In early June, the FTC approved a complaint challenging Whole Foods Market, Inc.’s (Austin, TX) $670 million acquisition of its chief rival, Wild Oats Markets, Inc., Boulder, CO, and authorized the staff to seek a temporary restraining order and preliminary injunction in federal district court to halt the deal pending an administrative trial on the merits. On February 21, 2007, Whole Foods and Wild Oats entered into a merger plan under which the former would acquire 100% of the voting shares of the latter, with WFMI Merger Co., a wholly owned subsidiary of Whole Foods, merging with and into Wild Oats. WFMI Merger Co. would then commence a tender offer for all shares of Wild Oats common stock and after completion, Whole Foods would merge WFMI Merger Co. and Wild Oats.

According to the complaint, the transaction would violate federal antitrust laws by eliminating the substantial competition between these two uniquely close competitors in numerous markets nationwide in the operation of premium natural and organic supermarkets. If the transaction continues unopposed, the FTC contends that Whole Foods is likely to raise prices and reduce quality and services unilaterally. “Whole Foods and Wild Oats are each other’s closest competitors in premium natural and organic supermarkets, and are engaged in intense head-to-head competition in markets across the country,” said Jeffrey Schmidt, director of the FTC’s Bureau of Competition. “If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality and fewer choices for consumers.”

In defining the relevant markets the FTC found that premium natural and organic supermarkets, such as Whole Foods and Wild Oats, are differentiated from conventional retail supermarkets in several critical respects. These include the breadth and quality of their perishables—produce, meats, fish, bakery items and prepared foods—and the wide array of natural and organic products and services and amenities they offer. In addition, premium natural and organic supermarkets seek a different customer than do traditional grocery stores. 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.

In response to this development, John Mackey, chairman and CEO of Whole Foods Market, stated, “We are very disappointed by this decision and we intend to vigorously challenge the FTC in court. The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic and fresh products, renovate their stores and open stores with new banners and formats resembling Whole Foods Market. Evidently the FTC does not appreciate the many benefits for consumers of the proposed merger, including our plan to invest capital in and improve many of the stores currently owned by Wild Oats.”

According to a BuisnessWeek article discussing the proposed block of the merger, “A combined entity of Whole Foods and Wild Oats would control about 11% of the natural foods market, which is hardly a monopoly…Together the combined companies would squeeze better bargains from suppliers, which should ultimately lower prices in the aisle, analysts say.”