John Mackey.

Photo: Whole Foods Market

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In a high-profile exchange with Michael Pollan last summer, Whole Foods Market CEO and founder John Mackey took an avuncular approach to farmers’ markets that might take business from his company.

“Whole Foods Market is committed to supporting local farmers’ markets across the United States (and also in Canada and the U.K.),” he wrote.

Elsewhere, the executive has displayed a zeal to crush competition that might make his counterparts at Microsoft blush. Last spring, Mackey sent a blunt email to the Whole Foods board, explaining his intention to buy Wild Oats — Whole Foods’ only direct nationwide competitor — for a price well above what many analysts thought Wild Oats was worth.

By taking over Wild Oats, he argued, Whole Foods would not merely be snapping up 110 fully functioning natural-foods stores across the nation. Grabbing Wild Oats would also buy Whole Foods the power to “avoid nasty price wars” in several markets, as well as “eliminate forever” the threat of a major nationwide competitor in the natural-foods space.

The Federal Trade Commission somehow got its paws on Mackey’s provocative email, and is using it as the basis for a rare foray into enforcing antitrust law in the food industry. In early June, the commission sued to block Whole Foods’ $565 million bid for Wild Oats, claiming the combined entity would act as a monopoly in many regional markets.

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In a brief [PDF] released last week, the FTC subtly revealed that Mackey had made other, even more provocative statements about Wild Oats before the deal went down this spring. It turns out that Mackey, the CEO of a company valued at some $5.6 billion, had for six years been secretly posting on a popular internet message board, clashing with anyone who dared criticize Whole Foods or praise Wild Oats. Using the handle “Rahodeb” — his wife’s name scrambled — Mackey regularly crossed swords with people calling themselves things like “Hog152” and “Dadajuiceboy.”

As far back as 2002, “Rahodeb” was openly pining for Wild Oats’ elimination, declaring that, “With the demise of Wild Oats, Whole Foods Market has no national competitors in their niche. This will accelerate their growth.” By spring 2006, Mackey’s alter ego could taste blood. “The end game is now under way” for Wild Oats, Rahodeb insisted: “Whole Foods is systematically destroying their viability as a business — market by market, city by city.”

Admittedly, it’s hard to look away from the spectacle of a major CEO’s descent into anonymous chat-room shilling. But what really interests me here is the FTC’s bold decision to challenge a merger within the food industry — after decades of standing idly by as fewer and fewer companies grabbed hold of more and more of the market.

Mackey vs. Mackey

The FTC’s case against the merger can be summed up as follows: A combined Whole Foods/Wild Oats would be the only nationwide supermarket specializing in premium-priced organic groceries, with an emphasis on perishable goods (fresh produce, meat, and dairy products).

The commission acknowledges that conventional supermarkets are rushing into organics, but counters that these chains cater to a group of shoppers distinct from the Whole Foods/Wild Oats set. Core “natural foods” shoppers, the FTC argues, don’t venture into Wal-Mart seeking organic milk or broccoli. They flock to Whole Foods for the experience, and they’re willing to pay extra for it. Thus if Whole Foods “devoured” (the FTC’s word) its only national competitor, the combined entity would be free to gouge natural-foods shoppers without fear of competition.

Mackey has openly ridiculed this claim on his blog on the Whole Foods website. In an extraordinary 14,000-word treatise (very few CEOs would comment so voluminously on a pending antitrust case), Mackey claims that assimilating Wild Oats would actually do very little to reduce the competition his company faces.

“Most of our products that we sell in our stores can now be found in every large supermarket store in every market we compete,” he wrote. “Excellent supermarket companies … have very good perishable departments that compete very favorably with our own stores and they also have very large selections of natural and organic products. Competition with Whole Foods has never been greater than it is right now and Wild Oats is only a relatively small part of that greater competition.”

And Whole Foods faces fierce competition from other sources as well, Mackey went on: “Trader Joe’s has very rapidly expanded by more than doubling its store base in the past five years and has entered into numerous new markets to directly compete against us.”

Mackey’s logic makes good sense on the surface. Sam Fromartz, author of Organic, Inc. and a seasoned Whole Foods observer, essentially echoed it on his Chews Wise blog; other business-press commentators weighed in with similar support.

