Did you know that natural and organic foods are in a “premium” class that is completely separate from gourmet and conventional foods? Neither did John Mackey, CEO of Austin, TX-based Whole Foods Market when he agreed to acquire arch competitor, Boulder, CO-based Wild Oats Markets for $565 million in February 2007. Fast forward to December 9, 2008, and Whole Foods is suing the Federal Trade Commission (FTC) which is still trying to block the deal based on the flawed logic that natural and organic constitute a “premium” category of foods that only these two competitors sell, and that by acquiring Wild Oats, Whole Foods will have monopoly pricing power that will harm consumers.

Hmm. . . let’s see. Is the FTC really trying to protect the upper income shoppers that frequent Whole Foods and Wild Oats? In the Commission’s tortured logic, discount natural retailer Trader Joe’s, approaching 300 stores, is somehow not part of this select group of two—even though Mackey has publicly stated long before the merger that Whole Foods developed its “365” private label line specifically to compete on price with Trader Joe’s. Nor apparently is grocer Safeway, which operates 1,800 newly remodeled “Lifestyle” supermarkets and has developed its own “O” organic private label line, with sales of approximately $500 million. Neither is Kroger supermarkets, with 2,500 stores, and which launched its “Private Selection” brand of organics with the slogan, “Organics for Everyone.” Whole Foods has about 275 U.S. stores. Monopoly. Sure.

With comparable store sales collapsing to near zero (0.4%) in the fourth quarter, and identical store sales—meaning stores that have not added square footage or been remodeled in the last year—trending negative by a half-percentage point, Mackey points out that Whole Foods is not immune to economic issues. Shoppers, he says, are becoming more value conscious, changing buying behavior and making fewer shopping trips.

Apparently shareholders have a different view of Whole Foods’ monopoly pricing power, trading shares down by 70% in the year since the merger closer. Based on Whole Foods’ recent stock market capitalization, the total value of all its shares, each of its stores, which cost it approximately $20 million to build, is worth $5 million apiece. With the beating the stock has taken, Whole Foods decided in November that it needed to shore up its balance sheet by selling equity in itself equaling 17% of the company to an investor group for $425 million. Is this the strategy of a company that enjoys a monopoly?

Any disinterested party looking at the facts would accept FTC’s view of the world only with a few truckloads of premium organic—free range, even—sea salt. So, why is Whole Foods Market attracting the type and amount of government scrutiny normally reserved for the true fat-cat players such as Exxon, Microsoft and Enron? One thing seems certain. This is a clear example of prosecutorial overreach. One hopes the incoming administration will have the good sense to call off the attack, since it does not look as if the current administration will do so.

What’s the Lesson?
As Orrin Hatch, the senior Senator from Utah has told the natural products industry, “If you are going to be in business, you had better be in politics.” Republican Hatch and Iowa Democrat Senator Tom Harkin are the two Congressional forces that championed the 1994 passage of the Dietary Supplements Health and Education Act (DSHEA). DSHEA regulates the dietary ingredients in vitamins and supplements as foods, and without it, we might not have an industry.

While these two gentlemen continue to serve, they will not do so forever. The Washington, D.C.-based Natural Products Association has been diligently trying to cultivate new Congressional champions who will be able to defend DSHEA in the years to come. It is a fact that laws come under review about every 10 years. DSHEA is 15 years old.

There is a new Government Accountability Office report due this month or next, reviewing DSHEA, Good Manufacturing Practices, and the Adverse Event Reporting laws, and making recommendations. With a new administration in place, several prominent senior Congressmen and Senators who don’t particularly like DSHEA, and who haven’t liked it since its passage in 1994, will be in positions of power. Senator Dick Durbin, the Illinois Democrat Senator, is perhaps the most outspoken critic of DSHEA. Durbin was President-Elect Barack Obama’s seat mate in the Senate, is now the second-ranking member and was the last person to speak at the Democratic Convention just before Obama officially became the party’s nominee. Expect President Obama to listen to Durbin’s agenda.

Congressman Henry Waxman (D-Calif.) is the new chairman of the powerful Energy and Commerce committee. Waxman was also around in 1994 when we passed DSHEA; he hated it then and still does today. With some of the most powerful people in Congress sworn enemies of DSHEA, we will need to be on our toes in 2009. It would good if you could plan to attend the Natural Products Association March 24, 2009, Lobby Day in Washington, D.C., to make sure your representatives know how safe, affordable and effective natural products are.

First Anniversary of AER Law
In December, we cycled the one-year mark for the new Adverse Event Reporting (AER) law, which became effective in December 2007. An AER must be serious, meaning requiring medical attention, hospitalization, death and the like. There were 214 AERs for natural products in the first three months of 2008, compelling the U.S. Food and Drug Administration to lower its estimate for the full year to 856 from 960. This compares favorably with the more-than 450,000 prescription drug AERs recorded in 2007, and supports natural products industry claims that supplements are safe.

Because of the favorable AER results, we as an industry are perhaps in the strongest position we have ever been in to make the case that supplements are protective. At the same time, we face dedicated adversaries in Congress who wish to remake the industry by requiring pre-market approval for any new dietary ingredient, which would effectively put the industry out of business.

As with most situations in life, there are threats and opportunities present at the same time. Here’s to a successful 2009! WF
 
Jay Jacobowitz is president and founder of Retail Insights, a professional consulting service for natural products retailers, and publisher of the Retail Insights Nutrition Newsletter. With 30 years of wholesale and retail industry experience, Jay has assisted in developing over 800 successful natural products retail stores in the United States and abroad. Jay is a popular author, educator, and speaker on successful natural products retailing, and is the Merchandising Editor of—and writes a regular column called “Merchandising Insights” for—WholeFoods Magazine. Jay serves on the board of directors of the National Nutritional Foods Association-East, and on the Membership and Communications Committees and Long-Term Planning Work Group for the Natural Products Association. Jay is next scheduled to speak at Expo West in Anaheim, CA. He will speak at a seminar on “Global Business Program” on March 5 (8:30-5:45) and March 6 (8:30-12:00). He can be reached at (800) 328-0855 or, via e-mail, at jay@retail-insights.com.
 
Published in WholeFoods Magazine, January 2009