By John Byrd
DENVER (July 24, 2009) - Last week Wal-Mart’s CEO Mike Duke stunned critics by announcing the company is developing sustainability labels for all of its products. The labels won’t appear for several years, but when they do they will reflect each product’s energy consumption, water and material efficiency, effect on climate change and social and community impact.
Wal-Mart will first compile a database, with a consortium of universities, about the environmental and social performance of products from its more than 100,000 suppliers. The database will estimate the lifecycle impact of each product—from raw materials to disposal—and will provide the information for the sustainability labels. Once the database is created, Wal-Mart plans to share it.
This is not Wal-Mart’s first foray into sustainability. In 2005, then CEO Lee Scott announced the company’s new sustainability strategy, saying “being a good steward of the environment and being profitable are not mutually exclusive.” He committed Wal-Mart to three goals:
• to be supplied 100% by renewable energy;
• to create zero waste;
• to sell products that sustain resources and the environment.
In part, Scott’s announcement might have been an attempt to bring back customers who had become ‘conscientious objectors’ toward Wal-Mart because of its negative image. A leaked report by the consulting firm McKinsey & Company found that 2% to 8% of Wal-Mart’s customers had stopped shopping at its stores. They estimated that this lost revenue reduced Wal-Mart’s total stock market value by about $16 billion.
To implement the 2005 strategy, Wal-Mart set up sustainability task forces in various product areas. These groups found a range of ‘quick wins’, such as reducing and changing packaging, pelletizing and selling or recycling plastics, and reducing energy use in trucks and coolers. Because of Wal-Mart’s enormous scale, even small changes produced millions of dollars in savings. Most of these cost savings could have been identified before an implementation of a ‘green initiative’ and for Wal-Mart, this was money on the table waiting to be found.
The sustainability strategy had one very significant success: compact fluorescent light bulbs. Wal-Mart gave prime selling space to these energy-saving bulbs and lowered their price. By 2008, 100 million CF bulbs had been sold. Over the life of the bulbs consumers will save $3 billion and reduce greenhouse gas emissions by 20 million metric tons. But this wasn’t the ‘game changer’ that CEO Scott wanted.
With last week’s announcement, Wal-Mart jumped far ahead of all other large corporations in its commitment to the environment and its communities. If Wal-Mart (and other retailers) uses the information it collects to push suppliers to produce in a more environmentally and socially sensitive way, then the company has truly changed the way business is done.
As with many things, Wal-Mart knows it will be the suppliers that bear the burden of finding and providing the new information. Suppliers that don’t supply the requested information will become “less relevant”. Executives did not say that suppliers would be penalized if they had poor environmental or social performance, but it was implied. Speakers repeatedly said that this initiative would save customers from having to choose between price and environmental impact—customers can be proud of the products they buy at Wal-Mart while saving money.
Wal-Mart’s suppliers have been put on notice that changes are coming. Out of necessity, other major retailers will have to follow Wal-Mart’s lead, so their suppliers will have to get ready too. If competitors don’t follow this lead, they risk more than losing customers—they risk losing future employees according to John Fleming, Wal-Mart’s chief merchandising officer: “When I go around to colleges and universities to recruit, sustainability is tops on their list.”
The largest of Wal-Mart’s suppliers—Procter & Gamble and Coca-Cola—already have most, if not all, of this information, but smaller firms may be caught off guard. Wal-Mart wants to know about water use and solid waste production, energy use and greenhouse gas emissions, whether raw materials were produced sustainably, about community engagement, and supply chain information. Companies playing catch-up need to compute carbon footprints, learn about lifecycle assessment and begin tracking water, waste and community involvement. Even for companies unlikely to ever sell to Wal-Mart or other major retailers, knowing this information will help to identify ways to reduce costs.
With its enormous buying power, Wal-Mart is the only company in the world that could attempt this seismic shift. The upheaval will be felt far beyond Wal-Mart’s immediate business partners. It may be time for Wal-Mart to dust off and rephrase its old ‘Everyday Low Prices’ slogan into something better suited for the times and its new foray into sustainability: ‘Everyday Low Impact Everywhere’.
John Byrd teaches finance and coordinates the MBA specialization in Sustainability at the University of Colorado Denver’s Business School.