Wednesday, December 3, 2008

Retail Memo: More on the Whole Foods Market-New Seasons Market Subpoena Issue; FTC Holding Firm For February, 2009 Hearing

Whole Foods Market, Inc., the FTC and 96 independent natural foods retailers

On Monday, December 1, Natural~Specialty Foods Memo wrote and published this piece, "Retail Memo: Whole Foods Wants A Court-Mandated Financial Records Dump from Portland-based New Seasons Market; it Says For its Battle Against the FTC," about a post Brian Rohter, CEO of nine-store Portland, Oregon USA-based New Seasons Market wrote on the natural grocer's Blog regarding a subpoena the privately-held local chain received from lawyers for Whole Foods Market, Inc. demanding New Seasons turn over its proprietary financial and related records as part of Whole Foods' battle against the U.S. Federal Trade Commission (FTC), which despite all empirical evidence to the contrary persists in arguing the post Wild Oats-acquired Whole Foods Market, Inc. is a monopolist retailer in the natural and organic foods retailing segment.

The FTC continues to argue -- a legal argument and case it first filed following the merger in the summer of 2007 -- that the combined Whole Foods-Wild Oats has a monopolistic advantage in 29 U.S. markets where the supernatural grocer operates.

The combined Whole Foods-Wild Oats (WHole Foods Market, Inc.) currently operates about 270 natural foods stores in the U.S., Canada and the United Kingdom.

Following its friendly acquisition of Wild Oats Market, Inc. in the summer of 2007 -- an acquisition Whole Foods Market, Inc. CEO John Mackey has recently said publicly he would not do over if he had the chance because of all the problems the merger has brought to the natural products retailing chain -- Whole Foods sold the 36 Henry's Marketplace and Sun Harvest stores Wild Oats owned and operated. The Henry's stores are in Southern California (about 26) and the Sun Harvest stores (the other 10-11) are located in Texas. Additionally, since the merger, Whole Foods has closed some of the former Wild Oats stores and is nearly finished converting the remaining stores into the Whole Foods Market banner.

The FTC has scheduled a new hearing on the merger for February, 2009. Whole Foods Market, Inc. recently sought to have the hearing canceled and the FTC's case dismissed. However, a federal court ruled that the February hearing could go forward. [November 25, 2008: Statement by David Wales, Acting Director of the FTC's Bureau of ...]

As part of its defense against the FTC's argument that it has a monopolistic status in these 29 U.S. markets, Whole Foods' lawyers recently filed subpoenas for the financial records of 96 natural products retail companies in these 29 market regions. Whole Foods' lawyers argue this information is needed -- even though most of the retailers are privately-held companies and not required to disclose such information like publicly-held companies are -- in order for the supernatural foods retailer to prove its case against the FTC that is does not pose an anti-competitive presence in these 29 markets or anywhere else in the U.S.

As regular readers of the Blog know, Natural~Specialty Foods Memo has argued since last year that Whole Foods post-merger is not a monopolist retailer in the natural and organic retailing segment in the U.S.

Our argument is that the natural grocer has plenty of competition from fast-growing natural foods chains, local multi-store independent natural foods retailers, and the supermarket and mass merchandiser sector, many of which like Safeway Stores, Inc. and Kroger Co. nationally, along with scores of regional chains and independents, have and continue to move further into the natural and organic category segments with their stores and operations.

[Note: You can read what Whole Foods CEO John Mackey had to say about the FTC case right after it was filed in these posts from his "The CEO's Blog" on the Whole Foods Web site from June, 2008.]

The operational and financial events of this year regarding Whole Foods Market, Inc. have born out the argument we first raised starting last year when the FTC claimed the merger would create a monopolistic Whole Foods that would be able to raise prices in various U.S. Markets, as well as cause competing smaller natural foods chains and independents to lose business and even close their stores.

The fact of the matter is that post the Whole Foods-Wild Oats merger, on the whole nationally in the U.S., Whole Foods' competitors have gotten stronger, while Whole Foods Market has gotten weaker.

For example:

>Whole Foods stock share value is down by 70% since last year.
>The super natural grocer had its worse quarter earlier this year, suffering a 40% profit decline.
>A couple months ago Whole Foods laid off at least 100 headquarters employees and has cut back dramatically on making new hires, even at store level.
>Further, as we reported here yesterday, the natural grocer just closed on the sale of about 17% of the company to a Southern California-based private equity firm, raising $425 million which Whole Foods needs for operational survival and its drastically-reduced 2009 expansion plans.

Regarding the FTC's argument that Whole Foods' has a monopolistic status in the 29 U.S. markets post the Wild Oats merger and therefore puts competitors in an anti-competitive position in these markets, as well as this monopolistic status allowing Whole Foods to raise retail prices on natural and organic food and grocery products, marketplace reality just doesn't bare the argument out.

For example, retail prices at Whole Foods stores throughout the U.S. have gone down, not up, post the merger. Granted this is due primarily to the economic recession, which has caused a flight to lower-priced retailers by previously loyal Whole Foods Market shoppers, resulting in the natural grocery chain having to create its new value program, which in addition to the lowering of numerous everyday prices on many items has included aggressive discounting and promotion, including even offering coupons for $5 off purchases of $25 or more, which amounts to a 20% discount on $20 purchases in the stores.

