Whole Foods/Wild Oats merger
 

WSJ is reporting that the FTC plans to oppose this merger. Anti-trust concerns. If true, this will be one of the worst decisions in recent memory. The only way to extract monopoly rents in the grocery industry is to have a sweet location. Any by sweet location I mean protection from competition through zoning regulations. A merger of these two companies will do nothing to prevent this kind of localized monopoly. There is however a somewhat convincing history of economies of scale in the grocery industry. Meaning a merger of Whole Foods and Wild Oats could actually reduce prices for consumers, which is a good thing.

Re: Whole Foods/Wild Oats merger
 

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Meaning a merger of Whole Foods and Wild Oats could actually reduce prices for consumers, which is a good thing.

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Hahahahaha. No.

The only thing that would lower prices at Whole Foods would be if Walmart started carrying organic. Of course, then all the Whole Foods customers would have to start shopping at Walmart at 2 AM is disguise, because we all know that no loyal Whole Foods customer would be caught dead shopping at Walmart.

Re: Whole Foods/Wild Oats merger
 

Mr. Mon,

Walmart doesn't have to carry organic to keep prices lower at Whole Foods.

Re: Whole Foods/Wild Oats merger
 

. . . it's going to be call FedUP

(oops, i thought this was the punchlines only thread)

Re: Whole Foods/Wild Oats merger
 

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There is however a somewhat convincing history of economies of scale in the grocery industry. Meaning a merger of Whole Foods and Wild Oats could actually reduce prices for consumers, which is a good thing.


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scale economies mean that the average unit cost to producers will decrease as the company gets bigger. whethere those savings are passed along to the customer depends on the market structure. and you're right to point out that location is the main source of market power for grocery stores (and many other retailers).

Re: Whole Foods/Wild Oats merger
 

econ - If the industry is competitive then the lower per unit costs will be passed on to consumers. Of course in the real world not ALL of the benefits of a lower cost structure will be passed on to consumers. My point in the OP is that this merger will not lead to higher prices and could lead to lower prices. Therefore why not let it go through? If the merger is allowed and we all of sudden start seeing Wild Oats or Whole Foods stores being shut down, I'll admit I was wrong.

Re: Whole Foods/Wild Oats merger
 

econophile,

if the average cost to the producer goes down in a competitive economy, shouldnt the average cost to the consumer also go down? this argument would seem like the foundation for the point Boris is making wrt prices falling.

all i care about is that they get their [censored] odwalla prices down a bit. 3.99 for a 16 ounce thing of juice? boooooo.

Re: Whole Foods/Wild Oats merger
 

I assume Whole Foods and Wild Oats are the 2 biggest players in the "natural foods" market? Who are their competitors? Is TJ's considered one? Why is Walmart or another huge national grocer, not in the natural foods space, an issue here?

-Al

Re: Whole Foods/Wild Oats merger
 

[ QUOTE ]
econophile,

if the average cost to the producer goes down in a competitive economy, shouldnt the average cost to the consumer also go down? this argument would seem like the foundation for the point Boris is making wrt prices falling.

all i care about is that they get their [censored] odwalla prices down a bit. 3.99 for a 16 ounce thing of juice? boooooo.

[/ QUOTE ]

i don't want to derail this thread, but your and boris's argument is based on a perfectly competitive output market. since most output markets are not perfectly competitive, a better working model is that of monopolistic competition (where there are many producers and each has some market power).

in a monopolistically competitive industry with scale economies, a merger will have two effect. first, it will decrease the average cost of producing the good since the merged firm will generally produce more than either firm did separately (note that mergers could result in less output, e.g. if two firms merge and become a monopoly). second, the merger will increase the firm's market power. the first effect pushes the equilibrium price down, while the second effect drives it up, so the end result could be an increase or a decrease in the prices charged to customers.

to predict whether the merger will make prices go up or down, one would have to estimate the firms production function (how much it costs to produce different quantities) and the consumers' price elasticity of demand (how sensitive the quantity that people buy is to changes in price). in mergers like this, the firm usually hires a team of economists to estimate this stuff and present their results to the department of justice or the federal trade commission, who might then approve the merger or recommend actions that the firms can take to make the merger less harmful to consumers.

