Sunday, March 8, 2009

Retail Memo: The FTC-Whole Foods Market Settlement Agreement Looks Much Like Our January 'Blueprint-Template For A Settlement Deal' Proposal

The FTC - Whole Foods Market, Inc. Settlement Agreement

The four members (their normally are five but the FTC is currently one short) of the U.S. Federal Trade Commission (FTC) voted unanimously on the settlement deal with Whole Foods Market, Inc., announced on Friday, March 6, ending the nearly 20-month legal battle waged by the FTC to overturn the 2007 friendly acquisition by Whole Foods Market of Wild Oats Markets, Inc. [Read the details of the settlement agreement in our March 6 piece here: Daily Memo: It's A Done Deal: Whole Foods Market and the FTC Reach A Settlement Agreement On Wild Oats' Acquisition Antitrust Challenge.]

Additionally, the 4 -to- 0 unanimous vote in favor of a settlement by the FTC's Commissioners came just eight days after President Obama named the only Democrat on the FTC, Jon Leibowitz, as its new Chairman, and just a few days after Chairman Leibowitz officially assumed the duties of FTC Commission Chairman.

[Read: Daily Memo: Whole Foods Market - FTC Settlement Deal Watch - Countdown to March 6, And: Daily Memo: Whole Foods Market - FTC Settlement Deal Watch - 9 Days to March 6. And: Retail Memo - Breaking: FTC Commissioner Jon Leibowitz Odds On Favorite to Be Named Chairman; Positive Development For Whole Foods' Settlement Talks.]

Below is a link to the press release issued by the FTC on Friday, March 6, announcing the settlement deal ending its antitrust legal challenge to Whole Foods Market's 2007 acquisition of Wild Oats:

[Link: FTC Consent Order Settles Charges that Whole Foods’ Acquisition of Rival Wild Oats was Anticompetitive.]

Below is the key quote from FTC Commissioner Jon Leibowitz in the March 6 press release regarding why the federal regulatory agency responsible for antitrust enforcement and consumer protection decided to reach and agree to a settlement with Whole Foods Market, Inc., despite for 20 months saying it's goal was to overturn the acquisition in order to preserve competition in what it called the "premium natural and organic retailing segment (PNOS) in a number of U.S. markets:

"As a result of this settlement, American consumers will see more choices and lower prices for organic foods,” said FTC Chairman Jon Leibowitz. “It allows the FTC to shift resources to other important matters and Whole Foods to move on with its business."

Although we've previously suggested the two parties should reach a settlement agreement in numerous pieces beginning some time ago, Natural~Specialty Foods Memo (NSFM) formally called for the FTC and Whole Foods Market, Inc. to reach a settlement on the legal case in this January 29, 2009 piece, where we focused the argument on the need for a settlement to be reached: Retail Memo - Breaking: Whole Foods Makes Settlement Offer to FTC; FTC Halts Action For 5 Days; Natural~Specialty Foods Memo Calls For A Settlement.

In that call for a settlement, we said achieving a settlement is important in part so that the FTC can move on to more important matters, including finding real antitrust cases to challenge, and so that Whole Foods Market can get back to what it does: merchandising and selling natural and organic food and grocery products.

In other words, FTC Chairman Leibowitz basically says in the March 6 press release what we said in our January call for a settlement, as well as in a number of stories prior to that.

In our January 29 piece, [Retail Memo - Breaking: Whole Foods Makes Settlement Offer to FTC; FTC Halts Action For 5 Days; Natural~Specialty Foods Memo Calls For A Settlement], we also offered a settlement blueprint or template for the FTC and Whole Foods. The basis of the settlement blueprint comes from the reporting, writing about and analysis we've been offering on the deal and antitrust challenge since the summer of 2007.

Below is a part of what we offered in the January piece:

A settlement blueprint or template

"In other words, the universe of stores we are talking about regarding a post-merger, combined Whole Foods-Wild Oats isn't much more than 100 nationally throughout the U.S. in these 29 markets where the FTC deems Whole Foods Market, Inc. a PNOS segment monopoly.

Our argument since the summer of 2007 has been that a post-merger, combined Whole Foods-Wild Oats isn't a monopoly. [You can read a recent story in which we made our argument as to why that's the case at the link here: 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.]

However, looking at FTC v. Whole Foods Market, Inc. today from a completely practical standpoint, we see no reason why the FTC and the natural grocer should not be able to achieve a settlement. After all, we are talking about a universe of just slightly more than 100 stores that the FTC is saying a "PNOS" category monopolist (Whole Foods) makes. We're also talking about just 29 specific U.S. markets. These two key facts need to be the starting point for negotiation, we suggest.

