Grocer merger raises unique legal questions

Allison Linn Senior writer • Profile • E-mail

The Federal Trade Commission’s decision to challenge the merger of the nation’s best-known upscale grocers, Whole Foods Market Inc. and Wild Oats Markets Inc., seems unusual at first glance.

After all, with thousands of grocery stores dotting the country, consumers have plenty of options for picking up a gallon of milk or a loaf of bread, even if you’re talking about an organic jug of milk or an artisan baguette.

Legal experts agree the challenge may seem somewhat surprising. But it's not the first time regulators have focused on a narrower slice of a market when deciding whether a merger will mean that consumers will have less choice or be forced to pay more for certain goods.

“It’s a market definition question,” said Bob Lande, a law professor at the University of Baltimore and head of the American Antitrust Institute, which generally favors strong antitrust protections. “Is there such a thing as a high-end food retailing market?”

The FTC clearly thinks so. In a court filing made public Friday, the commission argued that to allow the merger to go forward would substantially reduce competition "in the operation of premium natural and supermarkets," raising prices and otherwise hurting consumers in a number of markets.

“Consumers have benefited directly from the price and quality competition between Whole Foods and Wild Oats,” lawyers for the FTC wrote.

Under the proposed deal, Whole Foods would acquire Wild Oats in a deal valued at about $565 million, and also would take on Wild Oats' debt. Both companies have vowed to fight the agency.

The FTC is launching the challenge even though Whole Foods and Wild Oats are dwarfed in sales by mega-discounters like Wal-Mart Stores Inc. and traditional grocery chains like Safeway Inc. Not incidentally, those companies are among the many big chains that have added their own upscale and organic offerings in recent years.

Lande suspects the commission decided to challenge the deal on the theory that, while other competitors exist, Whole Foods and Wild Oats are most likely to make a pricing decision by looking at each other and not by considering Safeway’s branded organics line or Wal-Mart’s organic milk prices. That raises the concern that the merged companies will feel free to raise prices once they eliminate each other as competitors.

He points to a case in the early 1990s in which federal regulators sought to block an acquisition involving two high-end pen companies, arguing that it would stifle competition — despite the fact that, in general, pens are readily available from countless providers. A court rejected the government’s argument, however.

Stephen Calkins, formerly general counsel for the FTC and now a professor at Wayne State University law school in Detroit, said sometimes the commission can be surprised to find that what seems like a cut-and-dried merger could potentially stifle competition.

He was with the FTC when it reviewed a proposed merger of office-supply stores Staples and Office Depot. On its face, he said, the two chains appeared to have plenty of other competitors, ranging from mom-and-pop stationery shops to other big-box discounters.

But when regulators delved into the company’s paperwork, they concluded that the two companies didn’t consider those other types of stores when making pricing decisions. Instead, they relied mostly on what the other was charging. In fact, Calkins said, the commission argued that prices were lower in areas where the two were directly competing.

“We realized from the facts of the case that the important competition was between the superstores. They played a special role, and if one were to be eliminated … prices were likely to go up,” he said.

The FTC opposed the merger and the two chains remained independent.

MORE FROM FOOD INC.

Food Inc. Section Front

It’s crunch time for Pringles Meat-processing exec Oscar Mayer dead at 95 Hot dogs replace steaks this Fourth of July McDonald’s to debut $4 Angus burgers Maine lobstermen take to selling own catch The Big Money: Can’t take pizza out of The Hut Feed costs, swine flu put small hog farms in peril Papa John’s won’t follow rivals and add pasta Anheuser-Busch launching a new Bud Light Starbucks says all double-charges reversed Food Inc. Section Front   Add Food Inc. headlines to your news reader: