Weighing Wal-Mart

JEFF WELLS

WHEN THE ENVIRONMENTAL Defense Fund set up an office in Wal-Mart's hometown of Bentonville, Ark., in 2007, staff members spent several hours each week answering the same question from donors: Why are we working with Wal-Mart?

The company set a goal of selling 100 million compact fluorescent light bulbs in one year, and ended up selling 137 million.

It was a legitimate question at the time. Wal-Mart hadn't become the world's largest retailer by playing nice. But the non-profit organization and other groups had heard then-CEO Lee Scott's now-famous “21st Century Leadership” speech, in which he committed the company's vast resources and considerable clout — the very same qualities that had bolstered its reputation as a social and environmental bully — to meet a new set of goals that synthesized environmental conservation, labor relations, supplier alliances and other business practices in entirely new ways.

“I believe … that being a good steward of the environment and in our communities, and being an efficient and profitable business, are not mutually exclusive,” Scott had intoned. “In fact they are one in the same.”

Such beliefs in business are not unique. But because of its very size and reach, Wal-Mart's sustainability commitment was considered unprecedented. It was an opportunity for groups like the EDF to work with the company in an advisory capacity, and to contribute ideas on specific projects. And that's what staffers told the donors when they called.

“It became clear that [Wal-Mart] was going to come at this with energy and enthusiasm,” said Michelle Harvey, a project manager with the EDF who works in Bentonville.

Five years later, Wal-Mart has won over many skeptics. There's more sustainable seafood and locally grown produce on shelves, while behind the scenes, fuel-efficient trucks transport pallets of eco-packaged products. Its influence has caused ripple effects up and down the supply chain, from detergent makers to cardboard manufacturers. Brands well-known in the natural channel, including Seventh Generation, now stock Wal-Mart stores.

But as the EDF is the first to point out, the ambitious, sprawling nature of Wal-Mart's efforts create their own challenges. The next five years could be the ultimate test of Wal-Mart's transformation as it tackles its biggest, most difficult initiatives yet.

Giant Ideas

Few in the industry believe Wal-Mart experienced a sudden change of heart. Thought leaders like Scott and Whole Food Market CEO John Mackey (who uses the phrase “conscious capitalism” to describe the brand of for-profit altruism practiced by his company) see that sustainability brings greater efficiency, which means more money and ultimately, survival, expansion and a competitive edge. This way of thinking is vintage Wal-Mart, observers agree.

But efficiency alone isn't driving the company. Wal-Mart, several industry analysts said, has developed a keen eye for how markets and shoppers are evolving — insights it often took for granted during its march to the top.

“They realize now that public relations matter,” said Robin Sherk, an analyst with Kantar Retail who follows Wal-Mart. “If they want to enter urban markets like New York and other areas, they have to appeal to that audience and connect with that community. It's also about broadening their audience base, creating a proposition that goes beyond ‘always low prices.’”

One initiative introduced during Lee Scott's tenure was a scorecard that would grade suppliers on how environmentally friendly their packaging was. It set short-term goals for reducing solid waste and energy use, and undertook pointed initiatives like reducing the cost of compact fluorescent light bulbs.

That initial momentum converted some skeptics, but it was tested by the dual impacts of the recession and Scott's departure. In 2009, Mike Duke took over as Wal-Mart's CEO, and questions swirled over whether the company would continue bankrolling a sustainability strategy in which the return on investment was, in many ways, unclear. Duke announced that Wal-Mart would in fact “broaden and accelerate” its commitment.

“Lee came in with the fervor of the newly converted, and that really resonated with people,” said the EDF's Harvey. “With Mike, his real signature has been to make Wal-Mart a more cohesive global company. He's taken this initiative and moved it into foreign countries.”

To that end, energy-efficient stores have gone up in China, Brazil and elsewhere around the world. A year ago, Wal-Mart declared it would reduce its carbon output by 20 million metric tons globally over the next five years. There are less-publicized initiatives, as well, that promise to have an impact on its global footprint. By next year Wal-Mart hopes to have improved energy efficiency in its top 200 Chinese factories by 20%. According to the company's latest sustainability report, 119 of those factories have increased efficiency by 5%.

