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.

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