Monday, January 12, 2009

Retail Memo: FTC Asks Judge to Force Whole Foods to Put Most of the Wild Oats' Genie Back in the Bottle Pending A Resolution of its Merger Challenge

FTC v. Whole Foods Market, Inc.

The ongoing legal battle and saga between the U.S. Federal Trade Commission (FTC) and Whole Foods Market, Inc. took a serious turn today when the FTC filed a brief asking U.S. Federal Judge Paul Friedman to order a complete halt to the integration of Wild Oats into Whole Foods (and more), a process that after more than 18 months since the 2007 merger is nearly completed. Whole Foods-Wild Oats: Two peas in a pod no more if the FTC gets its way from the judge.

The FTC says in its motion it wants the federal judge to force Whole Foods to stop any further integration activities while the multiple disputes between the regulator and the natural grocer over its acquisition of Wild Oats is handled in court. Judge Friedman is currently preparing to rule on motions filed by the FTC regarding the acquisition/merger, along with ruling on Whole Foods' lawsuit against the FTC in which the natural grocery chain is asking that the entire issue be removed from FTC jurisdiction and settled in Judge Friedman's federal courtroom.

The FTC said in its legal filing that the request is "appropriate, and reasonable" to preserve the assets of Wild Oats until the conclusion of the hearings.

This is the trifecta of pain the FTC wants to put Whole Foods Market, Inc. through: It wants the judge to order Whole Foods to rebrand (change the signs on the stores) the about 100 Wild Oats stores it's converted to the Whole Foods banner back to Wild Oats. It's legal filing also asks the judge to order Whole Foods to stop converting any remaining Wild Oats banner stores into Whole Foods. There still are a few left to be converted. Lastly, and most ominous for the natural grocer, The FTC wants former Wild Oats stores now operating as Whole Foods locations to be put in the hands of a third party, and their original signs returned, until its challenge to the merger is resolved.

The federal regulatory agency said in its filing today that if the judge rules that it has a strong enough case, it's likely it will attempt to unwind the entire merger and force Whole Foods Market, Inc. to establish Wild Oats as a standalone company and operate it that way.

The FTC has set a trial for April before an agency-picked Administrative Law Judge in which the fate of the deal is to be determined. Whole Foods' lawsuit before U.S. Federal Judge for the District of Columbia Paul Friedman asks, among other things, for that hearing to be cancelled and the FTC to be removed from determining the legal status of the merger. Instead Whole Foods wants the judge to hear the case and decide on the deal once and for all.

It appears to Natural~Specialty Foods Memo that the dramatic legal move today is the FTC's response to Whole Foods' lawsuit, which it filed in early December, 2008, as well as the natural grocer's high-profile lobbying and public relations campaign against the FTC, which we've reported on and written about extensively.

In other words, the gloves are now completely off on both sides.

Whole Foods Market CEO John Mackey shot back at the FTC today through a spokesperson and through his legal counsel, calling the FTC's request "absurd" and saying the process of integrating Wild Oats is done.

"They want us to put the toothpaste back in the tube," lead Whole Foods Market, Inc. attorney, uber-Washington, D.C. lawyer, and friend of the (Bill and Hillary) Clinton's Lanny Davis said in a statement late today. "How can you halt something that is already done?"

If the judge rules in the FTC's favor and orders Whole Foods to change the 100 or so stores back to the Wild Oats banner, stop any further integration of the few remaining stores, and to place what was Wild Oats in the hands of a "third party" as requested in the regulator's court filing today, it's our analysis that doing so would basically be the death of Whole Foods Market as you know it, a retailer that's already near death's door in so many ways.

Those ways include: a loss of income of about 42% in its last quarter; a drop in the value of Whole Foods Market, Inc. stock of about 75% in the last year; an ongoing erosion in sales, customer counts and store customer market basket purchase sizes because in the current, severe recession shoppers are trading down; and growing competition from discount-priced natural foods retailers like Sunflower Farmers Market, Sprouts Farmers Market and others, as well as increased competition from mass merchandisers like Wal-Mart, Costco and Target and supermarket chains, all increasingly selling natural and organic foods, in most cases for less than Whole Foods Market does.

