1 Unintended Consequence of GMO Labeling at Whole Foods Market

In March Whole Foods Market (NASDAQ: WFM  ) announced plans to introduce GMO labeling for all products in its Canadian and American stores by 2018. The move made it the first national grocery chain to initiate a policy for what it calls "GMO transparency" and will no doubt bolster its customer base by appealing to those opposed to Monsanto (NYSE: MON  ) products. It's also a pretty audacious task.

Whole Foods must work with its suppliers of vegetables, meats, cheese and dairy, wine and beer, seafood, and personal care products to ensure their individual supply chains are void of GMOs. That isn't impossible, but considering that 93% of soy, 88% of corn, 90% of canola seed, and 94% of cotton are of genetically engineered varieties from Monsanto and its peers, the logistics are daunting. Less than five years remain to reach the goal. Can GMO transparency really work at such a high level? How could successful implementation lead to unintended consequences?

Why labeling will succeed

There's really no question, in my mind, of whether or not labeling will succeed. Sure, proposed labeling laws in the state of Washington failed since the announcement was made in March. Many major food suppliers oppose state-by-state GMO labeling for economic reasons, which would appear to doom the company's initiative as well. However, the failure of proposed labeling laws may actually be a boon for business considering the national coverage and controversy surrounding the events. Why? Whole Foods currently offers over 4,800 Non-GMO Project Verified products from 250 different brands. If labeling is going to succeed anywhere it will be at Whole Foods.

While the United States Department of Agriculture Organic seal conveys non-GMO foods and ingredients, many brands -- including Whole Foods 365 -- have pursued Non-GMO Project Verified certification as well. The extra certification is awarded after a rigorous check of supply chains and manufacturing processes and has gained a lot of traction with consumers. When the company provided a six month update on its labeling plans, it disclosed that the Non-GMO Project had received over 900 inquiries. Whole Foods is certainly succeeding in using its leadership position in the organic food market to drive change.

The labeling will come into play for suppliers that cannot verify their supply chains as well as those that cannot remove GMO ingredients from their supply chains. It simply isn't realistic for every company, although smaller farmers should have an easier time evicting GMO products from their business. Products containing GMO ingredients will still be sold in stores, they'll just be labeled as such for consumers. That could lead to additional problems.

Unintended consequences?

Even if all products are labeled, the move could alienate suppliers that cannot source non-GMO ingredients. For instance, Whole Foods has encouraged its meat suppliers to use Non-GMO Project Verified animal feed if they don't already. Unfortunately, the market for organic feed is not very large, although it could expand if more meat suppliers are actively seeking the products. Organic feed is also more expensive than traditional feed.

There will inevitably be some suppliers who cannot make the change due to market conditions or economics, which could lead to plummeting sales if consumers shun the products in favor of those that are grown with Non-GMO Project Verified animal feed. Whole Foods' plan for labeling could unintentionally weed out loyal suppliers that do not offer non-GMO products. There is certainly potential for strained relationships between the grocer and individual suppliers, but it may not be bad for business to own a chain of stores that only offer non-GMO products. Ironically, the company's push for storewide labeling could one day make it obsolete.

Foolish thoughts

The majority of products offered by Whole Foods are already Non-GMO Project Verified and, not surprisingly, many of its suppliers are local or regional groups of farmers that generally support the company's mission. Even the grocer's largest suppliers support the Non-GMO Project. Therefore, I don't see any reason why GMO labeling will fail at its stores. However, I do see the potential for a few strained relationships once labeling proliferates in 2018. That would likely affect individual suppliers more so than the national grocery chain and it could actually be a boon for business, but it is something for investors to chew on nonetheless.

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