Few companies take their social and environmental responsibilities as seriously as Whole Foods Market (NASDAQ:WFM). The company has created foundations for lifting the world's poorest people out of poverty and encouraging kids and schools to eat healthier. It also sports a local producer loan program and "5% days" when individual stores donate 5% of a day's net sales to a local nonprofit or educational organization.
Many also consider Whole Foods Market a consumers' hero for taking a leadership role in the organic food market. For instance, the company has become a champion for the Right to Know movement, which aims to allow consumers to make better grocery purchasing decisions by calling for the labeling of all foods containing ingredients produced from genetically modified organisms, or GMOs. Regardless of the success of public labeling mandates, the grocer will make storewide labeling mandatory by 2018 to appease its loyal customer base.
The move may be good for business overall, but it does create the potential for friction and disagreements with suppliers. While smaller brands can alter their supply chains and established brands from WhiteWave Foods (NYSE:WWAV) and General Mills (NYSE:GIS) can survive an ouster from shelves, not every brand is so fortunate. Has Whole Foods Market's unrelenting pursuit of non-GMO foods turned it into a bully? Could its practices actually be a growth-trap for small suppliers?
New rule: Obey or get the boot
The nation's favorite high-end grocery chain has done an excellent job communicating with its numerous and diverse suppliers about its intentions and expectations for its labeling initiative. Of course, it has other ways of persuading suppliers to comply. Recently the company announced that it would stop selling Chobani yogurt in 2014 to allow smaller brands that do not contain GMO ingredients to gain exposure. So much for labeling.
Whole Foods offered some intimidating words for companies in its supply chain. While the company has "challenged suppliers to create unique options," "Chobani has chosen a different business model," as told to the Wall Street Journal. That may resonate with customers, but it isn't exactly accurate. The truth is that Chobani has rooted ingredients containing preservatives and hormones from its supply chain, much like the Horizon brand from WhiteWave Foods.
Unfortunately, the company has taken heat for using milk produced from cows fed GMO animal feed. That should have been an easy problem to fix, right? It isn't quite that simple. Organic animal feed isn't available in adequate quantities or at reasonable prices to institute an overnight change, which makes it impossible for Chobani to source enough organic milk for its own products (I recently explained how market conditions could lead to events such as this).
Luckily for Chobani, being removed from store shelves won't spell disaster: The Greek yogurt pioneer generates the grand majority of its $1 billion in annual sales independent of the grocer. General Mills, which owns the Cascadian Farm organic brand, and WhiteWave Foods also have enough reach to survive any potential disagreements with Whole Foods. Meanwhile, smaller suppliers should be nimble enough to source organic ingredients for their own products -- for now.
Small suppliers beware?
You can't really argue that Whole Foods' unwavering pursuit of organic foods is bad for business, especially considering the company's extremely loyal and passionate customer base. It also isn't uncommon for a business to use its position of power to strong-arm suppliers into alignment with internal goals or bring about change. If all goes according to plan, the company will spur growth in the organic market -- including that for organic animal feed.
It just seems a bit strange to commit to labeling GMO products if, in the end, you won't end up selling any. Why announce a deadline of 2018 if you won't afford larger suppliers time to change their supply chains?
What will the grocer do if the organic animal feed market doesn't grow quickly enough (sending prices skyward) to keep up with demand? Will gaining exposure on the shelves of Whole Foods actually be detrimental for small suppliers in the long run? After all, small suppliers will grow up and require more inputs one day. While there is a seemingly endless supply of small suppliers willing to comply with organic standards today, investors have to wonder if the grocer is creating a standard that, for economic reasons, will be impossible to meet down the road. That could create more supply chain friction that, unfortunately, may not be so easy to move past.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or his previous writing.
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