Whole Foods Fights the Power

The Federal Trade Commission's witch hunt against Whole Foods Market (Nasdaq: WFMI  ) offers a good lesson for these crazy times. The FTC's bizarre response to a merger of two relatively small grocers -- Whole Foods and Wild Oats -- makes it the ultimate poster child for why government intervention can be dangerous to a vibrant economy.

Now Whole Foods has decided it's going to fight back. It's suing the FTC.

I'd say the FTC's vendetta is the product of either corruption or incompetence -- I'm not sure which, but neither bodes well for a competitive marketplace. Given the trend toward nationalizing business, anything that smacks of corruption or incompetence emanating from government agencies is part of the reason some of us are deeply concerned that we're facing the wholesale destruction of the American economy.

Don't bother us with the facts
The FTC's opposition to the acquisition of Wild Oats seemed outlandish from the start. Those of us who live in the real world realize that you can get organic stuff at Wal-Mart (NYSE: WMT  ) , Safeway (NYSE: SWY  ) , Kroger (NYSE: KR  ) , Trader Joe's, regional specialty grocery stores, farmers' markets, and independent stores. Besides, nobody's putting a gun to our heads and demanding that we eat an organic diet.

Still, the FTC fought this case in court -- and lost. It even committed a major blunder by spilling competitive information. Now it wants a rematch.

Whole Foods' lawsuit against the FTC alleges violations of due process rights under the Constitution and charges that the FTC has also, in effect, "prejudged" the company. Apparently, the FTC expects Whole Foods to defend itself in trials in 29 separate geographic regions within a five-month period, and the company says it has not been given reasonable time to prepare. Whole Foods also said the FTC doesn't want the case retried in federal court and heard by an objective federal judge, but rather wants to do the hearing itself.  

Even people who aren't big fans of Whole Foods must think the FTC's stance sounds unreasonable. In that regard, at least the FTC's been consistent through this whole nightmare.

Let's talk about competition
The FTC's idea of what constitutes "fair competition" is skewed, to say the least. I recall Whole Foods CEO John Mackey's contention last year that the FTC asked for more documentation about his company's transaction than it did when Exxon and Mobil hooked up. You'd think the ExxonMobil (NYSE: XOM  ) megamerger would be a heck of a lot scarier than the joining of two moderately sized organic grocers.

Heck, critics have often accused Wal-Mart of entering small towns across the U.S. and driving out competition to become, yes, the only game in town. If Whole Foods' takeover of Wild Oats -- both in urban and suburban markets, where there is plenty of competition -- is such a problem, wouldn't Wal-Mart's complete retail dominance of so many small towns be, too? Call me crazy. 

Is it any wonder why some of us have a hard time believing that benevolent regulators are looking out for anyone's interests but their own? I've been ranting about con games lately, and the FTC's aversion to the Whole Foods/Wild Oats merger looks like another one. Spending taxpayer dollars to go after Whole Foods becomes even more offensive when you consider the serious problems our economy faces.

Winners, losers, and fighters
All of these situations remind me why I'm so passionate about the dangers of government intervention in the marketplace. The threat of cronyism and corruption is real, and true competition can easily be destroyed through the whims or misinterpretations of bureaucrats and academics. The utter lack of logic the FTC has shown in this case makes it hard for me to have any confidence in regulatory justice.

Sure, there are a lot of modern-day wannabe robber barons running around in the business world, but Whole Foods is not one of them. Besides, the Wild Oats acquisition hasn't even helped Whole Foods. If anything, it overloaded Whole Foods with debt that the company didn't have before, and it's been a major drag on profits. Whole Foods' stock price has plunged.

I admire Whole Foods for standing up for its rights, especially since the FTC's stance looked absurd even in better times. But as a shareholder, I'm also concerned that this crusade may cost us dearly -- as the merger itself already has. Ideological battles can be terrible for companies, both financially and in terms of the distraction they cause.  

