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.

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