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Source link: http://archive.mises.org/12501/trader-joes-gets-ftc-discount/

Trader Joe’s Gets FTC Discount

April 17, 2010 by

Portland, Maine, is getting a new Trader Joe’s — courtesy of the Federal Trade Commission. For some reason, Trader Joe’s didn’t see a reason to enter the Portland market until the FTC offered to seize some property from rival grocer Whole Foods and sell it to Trader Joe’s at below-market price. The locals appear ecstatic; the FTC has already received over 340 comments from Portlanders praising federal intervention in their local grocery market.

The basis for all this is the FTC’s 2007 lawsuit claiming Whole Foods’s acquisition of Wild Oats Markets violated federal antitrust statutes. After a split court of appeals’ panel voted to retroactively enjoin the completed merger — and after the FTC announced there would be another rigged “trial” presided over by one of its own members —Whole Foods signed a “settlement” requiring the sale of 32 stores to government-approved buyers. Among the stores to be “divested” was the now-closed Wild Oats store in Portland.

The FTC staff ordered Whole Foods to retain The Food Partners, LLC, a Washington-based “investment banking firm” to conduct the sales. Last month Matthew S. Morris, the divestiture trustee for The Food Partners, filed a petition with the FTC seeking approval for the sale of the closed Portland store and related assets to Trader Joe’s East, Inc., which operates 338 stores throughout the U.S. but none in Maine. The FTC refused to disclose the terms of the deal to the public.

In his petition, Morris states that opening a new Trader Joe’s at the former Wild Oats site “would increase competition in the marketplace” and that “as there are a limited number of grocery stores in this trade area, Trader Joe’s will offer more choice and be one of the only grocery stores to offer quality foods at a good value.” Morris cites no research or evidence in support of these claims, which sound more like something you’d read in a Trader Joe’s press release than an official government filing. (Furthermore, unless you have a “Star Trek”-style replicator, there are a “limited number of grocery stores” in every trade area.)

There’s little substance to the petition beyond citing Trader Joe’s ability to operate a store in Portland. Morris notes that Consumer Reports ranked Trader Joe’s “the second-best supermarket chain in the nation” and that “Trader Joe’s philosophy is to bring its customers the best food and beverage values and the information to make informed buying decisions with the more than 3,000 unique grocery items.” (Boy, it sure sounds like Morris might want additional future business from Trader Joe’s; his firm previously advised the company’s acquisition of select stores from Albertson’s.) Morris also tells the FTC that Trader Joe’s can finance the Portland acquisition completely through existing capital and cash reserves; after all, Trader Joe’s had more than $6 billion in sales in 2008.

All this begs the question: Why does Trader Joe’s need the FTC’s help breaking into the Portland market? The FTC has spent three years micromanaging the aftermath of the Whole Foods-Wild Oats merger; it awarded Matthew Morris and his partners a lucrative, no-bid government contract to profit from the forced sale of 32 stores; and now it’s helping a large, well-established company break into a market that it could’ve entered at anytime. Something smells fishy — and it’s not the tuna steaks on sale for $8.99.

First there’s the FTC’s bait-and-switch position regarding Trader Joe’s. When the Commission needed to establish antitrust liability against Whole Foods, Trader Joe’s was considered insufficient competition for Whole Foods. The FTC’s chief economic expert during the court proceedings, University of Chicago economist Kevin Murphy, hemmed and hawed about whether Trader Joe’s constituted part of the FTC-defined market for “premium natural and organic supermarkets.” The FTC’s entire antitrust case rested on the notion that Whole Foods and Wild Oats were part of this distinct market that excluded all other supermarkets and grocers.

Dr. Murphy’s expert report (which cost $85,000) told the district court that “Trader Joe’s competes with Wild Oats and Whole Foods but to a significantly smaller degree … Trader Joe’s does not offer a competitive constraint on the vast majority of Wild Oats and Whole Foods products.” Murphy noted that unlike Whole Foods, Trader Joe’s “uses a small-store format” and did not emulate Whole Foods’s “upscale, lifestyle, high service.” Accordingly, Murphy did not include Trader Joe’s in the market for “premium natural and organic supermarkets.” But now that Whole Foods has surrendered, the FTC suddenly has no problem acknowledging Trader Joe’s as an acceptable substitute for the closed Portland Wild Oats store.

(For his part, Whole Foods CEO John Mackey said he always considered Trader Joe’s, not Wild Oats, as his company’s primary competitor: “Trader Joe’s is very aggressive with their pricing and this company more than any other acts as a market constraint on our pricing.”)

