Whole Foods: Rotten to the Core?

The Federal Trade Commission's antitrust concerns about Whole Foods Market's (Nasdaq: WFMI  ) acquisition of Wild Oats seemed pretty ridiculous last year. But hold onto your hats: The U.S. Court of Appeals has overturned last year's denial of the FTC's request to block the deal -- which, of course, has already happened.

This week's court ruling might be amusing if it wasn't such a potent combination of silly and annoying.

Core incompetence
Whole Foods has already been busy integrating Wild Oats (and if anything, it's been a drag on profitability thus far).

Things have changed since the FTC first began its rather strange crusade against the Whole Foods/Wild Oats deal. These days, consumers are dealing with a more complicated decision when they mull whether they will go to Whole Foods, Safeway (NYSE: SWY  ) , Kroger (NYSE: KR  ) , Trader Joe's, or Wal-Mart (NYSE: WMT  ) for groceries. They're dealing with extremely daunting food price inflation. For many, the decision of where to shop has become exponentially less whimsical.

A Wall Street Journal blog post shed some light on why the Court of Appeals has decided to let this dead horse get beaten once again. Apparently the FTC didn't do a good job communicating one of the major pieces of "evidence" leading to its problems with the deal: the impact on "core" customers, as opposed to "marginal" ones.

"Core" customers are supposedly loyal, committed customers, less likely to go to other stores, as opposed to "marginal" customers, who are supposedly more likely to seek out better prices. The Court of Appeals believes that Judge Paul Friedman, who blocked the FTC last summer, considered only "marginal" customers in his decision.

Marginally logical
This sounds like academic balderdash to me, so I can't wait for the next installment in this terrible summer sequel to see if this makes an iota of sense. Right now, it sounds to me like the government thinks it should protect "core" organic customers from not only a monopolistic Whole Foods, but also from themselves. Does that mean these people are being victimized by their own choices (or their own apparent inability to make such choices)?

The FTC spilled the beans on some of Whole Foods' competitive secrets last year (another choice moment, to be sure), and one of the tidbits was the hardly shocking concept that Whole Foods targets communities with highly educated consumers. Well if they're highly educated, one would like to think they're capable of making decisions concerning consumption.

So I guess this means the government feels it needs to protect people who, for whatever reason, don't shop around according to price? (I guess it is bailing out some people who paid way too much for houses, come to think of it.)

Furthermore, if shoppers are bummed that Wild Oats has been absorbed, they can either deal with it, go to Trader Joe's, really show some spunk and look up an independent organic store or farm, or suck it up and go to Wal-Mart. I have a funny feeling that times of economic distress show how loyal some consumers aren't. Whole Foods has admitted it needs to communicate value to its customers, given stepped up competition.

Maybe I'm missing something here, but the Court of Appeals' supposed clarification leaves the "real" issue at hand sounding just as silly as the whole thing sounded before.

We've got bigger problems than organic grocery "monopolies"
With gas and food prices as high as they are, circling back and attacking Whole Foods' acquisition of Wild Oats really makes me think these folks are still out of touch with reality and even worse, don't mind wasting taxpayer money.

The last thing we need is one more reason to believe the government is wasting even more taxpayer money, right? Yes, by all means, bail out Fannie Mae (NYSE: FNM  ) , Freddie Mac (NYSE: FRE  ) , and any "too-big-to-fail" company that brought about its own downfall. And then, by all means, put the cherry on top by saving us all from "evil" Whole Foods Market while you're at it.

Here's another angle: How many other acquisitions could be unwound with this kind of reasoning? Hey, the newly merged Sirius XM Radio (Nasdaq: SIRI  ) might be unfair to "core" satellite radio listeners. Those folks might be terribly victimized by satellite radio's current monopolistic stranglehold on radio personalities or the fact that they can actually access some stations that broadcast something other than pop-music bile in constant rotation. Whatever will they do? They might be too ignorant to recognize the reality that they have other options, like not subscribing.

