Friday, February 27, 2009

Daily Memo: Whole Foods Market - FTC Settlement Deal Watch - Countdown to March 6

The week has come to an end without a settlement deal being reached by Whole Foods Market, Inc. and the U.S. Federal Trade Commission (FTC) over the FTC's legal challenge to Whole Foods' 2007 friendly $565 million acquisition of Wild Oats Market, Inc.

The two parties will take the weekend off from the settlement talks and resume them on Monday, March 2, 2009. (Remember, February only has 28 days.)

The FTC has set March 6 as the day when its current halt of legal proceedings regarding its attempt to overturn the merger ends. The federal regulatory agency can extend its halt if it so desires.

However, the FTC has set April 6, 2007 as the start date of its administrative trial at which an Administrative Law Judge chosen by the U.S. federal government agency responsible for antitrust issues and consumer protection will hear arguments from both sides regarding the 2007 acquisition. Plans are that after the end of the trial, the Administrative Law Judge will make an administrative ruling on the status of the now nearly 100% combined Whole Foods-Wild Oats.

It's been about 18 months since the deal was done. U.S. Federal Judge Paul Friedman ruled in Whole Foods Market, Inc.'s favor nearly a year ago, giving Whole Foods the green light to merge Wild Oats into its operations and rebrand the former Wild Oats' stores to Whole Foods -- a ruling that was later overturned by a federal appeals court -- which is why the two parties are where they are today.

All but about 6-10 of the former Wild Oats stores have been rebranded to the Whole Foods banner. After selling off some of the stores after the acquisition, most notably the then Wild Oats'-owned Henry's stores in Southern California (26 stores) and Sun Harvest stores (9) in Texas -- which were bought from Whole Foods Market, Inc. by Los Angeles, California-based Smart & Final LLC -- along with closing a few of the Wild Oats banner stores, Whole Foods is left with about 100-110 former Wild Oats stores, all bought the handful mentioned above now integrated into Whole Foods' culture and operations.

When the Whole Foods Market-FTC. settlement negotiations start-up again on Monday morning, March 2, there will only be five full business days left until March 6, the date the FTC plans to end its halt of legal proceedings regarding the merger.

The FTC initiated the halt after outside legal counsel for Whole Foods Market, Inc. came to the regulator with a settlement proposal from the company in January, 2009. The initial halt, which was to have ended earlier this month, was extended to march 6 by the FTC as a good faith gesture designed to give both parties some "breathing room" in the settlement talks.

We believe both parties are motivated to reach a settlement deal rather than go to trial on April 6. The question remains: Can they collectively come to an agreement-settlement that satisfies the needs and requirements of both parties this late in the game?

FTC. v. Whole Foods Market: News & Notes

Fear & Loathing in the Texas Congressional delegation: The 'silence of the pols'

Whole Foods Market, Inc., which had gross sales in 2008 of $8 billion, is headquartered in Austin, Texas, it's hometown since 1980 when the very first Whole Foods Market natural foods store was opened in the city.

The company is ranked as the 21rst-largest food and grocery retailing chain in the U.S. by the supermarket industry trade publication Supermarket News, which each year ranks the 75 top food and grocery retailers based on total annual sales, regardless of format, in the U.S.

Whole Foods' is a major corporate citizen and employer in Austin and throughout the state of Texas. The natural grocery chain currently operates 278 stores in the U.S., Canada (6 stores) and the United Kingdom (5 stores). Of those 267 Whole Foods stores that are in the U.S., 16 are located in the state of Texas, the natural grocer's home state

Three of the 16 Texas natural foods markets are located in Austin, including Whole Foods biggest store, it's flagship, Austin natural foods emporium that's over 80,000 square feet in size. [Click here for a full list of Whole Foods' Texas stores.]

Whole Foods Market currently has five new stores in various stages of development in Texas.

In other words, with $8 billion in annual sales, its corporate headquarters in Austin, and 16 current and five new stores in development in Texas, Whole Foods Market, Inc. is an important company for Texas in terms of job creation, tax generation and revenue, and corporate philanthropy, among other benefits of having it located in the state.

One would think so at least. But we just have to ask: Where are Texas' two United States Senators and its 32 members of the U.S. House of Representatives when it comes to speaking out for Whole Foods Market, Inc. on the FTC. v. Whole Foods Market, Inc. legal case? The answer: basically silent.

Are they "for it (the merger) or are they agin' it (the FTC's challenge)," as they like to say in Texas? One should expect some rather vocal public show of support for the local grocery chain in this battle, shouldn't they? We've been listening closely for a long time and haven't heard it.

We've been covering the issue closely since the summer of 2007, and even more closely since November of 2008, when things started heating up again, to the present, where the heat is even hotter. In this time we have not been able to find one of Texas' 32 Congress members, including those from Austin, Whole Foods' hometown, who has taken a strong, public stand on the issue and spoken out regularly on the FTC's legal attempt to overturn the deal.

[You can view a complete list of all 32 members of Congress from Texas here. The list includes links to their e-mail addresses. So if you want to ask them where they stand on FTC. v. Whole Foods and why they haven't spoken out on it, just click the little folder at the bottom of this post and you can e-mail the story to them.]

The two Senators from Texas, John Cornyn and Kay Bailey Hutchinson, both Republicans, haven't said anything we can find, and certainly not in any significant public way, about the FTC's continued attempt to overturn the acquisition of Wild Oats Market, Inc. by one of their state's leading corporate citizens, Whole Foods.

Since Whole Foods Market, Inc.'s growth means more jobs in Texas, more taxes paid by the corporation, and other related things favorable to Texas, one would think the state's Senators, especially since both are Republicans who are self-stated strong anti-government regulation types, would speak out in favor of Whole Foods Market and urge the FTC to reach a settlement with their home town grocer wouldn't you? [Click here for information on the two Senators from Texas.]

This should have particularly been the case since the FTC launched the challenge in 2007 when a fellow Republican, George W. Bush, was President. President Bush just left office at the end of January. But then it's the two Republicans on the FTC who have been the most aggressive in wanting to break-up the merger. So, go figure.

Austin, Texas, where Whole Foods Market was founded and is headquartered, is in Texas' 25th Congressional district, which is represented in the House by Democratic Congressman Lloyd Doggett.

Congressman Doggett has been near as silent as one can be in public office about the FTC. v. Whole Foods Market, Inc. case. We find that rather strange. For example, take a look at his House Web site here. There's lost of news about issues dear to his heart but not one thing we could find about the FTC-Whole Foods issue, which is currently at his high point and affects his home city of Austin. Doggett was born in Austin and still lives there.

Neither Texas Senator has said much of anything about the FTC's 18-month challenge to Whole Foods friendly 2007 acquisition of Wild Oats Market, Inc. Since Whole Foods' spend $11 million alone in its first quarter of this fiscal year, and many millions more since the FTC challenge in 2007 started, millions the natural grocery chain could have used to hire employees in Texas, for example, you would think the company's biggest defenders would be the two Republican Senators from Texas, along with Congressman Doggett and the other 31 members of the House of Representatives from Texas.

We now some of the members of the Texas delegation have been working the issue from a lobbying perspective on Capital Hill among fellow members. But we also know many of the members from Texas have done little or nothing regarding the case. And we can't find one who has taken a strong position against the FTC's legal challenge and spoken out against it on a regular and sustained basis, such as appearing on the cable news channels, talk radio and the other normal venues members of congress always use when they want to make a point and influence regulatory agencies, the press, fellow politicians and the public.

Not even former Republican candidate for President and Congressman from Texas, Ron Paul, who like Whole Foods Market, Inc. CEO John Mackey is a Libertarian, has spoken out in any way in public about the FTC challenge to his home state grocer, which is really odd since Paul is arguably the leading elected official in Washington against excessive government regulation, not to mention the fact he represents people who work at Whole Foods stores in Texas.

The "Silence of the Texas Delegation" is indeed odd to us. It's not like they are shy people after all. And its not like Texas couldn't use a few more new jobs that a combined Whole-Foods, or even a healthier Whole Foods Market, Inc., will bring it.

You can bet if Whole Foods' was based... let's see... say in California, where it currently operates 53 stores -- three times as many as it has in Texas -- and has 20 new stores in the development pipeline, that Democratic Senator Barbara Boxer, a Whole Foods Market shopper in Washington D.C. and at home in Marin County, and Senator Diane Feinstein (also a Democrat -- who's husband, financier Richard Blum, has been known to comb the aisles of the Whole Foods Market store on California Street in the city not just as a shopper but also to get ideas for investments by looking at products on the shelves -- would be speaking out publicly and strongly in favor of Whole Foods' and against the FTC, even if they were lukewarm on the whole thing -- without a doubt. It's called good constituent service, not to mention job savings and creation.

We also are willing to bet that if the Colorado Congressional delegation, especially those members representing the city of Boulder and the surrounding metropolitan region, which lost Wild Oats' corporate headquarters after Whole Foods acquired the company, thought it possible that Whole Foods Market, Inc. might be interested in moving its corporate headquarters to Boulder, there would be no 'silence of the pols" like is the case with the Texas delegation.

We think that's food for thought for Whole Foods Market, and the members of the Senate from Texas, and the Texas Congressional delegation.

By the way, what's really with the Texas Congressional pols' and their silence vis-a-vis the FTC's ongoing attempt to break up the Whole Foods Market acquisition of Wild Oats?

Maybe they agree with the FTC?

Are the Republicans afraid to look soft if they support crunchy Whole Foods?

What about Democrat Doggett, the Congressman from Austin? He should have been on CNN's Larry King and MSNBC (and Fox News if they let him on) talking up the issue last year when the FTC got tough again. He wasn't there. He didn't do it. Too late now.

It's hard to know the answers though -- because of the "silence of the Texas pols" on the FTC. v. Whole Foods Market legal case and issue.