Next there’s the matter of the competition “lost” by the Whole Foods-Wild Oats merger. The FTC’s public case did not go into detail about individual geographical markets. A cursory examination of the Portland market actually shows the market has been in flux for several years. Wild Oats and Whole Foods were not longtime competitors in Portland — in fact, they operated competing stores for about a year.

Wild Oats opened its Portland store in 2003 after nearly two years of delays due to financing issues. The store also faced some public backlash for locating right next to an existing, independent natural foods store, The Whole Grocer. In 2006, The Whole Grocer’s owner sold the store to Whole Foods, which had already announced plans to enter the Portland market. Whole Foods closed The Whole Grocer, opened its own store, and acquired Wild Oats the following year.

So if we’re treating competition as a zero-sum game, was it “lost” when Whole Foods acquired Wild Oats, when Whole Foods bought out The Whole Grocer, or maybe when Wild Oats decided to compete directly against The Whole Grocer? Remember, the stated goal of antitrust is to “restore” competition that might be lost. Combined with this notion that “premium organic and natural supermarkets” are a distinct market, and what the FTC is really saying is we need to restore the competitive conditions that existed between 2006 and 2007: two national chains that sell natural and organic products. Prior to 2006, you had a national chain competing against an independent, local store, which does not satisfy the FTC’s market definition.

All that said, what about the fact that the FTC has received public comments overwhelmingly supporting a Trader Joe’s in Portland? Sure, it’s a great propaganda tool for the FTC, but it’s meaningless. Public comment doesn’t influence FTC decision-making; statute doesn’t even require the agency seek or review comments in these cases. What matters in FTC actions are the opinions of government antitrust lawyers and their paid experts (like Dr. Murphy).

But the public support for Trader Joe’s does underscore the notion that this is a dynamic marketplace that other stores, including Trader Joe’s, could enter at anytime. FTC intervention doesn’t make the market function any better; it merely adds another layer of political graft to the system.

We don’t know the terms of the Whole Foods “divestiture” to Trader Joe’s — the FTC keeps all that information from the public — but it’s a fair assumption that Trader Joe’s was the only bidder in Portland, and the company is likely paying less-than-market value for the Whole Foods assets. In effect, the FTC’s actions are a subsidy to Trader Joe’s to enter the Portland market; it may even be the case that Trader Joe’s would have opened a Portland store even sooner, but it waited to see if it could get an “FTC discount” for the former Wild Oats store. In any event, there’s no reason to think Trader Joe’s would not have come to Portland but for the FTC’s intervention.

{ 27 comments }

Victor April 18, 2010 at 9:25 am

Nevermind the weather–Glad to have left the COLD planned economy of Maine years ago. High taxes, nanny statism, and the FTC in cahoots with city planners. “Dirigo,” you do indeed…
“lead to” economic stagnation.

Shay April 18, 2010 at 10:38 am

What’s wrong with this? Hell, it’s be great if the FTC declared that Whole Foods had to start “selling” all its products at $0.01 each. How could there be any downsides to this?

iawai April 18, 2010 at 11:37 am

Since at heart this is an economics blog, you must surely be joking, right?

Elric April 18, 2010 at 1:40 pm

Great idea Shay, you should be the one who owns and operates the store that sells $.01 goods. Tell us when it opens, I’ll shop there.

brian April 19, 2010 at 6:08 am

Obvious sarcasm by Shay, I’m sure.

Lemmywinks April 18, 2010 at 11:52 am

Does anyone know how the FTC defines “premium natural and organic supermarkets?.”The FTC makes it sound like “organic” grocers (although I’m skeptical that this is an actual distinction) aren’t competing with “conventional” grocers. The reality is that many things at Whole Foods aren’t organic, and almost every mainstream grocer is tapping into the organic market from this competition. I’m just curious how much of this distinction is based upon image, rather than actual product competition.

Funny how my mainstream grocer (HEB) sells similar organic food for cheaper than my Whole Foods…..

S.M. Oliva April 18, 2010 at 12:15 pm

Lemmywinks —

Dr. Murphy’s report attempts to define “premium natural and organic supermarkets” at great length. And a lot of the definition, as you guessed, is based on image. Murphy says, for example, that Whole Foods is distinguished by “providing exceptional service and quality in ways that fit an upscale, gourmet/epicurean and ‘socially responsible’ lifestyle.”

Brent Railey April 19, 2010 at 1:49 am

I pretty much think it’s ironic that Whole Food’s, a company run by a pretty libertarian minded guy, targets a market that mostly consists of “save-the-planet” types.

mundi April 19, 2010 at 7:12 am

One thing i have learned is that the more regulated an industry is, the far far better the rewards are once you are in it. He will follow the money just like everyone else.

