Picking Sides on California's Prop 37
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
California's Prop 37 could make or break some natural food brands' reputations. This state proposition would require a food company to tell shoppers whether a food product contains GMOs. Annie's (NYSE: BNNY) and Natural Grocers (NYSE: NGVC) support GMO labeling, and many of these companies' customers gladly pay higher prices to avoid food that contains GMOs. Kellogg's (NYSE: K) and General Mills (NYSE: GIS) oppose this proposition, which could put these large companies' natural food brands at risk.
Annie's goes even farther than just showing support for Prop 37. A visit to Annie's Facebook page shows that Annie's supported and funded a campaign for a national GMO labeling law, which an article at Annie's website explains. A federal GMO labeling law could provide significant advantages for Annie's and Natural Grocers, while Kellogg's and General Mills could lose customers, so many food companies will watch Prop 37 closely. If Prop 37 fails in California, a federal law isn't very likely, but if it passes, federal regulators could use the California GMO law as a model.
Natural Grocers' reputation matters even more because it just went public. Natural Grocers needs to show that it won't sacrifice food quality to provide a better return to shareholders, and some comments on the company's Facebook page already mention this concern. Natural Grocers' support for Proposition 37 could reassure wavering customers. The company has made several posts about its support for Proposition 37 on its blog, including this recent post. Proposition 37 won't affect Natural Grocers directly because it hasn't expanded into California, but its support for the proposition could bolster its reputation in Mountain West states.
Proposition 37 puts Whole Foods (NASDAQ: WFM) in an awkward position. Whole Foods has its own GMO free store brand, 365 Everyday Value, and shoppers specifically seek out Whole Foods stores because they don't trust the food quality at cheaper supermarkets. Although Prop 37 could improve sales for some Whole Foods product lines, the companyrisks irritating its suppliers by supporting the proposition, since California would force Whole Foods' suppliers to label their food. Whole Foods hasn't come out in favor of Proposition 37, but the grocer encouraged its suppliers to move away from GMOs by selling organic food or joining the Non-GMO Project. This decision disappointed shoppers who wanted Whole Foods to take a stronger stand, which could help the much smaller Natural Grocers attract some Whole Foods customers.
General Mills (NYSE: GIS) takes the Amazon approach to GMO labeling. Amazon told California that it would collect state sales taxes if states reached a national sales tax agreement, but complying with individual state sales tax laws was burdensome. General Mills claims that forcing food companies to comply with individual states' GMO labeling requirements could make food more expensive at the supermarket, and national GMO labeling regulations would reduce compliance costs. General Mills' Larabar brand site prominently displays the company's position on Prop 37, so General Mills is feeling some heat here.
Kellogg's (NYSE: K) risks losing the goodwill it gained when it removed the GMOs from Kashi cereal because of its opposition to Proposition 37. Kellogg's posted an article on its website where it displays several GMO free Kashi cereals, but the comment section is full of complaints about Kellogg's support for the campaign against Proposition 37. Natural Grocers and Annie's compete in niche markets where avoiding GMOs entirely makes sense, but Kellogg's would take a big hit to its margins if it stopped using GMOs in all of its products.
Annie's and Natural Grocers lack the resources to match the marketing budgets of larger firms, and both companies have to spend the cash they do have on rapid expansion to justify their high valuations. As Facebook users learn which companies support Prop 37 and sell GMO free foods, both Natural Grocers and Annie's could benefit from viral marketing, helping these small caps attract shoppers they couldn't afford to reach through TV ads. Annie's and Natural Grocers are nowhere near value plays, but the Prop 37 controversy could help these companies perform better than investors expect.
Eric Novinson owns shares of Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.