Leibowitz is in as new FTC Chairman

On Tuesday, February 24 we reported in this piece [Retail Memo - Breaking: FTC Commissioner Jon Leibowitz Odds On Favorite to Be Named Chairman; Positive Development For Whole Foods' Settlement Talks] that current FTC Commissioner Jon Leibowitz, the only Democrat out of the current four sitting FTC commissioners, was a lock to be named by President Obama to head the regulatory agency, replacing the current Republican Chairman. We also said President Obama would likely announce his decision by the end of this week.

Yesterday (Thursday, February 27) in our Daily Memo: Whole Foods Market - FTC Settlement Deal Watch - 9 Days to March 6 column we wrote this item:

"On Tuesday in this piece [Retail Memo - Breaking: FTC Commissioner Jon Leibowitz Odds On Favorite to Be Named Chairman; Positive Development For Whole Foods' Settlement Talks]we wrote that current FTC Commissioner Jon Leibowitz, a Democrat, appears to be a lock as the new chairman of the regulatory agency. We said President Obama was likely to make the announcement before the end of this week. We are told by our sources the President will do so tomorrow. But President Obama is a rather busy President these days, so it might not happen on Friday. However, we continue to believe Leibowitz is the man."

Today, Friday, February 28, a spokesperson from the White House press office told correspondents that cover the White House that Jon Leibowitz indeed is President Obama's choice as the new FTC Chairman. The spokesperson said a formal announcement would be coming next week.

We made it by the skin of our teeth in terms of saying the choice would be announced by the White House by the end of business today. We will have some analysis on Mr. Leibowitz being named the new FTC Chairman as it relates to FTC. v. Whole Foods Market, Inc. next week. Stay tuned.

Friday Foodie Feature Memo: Brand Emeril (Lagasse) to the Rescue

Emeril Lagasse is a one man tour-de-force in the food world. He's a successful restaurant owner and chef, cookbook author, television cooking show host, appears on ABC's Good Morning America as the show's resident foodie, speaks to groups throughout the world about food and cooking, and is a specialty foods and gourmet cookware entrepreneur, who markets his Emeril's brand of specialty food products, which includes sauces, marinades, coffee, cooking spray, mustard, salad dressings, salsas, seasonings, spices, rubs, and his Emeril line of cookware and related kitchen gadgets.

He also has a line of Emeril brand food-related apparel, plus a corporate and consumer gift item line in which he includes bits and pieces of all of the branded products in his empire.

The Emeril brand of specialty foods are sold online, at supermarkets, and at specialty and natural foods stores.

Emeril's cookware and kitchen gadget line-cooking tools line,which has been one of his fastest-growing product line extensions, also is sold online, as well as at numerous medium-range -to- higher-end department and home-centered stores.

When it comes to the world of food and cooking, it's safe to say Emeril understands the term "line extensions." He's got the home kitchen -- from pantry, stove top and counter top to what the home chef wears to cook, and the recipes she uses to cook from -- covered.

But even Emeril and his marketing staff likely couldn't have thought about the latest line extension in the Emeril brand portfolio, or rather the new use a woman found for one of the celebrity chef and specialty foods entrepreneurs gourmet cookware line cooking pans.

A woman who is a big fan of everything Emeril, from his cookbooks and television shows to his branded specialty foods products -- and especially his cookware -- created a brand new use for one of those Emeril frying or saute pans recently -- and it was a spur of the moment brain storm.

You see, an intruder broke into her home and surprised her. But she in turn surprised him back by taking one of Emeril's cooking pans and beating the intruder over the head with it, thereby proving not only that cooking pans have more than one use, but also that Emeril's pan meets the stress test -- the handle did not fall off when she used it to club the intruder.

But enough said: A picture, as they say, is worth a thousand words. So feel free to view a video of the woman using one of Emeril's pans to fend off her household intruder. It's Friday after all, we can lighten up a bit.

Click her to watch the video.

We bet the woman is now one of Emeril's best customers. But we wonder: When she used the Emeril brand cooking pan on the intruder, did she also used the celebrity chef's famous tagline? That famous tagline -- "BAM!" of course.

Thursday, February 26, 2009

Daily Memo: Whole Foods Market - FTC Settlement Deal Watch - 9 Days to March 6

There was no announcement at the end of business today, Thursday, February 26, 2009, regarding a settlement deal between the U.S. Federal Trade Commission (FTC) and Whole Foods Market, Inc. on the FTC's legal challenge to overturn Whole Foods' 2007 friendly acquisition of Wild Oats Market, Inc.

The FTC halted its legal proceedings in its ongoing case against the deal until March 6 while the federal government agency responsible for antitrust and consumer protection issues and the Austin, Texas-based natural foods grocery chain hold talks designed to negotiate a settlement to the FTC's now about 18-month challenge to the merger.

While the clock is ticking towards March 6, the FTC could extend its legal proceedings halt beyond that date if it feels negotiations are promising but that all that's needed is more time to arrive at a settlement deal.

However, the FTC has an April 6 date set for an administrative trial in which an agency-appointed Administrative Law Judge will hear arguments from both parties on the acquisition-merger and at the end of the proceeding make a decision on the status of the combined Whole Foods-Wild Oats. Whole Foods has virtually completed integrating all but a handful of the Wild Oats stores into its culture and corporate operations, rebranding all but about 6-10 of the former Wild Oats stores that it hasn't sold or closed (about 100) to the Whole Foods brand.

[Read our first column of the countdown to March 6 here: Daily Memo: Whole Foods Market - FTC Settlement Deal Watch - 10 Days to March 6. The link also includes (at the bottom of the post) a compete bibliography of our recent coverage and analysis of FTC v. Whole Foods Market, Inc. from December 2008 to the present, as well as containing archival links to past stories from NSFM on the topic and issue going as far back as the summer of 2007.]

FTC. V. Whole Foods Market: News and Notes

A wise old Motley Fool:

The financial and investment publication "Motley Fool" appears to agree with Natural~Specialty Foods Memo's (NSFM) analysis and argument, which we've been making since August, 2007, that the FTC's 18-month challenge to Whole Foods Market, Inc.'s friendly $565 million acquisition of Wild Oats is folly.

Here's what Motley Fool writer Alyce Lomax wrote about the FTC. v. Whole Foods case in a general piece in the online publication on February 17, 2009 about government regulation and federal regulatory agencies like the FTC: "Regulators vs. reality: Meanwhile, I’ll bet we can all think of examples when regulators have done things that simply didn’t seem to make sense. How about the Federal Trade Commission’s bizarre and ongoing witch hunt against Whole Foods Market (Nasdaq: WFMI)? Whole Foods’ CEO John Mackey contended that the FTC asked for more documentation from his company when it was trying to acquire Wild Oats than it demanded when ExxonMobil (Nasdaq: XOM) hooked up. Meanwhile, the whole thing was absurd, since Whole Foods faces competition from everybody from Wal-Mart to Trader Joe’s."

Sounds about right to us.

[You can read the full piece, "The Trouble With Regulation, here.]

Whole Foods and its competitors:

The FTC's central antitrust argument regarding a combined Whole Foods-Wild Oats is that Whole Foods Market, Inc. now constitutes a monopoly in various U.S. markets in what the regulator calls the "premium natural and organic retailing segment (PNOS)." We argue this is wrong because the FTC-created category is non market reality-based and doesn't depict how natural and organic foods are retailed in the U.S. today.

That reality is that Whole Foods has plenty of competitors -- from fast-growing natural foods chains and independents to discounters like Trader Joe's, mega-discounters getting deeper into the categories like Wal-Mart, Costco, Target and others, mega-supermarket chains like Safeway Stores, Inc. with its Lifestyle format (1,750 stores in the U.S. and Canada), Kroger Co. and Supervalue, along with scores of big regional chains like Publix in Florida, H-E-B in Texas, Wegmans in New York, Raley's in Northern California and dozens more, topped off by scores of multi-store upscale independents and even more single store independents, all deep in natural and organic products merchandising and sales.

Three of those fast-growing natural foods class of trade chains agree with us based on their behavior. Those natural grocers -- Colorado-based Sunflower Farmers Market, Colorado-based Natural Grocers and Arizona-based Sprouts Farmers Market -- all are opening stores in Whole Foods Market stronghold markets throughout the Western U.S., taking the competitive battle right to the leader. These states include Colorado, New Mexico, Arizona, California -- and now Texas, where Whole Foods is headquartered, and where some might think it owns the natural and organic foods retailing market.

Not so. Sunflower Farmers Market just opened its latest Texas natural foods market right in Austin, Whole Foods' home town. It has, and is building, additional stores throughout the state. Sunflower now calls its Texas stores Newflower. The grocer hasn't confirmed it but the change from Sunflower in Texas (and it's just in Texas) to Newflower could be because there is a long time health foods store in the state that uses the Sunflower name.

Sprouts and Natural Grocers also have stores in Texas and plan more. Sprouts announced this week in fact it has just signed a lease for another Texas natural foods market. Sunflower-Newflower will be announcing shortly leases for two more new store sites in Texas, according to one of our sources.

Would these three fast-growing natural foods retailers really challenge Whole Foods on its home turf if they thought it was a powerful monopoly natural products retailer? Of course not. They are doing so for the complete opposite reason: They believe the Whole Foods Market business model and format is vulnerable to their smaller, fewer-frills, everyday low price formats, which is something all three of these Western U.S.-based chains have in common.
Maybe the FTC should just watch the market -- and the behaviors of Whole Foods Market's competitors? Just a thought.

FTC Chairman watch: Tomorrow?

On Tuesday in this piece [Retail Memo - Breaking: FTC Commissioner Jon Leibowitz Odds On Favorite to Be Named Chairman; Positive Development For Whole Foods' Settlement Talks] we wrote that current FTC Commissioner Jon Leibowitz, a Democrat, appears to be a lock as the new chairman of the regulatory agency. We said President Obama was likely to make the announcement before the end of this week. We are told by our sources the President will do so tomorrow. But President Obama is a rather busy President these days, so it might not happen on Friday. However, we continue to believe Leibowitz is the man.

