Earlier this month, Whole Foods (NASDAQ:WFM) made a big decision -- it's giving its suppliers five years to either source non-gentically modified (GM) ingredients or clearly label any products that contain genetically modified ingredients. Whole Foods is so far the only major grocer to make this requirement, and it may prove to be yet another key differentiator between the company and its more conventional rivals.
California residents may be reminded of last year’s Proposition 37, a ballot measure that would have required similar labeling for any foods with GM ingredients, statewide. The measure failed, contradicting polls that consistently show that huge majorities of Americans support GM labeling, but the vote was close -- 53.1% to 46.9%. There's a lot of debate over why the measure failed, but one thing is for certain -- a lot people are interested in what goes into their food, and Whole Foods isn't necessarily just preaching to the choir.
Everything gives you cancer
During the Prop 37 campaign, some comparisons were made with 1986's Proposition 65, which did pass and required warning labels on products containing chemicals known to cause cancer or birth defects. Unfortunately, it turned out that that was pretty much everything, and now almost any place you go has signs out front warning that the building contains cancerous chemicals. They're so commonplace that no one really pays attention to them now. I've lived in more than one apartment with a warning sign not far from my front door.
The same problem exists for GM labeling. About 75% of all packaged food contains ingredients that come from genetically modified organisms, and the worry with Prop 37 was that the labels would be so commonplace that consumers would stop noticing them.
The easy solution is to buy organic food, which legally can't contain genetically modified ingredients. This is what makes Whole Foods' labeling decision a key differentiator. Customers won't necessarily have more information -- Whole Foods already labels non-GMO products on its own. But conscious consumers may not connect the lack of a "non-GMO" label with the presence of GMOs, and by making suppliers label their own GM products, Whole Foods can highlight the stores' large selection of organic products, including its own Whole Foods 365 Organic line. Because organic products tend to carry a higher margin, this move could prove to be as profitable for the company as it is helpful for consumers.
Going old school
While it's unlikely that the labeling will convince huge droves of customers to give up processed food made from GMO ingredients, pushback against GMO foods can already be seen in some areas of the world. Certain drought-resistant corn seeds from DuPont (NYSE:DD) and Syngenta (NYSE: SYT), for example, are produced with the age-old technique of selective breeding, whereas Monsanto's (NYSE:MON) are genetically modified by splicing in genes from other, hardier plants.
The difference matters in certain European countries, which have strict laws regarding genetically modified foods, and in the U.S., where seeds made from selective breeding can still be considered organic. Somewhat ironically, there is, in fact, a smaller, independent seed company in the U.S. that produces a strain of certified organic corn that's been selectively bred to resist fertilization from errant GMO corn pollen, which can sometimes be a problem for organic farmers.
The Foolish bottom line
On the surface, requiring GMO labeling is (pardon the pun) a very organic move for Whole Foods, which already labels many of its products as locally grown, organic, or health- or eco-friendly in some other way, and it also has a well regarded sustainability labeling system for the fish it sells.
But the move is also very shrewd, as many of the company's suppliers might not bother to create two sets of packaging, one for Whole Foods and one for everyone else. Whole Foods may end up cross-contaminating other stores with the labeling system, drawing even more attention to the company's large selection of health-conscious -- and high-margin -- products.