Competition between Whole Foods Market and Wild Oats Markets had led to lower profit margins, an economist told a U.S. federal judge Tuesday who is weighing whether to block a merger of the organic grocers.
University of Chicago economist Kevin Murphy was the first government witness at a two-day hearing where the U.S. Federal Trade Commission is seeking to persuade U.S. District Judge Paul Friedman to block Whole Foods' proposed $565 million purchase of Wild Oats .
The government argues that the merger would reduce competition and raise prices for consumers, but the companies argue that they already face fierce competition from traditional supermarket chains.
Murphy cited instances in which Whole Foods opened a store near a Wild Oats market, leading to a "substantial decline" in Wild Oats' profit margin.
But a lawyer for Whole Foods spent most of the morning attacking Murphy's analysis, questioning whether he had selectively excluded certain stores from his study. The lawyer also criticized Murphy for not citing examples where Wild Oats closed a store in a particular locality.
A central question in the case will be whether the acquisition of Wild Oats would give Whole Foods the power to raise prices, a key test under antitrust law.
Murphy said his analysis did not include the effect on prices because data provided by Whole Foods was difficult to use.
Antitrust experts have also said much may depend on the words of Whole Foods' Chief Executive John Mackey, who told his board in e-mails that the deal was designed to avert price wars with Wild Oats and head off competition with mainstream supermarkets.
To get a preliminary injunction against the deal, the FTC must convince the judge it is likely to succeed in proving at trial that the combination of the two companies would be anti-competitive.
Whole Foods and Wild Oats lead the organic niche market, but their total sales pale in comparison to larger retailers. Mackey said in an e-mail to Whole Foods' board cited in the government's complaint: "(Wild Oats) is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space.
"Eliminating them means eliminating this threat forever, or almost forever," Mackey said.
The companies downplayed Mackey's writings in a court brief, saying he is "an extremely competitive individual" who does not care for his competitors.
Shares of Wild Oats were up 50 cents, or 3.2 percent, at $16.00 while those of Whole Foods were up $1.39, or 3.8 percent, at $38.17 in afternoon Nasdaq trading.