We see the FTC's demands as both unrealistic -- the merger is near completed for heavens sake -- and draconian -- the financial cost of doing what the FTC is asking in this severe recession and financial/credit crisis environment amounts to basically wishing a bankruptcy filing on Whole Foods Market, Inc., or at best forcing the company to fire hundreds or even thousands of employees as a way to conserve cash; cash it will need to do the expensive things contained in the FTC's filing.

We don't like to make predictions but we must: Judge Friedman has shown himself to be a fair and even-handed judge throughout the FTC-Whole Foods legal saga since the summer of 2007 when the case was assigned to him. Therefore, it's our belief that the judge will deny all or most of the requests being made by the FTC. However, we think he might grant one, which is that Whole Foods cease any further integration of remaining Wild Oats stores into Whole Foods. But even doing that would be difficult. Why? there's no Wild Oats entity anymore. It exists essentially only in FTC world.

Of course, we could be wrong. And if we are, and if the judge were to rule completely in favor of the FTC on its filing today, we expect a drop in Whole Foods' stock share price that will be so dramatic that it could likely render the value of the retailer so low that its new, major stockholders -- supermarket industry magnate Ron Burkle, who like Lanny Davis is a BFF of the former first family (particularly Bill Clinton), and the private equity firm Leonard Green & Partners, L.P., get together and engineer some sort of an acquisition of Whole Foods Market, Inc.

Leonard Green & Partners acquired 17% of Whole Foods Market, Inc. for $425 million on December 2, 2008.

Legendary supermarket industry investor Ron Burkle, who as a major investor (he held an 18% stake in Wild Oats at the time of Whole Foods acquisition) and board member was the driving force from the Wild Oats corporate side behind the merger with Whole Foods in 2007, revealed in a filing with the Security and Exchange Commission last Thursday that his Yuciapa Companies investment firm, which counts among its investors the once poor-as-President but now multi-millionaire (thanks in part to Burkle's efforts on his behalf) former President Clinton, bought a 7% stake in Whole Foods Market, Inc.

Burkle, a billionaire, is an activist investor. He made his fortune over a two-decade period primarily by buying supermarket chains and combining them, resulting in his ultimate deal, which was the sale of his huge supermarket holding company to Kroger Co. in the 1990's for billions of dollars.

Private Equity firms like Leonard Green & Partners and activist shareholders like Ron Burkle (his Yuciapa Cos. is essentially a private equity firm) both play the same endgame -- they acquire stakes in company's, get involved in how those companies operate, and eventually look for an exit strategy that makes them a substantial profit. This most often involves a merger or acquisition.

Mark our words, with Leonard Green & Partners and Ron Burkle now holding a combined 24% ownership stake in Whole Foods Market, Inc., the natural foods grocery chain, whatever the outcome of the FTC legal case, will not end up being the same company a couple years from now (or in less time) than it has been historically or is today. After word got out on Thursday that Burkle took a 7% stake in Whole Foods, the natural grocer's stock shot up by 23% above its previous day's share price.

Meanwhile, FTC v. Whole Foods Market, Inc. continues. Stay tuned.

Natural~Specialty Foods Memo (NSFM) Linkage:

>In this story [Retail Analysis Memo: Growth and A Tale of Two Retailers-Tesco and Whole Foods Market: Is One Ripe For Acquisition and the Other Ripe For Acquiring?] on August 16, 2008 we suggested Whole Foods Market, Inc. could (then) be ripe for an acquisition. Nearly five months later, and in much more dire straights, we think the probability is even higher that it is. The only limiting factor: Does anybody want Whole Foods in Today's economic climate? Not to mention it's little FTC problem as well.