Re: Whole Foods/Wild Oats merger
 

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I assume Whole Foods and Wild Oats are the 2 biggest players in the "natural foods" market? Who are their competitors? Is TJ's considered one? Why is Walmart or another huge national grocer, not in the natural foods space, an issue here?

-Al

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Oh ok, I see:

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The agency is concerned that the combined company will control too much of the U.S. natural-foods market, Whole Foods said. The FTC should instead consider the merger's effect on the overall supermarket industry as Safeway Inc., Wal-Mart Stores Inc. and other grocers expand their natural and organic departments, Whole Foods said.

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From this latest Bloomberg update.

Is that a fair stance from Whole Foods?

-Al

Re: Whole Foods/Wild Oats merger
 

[ QUOTE ]
[ QUOTE ]
I assume Whole Foods and Wild Oats are the 2 biggest players in the "natural foods" market? Who are their competitors? Is TJ's considered one? Why is Walmart or another huge national grocer, not in the natural foods space, an issue here?

-Al

[/ QUOTE ]

Oh ok, I see:

[ QUOTE ]
The agency is concerned that the combined company will control too much of the U.S. natural-foods market, Whole Foods said. The FTC should instead consider the merger's effect on the overall supermarket industry as Safeway Inc., Wal-Mart Stores Inc. and other grocers expand their natural and organic departments, Whole Foods said.

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From this latest Bloomberg update.

Is that a fair stance from Whole Foods?

-Al

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I think so. If there is an opportunity for excess returns from selling organic foods, the other grocers are going to jump more into the fray and offer more product.

Re: Whole Foods/Wild Oats merger
 

A group in my Grad School class had to do a presentation on Wild Oats, which changed to a presentation on Whole Foods since the proposed merger was announced 2 days after the assignment was announced.

During the presenation there was some figure about only 50% of natural food product is sold in an "organic" store, with another 30% being sold in mass market stores. And the mass market stores are growing their (organic food) sales at a faster clip than are the organic only stores.

Re: Whole Foods/Wild Oats merger
 

I don't know the specifics of this of this merger, as I've been out of the industry for a while. but I will just add that Whole Foods differs from traditional grocers in the amount of leeway they give to store managers/regional managers to run their stores the way they want. it's very decentralized, so much that any merger would have a smaller impact on prices than it would on a traditional supermarket merger.

as an aside, I think Whole Foods does it the right way. the idea that buying and merchandising decisions for Boston stores should be done in Boise is...you know.

a buddy of mine covers Whole Foods and has a lot (in all senses) invested in them. we talk about them a lot...will be interested to hear his thoughts.

Re: Whole Foods/Wild Oats merger
 

Econ - "i don't want to derail this thread, but your and boris's argument is based on a perfectly competitive output market. "

You're not derailing the thread at all.

My argument is that there are A) close substitutes for organic food (namely non-organic food); and B) there is plenty of competition in the retail market for organic food from independent health food stores and established super markets. Furthermore, if the new merged entity starts making money hand over fist from monopoly prices, Walmart, Safeway 99 Ranch, etc... are more than capable of offering a competitive product. Therefore the market is competitive. Some stores may have prices above marginal cost but this only because of a sweet location. These stores will continue to earn monopoly rents regardless of whether or not the merger goes through. I have a hard buying the argument that the demand curve for organic food is not highly elastic, except in a few localized instances.

Re: Whole Foods/Wild Oats merger
 

Question - since I am one of those "wouldn't be caught dead in Walmart" (well alot of this is based on the fact I couldn't tell you where the nearest Walmart to me is) I have no sense of this: do Walmart or Safeway currently have natural food products competitive with Whole Foods, Wild Oats, or I guess TJ's?

Also from the most recent Bloomberg update:

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``If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers,'' Jeffrey Schmidt, director of the FTC's Bureau of Competition, said in a statement. ``That is a deal consumers should not be required to swallow.''

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At first blush this strikes me as bordering on retarded considering the current price points. Then again I don't really know this market at all and what consumers will bear for their organic product...

-Al

Re: Whole Foods/Wild Oats merger
 

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Meaning a merger of Whole Foods and Wild Oats could actually reduce prices for consumers, which is a good thing.

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Hahahahaha. No.

The only thing that would lower prices at Whole Foods would be if Walmart started carrying organic. Of course, then all the Whole Foods customers would have to start shopping at Walmart at 2 AM is disguise, because we all know that no loyal Whole Foods customer would be caught dead shopping at Walmart.

