Bed, Bath & Beyond Cuts First Quarter Outlook; Federal Trade Commission Seeks To Block Whole Foods/Wild Oats Market Merger

In other news from today, home furnishings retailer Bed, Bath & Beyond (BBBY), an $11 billion, S&P 500 company lowered its outlook for its 1st quarter ended Saturday June 2.  It expects to earn between 36 and 38 cents per diluted share, below Wall Street’s estimate of 39 cents.  Same store sales are expected to be up 1.6%, down from the previously expected 3-5% increase.

Bed, Bath & Beyond CEO Steven Temares said:

Based upon what we have experienced and has been reported by others, the overall retailing environment, especially sales of merchandise related to the home, has been challenging.

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Whole Foods and Wild Oats Markets both  reported that the Federal Trade Commission (FTC) is seeking to block their merger as “anti-competitive”.  The Whole Foods press release said:

The FTC’s challenge to the proposed merger is based on its contention that the relevant antitrust product market is limited to natural and organic food stores and excludes other supermarkets.

I spent two years after college working at economics consulting firm Economic Analysis (acquired by LECG in 2004) and worked on a number of these antitrust cases (the field of economics is called Industrial Organization). 

The idea is that if one company controls a huge portion of the market and has little competition it has market power and can raise prices and reap inordinate profits because consumers don’t have any other choice but to buy from them.  Certainly there is some truth to this.

The key question, however, is always the definition of the relevant market.  Two cases I worked on come to mind:

(1) Tickets.com vs. Ticketmaster: in this case Tickets.com sued Ticketmaster as being a monopoly.  Now, anybody who has tried to buy a ticket to some event and paid Ticketmaster’s huge surcharges and commissions got an experience of what it’s like to deal with a company that has market power: it sucks!!! 

That said, Ticketmaster has made a huge investment in its ticket selling infrastructure and there are no legal barriers to entry.  Anybody who wants to try and capture some this lucrative market, like Tickets.com, is free to try.

(2) CA Attorney General vs. A Hospital Merger: in this case the CA Attorney General, Bill Lockyer, tried to block the merger of two hospitals on the grounds that the newly formed hospital would be a monopoly in its geographic area.  The argument here was much less compelling as it all depended on a small definition of the geographic area.  A larger geographic area, and one more accurately reflecting how people actually used hosptial services, showed that the combined hospital would have only a small market share.

Which of these is more analagous to the FTC’s claim against Whole Foods/Wild Oats?

Pretty obviously, it’s the latter. 

The only way Whole Foods/Wild Oats would be a monopoly is if you define the market very narrowly as natural and organic foods retailers. 

But how can you do that given that most other grocers sell some natural and organic goods?  And it’s obvious that people make tradeoffs and choices in shopping at Whole Foods/Wild Oats versus Safeway, Albertson’s, Kroger, etc….. 

If the relevant market is the entire supermarket industry, as seems obvious, Whole Foods/Wild Oats would have only a tiny market share and no market power.

At any rate, I’m sure that the FTC and Whole Foods/Wild Oats will be hiring their own expert economics witnesses who will make all kinds of ridiculously complex and sophistic arguments about why the relevant market is narrow or broad.  (The Wall Street Journal ran an excellent front page article (subscription required) on the economics expert witness industry a couple months ago, featuring LECG’s CEO and Berkeley Economics Professor David Teece).

Add in that Whole Foods CEO John Mackey is a philosophically inclined Libertarian and it should be fun to see how this all plays out!