Lanny Davis: The Zelig of Washington D.C.

Speaking of busy people, Washington D.C. lawyer (partner in the Orrick law firm) and Democratic Party major player Lanny Davis, who is the lead outside counsel and head lobbyist for Whole Foods Market, Inc., as well as the lawyer heading up the current settlement talks with the FTC for the natural grocery chain, (there are three Washington, D.C. law firms retained on the case) in its battle against the FTC., still has time not only to handle other clients for his firm, and to appear as an analyst at least once a week on CNN or Fox News (along with a few other projects), but he's also doing some Op Ed writing this week.

Davis, who was a fraternity brother at Yale College with former President George W. Bush, went to Yale Law School with former First Lady, Senator from New York and now Secretary of State Hillary Clinton, and has been best friends with her since then (including being one of her top advisers in her run for President last year), as well as serving as Special Counsel to Bill Clinton when he was President, is a volunteer with the Israel Project, an American nonprofit group that describes itself as being organized to get out facts about Israel to the media.

As part of that fact-communicating project, Lanny Davis wrote an opinion piece titled, "A Nuclear Iran; Just Suppose..." in Monday's (January 21) edition of the conservative Washington, D.C. daily newspaper The Washington Times. You might find his opinion and position on the issue interesting. [Click here to read the opinion piece.]

Independent Grocer Memo: New York's 7,000 Bodega (Small Grocery) Store Owners Say 'No' to Proposed 18% Tax Hike On Juice Drinks and Soda Pop

Sweet Grocery, pictured above, is a classic, old school Latino family-owned New York City bodega. The name bodega came from these classic stores, mostly started and operated by immigrants in the city's Latino neighborhoods. A distinctive design feature of an original bodega is the calssic metal sign like the one on Sweet Grocery above. Today the term bodega is used in New York City to describe a small grocery store regardless of it look. And most today look just like a typical urban, small grocery store looks. The photograph above was taken by New York City artist Josh Goldstein. His art is inspired by New York City's many bodegas. Josh Goldstien even has a Web site "BodegaNYC,' where he showcases and sells his bodega inspired art, and offers observations about the stores and the city. You can view the Web site and Josh Goldstein's bodega-inspired art here.

The "Bodega (small grocery store) Association of the United States," which is based in New York City and represents 7,000 independent grocery store owners in New York state, according to its Web site, most which independently own and operate small stores or bodegas in New York City, has joined a fast-growing coalition that's fighting New York State legislation that would slap an 18% sales tax hike on juice drinks and soda pop sold at food, grocery, convenience and other stores in the Empire State.

The anti-soda pop and juice drink tax-hike coalition called "New Yorkers Against Unfair Taxes," says it has thus far signed up 90 New York business and citizen's groups in its efforts to stop the proposed legislation. The coalition also says it has so far obtained the signatures of 5,400 New Yorkers in a petition drive it's launched to demonstrate voter opposition to the new tax. [You can view group's petition Web site at the link here.]

Today the anti-juice drink and soda pop tax increase coalition turned up the heat on its campaign in New York City by staging a rally at the Fine Fare supermarket, which is at 1239 St. Nicholas Ave at 172nd Street, in New York City. The store is a branch of the New York-based 50 store Fine Fare supermarket chain.

It's estimated there are about 25,000 grocery stores in New York State, the majority of which are small stores or bodegas, many averaging only a few hundred square feet in size. The highest concentration of those small, independently-owned grocery markets is in New York City. For those who've never visited the Big Apple, there are generally two or three, and often more, of these bodegas on every block.

Here's what Nelson Eusebio, the chairman of "New Yorkers Against Unfair Taxes," says about the "Bodega Association of the United States" joining the coalition: "The exorbitant cost of doing business in New York has already taken a major toll on the state's small supermarkets and neighborhood bodegas, with more than 2,300 bodegas closing over the past four years, representing a loss of more than 8,500 jobs. The inclusion of the Bodega Association of the United States is particularly significant, given its representation of more than 11,000 bodegas throughout the state of New York. (Note: the bodega association's Web site says it represents the interests of 7,000 grocery stores rather than 11,000. So we are using that number.)

Walking around most any neighborhood in the five boroughs, you will see an iron gate where a storefront used to be. In addition to the bodegas, more than one-third of our city's supermarket owners have had to close their doors in the past five years. I'm proud of the way New Yorkers have come together through this coalition to protect this industry and preserve our communities, and we will continue to press forward to defeat this tax," he adds.

Ramon Murphy, the president of the 7,000-member association of small grocery store owners says: "Every week a bodega closes down as a result of the current economic conditions, and this proposed tax could lead to even more family-owned businesses having to shut their doors forever," said Ramon Murphy, President of the Bodega Association of the United States. "We've joined the coalition to prevent this from destroying our livelihoods, and the communities built around these businesses."

The new, proposed 18% sales tax hike will be in addition to the sales tax New York state consumers already pay on the juice and soda drinks. If the legislation is passed, New Yorkers will pay about a 25-30% sales tax on the retail price of the drinks.

The "New Yorkers Against Unfair Taxes" coalition includes in its membership, in addition to the Bodega Association of the United States: The Food Industry Alliance of New York State, which represents supermarket chains and independents in the state; Gristedes supermarket chain; New York Association of Convenience Stores; New York State Restaurant Association, New York State Automatic Vending Association; which represents companies in the vending machine business; Coca-Cola Bottling Company of Buffalo, New York; Polar Beverage Company; Dan's Supreme Supermarkets, Inc., a chain of independent supermarkets in the state; Grocery Manufacturers Association, the national trade group for U.S. grocery product manufacturers; The Coca-Cola Company-Glaceau; National Restaurant Association; Hispanic Chamber of Commerce (many of New York's bodegas are owned by Hispanic Americans, particularly those of Puerto Rican nationality); National Puerto Rican Coalition; and numerous other associations and businesses, including many individual grocery stores and restaurants. [You can read a full list of the members on the anti-tax hike coalitions Web site here.]

New York's Democratic Governor, David Paterson, and the majority Democratic legislature in the state capital in Albany are struggling to find ways to cut expenses and raise revenues because of the state's massive budget deficit. Much of New York's tax revenue depends on Wall Street and the state income taxes paid by the highly paid financial services industry workers who work on the street, according to data Governor Paterson recently presented.

The financial industry crash, and all of the value taken out of the big banks and investment firms, combined with the many layoffs in the industry, have reduced New York state's income tax revenue by double-digit percentages. As a result, the Governor and the state legislature has cut tens of millions of dollars worth of programs, are cutting more, and are searching for new revenue by proposing tax increases like the 18% sales tax-hike on soda pop and juice drinks.

New York city's bodega owners are an important group and can be very affective politically in the state, particularly in New York City. Since they operate thousands of retail stores -- stores where the windows will be plastered with anti-juice drink and soda pop tax-hike signs and where daily the grocers can collectively tell tens of thousands of people about their anti-tax position -- the store owners will be a powerful "retail politics-oriented" force in the coalition's campaign to defeat the proposed legislation.

The anti-juice drink and soda pop tax-hike coalition is planning more rallies like the one held today at the Fine Fare supermarket. A major focus of the anti-tax hike campaign is to highlight what the coalition argues will be the loss of many more jobs at a time of massive job loss already in New York and throughout the U.S. if the tax hike passes.

Of course, the people of New York and the rest of the country want and need added services -- unemployment insurance, medical assistance, ect. -- because of the current unemployment situation.

And it is here where nobody has the answer: In this recession, states like New York and California (and many others) are going broke, hundreds of thousands of people are losing their jobs each month (perhaps 700,00 this month alone), and the demand for government services is way up but tax revenue is way down. There really are only two things state governments can do in some combination -- cut programs and thus expenses and raise revenue (taxes).

Unlike the U.S. federal government, most states in the U.S. can't borrow their way out of the mess because they have state laws that require them to balance the budget. New York and California both have laws that require this.

So it comes down to this: Does a state cut all of its vital services until it can balance the budget in these times when more and more people are demanding those services? Does it raise taxes, like with the juice drink and soda pop tax hike? Or does it try to do some of both: Cut programs as much as feasible and raise taxes in a way that focuses on things like consumption rather than payroll taxes or income tax.

That answer depends on where you sit, we suspect. And for New York's food and grocery retailers, they are sitting, actually standing most of the time, in the position of being the ones that feel they will be most impacted, along with the state's juice drink and soda pop drinkers, by the proposed 18% tax hike on the drinks. Therefore they oppose the legislation.

Supply-Side Memo: Dean Foods, Producer of White Wave, Horizon Organic and Silk Organic Is In the Tall Grass and Grazing For More

Dean Foods, which is the largest processor and distributor of fresh fluid milk and dairy products in the U.S., along with being one of the major players in the organic milk (fluid and soy) and natural-organic dairy products categories through its WhiteWave-Morningstar division, held an investor day today which was Webcast via the company's Web site. Some of the company's well-known natural-organic dairy brands are: Horizon Organic, Silk organic soy milk, WhiteWave dairy products and Rachel's Organics. [Click here for a list of all of the company's dairy brands.]

The purpose of Dean Foods' investor day and Webcast was to detail the company's new strategic plan for going forward. The company's natural-organic dairy divisions will play a major part in it's new strategic plan and direction.

Below are the three key planks of its new strategic plan that Dean Foods' executive team described at the meeting/webcast today:

~Dean Foods' said today it plans to extend its current low cost position in the dairy industry. "The first key component of the strategic plan, and the clear focus for the near term, is to reduce costs across the business and extend Dean Foods' low cost position in the marketplace," the company said today.

~Additionally, the company said it will focus on driving revenue and profit growth in its core businesses. "In the DSD dairy platform, the company says it plans to build on its core manufacturing and distribution strengths to continue to increase its market share and drive strong operating returns. This includes branded dairy products and private label.