The FTC and Whole Foods need to look at each of these 29 markets and the number of stores the combined Whole Foods-Wild Oats has in each of the markets. Both parties then need to do an independent competitive analysis on each of these markets, including in the analysis not just natural foods class of trade retailers but also food retailers that are hybrid natural-organic-specialty supermarkets. These include retailers like Gelson's and Bristol Farms in Southern California, Raley's and Andronico's Markets in Northern California, The Fresh Market (chain), which has stores in the south, Midwest, Mid Atlantic and eastern regions, Wegmans in the east, Haggen Foods in the Pacific Northwest, and the numerous other natural-organic-specialty "hybrid" chains that fit this category in the 29 markets designated as monopolist by the FTC.

Once this real competitive analysis is done in the 29 U.S. markets, the FTC and Whole Foods then need to agree on Whole Foods' closing an agreed upon number of those 100-plus former Wild Oats stores in each of the respective markets. There still might remain 29 of those markets after the independent competitive analysis work is done, which is something that can be completed in a matter of a few days. But there also could be fewer than 29 remaining after the analysis.

The burden in the FTC's administrative process is on Whole Foods in reaching a settlement, that's why the natural foods grocery chain reached out to the FTC and submitted a settlement offer. In return the FTC suspended action on the case for five days. We think thus far that's a positive spirit of cooperation.

As all lawyers and negotiators know, first time settlement offers are seldom accepted. Instead they tend to be the opening entree to get settlement talks started. Whole Foods has served that opening entree with its offer. The FTC has responded in kind with the temporary halt of legal activity. Both moves are good negotiation openers. After all, another thing all good negotiators know is that the best negotiations come when both sides give a little something right at the start." [Read the entire story here.]

What we suggested is essentially the framework the FTC used in arriving at the settlement deal.

The FTC required (and the natural grocer agreed) Whole Foods Market, Inc. to put up for sale 32 stores -- 13 stores (12 former Wild Oats units and one existing Whole Foods unit) currently in operation and 19 stores that already have been closed, some by Wild Oats before the Whole Foods Market acquisition, the others closed by Whole Foods post-acquisition. [Read the details, including a list of the stores to be sold, here.]

Additionally, the FTC required Whole Foods to put the Wild Oats brand and associated intellectual property up for sale. This is really nothing to Whole Foods since if it thought the Wild Oats brand had value to the company it would be using it in some way. Instead, Whole Foods has intentionally shelved the Wild Oats brand. Now perhaps it can even make a few bucks from selling it.

[Of course, in the dynamic and interesting world of food retailing anything can happen. Perhaps Mike Gilliland, the founder of Wild Oats and now founder and CEO of fast-growing Boulder, Colorado-based Sunflower Farmers Market, will buy the brand from Whole Foods and bring back the Wild Oats name in the form of a chain of natural foods stores bearing the banner. For example, Sunflower is opening stores in Whole Foods' hometown market of Texas. However, because of what likely is a trademark issue with a natural foods store in Texas that uses the "Sunflower" name, the natural grocer has renamed its thus far handful of Texas' stores "Newflower." Wouldn't it just be ironic if Gilliland bought the Wild Oats brand from Whole Foods Market, Inc. and instead changed the name of the Texas stores to "Wild Oats"? It's intellectual property and retail brand marketing food for thought. And you read it here first.]

So, in a nutshell, the FTC seems to have used a very similar process to the one offered in our blueprint-template to arrive at a settlement deal; the key element of such a settlement agreement being, as we suggested, having Whole Foods agree to sell some selected stores in return for the antitrust regulator dropping its legal action, so that both parties could move on to doing what they should respectively be doing, antitrust enforcement and consumer protection for the FTC, and selling natural-organic groceries for Whole Foods Market.

We think the settlement is a good one for Whole Foods.

Reader Resource: Below are links to all of the FTC-filed information on the settlement deal with Whole Foods Market, Inc.:

>Agreement Containing Consent Orders
>Decision and Order [Public Record Version]
>Order To Maintain Assets
>Analysis of Agreement Containing Consent Orders To Aid Public Comment
>Commission Letter Approving the Divestiture Trustee Agreement
>Divestiture Trustee Agreement [Public Record Version] [Appendices B, D, and E Redacted]
>Amended Part 3 Administrative Complaint [Issued on September 8, 2008]
>News Release
>Order Withdrawing Matter From Adjudication

1 comment:

Anonymous said...

I read extensively on the FTC case against Whole Foods. You were the only one I've seen mention the probability of selling stores as a part of a settlement. Good call.