While your favorite flavor of Ben & Jerry's ice cream may vary between Cherry Garcia, Hazed & Confused, or another concoction, one thing will remain consistent: all ice cream from the admirable company will use GMO-free ingredients by the end of the year. It's no surprise that Vermont-based Ben & Jerry's, owned by Unilever (NYSE:UN), is pursuing a supply chain largely void of ingredients sourced from biotech crops. After all, Vermont was the first state to pass legislation requiring the labeling of some foods containing such ingredients.
Some consumers will blindly applaud the company's decision, but the new ice cream lineup won't completely meet the requirements of the U.S. Department of Agriculture for organic foods or the increasingly popular Non-GMO Project, which certifies ingredients and products as completely free of genetically modified organisms. The same market conditions contributing to that fine print in the company's GMO-free campaign have already been realized by consumer food favorites such as Starbucks (NASDAQ:SBUX).
More important, shaking up the supply chain will have unintended consequences that will increase the pressure on Unilever at the most inopportune time and threatens agreements with longtime suppliers such as Hershey (NYSE:HSY). There are several ways in which the decision by Ben & Jerry's opposes the internal direction of Unilever when it comes to sustainably sourcing ingredients and premium pricing. Here are three major challenges facing Ben & Jerry's switch to non-GMO ingredients.
Challenge 1: Sourcing of non-GMO ingredients
Ben & Jerry's wasn't the first company to go GMO-free and then get smacked with reality, and it surely won't be the last. When consumer groups called on Starbucks to offer organic dairy milk to complement the soy milk option for European consumers, they were met with a pretty blunt answer: "No." Was Starbucks turning its back on consumers? Not really. The company simply realized that the market for organic dairy milk was not large enough to meet its needs
Ice cream obviously contains a good amount of dairy milk, which is exactly why Ben & Jerry's cannot source its dairy from organic sources. Instead, the company's GMO-free pledge only includes the ingredients in the cookies and fruits blended into its ice cream. That's problematic for several reasons. First, organic ingredients cost 25%-50% more than those from conventional sources. Second, it cancels supply agreements with long-standing partners such as Hershey. For instance, the toffee in Coffee Toffee Bar Crunch used to be supplied by Hershey, but was made with soy lecithin and corn syrup that are almost always genetically altered -- so it got the ax.
Third, the ice cream lineup won't actually be GMO-free or organic (not the same thing, by the way). Ben & Jerry's argues that the corn, not the cows or the milk they produce, is genetically modified. While the company uses the Caring Dairy rating system for sourcing its dairy milk, national standards, as well as those of the Non-GMO Project, require organic dairy products to be sourced from livestock fed organic animal feed. Conjuring up a definition of GMO-free that meets the company's specific needs puts it in an interesting position with anti-GMO activist groups.
Challenge 2: Consumer rejection
Changing ingredients also risks changing the product's taste, which depends on a variety of production factors, not the molecular similarity of ingredients. Unfortunately, groups of consumers have already voiced disappointment with some of the 14 flavors that have already been switched to Ben & Jerry's version of "GMO-free." For instance, customers have disliked the new Coffee Toffee Bar Crunch and demanded the old ingredients be used again. I'll bet Hershey agrees.
Challenge 3: Unilever's differing internal strategy
Unilever had high hopes last year for its premium ice cream brands -- Ben & Jerry's, Cornetto, Magnum, and Fruttare -- but they failed to deliver. Intensely competitive markets and a slow start to the summer in Europe and the United States were cited as the two of the major culprits. The company responded by doubling its efforts to support its ice cream brands, including using premium ingredients to capture higher margins and establishing stores in shopping malls and entertainment events.
I imagine Ben & Jerry's received permission from Unilever to go "GMO-free," but I don't think the decision aligns with its parent company's strategic vision. It's difficult to see how alienating customers and using more expensive ingredients while pledging not to increase prices will deliver stronger margins. There's also the delicate tightrope of alienating suppliers -- some of which play key roles in other Unilever products -- although consequences could be mitigated by Unilever's pledge to source 100% of its agricultural raw materials sustainably by 2020, which is sure to shake up supply chains more broadly. However, that pledge also includes sourcing from production methods that employ biotech crops and synthetic biology. In the end, Ben & Jerry's may be making its business expendable in the eyes of its parent.
Ben & Jerry's decision to go "GMO-free" seems to be based in political strategy (it's perhaps the most identifiable business in Vermont) rather than on good business strategy. Whatever the intention, it's not without risks and consequences. The incomplete supply chain shake-up alienates customers and places the ice cream manufacturer in a food system no-man's land: not completely reliant on biotech crops, but not satisfactorily meeting non-GMO guidelines, either. This has the possibility to do more harm than good for the brand.
The biggest risks may be encountered by Unilever, which is trying to expand margins and grow its premium ice cream brands. The fact that Ben & Jerry's and Unilever have differing views of supply chain sourcing isn't necessarily a bad thing, but it is when Unilever is part of the coalition suing Vermont over its GMO-labeling law. In fact, for the reasons outlined above, I wouldn't be surprised if Unilever looks to sell the brand. Will anti-GMO activist groups applaud Ben & Jerry's decision, or criticize it as incomplete while reminding consumers of its parent company's industry obligations? I think all indications point to the latter, which could substantially harm the creator of Cherry Garcia.
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Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, CAPS page, previous writing for The Motley Fool, or his work for SynBioBeta to keep up with developments in the synthetic biology industry.
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