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Walmart is carrying organic food.

Re: Whole Foods/Wild Oats merger
 

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have no sense of this: do Walmart or Safeway currently have natural food products competitive with Whole Foods, Wild Oats, or I guess TJ's?

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TJ's really competes on a different level than Whole Foods. They are much more about convenience and novelty than about natural/organic/fresh.

Wal-Mart and traditional grocers are carrying organics, yes. what they are missing - and I don't think is just marketing speak - is the entire experience you get at Whole Foods. It's an entirely betetr experience than what you get as Safeway, even if the products you get might be similar. I hate going to traditional grocers, but feel like I'm doing my body good when I shop at Whole Foods. the stores are set-up in a way that is very pleasing to the eye, and you could and I do) stare at the cheese, seafood, meat, and prepared food sections for a long time just b/c they do such a do a great job of sourcing the best products and presenting them well. As Stop & Shop, I can't wait to leave.

I think it's a classic case of the whole being greater than the sum of parts. Whole Foods pays their employees well, and it shows. They give their store managers great merchandising and buying power, and it shows. They are dedicated to stocking to only certain types of products, and it shows. They are determined to make going to the grocery store a positive experience, and it is. Competitors can pick off organic foods and try to compete, but it's kind of like the various US airline attempts who tried to create low cost brands to compete with Southwest (Song, Ted); you can't just copy one aspect of a competitive business and expect to replicate all of their success.

Re: Whole Foods/Wild Oats merger
 

KBZ - cool, thanks. Sounds like that will be the basis of FTC's argument?

Anyway, considering what I'm assuming are higher margins for organic products, and that it's a growing market, think it's reasonable to assume that Safeway / Walmart / whomever will start building out their organic selection and in time, end up being in Whole Foods' market and competing with them...

-Al

Re: Whole Foods/Wild Oats merger
 

Yes, traditional grocers are growing their sales of organic foods at a faster clip (%-wise) than are the Whole Foods of the world.

Re: Whole Foods/Wild Oats merger
 

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have no sense of this: do Walmart or Safeway currently have natural food products competitive with Whole Foods, Wild Oats, or I guess TJ's?

[/ QUOTE ]

TJ's really competes on a different level than Whole Foods. They are much more about convenience and novelty than about natural/organic/fresh.

Wal-Mart and traditional grocers are carrying organics, yes. what they are missing - and I don't think is just marketing speak - is the entire experience you get at Whole Foods. It's an entirely betetr experience than what you get as Safeway, even if the products you get might be similar. I hate going to traditional grocers, but feel like I'm doing my body good when I shop at Whole Foods. the stores are set-up in a way that is very pleasing to the eye, and you could and I do) stare at the cheese, seafood, meat, and prepared food sections for a long time just b/c they do such a do a great job of sourcing the best products and presenting them well. As Stop & Shop, I can't wait to leave.

I think it's a classic case of the whole being greater than the sum of parts. Whole Foods pays their employees well, and it shows. They give their store managers great merchandising and buying power, and it shows. They are dedicated to stocking to only certain types of products, and it shows. They are determined to make going to the grocery store a positive experience, and it is. Competitors can pick off organic foods and try to compete, but it's kind of like the various US airline attempts who tried to create low cost brands to compete with Southwest (Song, Ted); you can't just copy one aspect of a competitive business and expect to replicate all of their success.

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I disagree in that I [censored] hate Whole Foods, but I do agree that traditional groceries are not succeeding at horning in on the Whole Foods market. In DC I shop at Harris Teeter, which was, at one point, a nice, middle-market store with good produce, wide variety, etc. In the last year or so, they've definitely been moving downmarket, towards being more like Safeway or Shoppers' Food Warehouse. My purely speculative theory is that their basically losing their pickier customers to WF.

So, in conclusion, I think there's definitely a real market of people who will shop at Whole Foods and not at regular grocery stores, and that's true even if specific items of organic food are purchased by regular grocery customers.

Re: Whole Foods/Wild Oats merger
 

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So, in conclusion, I think there's definitely a real market of people who will shop at Whole Foods and not at regular grocery stores, and that's true even if specific items of organic food are purchased by regular grocery customers.


