Whole Foods: Niche player or giant?

A Whole Foods victory is no sure thing. So the new uncertainty surrounding the stock has made it even less popular among investors. For contrarians, that's the reason to buy. "I like Whole Foods because everyone hates it so much," contends John Lawrence, an analyst at Transamerica, which owns the stock. "It's also still in the early innings of growth."

Indeed, few retail stocks are as disliked as Whole Foods, says Stephen Chick, an analyst at JPMorgan Chase (JPM, news, msgs). Less than a third of the analysts who cover the stock have a "buy" rating on it -- part of the reason he is also favorable on Whole Foods. "Sentiment on the stock is too negative, in our view," Chick says.

Singled out

There are several other odd aspects to this case. For one thing, under the administration of George W. Bush, antitrust authorities in the FTC and the Department of Justice have been relatively easy on mergers.

They did nothing to contest last year's marriage of Whirlpool (WHR, news, msgs) and Maytag, then the top two rivals in household appliances. So far, there's been no opposition to the proposed merger of Sirius Satellite Radio (SIRI, news, msgs) and XM Satellite Radio (XMSR, news, msgs). What's more, the FTC recently lost two attempts to block mergers in the energy sector. To lose yet another case would be a serious black eye.

So why is the FTC apparently sticking its neck out on Whole Foods and Wild Oats? First, it's always kept a close eye on the grocery sector. "They are consumer products, and the consumer votes," says King & Spalding's Berg.

The FTC has some viable arguments. For example, the FTC says that when Whole Foods and Wild Oats operate in the same markets, they offer more-competitive prices and services. If the FTC can show this in court, it may be able to block the merger, says Peter Guryan, an antitrust attorney at the law firm Fried, Frank, Harris, Shriver & Jacobson, who has advised banks on antitrust angles to supermarket mergers.

In so doing, it would be building on precedent set in a ruling against a proposed merger of Staples (SPLS, news, msgs) and Office Depot (ODP, news, msgs) in the late 1990s. In that case, a court blocked the merger because it found more-competitive pricing of some products by the two companies when they were both in the same area.

To make this same case against Whole Foods and Wild Oats, the FTC will need to cite data and studies proving it. "A lot of it will come down to a battle of the economists," says Melissa Maxman, the chairwoman of the antitrust and trade-regulations group at Baker & Hostetler, a Washington law firm.

• Video: A new Whole Foods superstore

"This is absolutely not a Staples case," responds Atkins, the attorney for Whole Foods. "Whole Foods prices are lower than Wild Oats regardless of whether there is a Wild Oats in the same market. The transaction will bring down Wild Oats prices."

Selling a 'lifestyle concept'

The FTC will also contend that Whole Foods and Wild Oats operate in a distinct niche because the stores are selling a natural- and organic-foods "lifestyle" as much as a product lineup -- something that the mainstream grocery stores don't do. In building this part of its case, the FTC cites executives from both Whole Foods and Wild Oats making these points in internal memos and public forums such as conference calls.

But here, the FTC seems to be ignoring "the headway conventional grocers have been making in natural and organics, and how they are weaving those products into their merchandising strategies and remodeling efforts," says Morningstar (MORN, news, msgs) analyst Mitchell Corwin. "Safeway has been moving upscale for years, remodeling stores into its lifestyle concept, featuring fancier decor, more fresh foods and similar merchandising to Whole Foods."

Other competitors such as Wegmans, Publix and Trader Joe's are using the same tactics to win over the granola crowd. And Tesco, a natural-foods supermarket chain from the United Kingdom, is "coming aggressively into Southern California to compete head to head with us," Atkins says. "This is real. It is happening, and it is just getting more intense."

Expert Picks

It's time to drop Comcast (CMCSA, news, msgs) from the list of picks in my Company Focus tracking portfolio, as there has been a lot of insider selling recently. This group of picks is up 11.4% this year, by the way.

At the time of publication, Michael Brush did not own or control shares of any companies mentioned in this column.

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