At its natural-organic WhiteWave-Morningstar division, Dean Foods said it will focus on "leveraging and building upon the strong net sales growth of the branded portfolio to drive continued revenue growth and reignite segment operating profit growth."

~Finally, the dairy giant said it's going to "invest for growth in new capabilities and platforms to drive sustainable long-term growth." In other words its investing despite the current economic recession, at least in a prudent if not massive way.

Dean Foods' CEO Gregg Engles outlined this morning in the webcast a $300 million across the board cost-savings program the dairy processor, marketer and distributor will embark on over the next five years.

He said the majority of the $300 million in cost savings targets what the company calls its DSD Dairy Segment, which involves the production, marketing, distribution and sales of its branded fluid milk, soy beverage and related dairy products. These include the numerous brands under the WhiteWave-Morningstar natural-organic division.

[You can read a detailed summary of the company's specific cost-cutting plans designed to eliminate $300 million in expenses over five years here.]

Dean Foods' organic dairy brands -- Horizon, White Wave, Silk ect. -- have been a leading source of the company's growth since it acquired most of those brands. In the U.S., for example, Organic fluid cow milk and refrigerated, fresh soy milk have gone from mere micro-niche items sold primarily in natural foods stores just five years ago to near-mainstream items today.

Nearly every U.S. supermarket chain and independent grocer today offers organic fluid milk and refrigerated soy milk (as opposed to just the varieties in shelf-stable tetra packaging) for sale, devoting an increasing amount of dairy case display space to the products. Even many convenience stores, drug chain stores, discount stores and dollar stores are selling organic fluid and soy milk today.

Additionally, there's been an explosion in the amount of supermarket shelf space devoted to organic yogurt varieties, beverages and related natural and organic dairy products of all kinds in just the last five years alone. Additionally, many more mainstream supermarkets that in the past never sold natural-organic dairy products at all have added them to their dairy cases.

Dean Foods' biggest advantage in the organic segment is the strong brand identity it has with Horizon, Silk, WhiteWave and the like, in our analysis.

And even though organic category sales are down in the recession, it's surprising that organic dairy items, particular value-added items like yogurt, cottage cheese, ect., are still doing well overall.

Our analysis is this is the case in-part because consumers tend to cut back first on organic shelf-stable packaged food and grocery items in bad economic times, perceiving buying those to be less important to their health and well-being than fresh products like organic produce and dairy products are. In other words, fresh is the last organic segment cash-strapped shoppers will cutback on in many cases.

Milk prices down, good for dairy processors

Big dairy companies like Dean Foods actually are doing well in this economy in a relative sense because the price for milk they purchase from dairy farmers is at the lowest price it has been at in recent, and even not so recent, history. Dramatically lower the primary ingredient in a company's products and lots of good things will follow.

At the other end of that equation though are the dairy farmers, who are suffering.

For example, in California's Central Valley, one of the top milk producing regions in the U.S., a local dairy farmer association just announced a program in which the dairy farmers- members will kill off thousands of cows and sell them to the meat processing industry as a way to reduce their herds and thus lower the supply of milk, resulting, they hope, in higher prices being paid them by processors like Dean Foods (and others), which has a large processing plant under its Morningstar division in the Central Valley County of Merced. Similar scenarios are happening in all of the dairy-producing states.

With the cost of cow milk so low, Dean Foods today actually revised upward its estimate for its first quarter of the new fiscal year earnings. Here is what CFO Jack Callahan said today in the webcast: "As we discussed a few weeks ago in our fourth quarter earnings release, we expected the first quarter to be strong as the commodity environment continues to improve. "Most notably, the Class I Mover milk price will decline in March to $9.43 per hundredweight, which is the lowest price in recent memory. The energy complex also remains favorable. Based on our analysis of the January results and what looks to be, based on preliminary reports, a solid February, the quarter will likely be even stronger than we initially though," he said.

"The Company increased its first quarter 2009 guidance for adjusted diluted earnings per share to at least $0.41 per share, from its prior guidance for at least $0.38 per adjusted diluted share. Additionally, the Company's full year expectations have also increased, with management now expecting adjusted earnings to reach at least $1.55 per diluted share in 2009, representing full year growth of at least 19% from the $1.30 posted in 2008," company CFO Callahan added.

Dean Foods posted its highest-ever quarterly operating income in its recently-ended fourth quarter, which it announced on February 11. [You can Read More on the company's Q4 peformance.]

The solid performance in its fourth quarter and the increase in earnings estimate for the first quarter should allow Dean Foods to continue from a financial perspective the aggressive promotion its been doing of late on many of its organic dairy product brands like yogurts.

One thing we don't see changing at retail is the price of organic milk, Horizon brand or any other. A gallon of organic milk (from a cow) is priced about 50% -to- 60% higher at retail today than a gallon of non-organic milk. That's a stiff premium, which is why many consumers just can't afford to buy organic fluid milk in this economy (and often in a good economy) even though they want to. The core organic milk consumer still seems to be sticking (again our fresh organic cutback last theory) but their is significant overall sales erosion in the category as evidenced by recent data.

A slightly lower organic milk retail price a good goal

We suggest one long-term goal of the milk processing industry is to get the price of organic fluid milk down by at least 20%-25% over the two -to- three years.

Of course retailers can help with this by continuing to take the higher margins they do on organic fluid milk as compared to non-organic (after all they should as the volume is considerably less in organic), but perhaps taking a bit less high margin. A 5% reduction would be a big deal, for example, assuming the dairy processors would toss in 5% in cooperation. Doing so would help to build greater retail demand for organic fluid milk, in our analysis.

Until the price to consumers of organic milk comes down a bit closer to that of non-organic, say 20-25% higher, it will remain a niche product.

Wednesday, February 25, 2009

Daily Memo: Whole Foods Market - FTC Settlement Deal Watch - 10 Days to March 6

FTC v. Whole Foods Market, Inc. - Settlement Negotiations

The U.S. Federal Trade Commission (FTC) and Whole Foods Market continue negotiations over a settlement deal regarding the now about 18-month legal challenge by the FTC to overturn the 2007 friendly acquisition of then Boulder, Colorado USA-based Wild Oats Market, Inc. by Austin, Texas USA-based Whole Foods Market, Inc.

Earlier this month the FTC extended a halt in its legal proceedings against the deal until March 6, 2009 so the two parties could have some "breathing room" in their talks designed to reach some sort of mutually agreeable out of court settlement to Whole Foods' $565 million acquisition of Wild Oats in the summer of 2007.

Additionally, the FTC has set an April 6, 2009 date for an administrative trial, which will be held before an Administrative Law Judge chosen by the regulatory agency, in which the judge will hear legal arguments from the FTC's Bureau of Competition's lawyers and Whole Foods Market, Inc.'s legal counsel regarding the acquisition and the respective antitrust (or not antitrust) arguments from both sides. At the end of those oral arguments the FTC Administrative Law Judge will issue a ruling on the merger, assuming an out of court settlement deal isn't reach by the two parties before then, and the April 6 administrative trial goes forward.

The FTC can extend the March 6, 2009 legal action halt if a settlement deal hasn't been reached by then if it desires. If a settlement deal hasn't been reached by the two parties by March 6, 2009, the FTC could extend the legal proceedings halt if it feels progress is being made in the talks and all that's needed is more time to reach an agreement.

The FTC's case and argument: In summary

The FTC contends that a combined Whole Foods-Wild Oats is a monopoly retailer in what the agency calls the "premium natural and organic retailing segment (PNOS)" in 29 U.S. markets. As a result it says the 2007 acquisition of Wild Oats by Whole Foods Market, Inc. violates U.S. antitrust laws because in the FTC's legal view the combined Whole Foods-Wild Oats prevents competition in its self-defined category in these 29 U.S. Markets.

Natural~Specialty Food Memo (NSFM) disagrees with the FTC's position because, in summary, the entire premise of the regulator's antitrust argument rests on a false assumption of how natural and organic foods are retailed in America today, based on our experience and analysis. The FTC has created an artificial category -- PNOS -- which it then is using to justify its legal argument, in our analysis.

That false FTC premise presumes a combined Whole Foods-Wild Oats chain's competitors consist only of premium or high-end natural foods class of trade retailers such as New Seasons Market in Oregon (which ironically based on its format doesn't even fit the PNOS artificial category the FTC has created), Earth Fare in the southern U.S. and some others. That premise is wrong.

FTC argument not based on market reality

The empirical, market-based reality of natural and organic foods retailing in the U.S. today is that its a multi-corporate (and independent) and multi-format business. Major players include fast-growing natural foods class of trade chains like New Seasons Market and Earth Fare, along with Sunflower Farmers Market, Sprouts Farmers Market, Planet Organic, PCC in Washington state, Henry's Farmers Market, Natural Grocers by Vitamin Cottage and others.

It also includes hundreds of more upscale-oriented independent natural foods retailers and co-ops located throughout the U.S., including in most of those 29 markets in which the FTC argues the combined Whole Foods-Wild Oats is a monopolist natural products retailer.

Along with this segment, major players in natural and organic foods retailing today include some of America's biggest supermarket chains -- Safeway Stores, Inc. Kroger Co., Supervalue, Inc., just for starters -- as well as the two top-selling retailers of food and groceries in America -- Wal-Mart Stores, Inc. and Costco, both of which are deep in the natural-organic categories and getting deeper in terms of product selection and merchandising.

Add to this list Target, Trader Joe's, B.J.'s Wholesale and many more non-supermarket format food and grocery retailers.

Along with these segments are the big regional supermarket chains deep into natural and organic category product sales, as well as premium foods and premium fresh, prepared foods. These include Wegmans in New York, Publix in Florida, H-E-B and United Supermarkets' Market Street format in Texas, Raley's in Northern California and many more multi-billion dollar grossing regional supermarket chains located throughout the U.S., including in most of those 29 "monopolist" markets the FTC says the combined Whole Foods-Wild Oats controls in terms of the retailing of natural and organic foods.

