Monday, December 1, 2008

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


The ongoing FTC-Whole Foods Market, Inc. legal case and saga

"When the going gets weird, the weird turn pro." -- the late Gonzo Journalist Hunter S. Thompson.

For the second time in as many years (two) Whole Foods Market, Inc. is attempting to obtain the confidential financial and other records, including new store plans and strategies, of nine-store, Portland, Oregon based natural foods retailer New Seasons Market, as part of the supernatural foods retailer's ongoing legal battle and saga with the U.S. Federal Trade Commission (FTC) over its merger with Wild Oats Market, Inc. last year.

Whole Foods has filed a subpoena for these financial and related records from the privately-held, Portland, Oregon-based natural foods retailer, according to Brian Rohter, the CEO of New Seasons Market. Privately-owned companies like New Seasons aren't normally required to make financial information public like publicly-held companies such as Whole Foods Market, Inc. are.

Rohter wrote about Whole Foods' legal attempt to obtain the company's financial records and more, which New Seasons is fighting at a significant financial cost to the small retail chain, in the company Blog on November 24. Below is Brian Rohter's post from the New Seasons Market Blog:

Monday, November 24, 2008
We're Just Trying To Mind Our Own (Local) Business
By Brian Rohter - New Seasons Market Blog


You may have heard that New Seasons Market has found ourselves caught in the crossfire of an ongoing legal dispute between the Federal Trade Commission (FTC) and Whole Foods Market. The disagreement has to do with whether or not the Whole Foods merger with Wild Oats should be “allowed to proceed”. Yes, we know that seems like a crazy thing to be fighting about since all the Wild Oats stores that were around here have already been closed or turned into Whole Foods stores, but neither the federal government or Whole Foods asked us for our opinion about that.

You also are probably trying to figure out what this could possibly have to do with us. That’s a great question. Since we’ve been minding our own (local) business and have never expressed an opinion one way or the other about this merger, we were wondering the same thing.

As it turns out, because of their legal dispute with the FTC, Whole Foods has an opportunity to try and force us to give them copies of some of our most confidential financial records – for instance what our sales are, week by week, at each of our stores. They’ve also demanded all of our files that detail our strategic plans, all of our marketing plans and all of our studies about where we are considering opening new stores.

You can see the entire subpoena here, and below is a partial list of what they’re trying to get (quoted directly from the subpoena):

3. All documents relating to Whole Food’s acquisition of Wild Oats, including documents discussing the effect of the merger on you.

4. All documents discussing competition with Whole Foods or Wild Oats, including responses by you to a new Whole Foods or Wild Oats store and responses by you to prices, product selection, quality, or services at Whole Foods or Wild Oats stores.

5. All market studies, strategic plans or competition analyses relating to competition in each Geographic Area, including documents discussing market shares.

6. All market studies, strategic plans or competition analyses relating to the sale of natural and organic products, including the sale of natural and organic products in your stores.

7. All documents relating to your plans to increase the shelf space at your stores allocated to natural and organic products, the number of natural and organic products sold in your stores, or the sales of natural or organic products in your stores.

8. All documents discussing your plans to renovate or improve your stores to sell additional natural and organic products or to open stores emphasizing natural and organic products.

9. Provide documents sufficient to show, or in the alternative submit a spread sheet showing: (a) the store name and address of each of your stores separately in each Geographic Area; and (b) for each store provide the total weekly sales for each week since January 1, 2006 to the current date.

I have to believe that any reasonable person would agree that it’s really over the top for Whole Foods to be asking for this information, especially since we have nothing to do with their lawsuit. It takes away the level playing field, creates an unnecessary risk for our business and has the potential to have a negative impact on our network of local growers, ranchers and suppliers. It also could permanently damage the fragile regional food system that we’ve been working to create and, in the end, could reduce options for Portlanders who choose to shop at locally owned stores.

New Seasons Market is a small, locally owned company that competes against large, multi-national chains including Whole Foods. Whole Foods has about 270 stores in cities all over North America and in England. We have 9 stores in the Portland area. Allowing Whole Foods to look through all of our private information about how we operate and what our plans are for the future unfairly adds to their already large size and financial advantage. We’ve been able to build a successful local business being David against their Goliath, and we’re happy to keep doing that, but we do object to having one hand tied behind our back.

