海角大神

Trader Joe鈥檚 Gets FTC Discount

Portland, Maine, is getting a new Trader Joe鈥檚 鈥� courtesy of the Federal Trade Commission. For some reason, Trader Joe鈥檚 didn鈥檛 see a reason to enter the Portland market until the FTC offered to seize some property from rival grocer Whole Foods and sell it to Trader Joe鈥檚 at below-market price. The locals appear ecstatic; the FTC has already received over 340 comments from Portlanders praising federal intervention in their local grocery market.

The basis for all this is the FTC鈥檚 2007 lawsuit claiming Whole Foods鈥檚 acquisition of Wild Oats Markets violated federal antitrust statutes. After a split court of appeals鈥� panel voted to retroactively enjoin the completed merger 鈥� and after the FTC announced there would be another rigged 鈥渢rial鈥� presided over by one of its own members 鈥擶hole Foods signed a 鈥渟ettlement鈥� requiring the sale of 32 stores to government-approved buyers. Among the stores to be 鈥渄ivested鈥� was the now-closed Wild Oats store in Portland.

The FTC staff ordered Whole Foods to retain The Food Partners, LLC, a Washington-based 鈥渋nvestment banking firm鈥� to conduct the sales. Last month Matthew S. Morris, the divestiture trustee for The Food Partners, filed a petition with the FTC seeking approval for the sale of the closed Portland store and related assets to Trader Joe鈥檚 East, Inc., which operates 338 stores throughout the U.S. but none in Maine. The FTC refused to disclose the terms of the deal to the public.

In his petition, Morris states that opening a new Trader Joe鈥檚 at the former Wild Oats site 鈥渨ould increase competition in the marketplace鈥� and that 鈥渁s there are a limited number of grocery stores in this trade area, Trader Joe鈥檚 will offer more choice and be one of the only grocery stores to offer quality foods at a good value.鈥� Morris cites no research or evidence in support of these claims, which sound more like something you鈥檇 read in a Trader Joe鈥檚 press release than an official government filing. (Furthermore, unless you have a 鈥�Star Trek鈥�-style replicator, there are a 鈥渓imited number of grocery stores鈥� in every trade area.)

There鈥檚 little substance to the petition beyond citing Trader Joe鈥檚 ability to operate a store in Portland. Morris notes that Consumer Reports ranked Trader Joe鈥檚 鈥渢he second-best supermarket chain in the nation鈥� and that 鈥淭rader Joe鈥檚 philosophy is to bring its customers the best food and beverage values and the information to make informed buying decisions with the more than 3,000 unique grocery items.鈥� (Boy, it sure sounds like Morris might want additional future business from Trader Joe鈥檚; his firm previously advised the company鈥檚 acquisition of select stores from Albertson鈥檚.) Morris also tells the FTC that Trader Joe鈥檚 can finance the Portland acquisition completely through existing capital and cash reserves; after all, Trader Joe鈥檚 had more than $6 billion in sales in 2008.

All this begs the question: Why does Trader Joe鈥檚 need the FTC鈥檚 help breaking into the Portland market? The FTC has spent three years micromanaging the aftermath of the Whole Foods-Wild Oats merger; it awarded Matthew Morris and his partners a lucrative, no-bid government contract to profit from the forced sale of 32 stores; and now it鈥檚 helping a large, well-established company break into a market that it could鈥檝e entered at anytime. Something smells fishy 鈥� and it鈥檚 not the tuna steaks on sale for $8.99.

First there鈥檚 the FTC鈥檚 bait-and-switch position regarding Trader Joe鈥檚. When the Commission needed to establish antitrust liability against Whole Foods, Trader Joe鈥檚 was considered insufficient competition for Whole Foods. The FTC鈥檚 chief economic expert during the court proceedings, University of Chicago economist Kevin Murphy, hemmed and hawed about whether Trader Joe鈥檚 constituted part of the FTC-defined market for 鈥減remium natural and organic supermarkets.鈥� The FTC鈥檚 entire antitrust case rested on the notion that Whole Foods and Wild Oats were part of this distinct market that excluded all other supermarkets and grocers.

