Sunday, January 25, 2009

Retail Memo: Judge Sets February Hearing Dates On FTC Motion That Could Result in Whole Foods Market Having to Rebrand 100 Former Wild Oats Units

News & Analysis:
FTC. v. Whole Foods Market, Inc. - A Major Motion

Judge Paul Friedman, who presides in the U.S. Federal District Court for the District of Columbia, has set a two-day hearing on his court's calendar -- February 17-18, 2009 -- in which he will listen to arguments from U.S. Federal Trade Commission (FTC) and Whole Foods Market, Inc. lawyers regarding the FTC's motion asking the court to rebrand all of the former Wild Oats stores Whole Foods has thus far integrated and changed to the Whole Foods Market name. Judge Friedman also plans to offer a ruling on the FTC motion shortly after the two day hearing next month.

We first reported in this January 12, 2008 piece [ 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] on the FTC's motion to Judge Friedman's court when the regulatory agency filed it.

In its legal filing the FTC asks Judge Friedman to rule in its favor on three key points:

>Order Whole Foods to rebrand (change the signs, ect.) the about 100 Wild Oats stores it's converted to the Whole Foods banner back to the Wild Oats banner.

>Put the operation of those rebranded stores in the hands of a third party.

>Order Whole Foods to stop converting any additional former Wild Oats stores into Whole Foods stores. Note: there are just a few of such stores left to integrate and convert.

points one and two are the most ominous for Whole Foods Market, Inc. should Judge Friedman rule in favor of the FTC's motion. Rebranding the about 100 stores already converted, which is nearly all of them except 6-12 former Wild oats units, would not only cost Whole Foods a substantial of money (did they save the Old Wild Oats signs, for example) but would essentially mean putting back together a format -- Wild Oats -- that didn't work all that well in the first place. It also would be a marketing nightmare as it would take away any benefits the stores have gained from the Whole Foods name and style of merchandising.

The FTC and some others may not be aware but when Whole Foods acquired Wild Oats in the summer of 2007 it was only after the Boulder, Colorado-based then minor rival to Whole Foods had shopped the company around all over to potential buyers, including the mega-supermarket chain Kroger, which took a pass on acquiring Wild Oats, as did all the others.

Point number two, which goes with rebranding the 100 or so already converted former Wild Oats stores, which is putting the operation of those stores in the hands of a third party, not only seems like a draconian request by the FTC -- one sure to cost Whole Foods lots of financial losses and loss of business at those stores -- but also one without any kind of clear road map.

What does Whole Foods do? Create a new corporate entity? After all, Wild Oats no longer exists as a corporate entity of any kind. Who would want to run it? Does doing so mean creating new finance, HR, marketing departments? A new President? (of this third-party entity). New buyers? Who would provide the employees at the 100 stores health insurance, something Whole Foods Market, Inc. pays 100% of for its employees? The third party?

And, would Whole Foods be forced to pay for all this? To fund the third party entity, including health insurance, ect.? We think so. It really might be better at that point for Whole Foods Market to just close those 100 stores and walk away. Take a write down. Sell the real estate when the economy improves. Or, ask the FTC to appoint a receiver to dispose of the "surplus" stores, arguing the costs of complying with the order are too massive to make keeping them profitable, which would be a real argument. Maybe even ask for a bailout? It's not unheard of these days.

Perhaps the FTC would be willing to run the 100-store former Wild Oats entity, taking a page from the U.S. Treasury Department which now owns huge chunks (and the best preferred stock in) of America's top banks like Citi and Bank America. Many economists think the next step for the Treasury Department is the nationalization of these banks because they now are asking for billions more. Perhaps the FTC should just nationalize the 100-store former Wild Oats entity. We bet Whole Foods would entertain a decent offer -- one as decent as Treasury gave the big banks -- for those 100 stores.