Whole Foods says that we should give our information to their lawyers and they claim the lawyers won’t let anyone else in the organization see them. That’s like trusting the fox to guard the hen house – and we don’t have any faith it’s going to work like that.

I’m sorry to say this, but some of the people at Whole Foods have a history of less than stellar behavior when it comes to competing fairly. There are two obvious examples of this. First, last year, their CEO John Mackey was caught posting derogatory information online about Wild Oats, using a made up screen name. Here’s a New York Times story about that.

Second, during the first round of this law suit last year, the FTC released a bunch of e-mails that some Whole Foods executives had sent over the previous few years. You can find the entire (really lengthy) FTC report here, but just to give you a flavor of it, below are a few excerpts of Whole Foods’ comments in regards to Wild Oats:

“Wild Oats needs to be removed from the playing field...”“…[m]y goal is simple – I want to crush them and am willing to spend a lot of money in the process.”“...elimination of a competitor in the marketplace, competition for sites, competition for acquisitions, and operational economies of scale. We become the Microsoft of the natural foods industry.”

Yikes!

This case has been going on for about 18 months. This is the second time Whole Foods has tried to get access to our records. Last year they also filed a motion to try and get our financial records turned over to them; not just to their “outside” lawyers, but to executives who are on the Whole Foods payroll and work in the Whole Foods corporate offices in Austin, Texas. What possible reason do we have to believe they won’t just try and do that again?

When I received this subpoena my immediate reaction was disbelief. I was confident there was no way our legal system would force us to give our private business records to one of our competitors. It looks like I may have been wrong about that. We’re fighting this (and running up whopping legal bills in the process) and here's a copy of the motion we filed with the Federal Trade Commission. Amazingly, our lawyers tell us that there’s a chance we’ll lose the case and will be required to turn over the information.

Of course I asked what would happen if we refused. The answer was that we could be held in contempt of court and subject to large fines or even jail time. In case anyone is planning on visiting me there, I really love doing the daily Oregonian crossword and also M&M Peanuts. (My wife Eileen doesn’t think this is very funny.)We’ll keep you posted on this as the situation evolves.

[End of brain Rohter's November 24 post.]

As regular readers of Natural~Specialty Foods Memo know, we've been writing since last year, when the FTC first raised its objections to the Whole Foods-Wild Oats merger, about how wrong, foolish and a waste of U.S. taxpayers' money we believe the FTC's ongoing legal case and argument that the acquisition/merger (which is about as merged by now as mergers can be) should not go through was and is. The basic FTC argument is a merged Whole Foods-Wild Oats provides Whole Foods Market, Inc. with an anti-competitive position in the natural foods retailing segment, which will allow it to raise retail prices and behave in other "anti-competitive" and "monopolistic" ways.

The FTC's argument, and thus lawsuits,was wrong over a year ago and it's even more wrong today. All the FTC need do to see how foolish its legal saga and argument is in the face of it is to look at the demonstrable, empirical evidence of a combined Whole Foods Market-Wild Oats Market in the real world as of today, December 1, 2008.

The anti-FTC legal case and argument evidence:

1. Whole Foods Market's post Wild Oats'-acquisition stock share value today is about 70% less than it was at the very best time following the merger.

2. Whole Foods had a 40% drop in income in its last quarter.

3. Whole Foods is so in need of cash for regular operations that it recently sold 17% of the company to an investment firm from Southern California.

4. Whole Foods laid off about 100 corporate headquarters employees in Austin, Texas in the last two months. More layoffs are in the works. Store managers are being told to cut costs across the board dramatically.

5. Whole Foods has cut in half, from about 30 to 15, the number of new stores it had planned on opening next year. We hear the retailer will most likely not even open 15 stores in 2009.

6. Whole Foods has put its expansion plans in the United Kingdom on hold. It's also sold a couple of its Wild & Natural banner stores in the nation. It also might sell its one and only Whole Foods Market in the UK, it's huge, nearly 80,000 square foot market in London, England, if it could get a buyer, which it likely can't.

