The Federal Trade Commission announced today that it would file a lawsuit to block the proposed Whole Foods-Wild Oats merger. The two companies are the largest players in the natural grocery sector, with 300 stores and almost $7 billion in combined annual sales.

But critics of the FTC say that, by looking only at the natural grocery sector, FTC is missing the point. "I'm startled by FTC's actions," said John Moore, founder of brandautopsy.com and former director of national marketing for Whole Foods. "With all the major grocery stores stocking more natural and organic offerings, it seems preposterous to think a merged Whole Foods and Wild Oats would be a threat to competitiveness." Organic food—the specialty of both chains—makes up only 3 percent of the total grocery market.

Whole Foods and Wild Oats have announced that they will vigorously challenge the FTC's decision. "The decision isn't necessarily a surprise, because we knew that the FTC staff had expressed concerns," said Sonja Tuitele, spokeswoman for Boulder, Colo.-based Wild Oats. "What is surprising is how narrowly they've defined the market. We don't see it that way, and that's why we'll challenge the decision in court." Tuitele said the timeline for resolving a case of this nature is generally several months.

While the two companies are the biggest naturals chains, their sales represent only about 11 percent of total natural and organic food sales nationwide, with the majority of sales coming through individual health food stores and mass supermarkets.

"We are surprised by the decision," said Michael Krestell, an industry analyst with M Partners in Toronto, who had earlier predicted the deal would go through. "There's a lot of competition in that sector, not just supernaturals or independent grocers, and it seems the FTC has taken a very narrow view of the marketplace."

The FTC had twice asked for additional information on the merger prior to today's announcement, a sign that the agency had concerns about the deal. Meanwhile, Whole Foods continued to push back the final date on its offer to buy outstanding Wild Oats shares—from March 21 to April 24 to May 22, and now to June 20.

Moore speculated that the power of Whole Foods' brand image may play a bigger role in the FTC decision than mere numbers. "The big picture view tells us Whole Foods has very little market share, but its mind share is huge," Moore said. "Could it be that the strength of the Whole Foods Market brand is influencing the FTC's decision?"