Then again, if our economy is becoming the sort in which the government picks the winners and losers -- hello, financial companies; hello, General Motors (NYSE: GM  ) and Ford (NYSE: F  ) and all the others that want to become propped-up losers at taxpayer expense -- then maybe it's a good thing to refuse to go down without a fight. Go, Whole Foods!

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

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


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  • Report this Comment On December 10, 2008, at 1:01 PM, mlaursen wrote:

    Good article. The missing piece of the puzzle is why the FTC is gunning for Whole Foods. Makes me wonder if someone at the FTC is being paid off.

  • Report this Comment On December 10, 2008, at 1:16 PM, viconquest wrote:

    Awesome article and another example of an incompetent government at work. I wonder why the government doesn't offer higher salaries so they can bring in more capable people.

  • Report this Comment On December 10, 2008, at 2:50 PM, loat98 wrote:

    I agree that the FTC case against Whole Foods is misplaced. They seem to have segmented WFMI into the organic foods industry rather than considering them in the retail grocery business which is a much more logical grouping in my opinion. While I agree this is an error in direction for the FTC, I would not paint all regulators with the same brush. It seems that the power that a company like Walmart has over competitors and its supply chain would be a better place for the FTC to focus its efforts if the objective is to truly protect the public interest.

  • Report this Comment On December 10, 2008, at 4:18 PM, TMFDiggity wrote:

    Go on, girl! :)

  • Report this Comment On December 10, 2008, at 4:35 PM, NMPagan wrote:

    As a former customer of Wild Oats, I can tell you that they consitantly sold better quality foods at cheaper prices than Whole Foods, both of which had operated in this area. Once Whole Foods took control, prices skyrocketed, and quality went way down. I agree with the FTC that this merger was bad for consumers (and that those other mergers mentioned in the other posts are as well, especially anything Exxon does). I applaud the FTC for their dilligence in this, and hope that Whole Foods will be forced to sell better quality items at far lower prices.

  • Report this Comment On December 10, 2008, at 4:42 PM, rcoole wrote:

    Your comments are interesting given that the lack of regulation in the financial world is, at least partially, to blame for the reason we find ourselves in the dire straits we are in, economically. I agree with what you are saying in regard to this particular merger, however, your generalization with regard to government regulation seems somewhat over the top.

  • Report this Comment On December 10, 2008, at 4:45 PM, kieferal wrote:

    Why do you ignore the fact that the Whole Foods CEO posted anonymous rants about Wild Oats? It could go towards a motive why the FTC does not like the company.

  • Report this Comment On December 10, 2008, at 4:46 PM, JJ2929 wrote:

    I am not a Whole Foods shopper nor do I hold stock in it, but for the life of me, I can't see what the FTC is trying to accomplish. I can't even see where any corrupt regulators could have a hand in it -- except for one thing: Power corrupts (Lord Acton, 1887).

    It looks like they are trying to show their power to do something, when they have been powerless to do anything worthwhile.

    It seems like a terrible injustice with all the other mega-mergers that have taken place in recent years.

    And NMPagan's comment addresses the horrible impact this merger has had on what, 100 people?? Balderdash.

    Thanks, Alyce for bringing this to my attention.

  • Report this Comment On December 10, 2008, at 4:49 PM, imwetodddid wrote:

    I think Warren Oats should stay out of the food industry.

  • Report this Comment On December 10, 2008, at 6:11 PM, Vikingwarrior39 wrote:

    In answer to viconquest's question about paying more for qualified people, it's been my experience that all you end up with is more high paid unqualified people. E.G. Congress.

  • Report this Comment On December 10, 2008, at 7:16 PM, eguy wrote:

    The other chains you mention are not direct competitors to Whole Foods in the way that Wild Oats is. When they eliminate competition, Whole Foods grossly inflates prices and hires incompetent people. When they have a near monopoly over the cross section of products and preparations they provide, their prices and poor service become truly obscene. This has happened in my home town (where for example the same container of goat cheese costs $2.99 at Trader Joe's and $4.99 at WF, but of course TJ has only a fraction of the choice, so you end up with a choice of another trip or swallow the difference).