Regarding point three, Whole Foods' ceasing to further integrate any more of the former Wild Oats stores, that would be something Whole Foods Market, Inc. could live with without much grief. In fact, lawyers for Whole Foods told Judge Friedman last week that the natural grocery chain has voluntarily stopped integrating and rebranding any additional stores, along with agreeing to not close any more former Wild Oats stores until the case is settled.

We think that's a smart move in that it tosses a somewhat real and largely symbolic bone to the FTC in terms of the hearing in Judge Friedman's court on the three-part motion.

Plus, since lawyers for the FTC argue there are exceptions to the voluntary offering from Whole Foods, exceptions they say will allow the company to continue to integrate Wild Oats assets into the Whole Foods brand, ruling in favor of the FTC on just that one point would still be a "real" ruling by Judge Friedman for the FTC.

The judge's ruling?

Natural~Specialty Foods Memo (NSFM) is going to go out on a limb and offer what we think will be Judge Friedman's decision on the FTC motion.

We think he will grant the third point of the FTC's wish list, that Whole Foods' cease from rebranding and closing any additional former Wild Oats stores.

But we don't think the judge will grant the other two key points in the FTC's motion: That all of the former Wild Oats store so far rebranded be returned to the original Wild Oats' status, and that those about 100 stores be turned over to a third party entity to run them.

It's also possible that the judge could rule that the about 100 stores be rebranded, but still allow Whole Foods to operate them. If he does grant that aspect, we are rather certain he would do so in this way, based on close observation of how he has handled the case since the summer of 2007.

Of course we could be wrong on all counts.

If so, such a decision will be extremely costly for Whole Foods Market, Inc. at a time when the value of the company has decreased by a whopping 70% since its friendly acquisition of Wild Oats -- a deal Whole Foods' CEO John Mackey now says publicly he would never do over. Like Whole Foods Market's lead outside legal counsel Lanny Davis has sais, in a different context though, "You can't put the toothpaste back in the bottle."

In our analysis, rebranding the stores and turning the operations over to a third party does nothing to further the FTC's case.

What it does do though is give the FTC a de facto temporary victory in breaking up the merger. Why? Because were Whole Foods have to rebrand these 100 stores, then later if it wins the case, change them back again to Whole Foods stores, the cost of doing so, and the loss of customer goodwill would likely result in Whole Foods' ending up getting rid of or closing a number of these stores because of the extensive costs from all of the rebranding and the loss of business during the process.

This motion makes no sense other to to play hardball with Whole Foods. Judge Friedman, who originally issued the ruling in favor of Whole Foods that gave the natural grocer the green light to go forward with the integration process, has played it pretty fair throughout this long process, in our analysis. Therefore it would surprise us if he ruled in the FTC's favor on the two draconian aspects of the regulator's motion -- the rebranding of the about 100 former Wild Oats stores, now changed to Whole Foods, back to the Wild Oats name and their placement with a third party to operate them.

But it's merely our analysis and opinion. It won't be until after the February 15-16 hearings until we know what Judge Friedman's actual ruling will be. And for Whole Foods Market that ruling has profound consequences as it prepares for the April 6, 2009 trial on the merger to be held by an FTC Administrative Law Judge in Washington, D.C. It also has profound consequences for the natural grocer's everyday operations. Stay tuned.

1 comment:

KevininDC said...

This entire case seems like a great waste of time for the FTC. When it comes to the larger picture of food shopping what percentage of people really shop at Whole Foods compared to supermarkets, Wal-Mart, Costco, ect.? Whole Foods has less than 300 stores. So what's that percent? Maybe 2% of Americans shop at its stores? That's probably stretching it. You can get most organic groceries and even some meat and produce at Trader Joe's for alot cheaper than Whole Foods. I can get O' Organics at Safeway. Kirkland organic groceries at Costco. All cheaper than at Whole Foods. And I do. This basically leaves Whole Foods for some goodies. As I watch the economy crumble, 73-k jobs hacked yesterday alone, I wonder what the FTC is thinking on this one.