Thom Lambert headshot

Wall Chair in Corporate Law and Governance
University of Missouri Law School

Thomas A. Lambert is the Wall Chair in Corporate Law and Governance and Professor of Law. Professor Lambert’s scholarship focuses on antitrust, corporate and regulatory matters.

Antitrust

Popular Media

Whole Foods Throws in the Towel — Congrats to the FTC!

The witch hunt is over.

Last evening, the FTC announced that it would drop its antitrust action against high-end grocer Whole Foods in exchange for the chain’s agreement to sell 32 stores and to give up the rights to Wild Oats’ name. FTC Chairman Jon Leibowitz proclaimed that “[a]s a result of this settlement, American consumers will see more choices and lower prices for organic foods” — you know, those ubiquitous food products that are available at, among other places, Wal-Mart and that the FTC insisted were not the focus of its Whole Foods challenge, which was purportedly aimed at protecting competition in the provision of grocery store formats, not particular types of products. Mr. Leibowitz also announced that the settlement of this surreal antitrust action “allows the FTC to shift resources to other important matters.” Can’t wait to see what those will be.

It’ll be interesting to see what happens to Whole Foods’ stock price now that it’s no longer a monopolist in the market for “premium natural and organic supermarkets.” Absent the ability to earn supracompetitive profits as a monopolist — a power that, according to the FTC, it has had since it consummated the Wild Oats merger in August 2007 — its expected free cash flows will certainly drop, as will its stock price. Maybe, though, it will actually fare better once it gives up its PNOS monopoly. Indeed, the company’s stock price (reflective of expected profits) has been badly battered since the company became a monopolist, falling from $44.26 when the monopoly was attained, to around $22 just before the D.C. Circuit initially reversed the trial court’s decision permitting the merger to proceed (July 2008), to $10-12 in the last few weeks (see chart here). While the overall stock market has fallen by about one half during this same period, Whole Foods’ drop is substantially steeper, and it began soon after Whole Foods attained its monopoly position, well before broader market’s drop. Maybe returning competition to the company’s market will actually improve the company’s lot.

Or maybe, as my co-blogger Geoff so eloquently put it, the notion of a separate market for premium natural and organic supermarkets is bulls**t. If that’s the case, then Whole Foods hasn’t been a monopolist, able to earn supracompetitive profits, since August 2007. If Whole Foods has actually been competing in a broader market, one that would include, say, this Safeway Lifestyle Store (and gazillions of other conventional grocery stores like it), then it’s battered stock price probably just suggests that consumers are turning away from its high-priced offerings and toward the same products that are available at the conventional grocery stores at which the vast majority of Whole Foods shoppers also shop.

So let’s see — which story makes more sense: that attaining a monopoly tends to drive one’s profits (and thus one’s stock price) downward, or that Whole Foods never actually had a monopoly because it faced vigorous competition from conventional grocery stores? Tough one.

Oh well. I’ll give the FTC some credit for tenacity. It’s pretty impressive that the Commissioners were willing to stand their ground in the face of evidence that Whole Foods wasn’t earning monopoly profits, that numerous grocery retailers are moving toward the Whole Foods format, that there are obvious economies of scale in grocery retailing (so that the combined Whole Foods/Wild Oats would have lower per unit costs), and that Whole Foods’ customers typically cross-shop at conventional grocery stores and could thus easily respond to any merger-induced increase in Whole Foods’ prices. (See here.) Why bother with real-world facts when you’ve got a handful of inflammatory emails?

So congrats on the victory, guys (and Ms. Jones Harbour). On behalf of the nation’s grocery shoppers, I’d like to thank you for protecting us from a premium natural and organic monopolist (and we just won’t worry about any economies of scale Whole Foods will sacrifice in order to comply with this consent decree).

On a personal note, I’d like to thank you for making my own job so much easier.

Posted in antitrust, federal trade commission, markets, mergers & acquisitions, regulation