    In Portland, OR, where I used to live, there is New Seasons, a direct competitor, and they have blown WF out of the water with quality, price and most of all service. It is a vivid and embarrassing demonstration of what a shoddy business Whole Foods is.

    But of course it is hugely expensive to set up such a store, and especially in this terrible economy, which is itself a direct result of pathetically lax regulation and greed. The writer is upset because they own WFMI and want it to dominate, but that is a loss to the consumer.

  • Report this Comment On December 10, 2008, at 7:57 PM, minoh wrote:

    "why government intervention can be dangerous to a vibrant economy" - as can be the lack of it as the recent months have amply prooven. So what is your point?

    Besides that I agree with your opinion about the FTC case against Whole Foods. But why put it in such terms. Better bother us with the facts.

  • Report this Comment On December 10, 2008, at 7:59 PM, mlaursen wrote:

    eguy, there's a lot of chains of thought in your comment that I don't follow. To start with, if Wild Oats had simply gone out of business rather than being bought by Whole Foods, how would the consumer have been better served? If New Seasons is blowing Whole Foods out of the water, then does Whole Foods really have a near monopoly stranglehold on its market? Isn't it hugely expensive for Whole Foods to set up retail stores, too?

  • Report this Comment On December 10, 2008, at 8:01 PM, mlaursen wrote:

    There was a lot more involved in the current economic crisis than lack of regulation. There was inflationary monetary policy and promotion of poor lending practices by the quasi-government Fannie Mae and Freddie Mac corporations.

  • Report this Comment On December 11, 2008, at 9:53 AM, scope62 wrote:

    I have to plead ignrance when it comes to WFMI and Wild Oats. I've never been in either store.

    However, if free market forces are alowed to play out, AND if the prices are so high AND the service so bad once WFMI moves into the picture, then (logically) another competitor should be able to fill in the gap (i.e.New Seasons).

    Of course, it only plays out this way in a perfect world.The FTC needs to show that WFMI is willfully DISCOURAGING any competition.

  • Report this Comment On December 11, 2008, at 10:45 AM, fbohle wrote:

    I agree with you in your statements about the FTC and Whole Foods. However, I think it is disingenuous of you to rail against government oversight in general. The LACK of government oversight in our financial markets is being blamed for the financial disaster overtaking our nation today. You can't have it both ways. Focus on the problems in the FTC, and try to get them fixed.

  • Report this Comment On December 11, 2008, at 11:37 AM, richmacmf wrote:

    Whole Foods just opened in Tustin and I have had several people come to me unsolicited with rave reviews about it.

    I have been in the store in Seattle with my wife and we loved it there.

    Our US Govt and State of California Govt is inept and causes many more problems than they will every solve.

    We all can control things with our market choice. Shop where you get the best value. Don't rely on govt to protect you from your own laziness. Govt is there to provide basic social services and military protection in a very dangerous world. That is all. It has and is going too far.

  • Report this Comment On December 11, 2008, at 11:54 AM, sunnyq wrote:

    Well said Alyce Lomax!

    A concise, hard hitting and honest appraisal of a most shameful approach on the part of the FTC.

    Keep up the good work.

  • Report this Comment On December 14, 2008, at 12:05 PM, cummingsr wrote:

    Alyce, your take on the Whole Foods/FTC battle is right on target. The FTC is ridiculous with respect to its' unduly narrow definition of the 'organic' food marketplace. All supermarkets carry this overpriced stuff now. But what troubles me a lot is that well-reasoned opinions of real citizens seems to mean nothing in our current environment. It almost seems that our government has become utterly cynical or at least misguided in many of its' policies.