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Maybe. There are a lot of easy things normal grocery stores could do to keep some of the customers they are losing to the speciality organic stores though. For instance the main reason I keep going back to whole foods is the quality of the produce. If safeway's produce didn't suck ass I wouldn't ever go to whole foods.

Re: Whole Foods/Wild Oats merger
 

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So, in conclusion, I think there's definitely a real market of people who will shop at Whole Foods and not at regular grocery stores, and that's true even if specific items of organic food are purchased by regular grocery customers.


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Maybe. There are a lot of easy things normal grocery stores could do to keep some of the customers they are losing to the speciality organic stores though. For instance the main reason I keep going back to whole foods is the quality of the produce. If safeway's produce didn't suck ass I wouldn't ever go to whole foods.

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perishables (fruit, vegetables, meat, seafood, etc) constitute a much higher % of sales for Whole Foods than they do for traditional grocers. it's not so much something that Safeway does poorly, it's that Whole Foods has chosen to make it a key thing they focus on. it's relatively much easier for traditional grocers to improve their center store packaged natural/organic selection.

Re: Whole Foods/Wild Oats merger
 

link

Update: FTC says that the WF CEO posted negative predictions about WO stock back in early 2005. Pretty sketchy. Also maybe illegal, particularly if WF started buying up WO stock back in 2005 (when they were apparently already interested in a merger.)

Re: Whole Foods/Wild Oats merger
 

Bobman - thanks, nice link.

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DALLAS (AP) -- The chief executive of Whole Foods Market Inc. wrote anonymous online attacks against a smaller rival and questioned why anyone would buy its stock, before Whole Foods announced an offer to buy the other company this year.

The postings on Internet financial forums, made under the name "rahodeb," said Wild Oats Markets Inc. stock was overpriced. The statements predicted the company would fall into bankruptcy and then be sold after its stock fell below $5 per share.

In February, Whole Foods announced it would buy Wild Oats for about $565 million, or $18.50 per share.

The company acknowledged that the postings by "rahodeb" were written by CEO John Mackey.

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Note to self: stop posting on 2p2.

-Al

Re: Whole Foods/Wild Oats merger
 

Different link from USA Today - a little more detail

USA Today article

Re: Whole Foods/Wild Oats merger
 

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Different link from USA Today - a little more detail

USA Today article

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I hadn't realized exactly how extensive this was. Pretty crazy. A guy actually went to prison a few years back for a similar scam in which he made up fake press releases about Lucent and posted them on finance message boards. Those postings were a lot falser than these, but the fact that these were posted by the CEO of Whole Foods under an anonymous handle would render them pretty misleading. With all the press this is getting, it wouldn't surprise me to see an SEC civil action, or possibly even criminal charges.

Re: Whole Foods/Wild Oats merger
 

Hi readers,

There are a lot of CEOs who have lots of strange actions and beliefs. They are usually only called on it when their companies underperform. For example, Patrick Byrne of overstock.com fame has been ridiculed for his obsession over naked shorting, while Mike Jefferies has received nothing but praise for his management of A&F. No one picks up on things like this:

http://www.businessweek.com/magazine...2/b3935105.htm

Employees are reminded of that at the start of each day. Jeffries leaves his black Porsche -- doors unlocked, with the keys between the seats -- at the same odd angle at the edge of the parking lot. Everyone knows why: Jeffries is superstitious about success. That's why he always goes through revolving doors twice. Associates have learned not to pass him in stairwells; he returns the courtesy. Then there are Jeffries' lucky shoes, a worn pair of Italian loafers that a secretary keeps in her desk. "I put them on every single morning when I look at the numbers," he says. Several years ago, a piece of one sole fell off, sparking a headquarters-wide search.

Re: Whole Foods/Wild Oats merger
 

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wouldn't surprise me to see an SEC civil action, or possibly even criminal charges.

[/ QUOTE ]

what would these charges be?

Re: Whole Foods/Wild Oats merger
 

[ QUOTE ]
Different link from USA Today - a little more detail

USA Today article

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[ QUOTE ]
Note to self: stop posting on 2p2.

-Al

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-Al

Re: Whole Foods/Wild Oats merger
 

Just occurred to me - this is basically the biggest trainwrecking in Internet message board history. Brandi's got nothing on this one.

-Al

Re: Whole Foods/Wild Oats merger
 

I don't get how it's such a big deal that a CEO was talking shyte about a competitor company? This happens all the time. Why would the SEC get involved?