7. Whole Foods Market, Inc. senior executives and upper management are essentially going without bonuses and their famous stock options, which few really want right now anyway.

8. Whole Foods would like to sell more of the Wild Oats stores, beyond those it has already sold, but can't find any buyers willing to pay a price close to what the retailer needs to sell them for.

We ask you, does a retailer experiencing the above eight (and we could have listed a few more but were starting to get depressed) negative factors look like a natural foods retailing monopolist company to you? To us, and many others, it looks more like a fledgling company struggling to survive -- and a potential takeover candidate, based on its stock share value.

Meanwhile, there are competitor natural foods chains beating Whole Foods on price, and thus taking business and market share away from its stores. These include fast-growing Sprouts Farmers Market, just as fast-growing Sunflower Farmers Market, Trader Joe's, and even Henry's in Southern California, which Whole Foods sold to Smart & Final, Inc. after acquiring the 36 Henry's and Sun Harvest banner natural foods stores in the Wild Oats markets' merger.

There are other regional multi and single-store natural foods retailers -- PCC in Washington state, Mrs. Green's in New York, New Seasons in Portland itself in fact, along with others -- that are competing head-to-head with Whole Foods Market, Inc. stores and doing well, even in the current recessionary economy.

Then there are the supermarket chains, as we've detailed previously in Natural~Specialty Foods Memo. Safeway with its Lifestyle stores nationally, Publix in Florida, H-E-B and United Supermarkets' Market Street in Texas, Wegmans in New York, Raley's in Northern California, Fresh Market in the South (even Wal-Mart, Costco and Target) and dozens more, all are challenging Whole Foods with upscale supermarkets that feature lots of natural, organic, specialty and premium, prepared foods items and other in-store features similar to those offered by Whole Foods. Plus these chains sell conventional groceries as well, giving them a big benefit especially in the current down economy.

If anything, we see Whole Foods Market, Inc. being squeezed from both ends -- by aggressive regional natural foods retailers on one end and upscale supermarket chains and discounters heavily into the natural and organic categories at the other end.

And of course, surrounding both ends is the recession and financial crisis, which is forcing all food and grocery retailers to lower prices, promote more and put a much more significant emphasis on value.

Whole Foods is focusing on value as well -- but its "Whole Paycheck" reputation, right or wrong, is making doing so difficult, thereby opening up greater opportunity for Sprouts, Sunflower and the others which operate on a much lower cost model than Whole Foods does, resulting in lower everyday prices across all natural and organic product categories in their stores.

Having said this -- that we believe the FTC is out to lunch with its ongoing legal fight to stop the Whole Foods-Wild Oats merger -- we do not approve in any way, shape or form of Whole Foods Market, Inc. trying to obtain the private information from New Seasons Market, or from any other small, privately-owned similar natural products retailer, which should likely be the case since it would seem the supernatural retailer would want similar data from more than just New Seasons, wouldn't it? [The Whole Foods Market subpoena to New Seasons looks somewhat boilerplate in its nature. Therefore we are searching for other natural products retailers who may have received such a subpeona as well.]

It's like Whole Foods has adopted the FTC's wrong-headed and heavy-handed methods as a way to defend itself against the FTC's wrong-headed and heavy-handed methods. 'I have seen the monster (FTC) and have now become the monster (Whole Foods) in order to fight the monster on equal footing.'

We understand what the Whole Foods legal team is trying to do, which is to build a data base of financial and related data from competitors in the markets, like Portland, Oregon, where the FTC is claiming Whole Foods has too high of a concentration of stores post the Wild Oats merger.

But Whole Foods is going about it the wrong way. Why not ask various retail competitors to testify to the FTC as to if they see Whole Foods Market, Inc. today in a monopolist position? For example, we would find it hard for Sunflower Farmers Markets and Sprouts to answer yes to this question with any credibility since it would be rather hard to explain why the natural foods retailers are building so many stores and going right at the heart of Whole Foods throughout the Western U.S. As a self-proclaimed ethical retailer, Whole Foods Market needs to ask itself if the means justify the ends in this case.

