WASHINGTON — The Federal Trade Commission failed to prove that a separate market exists for “premium natural and organic supermarkets” in its antitrust case against the acquisition of Wild Oats by Whole Foods, according to the judge's opinion in denying a preliminary injunction against the merger. The opinion was made public last week.
The judge sided with the chains in concluding that Whole Foods and Wild Oats compete with a variety of traditional supermarkets that increasingly offer organic and natural products, and that the elimination of Wild Oats from the market would not likely be enough to allow Whole Foods to raise prices.
The FTC appealed the judge's decision and was granted a temporary stay on the merger last week. The appeals court was expected to decide whether or not to allow the FTC's appeal to proceed by early this week. If the court denies the request for an appeal, the merger could be completed as soon as today.
In issuing his ruling in favor of the chains, U.S. District Court Judge Paul Friedman said the FTC was not able to prove its contention that “premium natural and organic supermarkets” should be considered a distinct market from traditional supermarkets.
“The evidence before the court demonstrates that other supermarkets, including Safeway, Wegmans and Delhaize, compete today for the food purchases of customers who shop at Whole Foods and Wild Oats and that Whole Foods' customers already turn for some of their food purchases to the full range of supermarkets,” Friedman wrote. “Post-merger, all of these existing competitive issues will remain. If the combined firm raised prices or permitted quality to slide, many customers could and would readily shift more of their purchases to any of these alternative sources of natural and organic foods, often stores where they already shop. The evidence of substitutability or ‘interchangeability of use’ is striking.”
By concluding that a distinct market does not exist for premium natural and organic supermarkets, the judge said it was not necessary to closely consider the geographic overlap of the two companies. His report cited 17 locations where the two banners can currently be considered competitors and another seven where stores are in development.
In previous filings in the case, Whole Foods revealed that it planned to sell the 35 Henry's and Sun Harvest stores that Wild Oats currently operates to Apollo Capital Management, the parent of Smart & Final. In addition, Whole Foods plans to close or sell another 30 acquired Wild Oats locations, based on an FTC filing that was obtained by some news organizations before that information was blacked out.
Whole Foods currently operates 194 stores, and Wild Oats 110, leaving about 45 Wild Oats stores that Whole Foods would convert to its own banner after the planned sales and closures. The two firms agreed to merge in February in a transaction valued at nearly $700 million.
Despite the widespread publicity concerning remarks made by Whole Foods Chairman and CEO John Mackey in an email to his board, on his blog and as an anonymous poster on an online stock message board, the judge did not rely on those statements in his argument.
In making his case against the FTC, he cited testimony from other Whole Foods executives, from other supermarket industry executives and from industry observers, including John Stanton, a professor at St. Joseph's University in Philadelphia.
“I believe that Wild Oats or Whole Foods will face robust competition in just about any major area that they go into,” Stanton testified. “Supermarket chains will fight tooth and nail for those customers.”
Among the judge's conclusions was that Whole Foods compares its pricing and its product offerings with Trader Joe's and with other supermarkets more than it does with Wild Oats, and that Wild Oats is generally higher-priced in markets where the two currently compete.
The judge also made extensive note of the increasing prevalence of organic and natural private-label items at traditional supermarkets, such as Safeway's “O” line, and of the addition of dedicated natural and organic sections in traditional supermarkets, including Kroger Co. and Hannaford Bros.
Such stores compete aggressively for customers who are “on the margins” — that is, they are not dedicated shoppers of another banner — using price, quality, service and selection, Friedman said.