Re: Whole Foods/Wild Oats merger
 

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I don't get how it's such a big deal that a CEO was talking shyte about a competitor company? This happens all the time. Why would the SEC get involved?

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it's just character/sanity questions about the CEO. people have always thought he was an eccentric/weird/abrasive guy, so now he does something like this, and it just cements that image, which probably isn't ideal for the CEO.

Re: Whole Foods/Wild Oats merger
 

Boris - I'm not exactly sure myself, in the article they pointed out:

[ QUOTE ]
"This evidence raises more doubts about his sanity than his criminality," says Jack Coffee, a securities law expert at Columbia Law School. "The merger is a major business strategy, and he's undercut it with reckless, self-destructive behavior. It's a little weird, like catching him as a Peeping Tom."

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"It's more of an embarrassment than an issue of profound ethical and legal consequence," says Eric Dezenhall, a crisis communications consultant. "It shows a degree of obsessiveness that's a little disturbing."

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Obviously (and I was kidding above) posting on 2p2 is very different from what this idiot did but:

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For the curious, Yahoo on Thursday put up a link from its Finance page to all 1,394 postings with Mackey's screen name on all its message boards, going back to 1999. Some days, Mackey was a heavy poster. On Sept. 5, 2005, for instance, he posted 17 times from 12:03 a.m. until 11:09 p.m. On Nov. 11, 2005, he posted 17 times from 12:04 a.m. to 5:25 p.m.

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... if 1,394 posts in 7 years is "heavy posting" we are all doomed.

-Al

Re: Whole Foods/Wild Oats merger
 

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I don't get how it's such a big deal that a CEO was talking shyte about a competitor company? This happens all the time. Why would the SEC get involved?

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Making false or misleading statements with the intention to fraudulently affect the purchase or sale of securities is illegal.

There are a couple ways this could be securities fraud. The clearest way would be if this scheme was intended to drive down the price of OATS stock so WF could acquire the company cheaper. A less convincing argument could be made that this was just a malicious scheme to make other people trade OATS at a lower price to generally undermine the company. That's not the traditional securities fraud scheme, but it's basically what Moldofsky was convicted of in the article I linked above.

That's not to say he's obviously guilty. There are a lot of issues to overcome. For example, did he really say anything false or misleading? Assuming he didn't tell any actual lies, you could still make a strong argument that posting all this analysis without revealing his identity and his possible ulterior motives was misleading. His intent is also a big issue. He's going to claim that he was just talking trash or providing unbiased analysis. Is that convincing? Not to me, but it's hard to prove otherwise.

Re: Whole Foods/Wild Oats merger
 

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Making false or misleading statements with the intention to fraudulently affect the purchase or sale of securities is illegal.

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Right but with no weight behind said statements (e.g. an anonymous Internet poster) - seems groundless. However, if you look at Mackey's "farewell" post:

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Aug. 12, 2006: "This will be my final message on this bulletin board as I have lost my bet with hubris12000. ... Mr. Market hit the panic button and the stock has crashed, down almost 40% from its high of just a few months ago. Whole Foods itself has a very bright future and I will continue to hold my stock for a very long time — until the growth begins to significantly slow. I've enjoyed my 8 years on this Board, but all things must come to an end. ... Surgeon General and Boston Cowboy — you were both right about my true identity all along. Congratulations on your cleverness."

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I mean - does he out himself? If so you could read through his post history and all of a sudden you have what is possibly very inside information from the CEO of Whole Foods.

Either way - this guy is a total jackass.

-Al

Re: Whole Foods/Wild Oats merger
 

Fortune Magazine - Whole Foods CEO

Received this issue the last day or so. The Q&A was writtien before last week's trouble.

Re: Whole Foods/Wild Oats merger
 

Oh great, so the CEO is a major nutjob douche, so now that's what will get all the attention. No one will talk about the real problems with this and all other antitrust suits.

The purpose of antitrust laws is to protect the businesses that can't compete in the market, forcing consumers to pay the higher prices of those failing companies. Or in this case, stores that fail to attract organic/natural foods customers.

The businesses that are failing in this market are pestering (read: bribing) their politicians and the FTC to prevent this merger. They know they'll be even less competetive in the market if WF can charge lower prices because of their higher volume.

This is bullshyt.