    For example and not to change the subject: but consider the irony of Congress' push to pass the so-called Employee Free Choice Act at the same moment in history that we witness the Union-dominated American auto manufacturers going down the tubes! That legislation seeks to eliminate the secret ballot as the required procedure for unions to win bargaining agent certification. It seems to me that only a true cynic could represent that elimination of free elections supervised by the NLRB could be called a move toward "free choice." But I digress. You are right about the Whole Foods thing! Thanks.

  • Report this Comment On December 14, 2008, at 10:39 PM, whereaminow wrote:

    The CEO of Whole Foods is a Libertarian. If you don't think the government (Right and Left) targets Libertarian businesspeople, you're mistaken.

  • Report this Comment On December 15, 2008, at 10:51 PM, vaporland wrote:

    I disagree with this post. My wife is vegetarian and we shop there regularly. WF has outrageous prices even when considering the better quality product received there.

    The former Wild Oats employees we've talked to (now WF employees) all agree that prices and selection were much more competitive when there were two major organic merchandisers to choose from.

    WF swallowed the competition and is, unfortunately, a better purveyor of organic and related products.

    Unfortunate, because their prices are just too high.

    Wal-Mart, Safeway and Kroger's are NOT Whole Foods' competitors. Their limited organic selection and inconsistent quality are no match for WF.

    Once you make a serious commitment to a a more healthy / sustainable eating lifestyle, Wal-Mart, Safeway and Kroger's just don't cut it.

    Here in Denver there are a couple of other stores which compete with them well on price and quality, but not selection or location.

    There's a reason why their nickname is "Whole Paycheck"

  • Report this Comment On December 16, 2008, at 4:03 PM, journeywithme wrote:

    I have been into whole foods on more than one occasion. Prices were high; but the selection and quality of food and other items were, in my opinion, worth some of the extra cost.

    Be well.

    http://www.ourstockmarketjourney.blogspot.com/

  • Report this Comment On February 02, 2009, at 9:13 PM, ilikemike97 wrote:

    As per "Pagan":(As a former customer of Wild Oats, I can tell you that they consitantly sold better quality foods at cheaper prices than Whole Foods, both of which had operated in this area. Once Whole Foods took control, prices skyrocketed, and quality went way down. I agree with the FTC that this merger was bad for consumers (and that those other mergers mentioned in the other posts are as well, especially anything Exxon does). I applaud the FTC for their dilligence in this, and hope that Whole Foods will be forced to sell better quality items at far lower prices.)

    This is correct (at least in the Evanston Illinois market/case). When Evanston lost its chief competitor to Whole Foods, there was no legitimate recourse for the consumers of (organic/health) foods and we suffered major consequences (decreased quality and higher prices at Whole Foods).

    Of course there were a myriad of smaller stores that offered some of the choices and a handful of larger stores that offered a smattering of the choices eg Trader Joes, and as per the example of the author, (sic) Walmart. (The egregious stupidity of this statement should show how prejudiced the author of this piece is: that is to suggest that the existence of Walmart, which sells some "organic/health" foods, would mitigate the disappearance/subsuming of a legitimate alternative to Whole Foods, ameliorates the damage done by eliminating (legitimate) choice in

    many of the regional market areas throughout the country. Saying that Walmart offers a legitimate alternative to Whole Foods is analogous to saying that eBay offers a legitimate alternative to Lockheed and Boeing because they have offered aerospace items on their site.

    Additionally, the author uses the specious argument that the Exxon/ Mobil merger had far greater (potential) consequences in creating monopolistic market conditions; this is wholly immaterial to the argument as to whether consumers would suffer from a monopolistic environment created by the Whole Foods purchase of its major competitor (at least in many key regional markets across the USA.)

    This argument (the Exxon/Mobil example proffered by the author) is analogous to a defense attorney arguing to a judge that his client should be exonerated because there are thousand s of people walking the streets who are guilty of far more heinous crimes than his client- that's a nonwinning argument no matter how attractive this author tries to make it sound.

