Whole Foods Merger Analysis
I may be going out on a limb here, but I predict, on the basis of what happened in court yesterday, that the Whole Foods merger with Wild Oats Market will eventually be approved. Antitrust aficionados will know that the crux of this case is how the court will define the relevant market, and whether or not the merged firm would be a monopolist in that market. Is the market to be narrowly defined as including only nationwide, premium, organic and “natural” foods supermarkets (a definition that really includes only the merging firms), as the FTC supports? Or should it include all retailers of organic and “natural” foods (which includes almost every major supermarket chain and Wal-Mart), as Whole Foods insists?
The way court go about defining the relevant market is a little too convoluted to explain in a blog post, but I’ll refer readers the joint Justice Department/Federal Trade Commission Horizontal Merger Guidelines. According to the guidelines, a merger should be challenged when, in any given market, the merged firm will have sufficient market power to sustain a “small but significant and nontransitory increase in price.” And, for all practical purposes, DOJ, FTC, and courts tend to view a “small but significant” price increase to be one that is five percent or greater.
According to this article (sorry, subscription required) in today’s Wall Street Journal, though, the FTC’s primary expert testified that his market analysis revealed “a ‘substantial decline in margins’ and a 2% drop in prices at Wild Oats stores in Boulder when Whole Foods entered that market.” This is not what antitrust watchers would consider to be damning evidence that commands a narrow market definition. If that’s the strongest evidence FTC can throw at this deal (of course, I acknowledge that newspaper reporters can’t be trusted to have reported the most important facts), it’s more likely than not that the court will find that the relevant market is bigger than FTC claims.
Of course, that doesn’t necessarily mean that the merger is a done deal. After all, there are many idiosyncrasies about the food industry that make it very much unlike other markets. And there are all those apparantly damning statements by Whole Foods CEO John Mackey — such as one contained in a February e-mail to the Whole Foods board of directors indicating that the merger would allow Whole Foods and Wild Oats to “avoid nasty price wars.” Still, from a distance, it appears that FTC’s case is not quite as strong as it once appeared.