Domestically and abroad, Wal-Mart has made dozens of pledges around sustainability. And in numerous cases, it has delivered. By 2008, according to the sustainability report, the company had improved fleet efficiency by 38%, well above the 25% benchmark it originally set. Between 2009 and 2010, stores in the U.S. and Canada were able to redirect 64% of solid waste away from landfills.

Some goals have proven difficult, however. Plans to eliminate polyvinyl chloride (PVC), a compound widely used in plastics, from all private-label brands ran aground because “we have been unable to find suitable replacements,” according to Wal-Mart. Plans to increase efficiency at its Chinese factories, and to lower emissions at stores and distribution centers globally, meanwhile, are only 25% complete with less than a year to go.

Big-Box Realities

Lately, the company's agenda has unfolded in bold, sweeping strokes. Several months after laying out its carbon reduction initiative last February, Wal-Mart announced it would double the amount of local food it sources over the next five years, and invest more than $1 billion in products coming from small and medium-size farms. In the same time period, the company aims to reduce specific amounts of fat, sodium and sugar in the food it offers, and to make those healthy items more affordable to consumers. That goal was laid out at a press announcement in Washington, and endorsed by First Lady Michelle Obama.

“I think what we've seen is a more thoughtful approach from them,” said Harvey. “The challenge is to step up to that next level, to move past the easy pieces to where it gets hard.”

Industry experts agree, if there's one company that's up to the challenge, it's Wal-Mart. But some of them have doubts that the world's largest retailer can deliver on such an aggressive plan.

Marc Gunther, a contributing editor at Fortune magazine who covers corporate sustainability, points to Wal-Mart's Sustainability Index as one initiative that may be too complicated to bring to fruition. Announced in 2009, the index is an effort to catalog the environmental footprint of all the products Wal-Mart sells. The first phase was a 15-question survey sent out to suppliers asking about their sourcing practices and materials used, among other topics. The second — just now beginning — is to scientifically measure the impact of every product, then develop a scoring and labeling system to inform consumers of the results.

“[It is] ridiculously complex,” said Gunther. “I have a feeling it may collapse at some point under the weight of all that complexity.”

There are those, too, who believe Wal-Mart's mission, while rigorous in some areas, is neglectful in others. Stacy Mitchell, author of “Big Box Swindle” and a senior researcher with the New Rules Project, points out that emissions generated by the extra miles consumers drive to reach a Wal-Mart and other big-box stores — compared to local retailers — far outweighs any counteracting measures.

The sprawl issue is inevitable, given Wal-Mart's business model. Still, Mitchell believes it's something the company will have to address before it can call itself a sustainable retailer.

“It's a huge magnitude of emissions that are absent from the ways Wal-Mart thinks about sustainability,” she said.

Less inevitable are the difficulties with employee relations that continue to dog Wal-Mart. Numerous class-action lawsuits have come down against the company over the years, including a recent one brought by employees seeking unpaid wages that Wal-Mart eventually settled for $86 million. The company also has the largest sex-discrimination class-action lawsuit in U.S. history on its hands, representing every female employed by the retailer over the past decade.

Laurie Demeritt, president of the Hartman Group, a whole-health consulting firm based in Bellevue, Wash., said their consumer research shows this sort of news negatively affects consumer opinions of Wal-Mart.

“That social element is one that's becoming increasingly important to consumers under the sustainability umbrella, even more important than the environment in some ways,” said Demeritt. “That's something of an Achille's heel for them.”

Leveraging Change

From a business standpoint, Wal-Mart's sustainability drive has paid dividends. Energy and waste cost money, and so becoming a leaner business means driving unnecessary expenditures out of the supply chain.

“From Wal-Mart's perspective, waste is expensive,” said Catherine Greener, co-founder of Cleargreen Advisors, a Boulder, Colo.-based sustainability consulting firm that works with Wal-Mart suppliers. “And really, knowing what we know now, why should that still be in your products, your processes, your supply chain and your innovation?”

