U.S. Merger Review in the
Grocery Store Business
ABA Section of International Law
Committee on International Antitrust Law
Darren S. Tucker, O’Melveny & Myers, Washington, DC
May 21, 2008
U.S. Grocery Store Merger Review

Grocery store mergers handled by Federal Trade
Commission.


State attorneys general offices frequently participate
in the reviews.
FTC’s standard analysis is more structural than other
industries.



Product market: supermarkets.
Supercenters part of the relevant market.
Other types of retailers not part of the relevant
market because the agency believes that
supermarkets rarely price check, change prices, or
change price zones in response to:



1
Club stores1 (Sam’s Club, Costco)
Mass merchandisers (regular Wal-Marts, Targets, K-Marts)
Drug stores (CVS, Rite-Aid)
An exception was Wal-Mart’s acquisition of Supermercados Amigo in Puerto Rico, in
which the FTC alleged a product market consisting of supermarkets and club stores.
FTC’s Current Definition
of a Supermarket
“A full-line retail grocery store
with annual sales of at least $2
million that carriers a wide variety
of food and grocery items in
particular product categories,
including bread and dairy
products, refrigerated and frozen
food and beverage products,
fresh and prepared meats and
poultry, producing, including fresh
fruits and vegetables, shelf-stable
food and beverage products,
including canned and other types
of packaged products, staple
foodstuffs, which may include
salt, sugar, flour, sauces, spices,
coffee and tea, and other grocery
products, including nonfood items
such as soaps, detergents, paper
goods, other household products,
and health and beauty aids.” —
A&P/Pathmark, Docket No. C4209.
2
U.S. Grocery Store Merger Review:
Evidence and Remedies

FTC’s standard analysis (continued)

Geographic markets consist of local areas.
Recognition that customers shop close to where they live.
 Size and shape of markets determined by local factors (demographics,
driving patterns, etc.)
 Store overlaps determined by identifying customer draw areas


Concentration - Strong likelihood of enforcement when local market
would have 3 or fewer suppliers post-merger.
FTC Investigations of Grocery Markets, 1996-2003
Significant Competitors
2 to 1
3 to 2
4 to 3
5 to 4
6 to 5
7 to 6
8 to 7
Enforced
15
40
54
16
3
1
0
Cleared
0
5
10
4
2
1
1
3
U.S. Grocery Store Merger Review:
Evidence and Remedies

FTC’s standard analysis (continued)

Entry
FTC typically views entry as unlikely to occur in a timely manner to offset
competitive effects.
 FTC sends Civil Investigative Demands to competitors, especially WalMart, regarding their expansion plans.


Competitive Effects
FTC examines closeness in format through surveys showing to what extent
customers at each of the merging chains viewed the other as their second
choice.
 FTC also considers geographic proximity.


FTC generally requires up-front buyers when merging grocery
stores agree to divest assets to resolve antitrust concerns.

The FTC has found that there is a high risk that assets will
deteriorate pending divestitures in the grocery retailing business.
4
Whole Foods Merger

On February 21, 2007, Whole Foods (194 stores) and Wild Oats
(115 stores) entered into a merger agreement.

Both companies operated high-end supermarkets with an
emphasis on organic and perishable products.

On March 13, 2007, the FTC issued a Second Request in
connection with the transaction.



Large document production: over 16 million pages of documents
and a gigabyte of data.
19 employees ultimately deposed.
Numerous other U.S. grocery stores also received subpoenas from
FTC and a few also deposed (e.g., Trader Joe’s, Safeway).
5
Whole Foods Litigation



On June 6, 2007, the FTC filed a complaint in the U.S.
District Court for the District of Columbia.
FTC alleged that the acquisition would substantially lessen
competition for premium natural and organic
supermarkets in twenty-one local markets.
Case was unusual in several respects:



FTC alleged a more narrow market definition than in prior
grocery store mergers.
Key part of FTC’s case was based on the statements of the
Whole Foods’ CEO to his Board.
Very short trial; few live witnesses.
6
Whole Foods - Market Definition

FTC alleged a product market consisting of
“premium natural and organic food
supermarkets.”



Significantly narrower market than
alleged in prior grocery store enforcement
actions.
In most geographic markets, this left only
Whole Foods and Wild Oats.
In a pre-trial ruling, judge ordered the FTC
to provide a better explanation of what
types of stores fit into this definition.

