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Natural Foods Merchandiser

FTC blocks Whole Foods-Wild Oats merger

Whole Foods Markets' acquisition of Wild Oats was stalled June 7 when a judge granted the Federal Trade Commission's request for a temporary restraining order. A federal court will decide whether the merger of the two natural food giants violates antitrust laws. The FTC said the proposed transaction would eliminate "the substantial competition between these two uniquely close competitors in numerous markets nationwide in the operation of premium natural and organic supermarkets."

"Whole Foods and Wild Oats are each other's closest competitors in premium natural and organic supermarkets, and are engaged in intense head-to-head competition in markets across the country," said Jeffrey Schmidt, director of the FTC's Bureau of Competition, in a prepared statement. "If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers."

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 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 officials 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 independent 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's Web site says the agency differentiates premium natural and organic supermarkets, such as Whole Foods and Wild Oats, from conventional retail supermarkets in several ways. "These include the breadth and quality of their perishables—produce, meats, fish, bakery items, and prepared foods—and the wide array of natural and organic products and services and amenities they offer. In addition, premium natural and organic supermarkets seek a different customer than do traditional grocery stores. Whole Foods' and Wild Oats' customers are buying something more than just the food product—they are seeking a shopping 'experience,' where environment can matter as much as price."

In the complaint filed in federal court, the FTC noted that Whole Foods' 2006 annual report said, "We believe our heavy emphasis on perishable products differentiates us from conventional supermarkets and helps us attract a broader customer base."

The FTC had twice asked for additional information on the merger before filing the injunction and restraining order.

Moore speculated that Whole Foods' brand image might 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?"

Scott Van Winkle, a Wall Street analyst in the food industry, wrote a memo to investors saying a major distributor of natural and organic foods might stand to benefit from the FTC's suit.

"We note that the real winner from the FTC action isn't the consumer, but United Natural Foods [Inc.] ..., which will not have the heft of a combined Whole Foods/Wild Oats leaning on it to drive lower prices to pass along to the consumer." Whole Foods and Wild Oats make up about 36 percent of UNFI's sales, the Associated Press reported. Whole Foods contributes the largest amount, at about 26 percent of revenue, while Wild Oats makes up about 10 percent, according to UNFI's 2006 annual report.

Whole Foods reportedly also has a more favorable pricing deal with the distributor than Wild Oats does, meaning if that pricing agreement is extended to Wild Oats stores in the deal, UNFI could lose the difference in revenue as well.

The two natural food chains combined have 300 stores in three countries and almost $7 billion in annual sales. The value of the tender offer, merger and assumed debt is approximately $670 million.

Natural Foods Merchandiser volume XXVIII/number 7/p. 11

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