Dr. Murphy鈥檚 expert report (which cost $85,000) told the district court that 鈥淭rader Joe鈥檚 competes with Wild Oats and Whole Foods but to a significantly smaller degree 鈥� Trader Joe鈥檚 does not offer a competitive constraint on the vast majority of Wild Oats and Whole Foods products.鈥� Murphy noted that unlike Whole Foods, Trader Joe鈥檚 鈥渦ses a small-store format鈥� and did not emulate Whole Foods鈥檚 鈥渦pscale, lifestyle, high service.鈥� Accordingly, Murphy did not include Trader Joe鈥檚 in the market for 鈥減remium natural and organic supermarkets.鈥� But now that Whole Foods has surrendered, the FTC suddenly has no problem acknowledging Trader Joe鈥檚 as an acceptable substitute for the closed Portland Wild Oats store.

(For his part, Whole Foods CEO John Mackey said he always considered Trader Joe鈥檚, not Wild Oats, as his company鈥檚 primary competitor: 鈥淭rader Joe鈥檚 is very aggressive with their pricing and this company more than any other acts as a market constraint on our pricing.鈥�)

Next there鈥檚 the matter of the competition 鈥渓ost鈥� by the Whole Foods-Wild Oats merger. The FTC鈥檚 public case did not go into detail about individual geographical markets. A cursory examination of the Portland market actually shows the market has been in flux for several years. Wild Oats and Whole Foods were not longtime competitors in Portland 鈥� in fact, they operated competing stores for about a year.

Wild Oats opened its Portland store in 2003 after nearly two years of delays due to financing issues. The store also faced some public backlash for locating right next to an existing, independent natural foods store, The Whole Grocer. In 2006, The Whole Grocer鈥檚 owner sold the store to Whole Foods, which had already announced plans to enter the Portland market. Whole Foods closed The Whole Grocer, opened its own store, and acquired Wild Oats the following year.

So if we鈥檙e treating competition as a zero-sum game, was it 鈥渓ost鈥� when Whole Foods acquired Wild Oats, when Whole Foods bought out The Whole Grocer, or maybe when Wild Oats decided to compete directly against The Whole Grocer? Remember, the stated goal of antitrust is to 鈥渞estore鈥� competition that might be lost. Combined with this notion that 鈥減remium organic and natural supermarkets鈥� are a distinct market, and what the FTC is really saying is we need to restore the competitive conditions that existed between 2006 and 2007: two national chains that sell natural and organic products. Prior to 2006, you had a national chain competing against an independent, local store, which does not satisfy the FTC鈥檚 market definition.

All that said, what about the fact that the FTC has received public comments overwhelmingly supporting a Trader Joe鈥檚 in Portland? Sure, it鈥檚 a great propaganda tool for the FTC, but it鈥檚 meaningless. Public comment doesn鈥檛 influence FTC decision-making; statute doesn鈥檛 even require the agency seek or review comments in these cases. What matters in FTC actions are the opinions of government antitrust lawyers and their paid experts (like Dr. Murphy).

But the public support for Trader Joe鈥檚 does underscore the notion that this is a dynamic marketplace that other stores, including Trader Joe鈥檚, could enter at anytime. FTC intervention doesn鈥檛 make the market function any better; it merely adds another layer of political graft to the system.

We don鈥檛 know the terms of the Whole Foods 鈥渄ivestiture鈥� to Trader Joe鈥檚 鈥� the FTC keeps all that information from the public 鈥� but it鈥檚 a fair assumption that Trader Joe鈥檚 was the only bidder in Portland, and the company is likely paying less-than-market value for the Whole Foods assets. In effect, the FTC鈥檚 actions are a subsidy to Trader Joe鈥檚 to enter the Portland market; it may even be the case that Trader Joe鈥檚 would have opened a Portland store even sooner, but it waited to see if it could get an 鈥淔TC discount鈥� for the former Wild Oats store. In any event, there鈥檚 no reason to think Trader Joe鈥檚 would not have come to Portland but for the FTC鈥檚 intervention.

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