>Linked below are a couple past stories from Natural~Specialty Foods Memo (NSFM) about billionaire supermarket industry investor Ron Burkle:

~Food & Politics Memo: Billionaire Supermarket Industry Investor Ron Burkle Makes Millions For The Clinton's Post-Presidency

~Retail Memo: [Heard on the Street]: Will SuperValu, Inc. Be Supermarket Industry Investor Ron Burkle's Next Play

>More on Ron Burkle: Click here to read a piece from August, 2007 about Burkle and the Whole Foods-Wild Oats deal. As a note: NSFM has been the only publication we found to suggest in the past that we could see Burkle making a major investment in the combined Whole Foods-Wild Oats. He did just that on Thursday, January 9, 2009.

Supermarket chains v. Whole Foods: The FTC is so "1986" when it comes to understanding the food and grocery retailing industry in the U.S.:

>Our argument regarding why the FTC is wrong in its legal case in which it is claiming that a combined Whole Foods-Wild Oats is a monopoly in what it calls the natural and organic premium retailing segment basically boils down to this: such a classification by the FTC is a fiction because it is irrelevant to the reality of the retailing of natural and organic products in the U.S. today in which retailers of all types and formats -- from Wal-Mart, Target, Costco, Safeway, Kroger Co., Trader Joe's, regional supermarket chains, independents and even, to fast-growing natural foods chains like Sunflower Farmers Market and Sprouts Farmers Market and many others -- all are battling it out in the category arena.

In August, 2007 we wrote this piece [Will the Big 3 Supermarket Chains Challenge Whole Foods in its Niche? Our answer today: Yes, in the 17 months since we wrote the piece the "Big 3" have increased their merchandising in the natural and organic foods categories significantly. For example, at the end of 2008 sales of Safeway Stores' "O' Organics" organic products store brand was over $500 million in its 1750 supermarket in the U.S. and Canada. Four years ago the brand didn't even exist.

Additionally, on the market for just a bit over a year, Safeway's "Eating Right" healthy foods brand has over $200 million in annual sales. Such sales doesn't come only from new customers. Rather, most of it comes from stealing other retailers' and manufacturers brand sales. A significant share of these new stomachs for the Safeway brands comes from consumers who used to buy like products at Whole Foods Market stores.

More NSFM Linkage:

Natural~Specialty Foods Memo reported extensively on, wrote about and offered analysis on the FTC v. Whole Foods issue and related topics in December, 2008. Below is a linked bibliography of all of our December stories and posts:

December 29, 2008: Retail Memo - Breaking News: New Seasons Market Doesn't Turn Over Trade Secrets to Whole Foods Market Despite Deadline to Do So Being Today....December 29, 2008: Independent Grocer Memo: Natural-Organic, Local, Fresh and Premium Keys to Pacific Northwest USA's Haggen Foods; Now Adding Value....December 28, 2008: Retail Memo: Web Site and Blog-Driven Viral Boycott of Whole Foods Market Stores in Portland, Oregon Region Going On; Could it Intensify?....December 28, 2008: Retail Memo: Tomorrow Deadline For Portland, Oregon's New Seasons Market to Turn Over Trade Secrets to Whole Foods Market's Legal Counsel

December 24, 2008: Christmas Eve Memo 2008: 'Twas the Night Before Christmas' - FTC v. Whole Foods Market, Inc. Version....December 24, 2008: Independent Grocer Memo: From Mrs. Gooch's to the Auto Body Business, Then Back to Retail, Chris Kysar is On A Healthy Organic Foods Retailing Roll....December 24, 2008: Retail Memo: It's 'Deja Vu All Over Again' - Judge Paul Friedman to Whole Foods Market, FTC: 'What's My Role Here?'....December 23, 2008: Retail Memo: FTC Postpones Scheduled February 16 Administrative Hearing on Whole Foods-Wild Oats Deal Break-Up Until April 6, 2009....December 23, 2008: Independent Grocer Memo: National Grocers' Association Asks President-Elect Obama to Look Out For Independent Grocers When He takes Office in January....

