Reuteman: Natural food deal likely despite FTC

Published June 9, 2007 at midnight

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I owned a home in Cherry Creek North when Alfalfa's Market opened its third natural foods store there in August 1990. Instantly, it was the hottest spot in the neighborhood, a place where your very presence meant you knew things about health and food and nourishment far beyond what was available at the nearby Safeway.

Six years later, the small Boulder- based Alfalfa's chain merged with a larger Boulder natural foods chain, Wild Oats. The laid-back deal was dubbed "tofu takeover." The two chains kept their former names, and employees worried about such things as whether Wild Oats' first-name phone directory would "go corporate" and include last names.

Ten months later in 1996, Wild Oats went public. It was the second-largest natural-food store chain, behind Austin, Texas-based Whole Foods. Wild Oats Chief Executive Michael Gilliland kept a statue of St. Michael the Archangel - patron saint of grocers - in his office. The saint readied a sword to slay Satan, whose head was underfoot. Except Gilliland had covered Satan's face with a photo of John Mackey, Whole Foods CEO.

In January 1997, Whole Foods announced plans to open its first Colorado store in Wild Oats' backyard at 30th and Pearl streets in Boulder. According to the Natural Foods Merchandiser trade magazine, the decision broke a gentleman's agreement Mackey had made with Alfalfa's president, Hass Hassan. When Wild Oats bought Alfalfa's, all bets were off.

By 2000, a decade after Alfalfa's opened in Cherry Creek, Whole Foods began building a superstore across the street. At the height of construction, Alfalfa's decided not to renew its lease at 201 University Blvd. Wild Oats President Jim Lee said the decision had nothing to do with the competition to come. "We don't let our competitors dictate our moves," he said.

Baloney, countered Mackey. "Of course it has to do with our store opening. It's a preemptive strike to avoid competing with a store that will be three times as big. If I were in his shoes, I'd do the same thing."

I believed him. But by that time, I'd moved to the southeast part of the city near Bible Park. Eighteen months ago, Whole Foods opened a huge store on Hampden Avenue, half a mile from my house. It's transformed the sleepy neighborhood, upping the fun quotient by adding a destination that simply must be visited a few times a week, even if it's just to "pick up a few things."

Over the years, Whole Foods emerged the winner. It boasted $6.5 billion in revenue last year from its 192 stores. For Wild Oats, growth has been slower. Two of the past five years were unprofitable, and last year revenue hit $1.2 billion from 110 stores. It seemed inevitable that Whole Foods would buy them out, and the $670 million acquisition was announced Feb. 21. Since October 2006, Wild Oats had lost its CEO and CFO. Mackey, sensing weakness, made his move in early February: "I thought, gosh, maybe this would be a good time to approach Wild Oats. I called their interim CEO." Mackey said Gregory May asked him, "What's your price going to be" and the deal came together in a few weeks. Both boards unanimously approved.

Now comes the Federal Trade Commission, which voted unanimously this week to block the deal. "If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality and fewer choices for customers. That is a deal consumers should not be required to swallow," said FTC director Jeffrey Schmidt.

Whole Foods and Wild Oats will challenge them in court, and will likely emerge victorious. The FTC move has caused more head-scratching than an invasion of body lice. JPMorgan analyst Stephen Chick wrote, "The FTC doesn't necessarily have a history of rational decision-making with respect to deals." Others note the Bush administration rarely sees a deal it doesn't like, taking a laissez-faire approach that makes this decision stick out like putrid arugula. If the deal doesn't go through, I'll eat this column - between slices of brisket from the Whole Foods barbecue counter.

(Full disclosure: I bought 46 shares of Whole Foods in early 2003 and have held them, watching the shares rise from $22.60 to $77.44 in January 2006 and on Friday, $39.32.)

Business editor Rob Reuteman can be reached at 303-954-5177 or reutemanr@RockyMountainNews.com.

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