Reality check in aisle 1
As a shareholder, I'd say Whole Foods Market has plenty of competitive challenges right now, thank you very much, and even though I have faith the company can persevere, that doesn't mean those challenges don't exist.

We've got some major economic problems in the U.S. now, and call me crazy, but Whole Foods' completed acquisition of Wild Oats seems really low on any list of concerns consumers might have. I guess that isn't stopping the FTC's bizarre and dogged grudge match against the grocer, though.

Related Foolishness:

Whole Foods Market is a Motley Fool Stock Advisor recommendation. Wal-Mart Stores is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 31, 2008, at 9:18 PM, RPMick wrote:

    Bravo good sir. Bravo. Well put.

  • Report this Comment On July 31, 2008, at 9:38 PM, TMFDiogenes wrote:

    Love it, Alyce!

  • Report this Comment On August 01, 2008, at 9:15 AM, dscholey wrote:

    I believe that this is politically motivated - so who can we write to in an attempt to bring other political pressure to bear?

  • Report this Comment On August 01, 2008, at 9:56 AM, tyroon wrote:

    Well said Alyce.

    The way the government is stepping all over itself (and investors) to help the surviving big financial houses, I wonder (in jest) if a Wall Street firm's traders have a large short position on WFMI and the FTC is churning bad news to help push Whole Foods stock price down.

    The government/SEC certainly hasn't bothered to investigate the shorted 25 million WFMI shares to see how many of them are naked shorts. That's over 18% of WFMI's float! If the government really is sniffing for rot around WFMI, why is it they can't seem to smell the reeking breath of the short-buzzards right in their face? Naked short-selling is clearly illegal.

    Don't get me wrong, I'm a flag-waving American, but I question why the FTC will not give up on this silly vendetta against Whole Foods. They continue to hurt the stock and have cost me a lot of money by their interference with the free market system. Knowing that they are blowing my tax money to do it is like pouring sea salt into the wound!

    -JB in Austin

    Disclosure: I regularly shop at Whole Foods, I believe they have played a big role in improving our nation's food quality (by popularizing organic), and I am long the stock.

  • Report this Comment On August 01, 2008, at 2:13 PM, Sinfest wrote:

    Definitely politically motivated, imho. The Bush Administration has already politicized the Justice Department, just like they have done to everything else.

    However, I think the Fool is wrong about bailing out Fannie and Freddie being a waste of money.

  • Report this Comment On August 06, 2008, at 6:13 PM, spursin7 wrote:

    you write like a man

  • Report this Comment On August 08, 2008, at 2:31 PM, matcha695 wrote:

    If Mackey was skilled and PROFESSIONAL at interacting with the public and government, the FTC would never have become so obsessed with him and his company. Noticing Mackey's innate tendency to annoy a fair percentage of people he comes in contact with, I was smart enough to realize that WFMI was a poor investment a long time ago. Of course there are also many examples of very poor strategic choices the company has made as well as an inability to perceive and adjust to changes in the macro-economic environment.

  • Report this Comment On August 09, 2008, at 12:32 PM, XpiredCallGirl wrote:

    I completely agree with Alyce. Our executive branch of government is , unfortunately, filled with lackeys doing only perfunctory surveillance of real shysters like those at the helm of the sub-prime debacle. Whole Foods Market is a likely target for white bread, twinkie munching, Bush-appointed FTC bureaucrats who perceive it as a company whose patrons are earth friendly and progressive minded (read liberal-elite). True, Bushies and their would-be-inheritors to the throne won't be getting many votes from WFM patrons ... or anybody else who has been rudely awakened by this unfortunate period in our political and economic history.

  • Report this Comment On August 10, 2008, at 2:40 AM, matcha695 wrote:

    You can argue against and complain about the FTC's interference with WFMI, or you can be an investor and look at the reality as best you can and make investment decisions accordingly. Since this is Motley Fool I am surprised that this article is about how you think the world should treat this company instead of about the realities of it's prospects. In general, I don't remember this author having profitable stock investment ideas.

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