Peach-mango salsa contains 0% of your recommended daily iron content, but if you purchase it from Whole Foods Market (NASDAQ: WFM ) you'll get a full dose of irony. The fast-growing organic grocery chain -- a champion of the "Right to Know" movement attempting to pressure biotech food ingredients to come with labels -- has found itself in the midst of a massive food recall that has also affected Wal-Mart Stores (NYSE: WMT ) , Wegmans, and Trader Joe's. Wawona Packing Company in California has issued a recall on fruits sold to hundreds of stores nationwide from June 1 to July 21 after the food tested positive for Listeria contamination. If investors aren't aware already, food recalls can have severe detrimental consequences for a company's bottom line.
So where's the irony? All of this could have been avoided with a little help from Sample6, a diagnostics company developing pathogen detection technology powered by synthetic biology. This year the company began selling its first diagnostic, DETECT/L for Listeria contamination, to make the food system safer. The product portfolio at Sample6 could end up saving millions -- or even billions -- of dollars in costs associated with food recalls for food distributors such as Whole Foods Market and Wal-Mart, as well as manufacturers and packagers.
Think food recalls don't matter? Think again.
While Whole Foods Market and Wal-Mart can weather the recall better than food packagers or smaller distributors, customers and investors won't know the full extent of the recall for some time. Regardless of the severity, this is probably a good time to familiarize yourself with the risks associated with food recalls, especially considering that perishable food items accounted for $8.5 billion, or 66%, of Whole Food Market's sales in 2013.
Here's how Whole Foods Market characterizes food recalls in Risk Factors sections of its SEC filings:
We believe that our customers hold us to a higher food safety standard than other supermarkets. The real or perceived sale of contaminated food products by us could result in government enforcement action, private litigation, product recalls and other liabilities, the settlement or outcome of which might have a material adverse effect on our operating results.
The biggest direct effect on the bottom line occurs from the recall itself. Companies swallow the costs of product disposal, business interruption, customer reimbursement, investigations, and more. They could also lose a supplier. It may take weeks or months for the U.S. Food and Drug Administration to give a manufacturing or packaging facility the green light after contamination, which means Whole Foods Market and Wal-Mart will have to wait it out (losing additional revenue) or scramble to find an alternate supplier (sometimes at higher costs) on short notice.
Businesses are well aware of the risks. An Ernst & Young report (link opens PDF) titled Capturing Recall Costs found that 81% of companies surveyed considered the financial risk from recalls "significant to catastrophic." Of course, there may be indirect effects on the bottom line, too. News, memes, and stories of illnesses can spread to millions of people in minutes with social media; amplifying the potential damage caused to a brand's reputation. No company is immune, although I would consider Whole Foods Market better protected than most thanks to its strong customer loyalty. Meanwhile, Wal-Mart's size and geographic coverage likely insulates it against the same.
Synthetic biology to the rescue!
So what's the big deal about some contaminated fruit? Listeria monocytogenes is the pathogen behind listeriosis, which has the highest mortality rate of any foodborne illness. The Center for Disease Control estimates that 1 in 6 Americans contracts a foodborne illness from pathogenic strains of E. coli, Salmonella, Listeria, and others each year. Of that total, roughly 128,000 are hospitalized and 3,000 die. While most infected individuals fight off their illnesses in a few days, those with weakened immune systems -- infants, pregnant women, and the elderly -- may not be so lucky. In fact, that group of individuals represents 90% of all Listeria infections each year.
Despite the prevalence and potential lethality of foodborne illnesses, they're widely preventable. Why do they occur at all then? Well, one giant part of the problem is the current standard for food safety. Don't be too alarmed: Our food system is inherently safe. It's just that food safety testing could be greatly improved and modernized.
This is how it works today: Food manufacturers and packagers swab products, ship it to laboratories for testing, and cross their fingers that nothing went wrong. Unfortunately, it can take several days to receive results. Uh oh. Do food companies ship potentially contaminated food to save shelf life and risk a recall, or hold onto products until results come in and risk shelf life? Many choose the former. When they get it wrong, the consequences can be disastrous.
Why make any trade-off at all? Sample6 has pioneered an in-shift, in-plant, and enrichment-free pathogen detection system that yields results before product is loaded onto the truck. The improvement is staggering considering polymerase chain reaction methods can take up to eight production shifts to yield results, immunoassay methods can take nine, and cell culture can take up to 12!
What's the secret? Enrichment-free analysis. The methods above begin with a small number of cells, grow them into a larger number (the most time-intensive step), and then analyze the enriched sample. By contrast, Sample6 takes a small number of cells from a swab and introduces bacteriophages -- which naturally prey upon bacterial cells -- engineered to hunt down specific pathogenic strains. The bacteriophages force the bacteria to express a bioluminescent protein within their genome, which can then be detected in a simple desktop device. Essentially, the company amplifies the signal for detection with high numbers of photons, not bacterial cells. Contaminated food is kept out of the food supply, millions of dollars are saved, the rate of foodborne illnesses drops precipitously, and the crowd goes wild.
Foolish bottom line
This food recall is a good teaching moment all around. It can remind investors -- and customers of Whole Foods Market -- about the dangers of using blanket terms such as GMOs or synthetic biology. There's nothing wrong with opposing increasing use of pesticides or supporting organic farming practices, but there are numerous different types of GMOs and nearly limitless and unrelated applications of synthetic biology -- some of which could keep contaminated organic food out of the food supply.
This unfolding event can also remind investors about the risks posed by food recalls. Will the recall currently sweeping through store shelves of Whole Foods Market and Wal-Mart have a major impact on shareholders? Probably not, but recalls do pose a big risk to investors in the food industry. Luckily, novel technology platforms such as that being developed by Sample6 will help to greatly reduce the business, health, and financial risks associated with them. I just thought you had the right to know it will be thanks to biotech.
Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.