After the FTC seized property from Whole Foods and offered it to Trader Joe's at below-market price, the popular grocer finally entered the Portland, ME, market. Why does Trader Joe's need the FTC's help breaking into that market?
Trader Joe’s Gets FTC Discount
Portland, Maine, is getting a new Trader Joe’s — courtesy of the Federal Trade Commission. For some reason, Trader Joe’s didn’t 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’s 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’s 2007 lawsuit claiming Whole Foods’s acquisition of Wild Oats Markets violated federal antitrust statutes. After a split court of appeals’ panel voted to retroactively enjoin the completed merger — and after the FTC announced there would be another rigged “trial” presided over by one of its own members —Whole Foods signed a “settlement” requiring the sale of 32 stores to government-approved buyers. Among the stores to be “divested” was the now-closed Wild Oats store in Portland.
The FTC staff ordered Whole Foods to retain The Food Partners, LLC, a Washington-based “investment banking firm” 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’s 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’s at the former Wild Oats site “would increase competition in the marketplace” and that “as there are a limited number of grocery stores in this trade area, Trader Joe’s will offer more choice and be one of the only grocery stores to offer quality foods at a good value.” Morris cites no research or evidence in support of these claims, which sound more like something you’d read in a Trader Joe’s press release than an official government filing. (Furthermore, unless you have a “Star Trek”-style replicator, there are a “limited number of grocery stores” in every trade area.)
There’s little substance to the petition beyond citing Trader Joe’s ability to operate a store in Portland. Morris notes that Consumer Reports ranked Trader Joe’s “the second-best supermarket chain in the nation” and that “Trader Joe’s 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.” (Boy, it sure sounds like Morris might want additional future business from Trader Joe’s; his firm previously advised the company’s acquisition of select stores from Albertson’s.) Morris also tells the FTC that Trader Joe’s can finance the Portland acquisition completely through existing capital and cash reserves; after all, Trader Joe’s had more than $6 billion in sales in 2008.
All this begs the question: Why does Trader Joe’s need the FTC’s 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’s helping a large, well-established company break into a market that it could’ve entered at anytime. Something smells fishy — and it’s not the tuna steaks on sale for $8.99.
First there’s the FTC’s bait-and-switch position regarding Trader Joe’s. When the Commission needed to establish antitrust liability against Whole Foods, Trader Joe’s was considered insufficient competition for Whole Foods. The FTC’s chief economic expert during the court proceedings, University of Chicago economist Kevin Murphy, hemmed and hawed about whether Trader Joe’s constituted part of the FTC-defined market for “premium natural and organic supermarkets.” The FTC’s 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’s expert report (which cost $85,000) told the district court that “Trader Joe’s competes with Wild Oats and Whole Foods but to a significantly smaller degree … Trader Joe’s does not offer a competitive constraint on the vast majority of Wild Oats and Whole Foods products.” Murphy noted that unlike Whole Foods, Trader Joe’s “uses a small-store format” and did not emulate Whole Foods’s “upscale, lifestyle, high service.” Accordingly, Murphy did not include Trader Joe’s in the market for “premium natural and organic supermarkets.” But now that Whole Foods has surrendered, the FTC suddenly has no problem acknowledging Trader Joe’s 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’s, not Wild Oats, as his company’s primary competitor: “Trader Joe’s is very aggressive with their pricing and this company more than any other acts as a market constraint on our pricing.”)
Next there’s the matter of the competition “lost” by the Whole Foods-Wild Oats merger. The FTC’s 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 — 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’s 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’re treating competition as a zero-sum game, was it “lost” 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 “restore” competition that might be lost. Combined with this notion that “premium organic and natural supermarkets” 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’s market definition.
All that said, what about the fact that the FTC has received public comments overwhelmingly supporting a Trader Joe’s in Portland? Sure, it’s a great propaganda tool for the FTC, but it’s meaningless. Public comment doesn’t influence FTC decision-making; statute doesn’t 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’s does underscore the notion that this is a dynamic marketplace that other stores, including Trader Joe’s, could enter at anytime. FTC intervention doesn’t make the market function any better; it merely adds another layer of political graft to the system.
We don’t know the terms of the Whole Foods “divestiture” to Trader Joe’s — the FTC keeps all that information from the public — but it’s a fair assumption that Trader Joe’s 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’s actions are a subsidy to Trader Joe’s to enter the Portland market; it may even be the case that Trader Joe’s would have opened a Portland store even sooner, but it waited to see if it could get an “FTC discount” for the former Wild Oats store. In any event, there’s no reason to think Trader Joe’s would not have come to Portland but for the FTC’s intervention.
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