December 22, 2008: Retail Memo: Only Slightly More Than Half the 93 Natural Foods Retailers Issued Subpoenas By Whole Foods in its Case against the FTC Have Complied.... December 22, 2008: Retail Memo: Whole Foods Market Wants to Depose and Obtain Internal E-Mails From FTC Commissioner, Suggesting Possible Conflict of Interest Situation....December 22, 2008: Retail Memo: At Hearing Today Judge Tells FTC to Provide Road Map of How Whole Foods Could Take About Merged Companies Should Ruling Go In its Favor....December 19, 2008: Retail Memo: Whole Foods' Lobbying Effort Baring More Fruit - House Committee Leaders Send Letter to FTC Chair Similar to One Sent By Senate Leaders....

December 18, 2008: Retail Memo: 'This Isn't Over Yet' - New Seasons Market CEO On Judge's Decision the Natural Gorcer Must Turn Over Trade Secrets to Whole Foods Market.... December 18, 2008: Retail Memo: The 'Whole Primary Source Scoop' -- FTC and U.S. Federal Court Documents on the FTC v. Whole Foods Market, Inc. Case....December 17, 2008: Breaking News: Judge Orders New Seasons Market to Comply With Whole Foods' Subpoena and Submit Sales Data, Financial Records and Other Trade Secrets....December 16, 2008: Retail Memo: Whole Foods, Wild Oats and Boulder, CO...And the Rocky Mountain News' Editorial Take On FTC v. Whole Foods Market, Inc....

December, 15, 2008: Retail Memo: Eight Members of U.S. Senate Judiciary Committee Send Letter to FTC Chairman Regarding FTC's Legal Case Against Wild Oats' Acquisition....December, 13, 2008: Retail Memo - Analysis & Commentary: More On FTC v. Whole Foods Market, Inc. and Whole Foods Market, Inc. v. FTC....December 9, 2008: Organics Category Memo: Wither Organics? Organic Food & Grocery Category Sales Down; But Double-Digit Growth Still Likley With Mass Market Lift....December 9, 2008: Retail Memo: Whole Foods Markets' 'Whole Legal Paycheck:' Three Top Washington, D.C. Law Firms Teaming Up On The Natural Grocery Chain's FTC Lawsuit....

December 9, 2008: Retail Memo: Whole Foods Market CEO John Mackey and Team Launch First Aggressive Attack Against the FTC's Legal Case at Press Conference This Morning....December 8, 2008: Retail Memo: Mr. Mackey (and the Whole Foods Market Troops) Goes to Washington....December 8, 2008: Retail Memo: Breaking News - Whole Foods Market, Inc. Files Lawsuit Against the FTC; Argues the Regulator Violated the Company's Due Process Rights....December 7, 2008: Retail Memo: New Seasons Market CEO Brian Rohter and Whole Foods Market Co-President Walter Robb Discuss and Debate the Subpoena Issue Online....

December 7, 2008: Retail Memo: New Seasons Market CEO Brian Rohter Speaks Out Again Today on the Whole Foods Market, Inc. Subpoena of His Company's Data....December 7, 2008:Retail Memo: Whole Foods Market Retains Top Washington D.C. lawyers and Politically-Connected Lobbyists to Plead its Case Against the FTC....December 6, 2008: Retail Memo: Fast-Growing and Scrappy Sunflower Farmers Market Ventures Deep in the Heart of (Whole Foods Country) Texas....December 6, 2008: Retail Memo: Fast-Growing NF Chain Sunflower Farmers Market Responds to Whole Foods Market, Inc. Subpoena For Sales, Financial and Related Information....

December 3, 2008: Retail Memo: More on the Whole Foods Market-New Seasons Market Subpoena Issue; FTC Holding Firm For February, 2009 Hearing....December 2, 2008: Retail Memo: Whole Foods Market, Inc. Closes $425 Sale of Stock to Private Equity Firm; Adds Members of the Firm to its Board of Directors....December 2, 2008: Retail Memo: Portland, Oregon-Based New Seasons Market CEO Brian Rohter Responds to Whole Foods Market's Paige Brady....December 2, 2008: 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....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.

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, including pieces about mass market and natural foods class of trade retail competitors.

[Note: Natural~Specialty Foods Memo holds no Whole Foods Market, Inc. stock at present.]

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