    The fact that large segments of people in major regional markets have suffered from a lack of legitimate choices in this, albeit small (but burgeoning) niche market, makes this a legitimate cause for the FTC regardless of their incompetence/lack of diligence in previous cases.And the fact that in a small number of regional markets eg. Portland, Or. (as offered by one of the posters) that there are becoming a few competitors is heartening but again irrelevant. Many people in numerous regional urban/populous suburban areas have and continue to suffer from a lack of choice created from the monopolistic environment created from this merger.

    Whole Foods is being held to a standard which is clearly fair (and protects consumers) despite the fact that in previous cases the FTC has dropped the ball.

  • Report this Comment On February 03, 2009, at 2:33 AM, ilikemike97 wrote:

    With regard to your section headed by "In search of Bigfoot":

    Your insistence that the FTC is "meddling" is ridiculous and misleading; they have oversight responsibilities in such matters and are acting as such to protect consumers' rights. Perhaps you would also describe police officers interrupting a bank robbery as "meddling".

    And by referencing your own error laden editorial/posting (and not labeling it as such) is just plain bad journalism.

    You would be better off, or at least more even handed from an editorial point of view, referencing my response to your misleading error laden editorial posting (or others of a similar ilk that basically dismantled your argument for the FTC's having "meddled").

    So I am forced to include my previous response to your error laden propaganda re. FTC and Whole Foods. Bon apetit!

    As per "Pagan":"As a former customer of Wild Oats, I can tell you that they consitantly sold better quality foods at cheaper prices than Whole Foods, both of which had operated in this area. Once Whole Foods took control, prices skyrocketed, and quality went way down. I agree with the FTC that this merger was bad for consumers (and that those other mergers mentioned in the other posts are as well, especially anything Exxon does). I applaud the FTC for their dilligence in this, and hope that Whole Foods will be forced to sell better quality items at far lower prices."

    This is correct (at least in the Evanston, Illinois market/case). When Evanston lost Wild Oats(the area's chief competitor to Whole Foods), there was no legitimate recourse for the consumers of organic/health foods and we suffered major consequences (decreased quality and higher prices at Whole Foods).

    Of course there were a myriad of smaller stores that offered some of the choices and a handful of larger stores that offered a smattering of the choices, eg Trader Joes, and as per the example of the author, (sic) Wal Mart. (The egregious stupidity of this statement should show how prejudiced the author of this piece is: that is to suggest that the existence of Walmart, which sells some "organic/health" foods, would mitigate the disappearance/subsuming of a legitimate alternative to Whole Foods, ameliorates the damage done by eliminating (legitimate) choice in many of the regional market areas throughout the country. Saying that Walmart offers a legitimate alternative to Whole Foods is analogous to saying that eBay offers a legitimate alternative to Lockheed and Boeing because they have offered aerospace items on their site.)

    Additionally, the author uses the specious argument that the Exxon/ Mobil merger had far greater (potential) consequences in creating monopolistic market conditions; this is wholly immaterial to the argument as to whether consumers would suffer from a monopolistic environment created by the Whole Foods purchase of its (only) major competitor (at least in many key regional markets across the USA.)

    This argument (the Exxon/Mobil example proffered by the author) is analogous to a defense attorney arguing to a judge that his client should be exonerated because there are thousands of people walking the streets who are guilty of far more heinous crimes than his/her client- that's a nonwinning argument no matter how attractive this author tries to make it sound.

    The fact that large segments of people in major regional markets have suffered from a lack of legitimate choices in this, albeit small (but burgeoning) niche market, makes this a legitimate cause for the FTC regardless of their incompetence/lack of diligence in previous cases. And the fact that in a small number of regional markets eg. Portland, Or. (as offered by one of the posters) that there are emerging a few competitors (to Whole Foods) is heartening but again irrelevant. Many people in numerous regional urban/populous suburban areas have suffered and continue to suffer from a lack of choice created from the monopolistic environment engendered by this merger.

    Whole Foods is being held to a standard which is clearly fair (and protects consumers) despite the fact that in previous cases the FTC has dropped the ball.

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