Whole Foods: Where's the [premium, natural and organic] beef?

Geoffrey Manne —  21 June 2007

John Mackey posts a remarkable public response to the FTC, including the complete text and extended exegesis of one of the inflammatory hot docs that prompted the FTC’s action.  But most amazing of all is this comment:

The claims that the FTC makes in the above two paragraphs [from the FTC press release] are simply astounding because they have ZERO evidence to support several of the statements. Let’s start with the pricing issue: The FTC claims that if we “devour” Wild Oats it will mean “higher prices” and “Whole Foods likely would be able to raise prices unilaterally”. What is so interesting about this statement is that the FTC did not bother to actually gather any pricing information from Whole Foods or Wild Oats. Let me repeat that last statement because it is so important: the FTC did not bother to actually gather any pricing information from Whole Foods or Wild Oats. Why am I emphasizing this by repetition? Because the FTC did not go to the trouble of actually comparing prices in any of our markets. Nor did they ask either Whole Foods or Wild Oats for any pricing information . They asked for 20 million Whole Foods’ documents, but didn’t ask us for any pricing information! Pretty incredible in my opinion!

Now, it is possible that the FTC gathered scanner data from Nielsen or some other source, but I’m not certain that that data would be complete enough for the proper analysis.  If true, I find this ommission astounding.  I’ve been waiting all along for the empirical data to support the FTC’s bluster.  It would be remarkable to find that data absent!

Mackey does note that the FTC (of course) gathered gross profit information for both chains.  But, as I said before and as Mackey’s extended discussion confirms, that data may show nothing more than shifting market share–it does not necessarily tell you anything at all about prices to consumers.

There is much more in Mackey’s blog post, including an interesting discussion of market definition, highlighting these simple and compelling points (emphasis mine):

The fact that Whole Foods has successfully created a distinct retailing strategy and category for ourselves does not give us any kind of “monopoly” or “market dominance” that prevents other food retailers from successfully copying us or competing with us in other ways. The truth, of course, is that supermarkets all over the United States are copying many different aspects of Whole Foods successful retailing strategy—selling more and more natural and organic products, improving customer service, and upgrading the look and feel of their stores.

The creation of a unique business strategy or a unique category doesn’t force consumers to shop with us. Most successful businesses attempt to differentiate themselves from their competitors in various ways. This has certainly been one of Whole Foods competitive strategies. Although Whole Foods has been successful and has created differentiation in the marketplace the simple truth is that very few customers do all of their shopping at our stores. In fact, most of our customers shop at multiple food stores, meeting some of their needs and desires at Whole Foods and various other needs and desires at other stores. Just ask yourself this question: “Do you do all your shopping at Whole Foods or do you shop at different supermarkets”? The answer is obvious: most people shop at a variety of different food stores. Differentiation in the marketplace doesn’t guarantee customer acceptance or success. Successful differentiation also creates imitation and more competition in the future.

There are no legal “barriers to entry” to compete with Whole Foods Market on price, products, quality, service, or store experience. Whole Foods has no technological patents that preclude anyone from competing with us. Whole Foods has been successful primarily because we simply execute in many facets of the retail food business better than most of our competitors do.

Can anyone understand why the FTC brought this case? 

(HT, for the link to Mackey’s blog, Hanno Kaiser and Randy Picker)

Geoffrey Manne

Posts

President & Founder, International Center for Law & Economics

6 responses to Whole Foods: Where's the [premium, natural and organic] beef?

  1. 

    It is not Whole Foods’ obligation to know with certainty what the competitive effects of this merger will be; that burden rests with the FTC. Mackey’s point is that the FTC can’t possibly know that prices will go up following the merger because the FTC hasn’t done the analysis (this is to say nothing of the FTC’s inability to know what the dynamic effects of the merger will be). He also points out that he believes that the effect will actually be to lower prices. I don’t think Mackey needs to do a study to have a decent sense of the market. But that’s neither here nor there. The FTC does have to do a study before bringing suit. It is the FTC’s obligation to be fairly certain that its action–costing the economy millions of dollars–is not frivolous. And, finally, Mackey suggests that they have done some studies and that they support his positions. One example:

    Our pricing surveys indicate that in markets where Whole Foods directly competes with Wild Oats that on average Whole Foods prices are significantly lower than Wild Oats average prices.

    This is not the precise study the FTC ought to undertake, but it is some indication that Mackey is not speaking from ignorance.

  2. 

    Whether or not you believe the FTC’s case has merit or not, there is an inherent flaw in John Mackey’s logic used to criticize the FTC. Mackey’s basic argument is that the FTC is wrong to predict prices would “likely” rise to the merger because they have not looked at actual pricing data. If so, then the reverse has to be true: it is wrong to predict prices would NOT rise due to the merger without looking at actual pricing data. Therefore, when Mackey states, “Whole Foods quality, service, and prices are totally unrelated to whether Wild Oats competes with us in any particular market or not,” we should be asking Mackey where is his pricing study? (If you are prone to argue that Mackey does have a pricing study, then my question is where is it? Why not talk about it? Why not mention it as part of the volumes of documents given to the FTC? Why not use it as part of the public defense of the merger? I think the reality is that neither the FTC nor Whole Foods has a sufficiently detailed pricing study, at this point, to address the antitrust issues in this case with greater certainty.) Therefore, by criticizing the FTC using flawed logic, Whole Foods is also criticizing itself–again, regardless of whether or not you believe the case has merit or not.

  3. 

    The antitrust casebook I used in law school in 1970 (Handler & somebody, I think) had a make-believe case called “United States v. Joe’s Delicatessen,” about a deli owner charged with monopolizing the market for deli foods at a particular intersection in Washington, D.C, by buying the deli across the street. One of my classmates didn’t get the joke. Perhaps he’s now at the FTC.

  4. 

    I initially assumed that the FTC had been infiltrated by writers from The Onion. But then I read the comments to your June 6 post and saw that there are people who take this seriously.

  5. 
    Steven Donegal 21 June 2007 at 12:47 pm

    Can anyone understand why the FTC brought this case?

    A senior FTC staffer likes Wild Oats better than Whole Foods and doesn’t want to lose his market?

Trackbacks and Pingbacks:

  1. TRUTH ON THE MARKET » I am so smart, s-m-r-t. . . I mean, s-m-a-r-t. - August 17, 2007

    […] belief to the contrary, there was detailed pricing data available to the government.  I suggested, following Mackey’s claim that the FTC didn’t likely have such data, that bringing this […]