On June 6, 2007, the Federal Trade Commission (FTC) moved to block the acquisition of Wild Oats Markets, Inc. by Whole Foods Market, Inc. The FTC's complaint alleges that the merger would substantially lessen competition in the market for food purchased at "premium natural and organic supermarkets." Owing to the extraordinarily narrow boundaries of this alleged relevant market and the types of comments by business executives that are recited in the complaint to justify it, the FTC's decision to bring this action should be of concern to franchisors.
Franchisors have not recently had to worry much about the antitrust ramifications of vertical nonprice restraints on franchisees or of acquisitions of competing chains. The reason is that few—if any—franchisors have economic power in any reasonably defined relevant market. In other words, the industries in which franchisors generally compete (e.g., food service, lodging, service businesses, retail sales, real estate sales) are industries in which substitute products and services are generally readily available. The Supreme Court's recent decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480 (U.S. June 28, 2007), put claims of resale price maintenance in the same "rule of reason" category.
Thus, although a particular franchise system may develop a large and loyal customer base by offering quality products and services, user-friendly operations, and effective advertising and marketing, the quick service restaurant market, for example, is just too vast for any brand to monopolize. Not only is there vigorous competition within sectors of the market (e.g., hamburger chains), if customers feel that hamburgers have generally become too expensive, chicken starts to look more delectable.
But consider what would happen if the proper relevant market for an antitrust attack on these activities were redefined, from a market that included all competitors offering reasonably interchangeable products or services to one that included only those competitors that offered products of the same perceived quality, a particular level of service and/or a particular advertising image. What if price wars between hamburger chains, for example, were taken as evidence that chicken sandwiches do not effectively compete with hamburgers? What if associating a product or service with a certain "lifestyle" narrowed the relevant market for antitrust purposes to other companies that attempted to invoke a similar "lifestyle" in their advertising?
That is the direction taken in the FTC's complaint. If the FTC succeeds in having such a market recognized, the same types of arguments can easily be directed toward many franchised brands. For example, restaurant chains that feature a particular kind of food, or seek to highlight their service orientation, or seek to market a certain type of atmosphere (e.g., "kid-friendly") could be alleged to operate in markets so narrow that virtually any control over distribution or any acquisition of a similar company could be colorably argued to substantially lessen competition in that market. In the past, differentiation by firms of their quality, service level and brand image has been seen as a desirable way for businesses to compete for customers. To re-characterize competition in quality, service and image as elements that narrow the definition of markets would be a very dangerous development for franchise chains and for the economy as a whole.
There is even more that is unsettling about the FTC complaint. Much of the evidence advanced by the FTC in its complaint to show that Whole Foods and Wild Oats operate in an economic market separate from other supermarkets consists of statements by the defendants' executives in various contexts regarding why their respective brands have been successful. For example, the FTC quoted the following statements by the defendants or their executives as supposedly buttressing its definition of the market:
- Whole Foods is "a company that is authentically committed to its mission of natural/organic/healthy foods. Its core customers recognize this authenticity and it creates a customer loyalty that will not be stolen away by conventional markets who sell the same products. Whole Foods has created a 'brand' that has real value for millions of people."
- "Wild Oats is more than a retail chain—it's about a lifestyle, and that's how we market ourselves."
- "Whole Foods Market is about much more than just selling 'commodity' natural and organic products. We are a lifestyle retailer and have created a unique shopping environment built around satisfying and delighting our customers."
- The defendants target "affluent, well educated, health oriented, quality food oriented people."
- "Despite the increase in natural foods sales within conventional supermarkets, [Wild Oats] believe[s] that conventional supermarkets still lack the concentration on a wide variety of natural and organic products, and emphasis on service and consumer education that our stores offer."
And, as always seems to happen, a document was found in which a Whole Foods executive referred to markets in which Wild Oats had supermarkets and Whole Foods did not as Wild Oats' "monopoly" markets.
Obviously, it is not helpful from an antitrust perspective for an executive of a company about to make an acquisition to refer tothe company to be acquired as a "monopolist" in its markets. But a loose comment does not define an economic market, and the fact that a company is in some way differentiated from other competitors in the area does not make it a monopolist in an economically meaningful sense. The other comments recited above from which the FTC seeks to extract economic significance appear to be no more than the kind of reference to "our vision," "our culture" or "our image" that executives of any retail company might use to try to capture or suggest the quality that differentiates his or her brand. If comments like these become evidence of economic insularity, what franchise company's files will not yield evidence that it is a "monopolist?"
As the FTC's suit to block this merger progresses, the FTC may place some limits on its relevant market theory, or the court may limit or reject the FTC's theory. But as the FTC's complaint now stands, its implications could create considerable mischief for franchisors.