If all these examples aren't enough, feel free to add the thousands of multi and single-store independents throughout the U.S. that put a focus on upscale food and grocery retailing, including putting a major emphasis on natural, organic and premium foods. These regional players exist and thrive -- competing head-to-head with Whole Foods Market stores -- in most U.S. market regions, including those infamous 29 "monopolist" markets. In many cases these independents actually outsell Whole Foods in the natural and organic products categories in their respective markets.

Finally, the FTC's argument fails to take into consideration the dynamic, fast-changing food and grocery retailing business in the U.S. For example, when Whole Foods Market, Inc. acquired Wild Oats in 2007, not one of the now 113 Tesco Fresh & Easy Neighborhood Market combination grocery and fresh foods markets currently open and operating existed in California, Nevada and Arizona, the three markets United Kingdom-based Tesco, which is the third-largest retailer in the world, operates in.

That's a lot of new competition in slightly over a year (the first Fresh & Easy stores opened in November, 2008) in these three states, all states Whole Foods Market has stores. The competition isn't head-to-head between the two chains. But there is only so much share of the natural and organic foods pantry, and since Tesco sells numerous category items for lower prices than Whole Foods does, it is taking some of this share, just like all of the other competitors are, regardless of specific retail format.

Additionally, giant discount retailer Target announced yesterday it is putting a new, major emphasis on food and grocery merchandising. The retailer plans to add fresh meat and produce departments and expanded perishables, groceries, household consumer packaged goods and health and beauty care selections in all of its new and remodeled discount format stores. Target has already converted one such discount format store in Illinois to the food and grocery-emphasis model and has plans to do the to many more over the next year and beyond.

Target operates some Super Target combination full-supermarket and general merchandise stores in the U.S. These stores are similar in product selection to a Wal-Mart Supercenter. However, the retailer operates many more of the discount format stores. Therefore, adding fresh foods and expanded grocery selections to these stores will have a major impact in numerous U.S. markets as Target gains critical mass in the remodels and new store openings.

Target has become a major retailer of natural, organic and premium food and grocery products over the last couple years in its stores. It's created its own store brands of premium, natural and organic food and grocery products and continues to expand those lines, as well as regularly promoting the category items in its stores and in its weekly advertising circulars.

Over the last few months, for example, Target has been regularly offering its private label premium, natural and organic brands and lines at across the board 15% and 20% discounts in its weekly advertising circular. This is direct competition to Whole Foods Market, and as Target converts more and more of its discount stores to this new food-enhanced format, the competition will get even more intense, as it has for Whole Foods Market from Wal-Mart with its major initiatives in the natural and organic categories over the last few years in its Supercenters and Sam's Club stores.

We site the Tesco Fresh & Easy and Target examples to illustrate a simple point. In the about 18 months since Whole Foods Market, Inc. acquired Wild Oats, two major retailers, both much bigger than Whole Foods, have entered (Tesco) and announced plans to enter more deeply (Target) the food and grocer retailing space, both retail chains of which are and continue to make a major impact in the premium, natural and organic categories.

A good way to view Whole Foods Market today vis-a-vis the natural and organic categories, its core selling proposition, is that it is being challenged from multiple formats -- the fast-growing natural foods chains mentioned above, the big, regional and independent supermarket chains, and the discounters like Wal-Mart, Costco, Target, Trader Joe's ect. -- each picking off bits and pieces in terms of sales from Whole Foods' core natural, organic and premium primary offering.

This fact is one reason why Whole Foods is struggling during the current recession -- many consumers are turning to these alternate format stores, including Trader Joe's, and either not shopping at Whole Foods at all or spending far less at the stores than they were just a year ago.
When the recession ends and the economy improves, Whole Foods will be challenged even more aggressively by numerous retailers.

For example, Safeway Stores ("The Market") and Wal-Mart ("Marketside") have opened their own versions of a smaller-format, upscale grocery and fresh foods market -- Safeway has one store, "the market by Vons," which it opened in the summer of 2008, currently operating in Long Beach, California, with plans to soon open a second "The Market" format store, "the market by Safeway" in downtown San Jose, California.

Wal-Mart has four of its "Marketside" stores opened in Metropolitan Phoenix, Arizona (opened in OCtober, 2008), with a fifth unit set to open in the region (in Peoria, Arizona) later this year. It also has plans to open five of the stores in Southern California. Leases for the first two in the region have already been signed, one in downtown San Diego and the other in nearby Oceanside.

The Safeway and Wal-Mart small-format stores are between 15,000 and 25,000 square feet, small for a supermarket, but about the same size as the average new natural foods store. Whole Foods even recently announced it plans to build much smaller stores, about in the 20,000 -to- 35,000 square-foot range, going forward over the next few years. For the last few years new Whole Foods stores have generally averaged about 45,000 -to- 65,000 (and some even bigger) square-feet.

The "Marketside" and "The Market" format stores, which many people describe as looking like a "small Whole Foods Market" (we've been in both formats and they do look a bit like that) sell lots of natural, organic, specialty and premium, prepared foods. The Wal-Mart "Marketside" stores even prepare the foods in-store in a kitchen and have an eating area in the store for shoppers.

But the two new formats from Wal-Mart and Safeway also have the added advantage of selling basic food and grocery items (Tide, Pampers, Coke, Pepsi) as well as natural and organic, something Whole Foods obviously doesn't do. When the economy improves, Wal-Mart and Safeway could open scores (and in Wal-Mart's case hundreds) of these upscale, small-format stores throughout the U.S., competing head-to-head with Whole Foods. They certainly have the resources to do so. Wal-Mart Stores, Inc. has annual sales of $400 billion. Safeway Stores, Inc. has annual sales of about $60 billion. Whole Foods Market has annual sales of about $8.5 billion.

A settlement deal needs to be reached

All this being said, we believe the FTC and Whole Foods Market, Inc. need to come to a settlement deal that is mutually agreeable to both parties so that Whole Foods can get back to focusing on what it does best -- merchandising and selling natural and organic groceries (and saving in its second quarter the $11 million it had to spend in its first quarter of this fiscal year on legal fees to battle the FTC) -- and so that the FTC can get out there and find a real monopoly or two to file an antitrust action against.

Countdown to March 6

As we mentioned at the top of this piece, the FTC has halted its legal action in the Whole Foods-Wild Oats merger case until March 6, which is just nine days away.

Beginning today, we will be counting-down those nine days in this column, "Whole Foods Market - FTC Settlement Deal Watch," offering news, analysis and commentary each day between today and March 6 until a settlement deal is reached -- or not reached -- by the two parties.

The daily column will be in addition to our regular reporting, writing about and analysis on the FTC v. Whole Foods Market, Inc. legal case and issue.

As of the end-of-business today there is no report of a settlement deal between the FTC and Whole Foods. But we will keep you posted in "Whole Foods Market - FTC Settlement Watch," as well as in Natural~Specialty Foods Memo (NSFM) in general.

Natural~Specialty Foods Memo (NSFM) Linkage

Below is a bibliography of the most recent -- December, 2008 to the present -- reports, stories, analysis, commentary and posts on the FTC. v. Whole Foods Market case and issue, along with directly related topics and issues, from Natural~Specialty Foods Memo (NSFM). At the very bottom of the bibliography we also include links to direct and related posts going as far back as the summer of 2007.

February, 2009

February 24, 2009: Retail Memo - Breaking: FTC Commissioner Jon Leibowitz Odds On Favorite to Be Named Chairman; Positive Development For Whole Foods' Settlement Talks.... February 22, 2009: Retail Memo: The 'Whole Analysis' - Whole Foods Market Inc's First Quarter Financials, FTC v. Whole Foods...The Natural Grocer At Home and Abroad....February 11, 2009: Retail Memo: 'God And Man at Yale' - The FTC-Whole Foods Settlement Talks: Whole Foods CEO John Mackey Speaks Out at Yale University....

February 5, 2009: Retail Memo - Breaking: FTC Delays Whole Foods Merger Opposition Case Another 30-Days For Settlement Talks; Progress Towards A Deal Remains Positive....February 3, 2009: Retail Memo - Breaking Developments: FTC, Whole Foods Market, Inc. Progressing in Settlement Talks; Could the Negotiated End-Game Be Near?....February 1, 2009: Promotional Merchandising Memo: Whole Foods Market's Super Bowl In-Store Promotional Merchandising Message: 'Value'....

January, 2009

January 31, 2009: Store Brands - Private Label Memo: Smart & Final-Owned Henry's Farmers Market Preparing to Debut New Natural & Organic 'Sun Harvest' Store Brand....January 29, 2009: Retail Memo - Breaking: Whole Foods Makes Settlement Offer to FTC; FTC Halts Action For 5 Days; Natural~Specialty Foods Memo Calls For A Settlement....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....

January 24, 2009: Retail Memo: Despite its Battle With the FTC and Other Struggles, Whole Foods Market Still Ranked 22nd 'Best Place' to Work in America By Fortune....January 24, 2009: Retail Memo - News & Analysis: Gelson's Chain Challenges Whole Foods' Subpoena For Trade Secrets; FTC Says No Like it said to New Seasons Market....

January 23, 2008: Retail Memo: Three Judge Federal Appeals Court Panel Rules Against Whole Foods' FTC Lawsuit Today; What's Next?.... January 21, 2008: Retail Memo: An Argument in Favor of the FTC in FTC v. Whole Foods Market, Inc. -- Or At Least Against Whole Foods' Legal Tactics....

January 19, 2009: Retail Memo: Concerned With Fast-Looming FTC Hearing Date Whole Foods Re-Files Lawsuit Taking it Directly to Washington, D.C. Federal Appeals Court....January 19, 2009: Retail Memo - Breaking News: Portland's New Seasons Market and Whole Foods Market, Inc. Reach Agreement; New Seasons Will Provide Trade Secrets....