Richard Moss April 19, 2010 at 11:25 am

Perhaps this has something to do with the then Whole Foods CEO criticizing Obama’s Health Care Plan?

Perpetuity June 14, 2010 at 11:53 am

O sure, just like the BP spill is revenge against all the gulf state crackers against everything but some nostalgia nightmare of liberty.

Lemmywinks April 19, 2010 at 12:16 pm

Although it’s an interesting theory, the FTC has been messing with whole foods since before Obama even got elected, starting with the 2007 Wild Oats merger.

Funny how Whole Foods is probably the best example of environmentally conscious capitalism. They must be punished.

S.M. Oliva April 19, 2010 at 2:07 pm

Richard –

As Lemmywinks said, the FTC brought its case against Whole Foods in 2007 when the Republicans ran the Commission (and a Republican judge, Janice Rogers Brown, wrote the decisive court opinion supporting the FTC).

However, it’s worth noting that some of the Portland commentators who support the Trader Joe’s sale said they welcome a new option specifically because they chose to boycott Whole Foods after John Mackey opposed Obama’s health care scheme. This further undercuts a lot of the FTC’s efforts to define markets based solely on price sensitivity.

Perpetuity June 14, 2010 at 12:00 pm

I boycott Whole Foods on the basis that they barely sell whole food anymore. It caters to a bourgeois holier than thou crowd who commute miles to buy their pre-packaged junk that can be had at the local Hannafords.

Well, there is sone uniqueness in their products. The grass fed beef is great. The 365 brand ice cream has no high fructose corn syrup (thanks farm subsidies for putting this in everything on the shelf).

I can’t do my weekly grocery shopping there or it would triple my bill on just the basics, and they don’t carry all the basics anyway.

I am a foodie, and a cook, and Whole Foods is not whole.
Trader Joes will bring another choice, period and that makes me happy.

KCJ April 22, 2010 at 3:22 pm

One wonders why the FTC chose to assist a German-owned company in the US market? According to Wikipedia, “Trader Joe’s was founded by Joe Coulombe and is currently owned by a family trust set up by German businessman Theo Albrecht, one of the two brothers behind the German supermarket chain Aldi.[4]“

Perpetuity June 14, 2010 at 12:04 pm

A multinational also owns our other decent grocery chain: hannafords

http://en.wikipedia.org/wiki/Hannaford_Bros._Co.

S.M. Oliva April 22, 2010 at 4:06 pm

KCJ –

Keep in mind, Whole Foods is selling 32 stores under the FTC’s order. The stores are going to a variety of buyers; Trader Joe’s was likely the only bidder for the Portland store.

will June 20, 2010 at 4:39 am

Great essay, and well-argued. The FTC’s push to undo the Wild Oats acquisition after it had already been consummated has always stuck in my craw. The process of selling the former Wild Oats store in Portland is further evidence of the FTC’s highly-questionable standards and procedures.

kj August 25, 2010 at 6:21 am

princess Eugene named after & part of Nazi Eugenics. http://host01.web.officelive.com/Documents/zizzner.html

Alfordd September 1, 2010 at 2:04 pm

Really?? You begin a purportedly investigative article with the title “Trader Joe’s Gets FTC DISCOUNT” (emphasis mine) and then conclude the article by saying that you don’t know the terms of the deal, or even what Trader Joe’s is paying? Why not be honest and title this article something like “I think Trader Joe’s got a special deal, but I don’t know if its true or not?” This should be listed as an opinion article.

James Arrison October 22, 2010 at 11:25 am

Thank you Alfordd! This is what I intended to post as well – the title is factually inaccurate. It is likely that Trader Joe’s got a good deal because there would be few other supermarkets with interest in the property, but this is as much a function of market forces as the FTC’s involvement. This is exactly the kind of shoddy scare tactics that govern so much of right wing media these days. It is clear to me, though, that this is a blog and therefore opinion. It is just not very well thought out or communicated opinion.
As someone living near Portland I am eager to welcome Trader Joe’s to town. Folk from Maine have been trying to drag them into the state for a long time and it is quite a hurdle for a company to add a new state to it’s offerings. As to the author’s question, about when the competition was lost, it was clearly when the number of stores when from 2 to 1 which happened exactly once, when Whole Foods acquired Wild Oats – a very noticeable event in the community. And whereas there is an excellent Hannaford supermarket beyond the highway, a few blocks from this location, until next month when Trader Joe’s opens, Whole Foods is the only supermarket on the peninsula that is the heart of Portland.
There are many issues the FTC needs to take on after years of stagnation. A properly free cannot operate without competition. There is nothing in Adam Smith to counter the market damaging forces of monopoly.