We defended CEO John Mackey after the U.S. federal government cleared him of any wrong doing over his postings under an assumed screen name on the Yahoo Finance Internet financial boards during the run up to the Wild Oats acquisition, saying we thought it was unethical and just plain dumb, but that he should be allowed to move on after learning his lesson.

However, we aren't so sure now.

The attempt by Whole Foods Market, Inc. to obtain so much proprietary data from New Seasons via the courts smacks of "Wacky Mackey," the form of behavior John Mackey exhibits on occasion that has earned him that particular nickname -- "Wacky Mackey." We are rather sure John Mackey's and Whole Foods' corporate statement as to why they want this data from New Seasons would go something like this: It's the lawyers, not us.

But CEO's can tell lawyers no. And they should when legal requests cross the line, which we believe is the case in Whole Foods Markets' formal, legal request for New Seasons' proprietary financial and other information. We know John Mackey hasn't been afraid to tell lawyers no before, such as when they made certain suggestions to him during the time the federal government was deciding if he broke any laws with his Yahoo Finance posts under the assumed screen name. Mackey was cleared of any legal wrong doing in the matter.

The subpoena of New Seasons Market's financial and related records is just another sad commentary on what has been a foolish saga, the FTC's continued legal quest, based on non-market realities, to invalidate the Whole Foods Market-Wild Oats merger. which earlier this year John Mackey said if he had to do all over again he would not do.

But the subpoena demanding New Seasons' financial and related records, which any business would fight just like the nine-store natural products retailer is doing at an expense it doesn't need in this recession, makes Whole Foods Market, Inc. look as stupid as the FTC in this matter. It's wrong in our analysis and opinion -- and we bet it is going to backfire in terms of hurting Whole Foods reputation as an ethical retailer.

In fact, if things keep going the way they are for Whole Foods Market, Inc., it just might be forced to ask one federal government agency, the Treasury Department headed by "Bailout King" Hank Paulson, for some of Treasury's rapidly diminishing $700 billion in bailout funds, while at about the same time attend a hearing forced by (the FTC has a hearing on the Whole Foods-Wild Oats merger set for February, 2009) another federal agency, the FTC, in which that agency claims Whole Foods Market, Inc. is a monopolist, and that its acquisition of Wild Oats should be reversed.

We could imagine this scene happening in February, 2009:

Whole Foods' lawyer at the February, 2009 FTC hearing on the Whole Foods-Wild Oats merger hearing: I call former U.S. Treasury Secretary Hank Paulson to the stand please.

'Former Secretary Paulson, isn't it true that in early January, 2009, before President Barack Obama was sworn in and you were replaced by the new Treasury Secretary, that my client, Whole Foods Market, Inc., requested $500 million in federal bailout money in order to survive as a corporationthrough 2009?'

Former U.S Treasury Secretary Hank Paulsen (the former CEO of Goldman Sachs prior to being named Treasury Secretary by then President George W. Bush), who in February, at the time of the hearing, is back on Wall Street: 'Yes Sir, Whole Foods Market, Inc. did request $500 billion in bailout money via a letter signed by the company's CEO John Mackey. But we obviously didn't give the company the money for two reasons: First, that $700 billion is for Wall-Street, which is what I said all along as Treasury Secretary, right up until the day I left Washington and returned to Wall Street. That's why I named the bailout TARP (Troubled Assets Repair Program). There's nothing about grocery markets in Tarp Sir.'

'Also, the head of the FTC told us at Treasury that Whole Foods Market, Inc. was a monopolist that controlled the natural foods retailing segment in the U.S., whatever that means.' 'So, yes Sir, Whole Foods asked -- but we didn't give.'

Whole Foods' lawyer: 'Thanks former Secretary Paulson. For your answer that is...but not for turning down Whole Foods' request for a tiny share of that bailout money, which could have meant the company's not having to soon be acquired, assuming there's an entity somewhere out there willing to acquire the retailer.' And, by the way: ' Congratulations on being appointed the new Chairman and CEO of Citicorp, Mr. Paulsen.'

