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Saturday, June 09, 2007

Competition among Premium Natural and Organic Supermarkets

The government has decided to block the merger of Whole Foods and Wild oats:

Bush's War on Whole Foods, by Daniel Gross, Slate: ...We're in the midst of a merger mania, and the Federal Trade Commission and the Justice Department's antitrust division—the agencies tasked with assuring that mergers don't harm consumers by reducing competition—have approved almost every deal. If the nation's largest hog producer buys the second-largest hog producer? OK. Telecommunications giants SBC and AT&T want to merge? No problem. Giant supermarket company Albertson's and giant supermarket company SuperValu get together? You got it.

But when Whole Foods, the extremely successful, bobo-friendly, high-end, blue-state organic grocery chain and Wild Oats, the less successful, bobo-friendly, high-end, blue-state organic grocery chain, say they want to merge, the answer is no. This week, the FTC sued to stop this puny ($670 million) merger, saying the planned deal would "eliminate[e] the substantial competition between these two uniquely close competitors in numerous markets nationwide in the operation of premium natural and organic supermarkets" and result in higher prices and less consumer choice. ...

Whole Foods and Wild Oats are not like Citigroup and Chase, which frequently have bank branches across from each other. ... Neither is a nationwide chain. Whole Foods boasts 195 stores, and Wild Oats has 110 stores. ... Sure, they overlap in a few markets... But mostly, the organic chains operate in different places. ...

In those few places where they overlap, if the Wild Oats were to be closed, or turned into a Whole Foods, how will customers be harmed? These stores are located in urban and suburban areas that are thick with places to shop for food, especially organic food. ... Competition to organic supermarkets is springing up everywhere. There are hundreds of farmers markets. ... Big chains like Kroger and Safeway have developed house brands of organic foods. Wal-Mart is getting into the act, too. Any place with enough yuppies to support a Whole Foods or a Wild Oats is likely also to have a Balducci's or a Trader Joe's. ... These may not be organic superstores, but they offer plenty of natural foods and the sort of high-end products and prepared foods that appeal to Whole Foods and Wild Oats shoppers.

One key antitrust issue is how the authorities define the market. ... Here, again, the FTC gets it all wrong. It says that the organic supermarkets occupy their own special category of store because "Whole Foods' and Wild Oats' customers are buying something more than just the food product—they are seeking a shopping 'experience,' where environment can matter as much as price."

It's hard to see how permitting Whole Foods to convert existing Wild Oats into Whole Foods outlets and perhaps close a few dozen redundant stores will deprive foodies of a unique retail experience. And experience is in the eye of the shopper. For some subset of foodies, Whole Foods and Wild Oats are simply too corporate and not sufficiently local—they're no better than Stop'n'Shop. ...

I try not to take public policy personally. But it's hard not to in this case. [The]... perfectly nice town in which I live ... only has a Wild Oats—along with a Trader Joe's and a Balducci's and a twice-a-week farmers market, plus an artisanal chocolatier and a cheese shop. Oh, and a few good fish shops. But our Wild Oats is a forlorn place—it's clean but dim and generally empty. ...

For months, local foodies have been salivating at the prospect that Whole Foods would buy out the company and convert the Wild Oats into a Whole Foods. Fresh sardines, luscious tomatoes, and lovingly cured salamis were only a merger away. But not if the FTC has its way. ...

Free Exchange is not impressed:

I can only presume that the FTC commissioners are haunted by a vision of a might-have been America in which the two titans, Whole Foods and Wild Oats, battle like Mothra and Godzilla across the upscale strip malls of America, laying waste to the existing landscape of high prices. Yet it is hard to see how Whole Foods is preventing new entrants from playing exactly that role in the future. Or old ones, for that matter. The FTC, in defining the "relevant market", seems curiously unaware of the existence of thousands of alternative food shopping venues, colloquially known as "supermarkets", that are even now plying organic produce and pre-packaged vegetarian meals to urban hipsters everywhere.

Even more curious, however, is how the FTC decided that America's affluent consumers of expensive foods with dubious health and environmental benefits are in such dire need of protection. If anyone in America has countervailing market power, it is the consumers pushing shopping carts filled with Guatamalan cherries and whole-wheat frozen enchiladas out of the local Whole Foods on a Saturday morning. ...

Since we're taking public policy personally today, my town is a little different than Dan's. We've had Wild Oats stores, and will soon have a Whole Foods. Wild Oats couldn't beat the local competition and failed. Whole Foods will try next, but around here, Wild Oats and Whole Foods aren't welcomed, they're "big box stores":

Recalling Wild Oats, Kathleen Epstein, Eugene Weekly: Let us look at the failure of Wild Oats, another big box food store that tried to establish itself in Eugene... Hailed as an excellent natural foods store, Wild Oats bought out the locally owned, highly successful Oasis Market, which had two excellent stores. ... Wild Oats failed to win the hearts, minds and pocketbooks of the people of Eugene. Eight years later, they were forced to close.

Whole Foods, too, will fail. Eugene already has a host of locally owned and operated natural foods stores, plus a locally based chain of supermarkets that provide both conventional and organic products. Why would people support a large corporation that sends its profits to its shareholders, instead of remaining loyal to their locally owned markets? ... Within time, the 53,000 sq. ft. building will be empty...

There was quite a bit of opposition to Whole Foods coming here, protests, etc., though they did manage to get permission to build and will open soon:

Backers, foes will get their fill of Whole Foods issue, by Edward Russo The Register-Guard: The civic debate over the proposed Whole Foods Market development in downtown Eugene will reach a fever pitch this evening... To critics, the private-public project is a slap-in-the-face to locally owned natural food stores, runs contrary to the city's goal of nurturing environmentally friendly businesses, and is part of a trend that threatens to rob Eugene of its individuality. ...

And when they do open, they'll find plenty of competition, at least around here (e.g. there's a popular locally based chain of stores serving the same market).

There are a lot of other mergers I'd worry about before this one.

[Update: Eugenians are disagreeing with the characterization of Wild Oats as "big box". The comments are that it was doing fine until it failed, and failure was due to it being too small of a store, management issues, or issues with the chain more generally. In any case, they chose to enter this market at that scale of operation, didn't make it here, and did not choose to build a bigger store like Market of Choice has done, etc. So, for whatever reason, Wild Oats was unable to compete in this market and pulled out.]

    Posted by on Saturday, June 9, 2007 at 03:51 AM in Economics, Regulation | Permalink  TrackBack (0)  Comments (32)


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