The FTC identified 10 attributes that
“generally” delineate the relevant product
market.
Attributes Unique to Premium Natural
and Organic Supermarkets
• Generally focus on high quality perishables,
specialty and natural organic produce, prepared
foods, meat, fish and bakery goods
• Generally have high levels of customer service
• Generally target affluent and well educated
customers
• Generally select store sites based on the
targeted customer
• Generally are mission driven with an emphasis
on social and environmental responsibility
• Generally are a ‘third place’
• Generally provide the customers with a
confidence of a ‘lifestyle brand’
• Generally provide the customer with added
confidence and trust in the provision of the
natural and organic products that are good for
the consumer
• Generally provide a ‘unique’ environment
• Generally are stores that meet ‘core values’ and
a ‘superior store experience’
Judge skeptical of FTC’s market definition from the start
7
Whole Foods - Bad Documents



FTC relied extensively on Whole Foods and Wild Oats
documents indicating that the parties saw each other as their
closest competitor and that the transaction would allow
Whole Foods to raise prices.
FTC revealed that Whole Foods’ CEO had posted anonymous
messages on Internet financial message boards critical of
Wild Oats.
“By buying [Wild Oats]
… we eliminate forever
the possibility of Kroger,
Super Value, or Safeway
using their brand equity
to launch a competing
national/organic food
chain rival to us.”
Documents widely cited in press coverage of case.
Wild Oats “may not
be able to defeat us
but they can still hurt
us.”
By buying Wild
Oats “we will …
avoid nasty price
wars … [that] will
harm gross margins
and profitability.”
Documents were a key form of evidence for the FTC
8
Whole Foods - The Result

On August 16, 2007, the district court denied the FTC’s request for a preliminary
injunction.

Court relied heavily on the testimony of the defendants’ economic expert, as well as
declarations submitted by the defendants.

Court’s opinion largely ignored the company documents cited by the FTC.

Court rejected FTC’s “premium natural and organic food supermarkets” product market.






Extensive cross-shopping for natural and organic foods.
When Whole Foods enters a new market, most of its sales are taken from traditional
supermarkets, not “premium” supermarkets.
Majority of natural and organic foods sold at conventional supermarkets.
Traditional supermarkets offering more natural and organic products, including private labels.
Whole Foods price checks against conventional supermarkets.
Whole Foods considers all supermarket chains when it enters a new market.
“[T]his case hinges—almost entirely—on the proper definition
of the relevant market.” – District Court
9
Whole Foods - The Result


The next day, the FTC filed an emergency motion to the
Court of Appeals for an injunction pending a full appeal.
On August 23, 2007, the court of appeals denied the FTC’s
motion.


“Although the FTC has raised some questions about the district
court’s decision, it has failed to make a ‘strong showing that it is
likely to prevail on the merits of its appeal.’” — Appellate Court
With the injunction dissolved, the merger closed on
August 28, 2007.
10
Whole Foods - The Appeal

On October 22, 2007, the FTC filed briefs stating that it
would continue with its appeal.




FTC hopes to halt Whole Foods’ plan to close or sell dozens of
Wild Oats stores.
The first time in more than a decade that the agency has
continued to appeal a merger case after the Circuit Court has
refused to issue an emergency injunction
Briefing on the appeal was completed March 12; oral argument
was held on April 23.
FTC’s administrative action against Whole Foods remains
stayed pending the outcome of the federal court litigation.
11
Whole Foods Case in Perspective

FTC’s district court loss in Whole Foods case is not unusual. Agency
had lost its last three preliminary injunction hearings in merger cases.




The short trial benefited the merging parties.


Equitable Resources/The Peoples Natural Gas Company – Merger of
natural gas utilities in Pittsburgh area.
Western Refining/Giant Industries – Merger of bulk gasoline suppliers in
northern New Mexico
Arch Coal/Triton Coal – Merger of coal mine companies in Wyoming.
Court focused on the economic evidence to the exclusion of the FTC’s
documentary evidence.
FTC overplayed its hand with the bad documents.


Cases rarely turn on “hot docs.”
Defendants also had documents to support their case.
12
Whole Foods Case in Perspective

FTC’s choice of venue was questionable.




FTC brought case in Washington, D.C.
D.C. was not an area of alleged harm; no Wild Oats stores in the
region.
Judge did not visit the different retail formats (compare FTC v.
Staples).
Courts are critical of agencies asserting inconsistent
market definitions (see also Western Refining).
13
Postscript – A Return to Traditional
Supermarket Analysis?

On November 27, 2007, the FTC challenged a new supermarket
merger between the Great Atlantic & Pacific Tea Company, Inc.’s
(A&P) and Pathmark Stores, Inc.

The FTC alleged that the relevant product market was
“supermarkets.”



An apparent return to conventional agency analysis.
The FTC alleged that the proposed acquisition would result in
reduced competition between the two supermarket firms in Staten
Island, New York and Shirley, Long Island, New York.
Under the terms of a consent order settling the FTC’s charges, the
companies agreed to sell four of A&P’s Waldbaum’s supermarkets
and one Pathmark supermarket in Staten Island, as well as one
Waldbaum’s supermarket in Shirley, Long Island, to FTC-approved
buyers by January 10, 2008.
14