Hank Paulsen: 'Thank you Sir...it's great to be back home on Wall Street. And, regarding the bailout request...Well, I'm sorry. But Lehman Bros. went down -- and its a whole lot older than Whole Foods Market is. Plus, I was on a first name basis with all the players over at Lehman. I mean, does America really need a national organic grocer, which I am told is what Whole Foods Market is? We love the store in the Time Warner building in Manhattan though, even with its recent downscaling.'

We offer this little narative to point out the absurdity of the entire FTC's ongoing legal case and its argument. For example, what can be done now regarding the merger anyway, even if let us say one assumed Whole Foods was in a monopolist position like the FTC argues. Most legal experts say the FTC will end up demanding Whole Foods sell a bunch of the former Wild Oats stores in selected regions in the U.S., so as to shrink the chain's store count, should it win its case.

If it has a buyer Whole Foods would likely beat the FTC to the punch in many regions, since at least about half of the current remaining former Wild Oats stores that have been and are being turned into Whole Foods banner stores are either very loudly barking retail dogs or had a bark when they were acquired last year that was far bigger than their current sales bite is.

Therefore, ironically, Whole Foods Market, Inc. just might have to sell many of these stores anyway, assuming it can find find a buyer or multiple buyers for the stores -- a situation we doubt will happen anytime soon in the current recession -- in order to generate operational cash to make it through next next year.

Whole Foods has no reason to legally or ethically ask for a legally-binding, court-mandated financial data and related records dump from privately-owned New Seasons Market though, just like the court said it didn't in 2007. Ethically, doing so seems the opposite of organic and sustainable. It's really down right toxic, come to think about it.

Resources:

Click here, here and here for a selection of past posts on the FTC-Whole Foods-Wild Oats merger issue in Natural~Specialty Foods Memo.

6 comments:

Paige said...

Hey, Whole Foods Market here. We want to share our point of view with your readers. We are reading and listening to your concerns so we hope you’ll be open to reading ours.

The last year has been something of a nightmare for the administrative team members here who have been jumping through hoops to meet requests from the FTC. While our customers, our competitors’ customers, industry insiders and merger experts all seem to agree that customers have not been adversely affected by the Whole Foods Market/Wild Oats merger, the FTC continues to press their case forward.

While we would love to see this whole issue go away, we have no option but to defend ourselves against the FTC's ongoing effort. We know that New Seasons and many other fine natural foods stores are serving their customers well and that those customers, like ours, continue to have ample choices even after our merger with Wild Oats. Since the FTC insists that we have harmed these markets, we have to defend ourselves by showing that these markets are doing well. Part of our defense is based on gathering information from third parties through subpoenas, mostly from competing retailers but also from some vendors who supply Whole Foods Market.

We have not singled out New Seasons. Rather they are one of 96 companies (stores and vendors) that our outside legal counsel has subpoenaed. Why so many? The FTC has targeted Whole Foods Market in 29 different markets, and we must now defend against the claim that we do not face substantial competition from other supermarkets in all of these markets.

If we could defend ourselves without gathering information from competitors, we would. We don’t appreciate being put into this situation by the FTC. This is absolutely NOT an attempt to look into competitors’ information. In fact, no one inside Whole Foods Market will look at this information at all – only our outside counsel and their consultants are authorized to see the information gathered due to the FTC’s protective order. For those non-lawyers reading this, subpoenas and protective orders are a standard part of litigation practiced in virtually every antitrust case in the United States. The protective order prohibits any of this information from being shared with any Whole Foods Market team member, including in-house legal counsel. And while we understand that some of you will have trouble trusting the government system of protective orders, we give you our word that Whole Foods Market will not breach that trust.

We find it very unfortunate that the FTC’s ongoing pursuit to affect our merger (which was consummated more than a year ago) continues to be burdensome to Whole Foods Market, other stores like New Seasons, and U.S. taxpayers. We know the New Seasons and Whole Foods Market customers are a dedicated, caring group of people. We thank you for your concern for your local stores. Know that while we may not always see things eye to eye, we are working toward the same goal – making the world a better place through food choices.

(Posted by Whole Foods Market team member Paige Brady.)

Natural~Specialty Foods Memo said...

Thanks Paige for your contribution.

