The Federal Trade Commission’s decision to challenge the merger of the nation’s best-known upscale grocers, Whole Foods Market Inc. and Wild Oats Markets Inc., seems unusual at first glance.
After all, with thousands of grocery stores dotting the country, consumers have plenty of options for picking up a gallon of milk or a loaf of bread, even if you’re talking about an organic jug of milk or an artisan baguette.
Legal experts agree the challenge may seem somewhat surprising. But it's not the first time regulators have focused on a narrower slice of a market when deciding whether a merger will mean that consumers will have less choice or be forced to pay more for certain goods.
“It’s a market definition question,” said Bob Lande, a law professor at the University of Baltimore and head of the American Antitrust Institute, which generally favors strong antitrust protections. “Is there such a thing as a high-end food retailing market?”
The FTC clearly thinks so. In a court filing made public Friday, the commission argued that to allow the merger to go forward would substantially reduce competition "in the operation of premium natural and supermarkets," raising prices and otherwise hurting consumers in a number of markets.
“Consumers have benefited directly from the price and quality competition between Whole Foods and Wild Oats,” lawyers for the FTC wrote.
Under the proposed deal, Whole Foods would acquire Wild Oats in a deal valued at about $565 million, and also would take on Wild Oats' debt. Both companies have vowed to fight the agency.
The FTC is launching the challenge even though Whole Foods and Wild Oats are dwarfed in sales by mega-discounters like Wal-Mart Stores Inc. and traditional grocery chains like Safeway Inc. Not incidentally, those companies are among the many big chains that have added their own upscale and organic offerings in recent years.
Lande suspects the commission decided to challenge the deal on the theory that, while other competitors exist, Whole Foods and Wild Oats are most likely to make a pricing decision by looking at each other and not by considering Safeway’s branded organics line or Wal-Mart’s organic milk prices. That raises the concern that the merged companies will feel free to raise prices once they eliminate each other as competitors.
He points to a case in the early 1990s in which federal regulators sought to block an acquisition involving two high-end pen companies, arguing that it would stifle competition — despite the fact that, in general, pens are readily available from countless providers. A court rejected the government’s argument, however.
Stephen Calkins, formerly general counsel for the FTC and now a professor at Wayne State University law school in Detroit, said sometimes the commission can be surprised to find that what seems like a cut-and-dried merger could potentially stifle competition.
He was with the FTC when it reviewed a proposed merger of office-supply stores Staples and Office Depot. On its face, he said, the two chains appeared to have plenty of other competitors, ranging from mom-and-pop stationery shops to other big-box discounters.
But when regulators delved into the company’s paperwork, they concluded that the two companies didn’t consider those other types of stores when making pricing decisions. Instead, they relied mostly on what the other was charging. In fact, Calkins said, the commission argued that prices were lower in areas where the two were directly competing.
“We realized from the facts of the case that the important competition was between the superstores. They played a special role, and if one were to be eliminated … prices were likely to go up,” he said.
The FTC opposed the merger and the two chains remained independent.
Calkins said regulators may have found a similar situation with Whole Foods and Wild Oats. Still, he was somewhat surprised that the FTC’s court filing did not contain more concrete data on pricing and seemed to focus heavily on how shopping at the two stores implies a unique lifestyle choice.
"Relative to most other retailers, premium natural and organic supermarkets' products often are priced at a premium reflecting not only product quality and service, but the marketing of a lifestyle to which their customers aspire," the FTC wrote.
Calkins said that stance could leave the door open for the two grocers to argue that they have plenty of competition in the lifestyle arena, including such things as farmer’s markets and food co-ops.
Calkins said more specific details on pricing may emerge later.
In the filing, the FTC did allege that when one of the companies entered a market where the other already had a store, both companies responded by improving stores and reducing prices. The two retailers do not respond the same way when a different grocer comes into the market, the FTC found.
Whole Foods dismissed the FTC’s contentions.
“When we go out and look at pricing, we don’t look to Wild Oats as much as we look at our regional competition,” spokeswoman Kate Lowery said Friday.
She said the company also has sees conventional grocers as stiff rivals.
“The FTC’s petition has no basis in fact or law, and it seems to me that they’re ignoring the evidence that proves that we have fierce competition in the marketplace,” she said.
The FTC’s challenge comes as many traditional grocers have expanded their natural and organic offerings, buoyed by increased demand. Still, antitrust experts speculate the commission could argue that, while other grocery stores offer some organic and natural foods, they do not offer nearly as many as Whole Foods and Wild Oats.
That means that, while competition from a company like Wal-Mart or The Kroger Co. may help keep down the price of milk and a few other products, it may not stop the merged companies from charging more for hundreds of other delicacies found primarily in their stores.
At this point, it’s tough to tell which side will prevail.
Claude Wild, a former regional director for the FTC who is now of counsel with Greenberg Traurig in Denver, said it’s possible the companies will be able to work out an agreement in which they get rid of some stores or make other concessions.
The two also may be able to successfully argue that, while they don’t face as much competition from mainstream retailers now, that will change in the near future.
There are clear signs that could happen. For example, Wild had to laugh when he noticed that a story in his hometown paper on the FTC’s challenge to the Wild Oats-Whole Foods merger ran next to a Safeway ad — promoting that grocer’s natural foods line.