In addition, Whole Foods' competitors, ranging from Sprouts Farmers Market, Sunflower Farmers Market, Henry's and others also have been putting increasingly competitive heat on Whole Foods in the natural and organic categories as they offer everyday low prices anywhere from 10-20% lower than those at Whole Foods because of the no frills retailing models they work on. All three of these chains are rapidly expanding, including in the case of Sprouts and Sunflower into Whole Foods' home state of Texas. for example.

Further, throughout the country regional supermarket chains ranging from Publix in Florida, Wegmans in New York, Fresh Market in the South, Raley's in Northern California and many more in many other market regions, are continuing to pose strong competition to Whole Foods as these upscale chains grow their respective offerings in the natural, organic, specialty and prepared foods segments, in most cases selling the products for less than Whole Foods does. Nationally, from the west coast to the Midwest and eastern U.S., Safeway, with its nearly 1,800 Lifestyle stores, is directly challenging Whole Foods in the natural, organic, specialty and prepared foods categories as well, to give just one mega-example.

Despite our argument against the FTC's case against Whole Foods Market, Inc., and the complete folly of the agency's wasting its legal talent and U.S. taxpayer money to pursue its non-market-proven claim, we disagree with Whole Foods' lawyers attempt to legally force these 96 privately-held natural foods retailers to disclose their proprietary financial and related data, which also includes the retailer's plans for future new store growth.

We think there has to be a better and more ethical way for Whole Foods to prove its case.

As we've been writing about for the last two days, one of the 96 natural foods retailer's who received a subpoena to disclose this financial information is Brian Rohter, CEO of nine-store New Season Market, a local natural products retail chain based in Portland, Oregon.

Rohter is fighting back however, as we reported and wrote about.

Yesterday, Paige Brady of Whole Foods Market, Inc. responded to our story about Brian Rohter and New Seasons Market's objection to the Whole Foods subpoena in this piece: "Retail Memo: Whole Foods' Paige Brady Responds to Yesterday's New Seasons Market Piece; Lots of E-Mails; Issue Heats Up On the New Seasons Market Blog." Brain Rohter then responded to Paige Brady's response with this piece: "Retail Memo: Portland, Oregon-Based New Seasons Market CEO Brain Rohter Responds to Whole Foods Market's Paige Brady."

Today, the New-Seasons-Whole Foods Market issue made it into the mainstream media via a story in the Portland Oregonian, the major daily newspaper in the Portland Metropolitan region.
You can read that story, " New Seasons fights chain's subpoena: Whole Foods, with more than 270 stores, wants proprietary information from the Portland grocer to help with an FTC case," published in the Oregonian today here.

The financial industry Blog, "Blogging Stocks," also has picked up on the story, publishing a piece about it last night. You can read that post by Sarah Gilbert, "Whole Foods playing dirty pool against local competitor,"here.

One can't view the legal action taken by Whole Foods' lawyers in isolation. That's not how food retailing works -- especially in the natural products retailing sector. Instead, as more consumers learn of the subpoena's going out to 96 smaller, natural foods retailers, we predict a "David vs. Goliath" public relations nightmare is going to occur for Whole Foods. It's already beginning in the Portland, Oregon Metropolitan region since New Seasons Market CEO Brian Rohter's post on the company Blog has started to gain publicity.

When we first reported on his Blog post on December 1, there were a mere 10 comments on his post. When we wrote about the issue yesterday, there were 54. As we write this piece today, there are 74 comments on the New Seasons Market CEO's Blog post.

If you read those comments here, you will see the majority are favorable to New Seasons. Many people commenting even say they are boycotting Whole Foods stores. With the Oregonian newspaper picking up the story today, you can expect much greater awareness in the region of the issue.

This issue is going to heat up even further. After all, remember there are 95 other U.S. natural foods retailers out there in those 29 markets, in addition to New Seasons, that have received the same subpoena from Whole Foods' lawyers to turn over their private financial and related records.

If Whole Foods Market, Inc. is going to go through with its legal demand for the financial records and related information from these 96 natural products retailers, which appears to be the case based on what its legal council says it must do, the supernatural foods retailer needs to get out in front of this issue and assure the retailers, the industry and consumers that it won't use this information for competitive reasons; that the company will create a firewall between its corporate operations and legal team so that the information is not shared with anyone at Whole Foods by the lawyers.

This of course doesn't mean Brian Rohter of New Seasons or any of the other 95 retailers should give up the information if they choose not to. And in the case of New Seasons Market it is fighting its subpoena on principle, at a cost to the independent retailer of which Brian Rohter says could easily be $250,000 or more.


torridjoe said...

Hi--my name is TJ, publisher/managing editor of LoadedOrygun, a community site dedicated to Oregon political, economic and cultural issues. We are following the New Seasons/WF story very closely, and as advocacy journalists we are concerned about the attempt to extract proprietary information from one of Portland's signature companies, that embody nearly everything the city strives for in local, sustainable practice.

Recognizing that there may be folks on both sides of the issue reading this story, I would direct myself towards those who feel the attempt by WF is too heavy handed and unnecessary: if you live in the Portland area and would be interested in public action (ie, pickets/information dissemination) in order to pressure WF to drop its demand, send email to loadedtips-at-gmail.

Anonymous said...

It is an issue that has to be challenged in court; the subpoena. However, all or a portion of the 96 retailers could join together and form a class (eg: class action) as a way to fight the subpoena. This would allow a pooling of financial resources and legal talent. It also could have a greater impact than just one retailer fighting it alone.