Friday, June 08, 2007

Whole Foods in Trouble?

Whole Foods and Wild Oats

More Sowing to be Done?

Whole Foods: Shares of the natural-foods grocer tumbled 3% the day after it was announced that the Federal Trade Commission was suing to block its purchase of Wild Oats. The move led Morgan Stanley to downgrade Whole Foods, saying, “For a stock already struggling with poor core earnings performance, uncertainty over the merger only adds to near-term investment risks.” The ruling also could have greater implications for the M&A market, which leads to…

Wall Street Journal

FTC Challenges Whole Foods-Wild Oats Merger

Posted by Peter Lattman

June 6, 2007

The WSJ has three stories related to Whole Foods. In one, we learned that the natural-foods grocer is opening its first store in London. In another, we learned that the traditional grocers like Kroger and SuperValu are fighting back after being crushed from Wal-Mart on the low end and Whole Foods from on high.

But it’s the third story that really turns us on. The FTC said yesterday that it would file a complaint today to block the proposed merger between Whole Foods and Wild Oats, arguing that the merger would lead to higher prices for natural and organic products in markets where the two chains compete. Whole Foods announced in February that it planned to acquire Wild Oats for $565 million. It’s an unusual move for the Bush adminstration; the WSJ cites a study showing that the administration rarely meets a merger it doesn’t like.

Says Jeffrey Schmidt, director of the FTC’s bureau of competition: “If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality and fewer choices for consumers.”

“Grass-fed organic baloney!” say Whole Foods and Wild Oats executives. They say that Whole Foods not only competes with natural and organic food stores, but more traditional chains as well. (Indeed, they might consider emailing the FTC today’s WSJ story on traditional supermarkets.) A Wall Street analyst told the Times that 74 percent of natural and organic foods were now sold through conventional supermarkets and the like.

Stephen Calkins, a law professor at Wayne State and former FTC general counsel, told the Times the FTC’s challenge was reminscent of its block of a merger in 1997 between Staples and Office Depot. Though the stores argued that office products were widely available, the FTC said that prices at both stores depended on the proximity of other office superstores. He told the Times:

“In terms of Whole Foods, the single most important question will be: Are the prices higher when the other store is not present?”

The WSJ says the move to block the merger boils down to a different question: Are Whole Foods and Wild Oats natural-food chains or grocery stores?