However, the FTC wields a powerful weapon to bolster its case: Mackey’s own pronouncements from before the Wild Oats buyout. Over and over again in its 40-plus page brief, the commission trots out Mackey himself to make the case that Whole Foods operates in a different universe from its would-be rivals among conventional supermarkets. While the FTC document doesn’t specify sources for the Mackey quotes, I talked to a press rep from the commission, and he told me they come from Mackey’s chat-room forays and blog, as well as internal company documents.

In one instance, the FTC quotes Mackey as claiming that, “Safeway and other conventional retailers will keep doing their thing — trying to be all things to all people. They can’t really effectively focus on Whole Foods Core Customers without abandoning 90 percent of their own customers.” At another point, the FTC has Mackey boasting of Whole Foods’ “authenticity, integrity, and the power of their brand with their customers. This creates strong loyalty from their customer base — something Safeway doesn’t have and likely never will have.”

Nor did pre-merger Mackey seem particularly impressed with the challenges mounted by specialty-foods retailer Trader Joe’s on the high end or Wal-Mart from the low end. According to the FTC, Mackey wrote in 2006 that “Wal-Mart doesn’t sell high-quality perishables and neither does Trader Joe’s … That is why Whole Foods coexists so well with [Trader Joe’s] and it is also why Wal-Mart isn’t going to hurt Whole Foods.”

Given such pronouncements — and the FTC has gathered several, from Mackey as well as other Whole Foods execs — the agency will likely succeed in blocking the merger. In fact, the smart money is already lining up against the deal. “We believe the FTC case against the merger appears solid and are now leaning more toward the FTC prevailing in its injunction,” a stock analyst for Bear Stearns recently wrote in a note to the Wall Street powerhouse’s clients.

One Buyer Doesn’t Fit All

So the FTC has moved decisively to protect the sort of consumers who adore Whole Foods and disdain conventional supermarkets. Wow. In this laissez-faire age, it’s remarkable when a federal agency effectively challenges any sort of corporate merger.

But in my view, the agency could have mounted a broader challenge to the merger — one that looked not only at the interests of people who buy from Whole Foods, but also entities that sell to it, including farms.

As Barry C. Lynn showed in a luminous essay published in Harper’s last year, federal authorities since the Reagan era have narrowly defined antitrust law as an instrument for protecting consumers from price gouging.

In this conception of antitrust, the government steps in only when a company, unimpeded by competitors, gains enough market power to dictate prices to consumers. And the burden is on the government to show that the company is actually using its power abusively — that is, charging higher prices than it would under competitive circumstances.

But these days, few dominant corporations dare attempt to gouge consumers. Rather, they use their market heft to boost profitability by squeezing their suppliers — the firms they buy products from. Known as monopsony, this form of market power involves a dominant buyer dictating terms to sellers. In a market characterized by perfect monopsony, a seller can either accept the price the buyer is willing to pay, or exit the business.

According to Lynn, U.S. antitrust theory from the 1890s to the Reagan era included robust protection from monopsony. But in recent years, he writes, “it has become a truism that antitrust law is designed to protect only the consumer.” As a result, he argues, huge firms have arisen whose very business model hinges on exercising monopsony power, which they use with impunity.

Lynn’s example par excellence is Wal-Mart — a company for which Mackey, under his Rahodeb guise, once expressed effusive admiration. Lynn shows that Wal-Mart uses its vast market heft to extract all manner of concessions from suppliers, including discounts unavailable to Wal-Mart’s competitors. Wal-Mart and like-minded firms use monopsony power to “dictate downward the wages and profits of the millions of people and smaller firms who make and grow what they sell.”

The effects are clear, Lynn continues: “We see them in the collapsing profit margins of the firms caught in Wal-Mart’s system. We see them in the fact that of Wal-Mart’s top 10 suppliers in 1994, four have sought bankruptcy protection.”

How does monopsony apply to Whole Foods and its attempt to buy out its only direct nationwide competitor? If Mackey is correct that conventional supermarkets can never effectively compete with Whole Foods in its core fresh offerings like meat, produce, and dairy, then Whole Foods and its lone remaining competitor will become increasingly powerful buyers of those goods from organic farmers seeking to serve local and regional markets. To protect those farmers from a single buyer wielding untoward power, the Whole Foods/Wild Oats merger should be halted.

I’d like to see the FTC use that logic to block Mackey’s zeal to dominate the natural-foods market — and then apply it to other sectors of the incredibly consolidated, monopsony-dependent food industry.