No Wild Oats for Whole Foods?

Regulators want to block the merger, claiming it's bad for consumers, but industry experts disagree, citing healthy competition

by Pallavi Gogoi

The popular grocery chain Whole Foods Market (WFMI) charges handsomely for its all-natural and organic offerings—enough to be dubbed "whole paycheck" by many wags. Now, the U.S. Federal Trade Commission charges that Whole Foods would boost prices even higher, while reducing the quality and services at its stores, if it's allowed to acquire chief rival Wild Oats Markets (OATS).

But is that true? The FTC wants to block the $670 million deal announced in February on the grounds that it would prove anticompetitive and harm consumers. "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," Jeffrey Schmidt, director of the FTC's Bureau of Competition, said in a June 5 news release announcing the agency's lawsuit aimed at blocking the sale. "If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers. That is a deal consumers should not be required to swallow."

Large Playing Field

However, what the FTC seems to be ignoring is that the market for natural and organic foods is growing rapidly with a plethora of new entrants, from giant retailer Wal-Mart Stores (WMT), to Kroger (KR), Safeway (SWY), SuperValu (SVU), Publix Super Markets, Costco Wholesale (COST), Meijer, and the fast-growing hip specialty retailer Trader Joe's.

Both Whole Foods and Wild Oats were quick to seize on that fact: "The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic, and fresh products, renovate their stores and open stores with new banners and formats resembling Whole Foods Market," says John Mackey, chairman and CEO of Whole Foods. "Evidently the FTC does not appreciate the many benefits for consumers of the proposed merger, including our plan to invest capital in and improve many of the stores currently owned by Wild Oats."

A combined entity of Whole Foods and Wild Oats would control about 11% of the natural foods market, which is hardly a monopoly. Also, both retailers have built their reputations on the premise that they provide higher-quality produce and are committed to supporting local and small farms. It is these high standards that consumers have grown to depend on when it comes to organic foods, the fastest-growing area in the food industry. According to the Organic Trade Assn., sales of organic foods grew 22.1%, to reach $16.9 billion, in 2006. Together the combined company would squeeze better bargains from suppliers, which should ultimately lower prices in the aisles, analysts say.

Selling More Than Food

"There is so much competition from Wal-Mart and other grocery stores getting into the business that I don't see how these two could have a monopoly," says Peter Cohan, president of Peter S. Cohan & Associates, a management consulting and venture capital firm, who teaches management at Babson College.