foods lifestyle. Food isn't lifestyle now. It's more of a basic. Even the upper middle class feel this way. The question for Whole Foods is: Will people go back to their old pre-recession shopping patttern when it ends. That's questionable. The longer a deep recession, the more behavior changes. The challenge for Whole Foods is does it remain the same and hope old patterns come back? Or does it change? If so, how?