Maggie October 12, 2010 at 12:43 pm

Whole Foods completely sucks and needs to watched. What they’ve done in Portland is despicable. This article doesn’t mention the fact that they told the Maine Lobster industry that they were inhumane and incorrect in the way that they process lobster and decided to buy all of their lobster from a New Hampshire distributor and then electrocute the live lobster in the store using a “Crustastun”. Lovely. Way to keep it local, not. They couldn’t purchase fresh lobster from the docks just down the street? Talking about pissing off the entire local economy and the 1000s of people employed as lobstermen, distributors, retailers and others who rely on the lobster industry to make a living. Most people in Maine boycott the store for this reason alone, or for the fact that they swallowed a local health food store, The Whole Grocer, plus the prices are ridiculous. I can find most of their items at Hannaford for a fraction of the cost and none of the pretension. People who do shop at the Portland, Maine Whole Foods are completely unaware of where their food comes from and where their dollars are going. Portland is a very green, outdoorsy city with local pride and and the people here can see right through WF’s corporate monster tactics and lack of sensitivity to the local market. Trader Joe’s has a much better shopping experience and reputation. TJs is so consumer focused that they’ll probably hurt traditional supermarkets in the area, though. I, for one, will frequent Trader Joe’s any day before Whole Paycheck, I mean Whole Foods. Thank you, FTC and down with Whole Foods.

J. Murray October 12, 2010 at 12:47 pm

If Trader Joes was so great, then you guys would have voluntarily convinced them to open shop up in town. Since they didn’t, it’s clear Portland really doesn’t value Trader Joes or Wild Oats all that much. It’s also odd you think you speak for the whole 533,000 people who live in the area as if the entire city operates in efficient, ant colony lock step.

Peter Hayward October 16, 2010 at 2:11 pm

Maggie, you have perfectly described the woeful state of Whole Foods in Portland.

With its new store only a fraction of the size of Whole Foods, Trader Joe’s Portland store (opening 10/29) will probably not have a great impact on Whole Foods’ Portland sales, but the free market competition between the two stores will be a win-win for Portlanders (something that the blog’s author fails to mention).

Rory Tony November 10, 2010 at 12:48 am

Granted TJ’s has only been here a couple of weeks, but so far the impact on both Hannaford’s and Whole Foods has been very noticable. Hannafords has parking spaces at times and close to the doors that it definitely did not have before. And Whole Foods has SIGNIFICANTLY lowered some prices (milk has dropped; fresh mozzarella dropped over 25%; cereals down about 50 cents a box, etc.)

By the way, there are many things that Whole Foods has which are simply unavailable at Hannafords. Poultry meats are a good example, like unprocessed turkey bacon and skinless chicken sausages, both at prices comparable to beef or pork. Organic pasta sauce is half the price at Whole Foods (compared to Hannafords). You can’t get natural frozen fruit bars at Hannafords, and they’re reasonably priced as well.

And of course, the prices at Trader Joes on things like maple syrup, olive oil, cellulose sponges, dried fruit, frozen green chile cheese tamales — these are the things that make it such an amazing store.

But the Portland TJ’s prices are slightly above those around Boston. Trader Joe’s told me for years they couldn’t move to Portland because it was too far from it’s nearest other store, and that may explain the increase in cost. But it’s possible the FTC DID help jump start TJ’s expansion, and if so, I agree it’s unfair to Whole Foods. In the long run though, Hannafords, Whole Foods, and Trader Joes, are going to have to learn to live with each other. They actually complement one another pretty well. (And how convenient they decided to camp within blocks of each other!!)

One last thing — finally Portland will have a large grocery store open on Easter and the Fourth of July. It always pissed me off that WF, Hannaford, and Shaws couldn’t agree that at least ONE of them should be open on a holiday.

Joel Glidden October 26, 2010 at 10:00 am

Maine has a very business-hostile climate. I don’t think anyone here would naturally assume that any store would come here without a special discount. People were actually pretty shocked to hear that Trader Joe’s was coming to Portland. Development has always been slow here and business tend to do badly, especially new chain stores.

Discounts Sydney December 30, 2010 at 9:52 am

Really?? You begin a purportedly investigative article with the title “Trader Joe’s Gets FTC DISCOUNT” (emphasis mine) and then conclude the article by saying that you don’t know the terms of the deal, or even what Trader Joe’s is paying? Why not be honest and title this article something like “I think Trader Joe’s got a special deal, but I don’t know if its true or not?” This should be listed as an opinion article.

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