January 16, 2009: Read Memo: Colorado Newspaper Columnist Joins NSFM's 'Whole Foods Market Isn't A Monopoly' Bandwagon....Friday, January 16, 2009: Retail Memo - Exclusive: Supermarket Industry Investor Ron Burkle Looking For A Seat On Whole Foods Market's Board of Directors....Thursday, January 15, 2009: Retail Memo: Natural-Organic Foods and U.S. Retail Marketplace Realities; Why the FTC's Case Against the Whole Foods-Wild Oats Merger is Pure Folly....

January 15, 2009: Retail Memo: Fresh & Wholesome Market Fears Not A Whole Foods Market Monopoly; In Fact Part of its Competitive Strategy is to Be the Anti-Whole FoodsRetail Memo: Whole Foods Offers Carrot and Stick to Retailers That Have Yet to Comply to Subpoena For Trade Secret Data and Information....

December, 2008

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 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.

Natural~Specialty Foods Memo (NSFM) Archives

FTC v. Whole Foods - Linkage from the NSFM 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.

Tuesday, February 24, 2009

Retail Memo - Breaking: FTC Commissioner Jon Leibowitz Odds On Favorite to Be Named Chairman; Positive Development For Whole Foods' Settlement Talks

U.S. Federal Trade Commission Commissioner -- and likely new FTC Chariman -- Jon Lebowitz. Is he a Whole Foods Market shopper? [Photo Credit: FTC.]

Breaking News Analysis: FTC. v. Whole Foods Market, Inc.

Current U.S. Federal Trade Commission (FTC) member Jon Leibowitz is the odds on favorite to become the new chairman of the U.S federal regulatory agency responsible for antitrust issues and consumer protection, according to the Washington, D.C. rumor mill.

President Obama could name Commissioner Leibowitz, the only Democrat on the FTC, as soon as tomorrow, and most likely no later than by the end of the week, we believe. It's a pretty solid rumor, in other words.

The current four-member FTC consists of one Democrat (Leibowitz), two Republicans, and one Independent. The FTC is short one member, which President Obama likely should name soon. By statute, the FTC is a five-member Federal Commission.

Rumors that President Obama would choose Commissioner Leibowitz to head the FTC began circulating in earnest in the nations' capital the first week of this month. On February 3 the Capital Hill publication CongressDaily wrote this: "Federal Trade Commission member Jon Leibowitz might get a boost to the chairman's spot, sources say. Leibowitz, a former Hollywood lobbyist, leads the pack to be the next chairman now that former FTC member Christine Varney has been tapped to work at the Justice department. Mozelle Thompson, a former FTC member and current policy adviser for Facebook, also is a contender for the top position."

After reading the February 3 report in CongressDaily we talked to some of our Washington, D.C. sources who've been helpful in our coverage of the FTC. v. Whole Foods Market, Inc. antitrust case, in which the FTC is attempting to overturn the 2007 friendly acquisition by Whole Foods of Wild Oats' Market, Inc., and they all told us they believed Commissioner Leibowitz was the front-runner for the FTC Chairman slot, something we mentioned in a previous piece in Natural~Specialty Foods Memo (NSFM).

Since February 3 we haven't heard anything different; Leibowitz has remained the odds on choice as chairman by President Obama.

Yesterday, CongressDaily ran this brief report in which it said a member of the Obama Administration confirmed to the publication that current FTC Commissioner Leibowitz is the President's choice to chair the regulatory agency.

We talked to our sources today and they all agree with the CongressDaily report. Two of those sources said they expect the President to announce his choice of Mr. Leibowitz as FTC Chairman as soon as tomorrow, but no later than Friday.

Since Mr. Leibowitz is already an FTC Commissioner he doesn't have to go through a Senate confirmation process like an outside appointment by President Obama would have to. This means he can essentially take over the chair of the FTC as soon as he is named and sworn-in.

As chairman, Mr. Leibowitz would succeed Republican William E. Kovacic, who was named acting chairman last March by President George W. Bush after Deborah Majoras quit as chairman to take a job at consumer products giant Procter & Gamble. Mr. Kovacic will remain an FTC Commissioner, just not chairman.

FTC Commissioners are appointed for a seven year term by a sitting President. They aren't subject to being replaced by a new President as long as they have time remaining in their respective term. However, the new President does get to name the FTC Chairman, which is why President Obama is naming a new FTC chairman, who will most likely be Commissioner Leibowitz.

Although a Democrat, Mr. Leibowitz was named to the FTC in 2004 by Republican President George W. Bush.

Mr. Leibowitz, who is 50, formerly worked for the Motion Picture Association of America and is a former Democratic legal counsel for the Senate Judiciary Antitrust Subcommittee. He also once worked for Wisconsin Senator (Democrat) Herbert Kohl, who is a member of the Kohl's Department store family.

FTC Commissioner, and we believe soon to be chairman, Jon Leibowitz, also has a very close media connection -- his wife is the popular Washington Post newspaper columnist Ruth Marcus.

Leibowitz choice a net positive for settlement talks

President Obama's choice of Commissioner Leibowitz as the likely head of the FTC is positive news for Whole Foods Market, Inc.'s current negotiations with the FTC to reach a settlement deal in the regulatory agency's legal case against the natural grocery chain's 2007 friendly acquisition of Wild Oats Market, Inc..

As an FTC Commissioner Mr. Liebowitz hasn't been nearly as aggressive as the other commissioner's have, particularly two of the four, regarding wanting to completely overturn the acquisition-merger. In fact, it's our analysis that one of the key reasons the FTC has decided to negotiate with Whole Foods, postponing its legal action in the case until March 6, rather than just wait for the April 6 administrative trial it has set to hear and rule on the deal, is because of the fact it's been fairly well-known on the commission and in the nation's capital that Commissioner Leibowitz has been President Obama's leading candidate for the FTC Chairman's position.

Additionally, the FTC currently is short one commissioner. By statute there are five FTC Commissioners. Currently there are only four. That means, in addition to appointing a chairman, President Obama will soon pick a fifth member of the regulatory agency, likely a Democrat. This vacancy, and likely soon to be named new Commissioner, provides an added incentive to reach a settlement deal before the composition of the FTC changes, in our analysis.

In addition to Jon Leibowitz,,the other current FTC Commissioners are: soon to be outgoing Chairman, William E. Kovacic (Republican), Pamela Jones Harbour (Independent), and J. Thomas Rosch (Republican). Each FTC Commissioner serves a seven year term. No more than three of the five FTC Commissioners serving together can be from the same political party.

Commissioner Rosch and Commissioner Kovacic have been the most aggressive members in wanting to overturn the Whole Foods Market, Inc. friendly acquisition of Wild Oats, which is interesting because traditionally Republicans are far less concerned about antitrust issues as they relate to mergers and acquisitions than Democrats are. Commissioner Leibowitz is an antitrust hawk though. But he has seemed all along to be far more willing to work out a settlement deal.

Additionally, the Whole Foods Market, Inc. acquisition of Wild Oats was a small one -- $565 million -- compared to most corporate mergers and acquisitions that come before the FTC, making the FTC's focus on it even more surprising.

Further, since the merger is one in an industry, natural and organic foods retailing, in which a very small percentage of American consumers are affected (eg: only those consumers that buy and natural and organic foods at natural foods stores), the fact the FTC, and particularly its two Republican Commissioners, has so aggressively pursued overturning the deal remains a major mystery to many, including Natural~Specialty Foods Memo (NSFM).

Add to all that the fact Whole Foods Market, Inc.'s value has dropped about 75% since the Wild Oats' acquisition -- it did increase a little over 30% last Wednesday, following the company's release of first quarter financials that beat analysts' estimates (which means its value is now only down by about 45% from 52-weeks ago) -- and the FTC's continued claims that the natural grocery chain is a monopolist in 29 U.S. markets becomes not only more of a mystery but also a mystery wrapped in an enigma.

The FTC argues that a combined Whole Foods-Wild Oats is a monopolist in 29 U.S. markets in what the regulator has termed the "premium natural and organic retailing (PNOS) segment," a segment we've argued since the summer of 2007 that's essentially fiction because it doesn't reflect the reality of how natural and organic food and grocery products are retailed today in the U.S.

Natural and organic foods retailing today in the U.S. is a multi-company, multi-format business. Whole Foods' competitors include fast-growing natural foods class of trade grocery chains like Sunflower Farmers Market, Sprouts Farmers Market, Natural Grocers, Earth Fare, PCC in Washington state, New Seasons Market in Oregon, Henry's Farmers Market (which was bought from Whole Foods in 2007 after the Wild Oats acquisition by Los Angeles-based Smart & Final LLC), along with a number of others. It also includes hundreds of more upscale-oriented independent natural foods stores and co-ops located throughout the U.S.

In addition, Whole Foods greatest competition comes from the numerous supermarket chains and discounters -- Safeway Stores, Kroger Co, Supervalue, Inc. Wal-Mart, Costco, B.J,'s Wholesale, Target, Trader Joe's just to name a few -- that have moved increasingly into the natural and organic products retailing space, along with selling basic food and grocery products in their stores.

And all of these big retailers and many others are moving even deeper into the natural and organic retailing categories.

For example, in a conference call with analysts today during which it reported its quarterly financials, discount store giant Target Inc. announced it is moving into food and grocery retailing in a major way. It plans to remodel most of its Target discount stores, adding more food and grocery items, including fresh foods, and put a merchandising emphasis in its stores on food and groceries, including premium, natural and organic, in a way similar to what Wal-Mart does in its Supercenters.

Along with all this competition, add to the list the scores of big regional supermarket chains -- Wegmans in New York state, Raley's in Northern California, H-E-B in Texas, Public in Florida, United Supermarkets Market Street also in Texas, and dozens of others -- that operate supermarkets that sell massive selections of natural, organic, specialty and premium foods similar to the Whole Foods Market format.

