Bush's war on Whole Foods.

Commentary about business and finance.
June 7 2007 6:33 PM

Bush's War on Whole Foods

The government's crazy effort to stop the organic chain from buying a competitor.

A Whole Foods storefront. Click image to expand.
Grocery shoppers at Whole Foods

The U.S. attorney scandal has raised fears that the Bush administration is misusing the levers of government to punish political opponents. Now I think I've uncovered another sinister example of the administration using government lawyers to stick it to liberals. And this time, Bush is aiming for the belly!

The background: 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.

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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.

One fear of antitrust types is that a company will buy a rival just to eliminate the competition and thus harm consumers. But Whole Foods and Wild Oats are not like Citigroup and Chase, which frequently have bank branches across from each other. Look at the disparity in sales—$5.6 billion for Whole Foods and $1.2 billion for Wild Oats—and scope. Neither is a nationwide chain. Whole Foods boasts 195 stores, and Wild Oats has 110 stores. Whole Foods has four stores in Manhattan. Wild Oats doesn't have a single store in New York state. Whole Foods has 17 outlets in Massachusetts to Wild Oats' three. Sure, they overlap in a few markets, such as West Hartford, Conn., and Denver. But mostly, the organic chains operate in different places. "If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers," said Jeffrey Schmidt, director of the FTC's Bureau of Competition. Yet Schmidt's own region is evidence that these two chains don't seriously compete. He has probably never shopped at a Wild Oats, since there isn't one in the District of Columbia, Virginia, or Maryland, a region that boasts 18 Whole Foods.

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. The Organic Trade Association reports that organic-food sales accounted for only 3 percent "of all retail sales of foods and beverages," in 2006, or $16.9 billion. But the market is growing rapidly—up 22.1 percent last year.

Competition to organic supermarkets is springing up everywhere. There are hundreds of farmers markets. The Whole Foods on Manhattan's Union Square is right across from the famed Union Square Greenmarket. 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. And Britain's Tesco is coming into the United States. 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. If two Colorado ski resorts merge, should the relevant market be Colorado or the entire United States? 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."

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