What we are all about is dialogue, including yours.

Glad you at Whole Foods Market, Inc.have been following our more than year-long argument (via numerous pieces in the Blog) about the folly of the FTC's legal argument.

We understand Lanny Davis, former counsel to President Bill Clinton, has been retained as a member of the Whole Foods legal team.

Since, as you know, there will be changes made to the FTC once President-elect Barack Obama takes office in late January, it is our hope, using the well-connected Mr. Davis, that Whole Foods' legal team can appeal politically as well as due battle legally, regarding this ongoing FTC saga.

With all of the crisis' (multiple plural) facing the incoming administration, having the FTC waste its legal talent and taxpayers money pursuing the Whole Foods-Wild Oats matter is folly, in our analysis.

Therefore, we do hope Whole Foods is pursuing this political track as well.

In addition, should such a track bear fruit, resulting in say the FTC dropping the entire matter upon the new administration's taking office before the February hearing,it would make moot all of the gathering of this data from the numerous natural foods retailers.

Sincerely,
Natural~Specialty Foods Memo

Brian Rohter said...

Brian Rohter of New Seasons responds to Paige and Whole Foods on New Season's blog as follows:

"Paige Brady from the Whole Foods corporate office has posted here on our blog explaining their perspective on this situation. We appreciate her gumption and are thankful for her kind words about our company and our customers.

Also, Whole Foods just put out a press release, saying most of the same things as Paige and assuring us that we have nothing to fear if we’re forced to turn over all of our private information to them. I have to say that I disagree with their point of view.

Whole Foods says, “ . . . all responses are subject to an FTC-issued protective order. The protective order precludes any of this information from being shared with any WFM employee, including in-house counsel. Only outside counsel and their consultants can see this information.”

Sorry, but they’re leaving quite a bit out of that statement.

Just take a look at the history of Whole Foods actions. Last year, in the first round of this dispute, private information was subpoenaed from a bunch of grocery stores. All of those stores, including us, received the same promises of confidentiality—“only outside counsel will see these records, no employees of Whole Foods will ever see them, etc., etc”.

Then in the middle of that process, Whole Foods went to court to try to get all those same documents and files sent to their corporate headquarters in Austin, Texas so their in house counsel (the same one they’re talking about above that "will never see the private files") could look through them. Whole Foods position was, even though this attorney was an employee of Whole Foods and was on their “Leadership Team”, it was okay for her to see everyone else’s private data because she wasn’t engaged in “competitive decision making”.

Sound unbelievable? You can see for yourself at the FTC website. The link is http://www.ftc.gov/os/caselist/0710114/070620response.pdf You’ll find it on page 3. Why should we believe they won’t try that again?

And those “consultants” that Paige refers to above? Once they’ve looked through our information they’re not going to “unlearn” it. The very nature of their job means they carry things they’ve learned from one job to another. Will they ever work for Whole Foods again?

And that protective order? There’s no real penalty for violating it.

In their press release Whole Foods says, “It is important to understand that no competitor will be disadvantaged by complying with the subpoena . . .”

Sorry again, but that’s incorrect. Aside from the issues we’ve already talked about, our lawyers are telling us that it may cost us between $250,000 and $500,000 to comply with all the requirements of the Whole Foods subpoena. That may not be a huge amount of money to a company the size of Whole Foods, but to us it is a fortune.

So as much as we’d like to just say, “No worries. Let’s all just get along”, in this instance we don’t see how we can do that. Whole Foods has the ability to make this problem go away. We hope they do."

Natural~Specialty Foods Memo said...

Thanks for your contribution Brain Rohter.

If you check the top of the Blog -- www.naturalspecialtyfoodsmemo.blogspot.com -- you will also see we published your response as a full piece yesterday.

Anonymous said...

NSFM,
Excellent work as always.
Good to see the responses from Rohter and the WF's hack.
I've been looking for the list of the other 95 markets that got subpeonaed? Any clues?

Anonymous Seattle

Anonymous said...

I'm a broker in the industry and have heard Sunflower Farmers Market, Sprouts, Henry's and Mrs. Green's Natural Markets have received subpoenas.