Whole Food's Statements Create Difficulties for the Wild Oats Deal

Implications:   The FTC's recently released unredacted version of the complaint against Whole Foods adds some spice to the case and helps explain the thinking behind bringing the case. In the unredacted material, Whole Foods' CEO John Mackey explained to the Whole Foods board that part of the rationale for acquiring Wild Oats was to "avoid nasty price wars" in a number of cities. In the newly unredacted material Whole Foods asserts that it "has created a brand that has real value;" and that it has created a "customer loyalty that will not be stolen away by conventional markets who sell the same products." Although the statements will likely make for hard going in court, they do not directly go to the key point in the case; the likely nature of future competition. To succeed in court, Whole Foods, will have to provide objective evidence showing that in the future, it will have compete against conventional supermarkets .

Analysis:

Yesterday, the FTC released the unredacted version of its complaint against Whole Foods' proposed acquisition of Wild Oats. The previously redacted comments add some spice to the complaint and help explain the thinking behind the FTC bringing this case. In the unredacted material, Whole Foods' CEO John Mackey explained to the Whole Foods board that part of the rationale for acquiring Wild Oats was to "avoid nasty price wars" in a number of cities. Mackey also explained that acquiring Wild Oats would prevent another super market chain" from using their brand equity to launch a competing national/organic food rival."  The quoted statements in the complaint made a number of points about the differentiation between Whole Foods, conventional supermarkets  and organic sellers. For example, Whole Foods' core customers recognize that it is "authentically committed to its mission of natural/organic/healthy foods;" "Whole Foods has created a brand that has real value;" and that it has created a "customer loyalty that will not be stolen away by conventional markets who sell the same products." As to other organic and natural markets, the quoted statements in the Complaint explain that "Whole Foods isn't primarily about organic foods. It never has been. Organic foods is only one part of its highly successful business model." Instead, "superior quality, superior service, superior perishable product and superior prepared foods" are among the factors that distinguish Whole Foods. Similarly, the factors that differentiate Whole Foods from conventional supermarkets, Trader Joe's and Wal-Mart are Whole Foods' high quality produce (fruit, vegetables, meat, seafood, bakery and prepared foods). As result, Whole Foods' is able to "coexist so well with [Trader Joe's]" and Wal-Mart "isn't going to hurt" Whole Foods. "Safeway and other conventional retailers will keep doing their thing -trying to be al things to all people…" and therefore can't "effectively focus on Whole Foods with out abandoning 90% of their own customers" Whole Foods knows its "core customers well" and Whole Foods' customers "will not abandon [the store] because Safeway has made their stores a bit nicer and is selling some organic foods." Even though conventional supermarkets have been selling organic foods for many years, such sales have "never hurt Whole Foods." The quoted statements assert that Whole Foods has targeted for entry markets where Wild Oats "enjoyed a monopoly," and vice versa.  They also claim that Whole Foods has always taken market share from Wild Oats whenever it has built a competitive store.

These statements go to the core of much of the case against the acquisition and will likely make for hard going in court. Because the statements come from high ranking officials, it is likely that the court will give the statements a fair bit of deference. The way to rebut these statements is to provide the court with objective evidence that proves that the statements are incorrect. Since the FTC has not provided the dates when these statements were made (except for the rationale to the Whole Foods board for the acquisition of Wild Oats), the parties may be able to point to objective evidence of how competitive forces have changed since a given statement was made. Finally, the quoted statements do not directly go to the key point in the case; the likely nature of future competition. To succeed in court, the parties will need to show that the factors that may have isolated them in the past from competition with other supermarkets are unlikely to continue, and, in the future, Whole Foods, will have to compete against a number of conventional supermarkets. In light of recent declines in Whole Food's earnings and changes in the way a number of supermarkets are planning to operate, Whole Foods may persuade the court that on a going forward basis the deal is not anticompetitive and be allowed to purchase Wild Oats.