And if this isn't enough competition, there are hundreds of multi and single-store independents throughout the U.S. with upscale stores that compete head-to-head with nearby Whole Foods Market stores. In many cases, the stores of these independents located near Whole Foods Market stores do as much or more in natural and organic product category sales as the Whole Foods' markets do.

The bottom line is: There's no shortage of competition for Whole Foods in any U.S. market. And if there is in a couple or even a few markets, that will change as fast as you can say: "The U.S. food and grocery retailing business is dynamic and every changing."

As an example of this, Target's announced plans today alone will change food retailing in many U.S. markets once the giant discount chain gets things up and running with its planned, new major focus on food and grocery retailing.

The market place, in the form of Whole Foods' competitors, doesn't agree with the FTC either. Just last week Sunflower Farmers Market opened its first store (under the Netflower banner) in Whole Foods Market's stronghold, headquarters city of Austin, Texas. Sunflower is planning a second store in Austin as well.

Sprouts Farmers Market also recently opened a store in Austin. And yesterday it announced it has signed a lease for a second Austin natural foods market.

Another fast-growing natural foods grocery chain, Colorado-based Natural Grocers, also is moving into Austin.

Would these three chains really move into what is arguably Whole Foods strongest market, the Austin, Texas Metropolitan region market, if they believed it held a monopoly in the "premium natural and organic retailing segment," a segment they believe is a fiction just like we do?

Of course they wouldn't. They are doing so because they see Whole Foods, and its format and model, as vulnerable to their more discount-priced natural and organic products retailing models, which is a focus all three of the fast-growing natural foods chains share. Note to the FTC: That's competition. Austin is an example of what scientists call empirical evidence and lawyers call demonstrable evidence. And the same evidence exists in pretty much all of those other 28 U.S. markets.

The naming of FTC Commissioner Leibowitz to head the agency, along with the fact that President Obama will soon name a fifth Commissioner, most likely a Democrat, is serving as an incentive for the FTC to get a settlement deal done with Whole Foods Market, Inc. This isn't so much because of the Whole Foods issue and case itself, although that's a part of it, but rather because with a new chairman the issues focus the FTC is going to change, something Commissioner Leibowitz seems already to be indicating in comments he has been making over the last couple weeks. We don't mean moving away from antitrust, that's the agency's mission, along with consumer protection. What we mean is that each chairman shapes what the FTC focuses on. And Mr. Leibowitz's focus and emphasis will be different than that of the current chairman in many respects.

As a result, its our analysis that the probability of a settlement deal being reached by the FTC and Whole Foods Market in the next few days has, as of today, gone up significantly primarily because the FTC wants to resolve such matters before the new chairman takes over and before the composition of the board changes. The FTC's halt of legal action regarding the merger case ends on March 6, which is just 10 days away.

Sunday, February 22, 2009

Retail Memo: The 'Whole Analysis' - Whole Foods Market Inc's First Quarter Financials, FTC v. Whole Foods...The Natural Grocer At Home and Abroad

Whole Foods Market's flagship store and corporate headquarters in Austin, Texas. [Photo Credit: Whole Foods Market, Inc.]

Whole Foods Market, Inc. reported its first quarter fiscal year sales and profits on Wednesday afternoon (February 18), after the financial markets closed. [You can view Whole Foods' detailed financial release at the link here: Whole Foods Market Reports First Quarter Results.]

The good news

Whole Foods' beat stock analysts estimates in terms of its Q1 profits, despite the fact the natural foods grocery chain's profit dropped by 17% during its first quarter, to $32.3 million, compared to $39.1 million for the same quarter last year. Overall Q1 revenue increased by $2.5 billion over last year's first quarter revenue.

As a result of beating analysts estimates, Whole Foods Market, Inc's stock soared by a whopping 34% in trading on Thursday and Friday, following Wednesday's report. That's a much needed boost for Whole Foods' stock since its per-share value had dropped by about 75% (from its 52-week high) prior to Wednesday.

The bad news

In addition to the 17% Q1 net income loss, Whole Foods Market, Inc. experienced for the first time in the company's history a quarterly drop in same-store sales. Sales at stores open for at least one year decreased by 4% in the first quarter. Same-store sales are an important industry indicator of a retailer's performance.

Whole Foods' senior management has found great pride, as it should, in the fact that same-store sales has increased every quarter, until now, for the natural foods grocery chain.

But in the current severe economic recession, it isn't a surprise to Natural~Specialty Foods Memo (NSFM), nor should it be to investors and industry observers, that Whole Foods Market, Inc. experienced the decrease in same-store sales in its first quarter. Having said that, this is something the natural grocer must reverse in the second quarter.

As we've previously reported, Whole Foods Market made a number of cost-cutting moves last summer, including laying off about 100 employees at its corporate headquarters in Austin, Texas, in hope that in the face of reduced sales it could stem its loses. It's likely that without those cost-reductions the natural and organic foods grocer would have shown poorer Q1 results.

During a conference call with analysts on Wednesday, Whole Foods said it has enacted a salary and hiring freeze going forward as a way to further cut costs.

In the conference call, Whole Foods' CEO John Mackey said the company is seeing early signs that increased sales, do largely to more aggressive pricing and promotions by the retailer, may be stemming the same-store sales decrease experienced in the first quarter. Of course, with the recession continuing to get deeper and worse, it's near-impossible what the next couple of months will bring for more upscale, specialty-oriented grocers like Whole Foods Market.

It's our analysis that Whole Foods still likely has some cutting to do because we believe, as do most experts and analysts, that the recession is going to get worse before it gets better, even with the $787 billion economic stimulus package signed by President Obama, and that the remainder of 2009 will see cash-strapped consumers continuing to trade-down in terms of shopping more at discount food retailers, along with spending less money overall on food and groceries because the plain just have less to spend.

We do see some positive signs, based on store visits and interviews and discussions with shoppers, that Whole Foods' new value emphasis, in which it has lowered some prices, is offering better promotions, including coupons, focusing more on basic items, along with featuring less expensive store brands more often, is beginning to bare some sales fruit at store-level.

FTC v. Whole Foods: The FTC-induced bad news

As Natural~Specialty Foods Memo (NSFM) has been reporting on writing about regularly, Whole Foods Market, Inc. continues to battle the U.S. Federal Trade Commission (FTC) over the natural grocery chain's friendly 2007 acquisition of Wild Oats Market, Inc. At present, Whole Foods and the FTC are in negotiations over a possible settlement to the long and protracted FTC legal case against the deal.

The FTC has a halt of further legal proceedings in place until March 6, while the two parties are negotiating a possible settlement.

Should a settlement not be reached by then, the FTC will go forward with its legal challenge to the merger. The regulatory body has an April 6, 2009 date set to begin an Administrative trial in which an FTC Administrative Law Judge will hear arguments from Whole Foods and the FTC on the deal and rule on its outcome, which could include an order to break-up the now nearly-100% merged grocery chains.

Whole Foods Market, Inc. reported Wednesday that it spent a whopping $11 million in the first quarter alone on legal costs related to fighting the FTC challenge to the merger. This $11 million is a significant contributor to the natural and organic grocer's 17% income loss in Q1.

Since it's our argument that the FTC is wrong in its argument and legal case that a combined Whole Foods-Wild Oats represents a monopoly in 29 U.S. markets, in what the regulator calls the "premium natural and organic retailing segment (PNOS),"we strongly suggest this $11 million expense was an unnecessary one for Whole Foods. In fact, were we an investor in Whole Foods Market, Inc., we would protest the FTC's continued legal challenge to the merger to the President and Congress, arguing that doing so by the FTC is a misuse of taxpayer funds.

Because of the serious challenges Whole Foods is facing due in large part to the the bad economy, along with increased competition from other natural foods class of trade retailers, supermarket chains moving increasingly into the natural and organic products space, and discounters like Wal-Mart, Costco, Target, Trader Joe's and others, it could have used that $11 million for promotional and other merchandising purposes rather than having to spend it on legal counsel.

After all, do Whole Foods' first quarter financials look to any reasonable person reading them like the sales and income numbers of a retailer that holds a monopoly in any so called segment of the U.S. food and grocery retailing industry?

We think not. And just because the company's stock soared by 34% on Thursday and Friday, that means very little in the medium-to-long run. Wall Street plays the expectations game. Whole Foods Market's Q1 numbers were much better than many analysts thought they would be. Therefore, the natural and organic grocer's having beat these estimates, the stock soared. Remember, what goes up, particularly in the stock market, also comes down -- and often times nearly as rapidly as it went up. Investors also were looking hard for companies to invest in last week, which helped fuel a flight of cash into Whole Foods' stock.

It's our analysis and opinion that the FTC case against Whole Foods Market, Inc. has actually become an economically punishing one for the company and its shareholders. This at a time when the federal government is spending hundreds of billions of dollars of taxpayer money to keep companies in other industries -- financial services, automobile manufacturing -- alive.

General Motors is now asking Congress and President Obama for another $21 million and Chrysler, which is majority-owned by the Cerebus private equity firm (about 80% ownership) is asking for an additional $5 billion.

Meanwhile, an agency of this very same government, the FTC, is prosecuting a legal battle against Whole Foods Market, Inc. that cost the retailer and its investors $11 million in the first quarter, millions more before that, and possibly million more in the next couple months unless a settlement is reached with the FTC.

This is just wrong. The FTC argument is folly, in our analysis. And at a time when the federal government is bailing out a host of companies, it is doubly-wrong that the FTC is pursuing a course of action that is significantly contributing to severe struggles by Whole Foods Market, Inc., as well as costing its investors money.

There is some indication our argument, and those of others, has sunk into the heads of some of the FTC Commissioners -- and we hope it has -- which could be one of the reasons they've decided to work towards a settlement agreement with Whole Foods.

The 'whole' conference call

There were a number of other announcements and points of information of interest during the analysts' conference call with Whole Foods on Wednesday. Below is a summary of those key points of interest as stated in the conference call by the company's senior executives:

~"Although transaction count and basket count are still down, the decline in transaction count has improved slightly. While it is obviously still too early to say our sales are stabilizing, we (Whole Foods) are encouraged by these trends."

