Thursday, June 29, 2017

How Myopic Antitrust Policy Helped Amazon Gain Dominance

When Whole Foods and Wild Oats merged, the commission said Wal-Mart wasn’t a competitor.


By Allysia Finley
The Wall Street Journal
June 29, 2017

Amazon’s $13.7 billion bid for Whole Foods has stirred speculation among investors, business reporters and consumers. If Amazon CEO Jeff Bezos has a strategy for marrying the online and brick-and-mortar operations, he hasn’t explained it—and perhaps for good reason. It’s rarely wise to show your cards to competitors or regulators.

A decade ago, the Federal Trade Commission turned Whole Foods CEO John Mackey’s statements against him in an antitrust suit that sought to unwind its merger with Wild Oats Markets. Mr. Mackey said Whole Foods’s goal was to “eliminate a competitor” that a conventional supermarket might otherwise purchase and use as a “growth platform.”

Markets are dynamic—meaning businesses face constant pressure from competitors that offer innovations or lower prices. In 2007, then-Sen. Barack Obama asked Iowa voters, “Anybody gone into Whole Foods lately? See what they charge for arugula?” At the time, Iowa didn’t even have a Whole Foods, and Republicans seized on his statement to portray him as an out-of-touch elitist. Now you can buy a box of arugula at a 99-cent store.

The problem is that FTC regulators defined competition so narrowly when evaluating prior mergers that they failed to see the market for the trees. Antitrust enforcement actions that sought to prevent grocery stores from consolidating have helped Amazon, which has been able to expand unencumbered by the FTC. Now supermarkets may be in a weaker position to give Amazon a run for its money.

After Whole Foods proposed the Wild Oats merger in 2007, the FTC accused Whole Foods of trying to corner a distinctive “premium natural and organic” market. The agency argued that Wal-Mart ,Safeway and Trader Joe’s—all of which are among Whole Foods’s top competitors today—drew different clienteles and thus were not direct competitors.

Whole Foods spent two years battling the FTC in court. But the agency’s arguments lost weight as Wal-Mart and supermarkets expanded their offerings of organic products and poached price-conscious customers from Whole Foods. In 2009 the government settled, with Whole Foods agreeing to sell 13 of its Wild Oats stores, which accounted for a token 1.3% of the company’s sales.

But although the merger strengthened Whole Foods’s position in the organic market, its stock price has sagged over the past two years as competition in groceries has escalated. Meanwhile, Wal-Mart and conventional supermarkets, which were booming during the 1980s and ’90s, have to fend off competition from warehouse outlets, dollar stores and German low-cost retailers Aldi and Lidl.

Online food retailers like FreshDirect, Amazon and Jet.com (acquired last year by Wal-Mart) are now catering to customers who prize convenience over cost. Silicon Valley startup Instacart promises to deliver groceries from retailers like Whole Foods, Costco and Target within two hours. And meal kit service Blue Apron is pitching an initial public offering.

The result has been a wave of supermarket consolidation. In 2015 Albertsons merged with Safeway to maximize economies of scale and negotiate leverage with suppliers. Yet the FTC complained the deal would significantly reduce competition and potentially increase prices.

The FTC came to this conclusion by narrowly defining the market as consisting of “one-stop shopping” supermarkets and excluding discounters, warehouses, convenience stores and organic retailers. The commission also arbitrarily evaluated geographic competition by examining supermarkets that operated between 0.2 and 10 miles of each other. In the Whole Foods-Wild Oats deal, the FTC defined the relevant geographic market as “an area as small as approximately five or six miles in radius” from each store. With the growth in online shopping, delimiting markets by geography is increasingly absurd.

To get their merger approved, Albertsons and Safeway agreed to sell 146 of their stores to the small Northwest supermarket chain Haggen, which filed for Chapter 11 bankruptcy reorganization within a year.

Government antitrust interventions have a history of backfiring. When rental-car company Hertz sought to buy Dollar Thrifty in 2012, the FTC forced it to divest Advantage Rent A Car. Regulators argued that the merger would have reduced competition in the airport rental market, which was beginning to see disruptions from ride-hailing startups and Zipcar, a rental agency with an innovative business model. One year after its brokered sale, Advantage went bankrupt. In 2013 Avis bought Zipcar for $500 million.

Car-rental companies are continuing to struggle because of competition from Uber and Lyft, but are innovating to keep up. In the past three years, Hertz’s stock price has tumbled more than 90%. This week, Hertz and Avis announced self-driving car partnerships with Apple and Waymo.

That story of creative destruction has been repeated across industries throughout history. Wired broadband has replaced dial-up Internet in most of the U.S. but is now being usurped by mobile. Or consider the evolution from pagers and car phones to cell phones and smartphones. A decade ago, BlackBerry led the “personal digital assistant” market, which was tiny compared to the market for flip phones. Regulators can’t foresee how innovations will disrupt markets. Antitrust interventions that seek to preserve the status quo will invariably fail—and could cause businesses to fail.

How the Amazon-Whole Foods merger will play out is anyone’s guess, but businesses typically have a better record of predicting—and spurring—market revolutions than government. That’s something for President Trump to keep in mind as he fills three vacancies on the FTC.


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