WASHINGTON — Just what are Whole Foods and Wild Oats, anyway?
That's the question the Federal Trade Commission is seeking to answer as it evaluates how the two natural/organic chains, which have agreed to merge, compete against each other and against other supermarkets to see if their merger would violate federal antitrust laws.
“I think what the FTC is going to focus on regarding Whole Foods' acquisition of Wild Oats is whether their store formats are so different and unique that they constitute a separate product market from traditional supermarkets,” said James Fishkin, a partner in the Washington office of Dechert LLP and a former attorney with the FTC who worked on many of the large supermarket mergers in the late 1990s.
Fishkin was also scheduled to be a presenter at an all-day FTC conference late last week on supermarket mergers called “Grocery Store Antitrust: Historical Retrospective & Current Developments.” The conference comes as the FTC investigates not only the unique situation presented by the acquisition of Boulder, Colo.-based Wild Oats Markets by Austin, Texas-based Whole Foods Market, but also the proposed acquisition of Pathmark Stores, Carteret, N.J., by A&P, Montvale, N.J., in a scenario that resembles Ahold's failed attempt to acquire Pathmark in 1999.
FTC's ongoing investigation into the Whole Foods-Wild Oats agreement prompted Whole Foods last week to delay for a third time its cash tender offer for Wild Oats' stock. The May 22 deadline was extended to June 20.
A&P and Pathmark also last week issued a statement about the timing of their proposed merger, noting that they would not certify that they had complied with the FTC's request for more information before June 30, and that they would not consummate the merger for at least 60 days following compliance.
A&P previously had said it did not expect the deal to close until late this year. Both A&P and Pathmark said they were working to comply with the FTC's request.
One industry source told SN that the FTC may be taking a close look at specific comments made by John Mackey, chairman and chief executive officer, Whole Foods. In past conference calls with analysts, Mackey has stated that he does not feel traditional supermarkets are strong competition for his format.
WHO IS THE COMPETITION?
Those types of statements could weigh against Whole Foods as the FTC examines documents and deposes executives on the nature of the chain's competition. If Whole Foods and Wild Oats are found to be so different from traditional supermarkets that they compete mostly against each other, the FTC could rule against the merger on the basis that Whole Foods could simply shut down the acquired stores or sell them to traditional supermarket chains, thereby eliminating competition, one observer told SN.
Even if Whole Foods and Wild Oats are thought to be their own class of trade separate from traditional supermarkets, however, the FTC would consider the ease with which traditional supermarkets or other retailers could compete to help keep prices low for consumers.
“It's a persuasive bargaining thing — Whole Foods will try to say, I think, that it's a relatively small transaction in the grand scheme of things, and if you look at the whole grocery world, the amount of competition is increasing,” said Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va.
Analysts previously said they expected that Whole Foods might have to divest up to 30 Wild Oats locations to satisfy the FTC. As reported in the March 5 issue of SN, the two chains overlap in about two dozen markets, particularly in Southern California and the Denver-Boulder area.
“I don't think Whole Foods went into this without considering that the FTC would require some select store divestitures,” said Chuck Cerankosky, an analyst with FTN Midwest Research, Cleveland. “But I don't think the FTC has any reason to be speedy about approving any deal. And it seems with the other recently announced acquisitions — Sirius and XM Radio, Alcoa and Alcan — they've got a lot on their plate.”
One source told SN they believe the A&P-Pathmark deal is progressing smoothly, although that agreement presents a more typical situation of head-to-head competiton within a single market. Another factor in that proposed merger is the dearth of Wal-Mart Supercenter competition in the two chains' core New York Metro market.
Fishkin said he expected that the FTC would look closely at how the market has changed over the last eight years.
“I think that the FTC will focus on the areas where A&P and Pathmark compete with each other, and they will analyze the extent of the level of competition between the firms and look at who else competes in the area,” he said. “In addition, the FTC will look at any changes in the market since 1999, when Ahold attempted to acquire Pathmark.”
After a nine-month FTC investigation led by Fishkin, Ahold backed away from the Pathmark deal, based on the FTC's ruling. At the time, Ahold owned the Edwards banner — now operating as Stop & Shop — in the New Jersey and Long Island markets.