~"Competition continues to be a factor as retailers fight over fewer food dollars being spent. Cannibalization also remains a factor, but to a lesser degree."

~"Whole Foods Market private label SKU count increased 11% year-over-year, accounting for 22% of our total grocery and Whole Body sales."

~"We (Whole Foods) plan to roll out a 5-Step Animal Welfare Rating system beginning in our United States stores later this year."

~"We (Whole Foods) reduced our planned new store openings by 50% for fiscal year 2009 to 15 from a prior range of 25 to 30. We terminated 11 leases in development, totaling approximately 570,000 sq ft, and down-sized nine leases by an average of 10,000 sq ft each."

~"We (Whole Foods) spent a lot of time in Q1 really focusing on values especially in produce, meat and seafood. And we've seen a lot of very good reaction to our promotions that we've done in those areas."

~"We (Whole Foods) believe the long-term growth and return potential in the United Kingdom is much greater than Canada, and we're taking some proactive steps to improve our operations there."

Whole Foods United Kingdom

This last point about Whole Foods Market's favoring the long-term growth and return potential in the United Kingdom over that in Canada (those are the only two international markets the company operates in outside the U.S.) is extremely interesting.

During the conference call Whole Foods' said it is breaking up its UK stores into separate geographical regions, similar to what it does in the U.S. That shouldn't be too hard a task at present since all of its UK stores are located in London, England.

Whole Foods Market, Inc. currently operates five stores in the UK, all in London, England, as mentioned above. Only one of the five stores, its nearly 80,000 square foot natural-organic and premium food emporium in the huge The Barkers Building on 63-97 Kensington High Street in London, has operated under the Whole Foods banner since it was opened, which was in 2007. The other four London stores have operated under the Fresh & Wild banner. Fresh & Wild was a small, UK-based natural products chain Whole Foods Market, Inc. acquired a few years ago.

Whole Foods is in the process of changing the name of the remaining Fresh & Wild banner stores to its Whole Foods banner, so that all of its UK (read just London for now) stores operate under the same banner -- Whole Foods. The rebranding is set to be completed by the end of this month. [You can view a list of Whole Foods' UK-London stores here.]

The nearly 80,000 square foot Kensington High Street Whole Foods banner store the retailer opened about two years ago has been a struggle for the natural grocery chain. During its first year of operation, 2007, the aisles of the huge market were almost always empty. However, beginning towards about the end of the first quarter in 2008, business started to pick up considerably at the market, after Whole Foods made a number of changes to the store, along with initiating more aggressive promotions and other merchandising and marketing initiatives.

But beginning in about October of last year, business dropped at the upscale store, as it began doing at most all of Britain's premium and natural foods-focused food stores because of the financial-credit crisis and deepening of the global economic recession. The struggle in the down UK economy continues for the Kensington High Street Whole Foods, as it does for other natural grocers and upscale UK supermarket chains like Waitrose and Marks & Spencer.

Like in the U.S. at present, British consumers are flocking to discount stores where they can save money on their food and grocery purchases. The fastest-growing food retailer in the UK in terms of sales and market share growth over the last year has been Aldi-UK, the British division of the global small-format, hard-discount Aldi International chain, which is based in Germany.

Aldi's U.S. division, Aldi USA, which operates almost 1,000 small-format, hard-discount stores in the U.S., also has seen a dramatic increase in business during the recession. It's growing fast and plans to open 100 new stores in the U.S. this year, including moving into the new markets of New York and Texas, where Whole Foods market is based. Aldi USA also moved into Florida for the first time in late 2008.

Aldi-UK is increasingly (more so than Aldi USA) offering natural, organic, specialty and premium food and grocery products in its UK stores, in most cases under one or more of its various store brands. These items sell for 15% -to- 30% less everyday than comparable items at UK natural foods stores and upscale supermarkets like Waitrose. As a result, Aldi-UK is taking some share away from these format stores in the natural and specialty categories just like it's taking share away from leading UK supermarket chain Tesco in the basic food and grocery segment.

During the Wednesday conference call, Whole Foods Market, Inc. CEO John Mackey said the natural foods chain has determined that the nearly 80,000 square-foot Kensington High Street Whole Foods store is just plain too big, which he said is the primary reason for its struggles in the UK. Mr. Mackey announced that going forward, any new Whole Foods stores opened in the UK would be in the 20,000 square foot range, which by UK standards is still a good-sized food store.

Natural~Specialty Foods Memo (NSFM) reported and detailed last year in this March 4, 2008 piece [Retail Memo: Whole Foods Market to Dramatically Expand in the United Kingdom; Will Open Up To 30 New Stores in the U.S. in Fiscal 2009] how at the time Whole Foods Market was aggressively looking for new store sites in the UK, particularly in and around London. Those store locations-sites were closer to the nearly-80,000 square-foot size rather than the 20,000 square foot model the natural grocer now says it will follow in the UK. (Note to the March, 2008 linked piece. As we've reported since, Whole Foods Market reduced the number of planned new stores to about 15 for this year. Another cost-cutting move.)

But Whole Foods' aggressive search for new store locations in the UK has cooled dramatically in the current recessionary climate. As far as we are aware, the natural-organic grocer has no new UK store openings planned for 2009.

Further, we aren't sure a UK growth strategy, even long-term, is a good one for Whole Foods. The UK, particularly Britain, and especially England, is a very retailer brand loyal market. For example, just four grocery chains -- Tesco, Wal-Mart-owned Asda, Sainsbury's and Morrisons -- control a whopping 73%-75% of the total food and grocery sales market share.

If you add in the Cooperative Group chain, which last year acquired the Somerfield supermarket chain, making the Co-op the UK's fifth-largest grocer after number four Morrisons (Tesco is number one, Asda number two, Sainsbury's number three), the five chains control about 82% of all grocery sales in the country. All also sell plenty of natural, organic and specialty-premium food products.

There is room for niche players, such as upscale Waitrose and Marks & Spencer, which combined control about 9% of the remaining 18% of share in the nation -- that leaves about 9% for everybody else, and about half of that 18% is controlled by the UK hard-discount grocers Aldi, Lidl, Iceland and Netto -- but it's a tiny niche. And, there are numerous UK-based natural products retailers, such as Boots and others, filling a big part of that tiny niche.

Whole Foods could make it in the UK -- but not without spending a considerable amount of money on marketing and advertising, in our analysis. And the retailer needs to do a much better job of adapting to the British style of food retailing to do so. However, in its quarterly financial report, Whole Foods said its UK operations were a major contributor to the company's overall income loss, which isn't a good sign going forward right now.

And even if Whole Foods can do well in the UK down the road, one has to ask at what level? In other words, can the UK really contribute a significant amount of sales and profits to Whole Foods Market, Inc. over the next five, or even ten years, to make it worth the effort? The jury of course is out on that -- but we think it is something worth looking at closely by Whole Foods in its strategic planning process.

Whole Foods Canada

Last month we heard a rumor that Whole Foods Market, Inc. could be considering selling its stores in Canada, assuming of course it could find a buyer in the current frozen credit market. We have been unable to substantiate such rumors to date.

The conference call comments by CEO John Mackey -- that the UK holds far more long term promise for the natural foods grocery chain than Canada does -- are interesting ones though in light of those rumors.

The reason this is interesting -- and it is based on deductive reasoning and not source information -- is because Whole Foods has historically been a growth-based retailer in all of its markets. Therefore if it believes Canada holds minimal long-term growth potential then selling the stores there might make good sense. The natural-organic grocer could then use the cash from such a sale to grow the business in the UK and for other purposes.

Whole Foods Market, Inc. currently operates six stores in Canada. Four of the stores are located in Vancouver, British Columbia. The other two stores are in Ontario; one in Toronto and the other in Oakville. [Click here for a list of the Canada stores.]

With only six stores in the entire country of Canada, and in only two market regions (Vancouver and Ontario) to boot, Whole Foods' really can't make much of an impact in the country at present. And, based on the conference call comments, it doesn't sound like any additional stores are planned in Canada in the near or even medium-to-long term. Therefore, selling the stores starts to make even better sense.

One likely candidate, should Whole Foods decide to sell its stores in Canada, would be Canadian natural products retailer Planet Organic, Inc. Planet Organic has been growing fiarly rapidly in Canada and even entered U.S. natural foods retailing in 2008 when it acquired the Mrs. Green's chain of 11 natural foods stores based in upstate New York.

However, Planet Organic had to back out of a deal to acquire Santa Cruz, California-based New Leaf Natural Markets last year because it couldn't raise the about $15 million needed to do the deal. Planet Organic had floated a new stock offering on the Vancouver stock exchange for about that amount, which it was planning to use to make the acquisition, but decided to pull the offer because of the financial-credit crisis and the related drying up of investment capital, after it determined there wasn't an investor appetite for the new offering by the company.

But, since the Whole Foods stores are right in Planet Organic's backyard -- it just might be better able to find the money should the Austin, Texas-based natural foods grocery chain decide to unload its stores in British Columbia and Ontario, Canada.

FTC v. Whole Foods settlement deal

Meanwhile, Whole Foods Market, Inc. needs to come to a settlement agreement with the FTC so that it can get back to focusing on what it does best, merchandising and selling natural, organic and premium food and grocery products, rather than fighting legal battles. It also needs to reach a settlement, assuming one that's not to devistating to its acquisition of Wild oats, so that it can stop burning cash paying for legal fees related to the legal case.

We say this, that a settlement deal needs to be reached between Whole Foods and the FTC, despite the fact we believe the FTC's case is pure folly.

At this point though, reaching a decent settlement deal is far better for Whole Foods Market, Inc. than continuing to have to fight the FTC in court, the end result of which could be a break-up of the now combined Whole Foods-Wild Oats, which at this point in Whole Foods Market, Inc.'s nearly 100% integration of Wild Oats could be a very costly process and end result.