Being a $400 billion retailer means these actions ripple through the entire industry. And it's this leverage that sources believe is Wal-Mart's legacy, and how it will ultimately achieve the positive environmental impact it has promised.

“Wal-Mart is suddenly making sustainability part of conversations that it would not have been a part of before, not only among their 100,000 suppliers, but among governments they touch at every level, in every country that they work in, and among their competitors,” said Marc Major, the other co-founder of Cleargreen Advisors.

In 2007, Wal-Mart announced that it would sell only concentrated laundry detergent. That spurred suppliers to make the switch, and today concentrated laundry detergent dominates shelves not only in Wal-Mart stores, but in every mainstream grocery store in America, as well.

Critics point out that Wal-Mart puts the burden on its suppliers to meet these goals. But Harvey from the Environmental Defense Fund said that's really the only way to bring widespread change to the industry. The supply chain, she noted, accounts for more than 90% of retail carbon emissions, and so it's imperative that manufacturers address their operations.

“These systems need to be changed, and Wal-Mart is the engine that can change them,” said Harvey.

In addition to mandating efficiencies for its legacy suppliers, Wal-Mart is also reaching out to health and wellness brands it didn't consider in years past. John Murphy, vice president of sales at Seventh Generation, Burlington, Vt., said partnering with Wal-Mart made his company take a hard look at its mission and its pricing scheme.

“Historically, we were very concerned about Wal-Mart not addressing some of the environmental and social impacts that we felt they were creating in the world,” he explained. “But watching them make probably the most aggressive effort of any retailer in the industry to figure out how to create those positive changes with their size and scale, that was a big motivator for us.”

Kevin Dooley, a supply chain management professor at Arizona State University, likes to think of Wal-Mart's actions as the next evolution of retail management as opposed to a stand-alone, unique eco-mission. Several decades ago there was the quality movement, followed years later by the lean manufacturing movement. Each step refined the sales and production process, reducing expenses while increasing the quality of the product.

“Sustainability is another lens that's going to help us do supply chain improvement,” said Dooley, who is also president of the Sustainability Consortium, which is helping Wal-Mart and other food companies develop product sustainability ratings. “What we didn't see looking through quality and lean, we're going to see through sustainability.”

A Long Way to Go

The challenge is to reach that next step — to deliver on the goals Wal-Mart set for itself back in 2005. To this end, the company works with numerous NGOs, consulting firms and other organizations to help with the massive amount of legwork involved. These partnerships have helped propel the company forward, but according to Harvey, Wal-Mart has to make sustainability more a part of the everyday operations within its own walls if it hopes to match its ambitions.

“There's a recognition that this needs to move into the infrastructure within the organization, into the tools that the buyers and the merchants use,” she said. “They've learned a lot over the past five years. The real challenge this year will be to move it into the business of the day-to-day buying decisions.”

Drumming up consumer support is key, noted Demeritt of the Hartman Group. Up to this point, Wal-Mart has relied on indirect means — primarily the news media and suppliers — to convey its mission, rather than offer direct messaging or advertising. That's starting to change, she said, and it may need to increase as the company broadens its scope.

“They have to think about what's going to resonate with their consumers and not just relegate this to an environmental message,” she said.

Plenty of difficult, unglamorous work has to happen behind the scenes as well, and that's just what Wal-Mart and its partners are doing. To better understand the carbon footprint of its products, for example, the company put its private-label offerings under the microscope. Harvey, who continues to work with Wal-Mart on the project, and her team recently looked at the total impact generated by several products, including dish soap, tomato sauce, cereal and sour cream. With the tomato sauce, the team assumed that the watering and harvesting of the tomatoes would account for the greatest environmental impact, when it fact it was the metal cans, according to Harvey.

It's these types of insights that will better inform buying decisions, and ultimately serve as part of the Sustainability Index. But they require a lot of time and effort to come by.

“It's a huge challenge to align the internal metrics and the internal incentives of an organization to make sure these things happen,” said Major of Cleargreen Advisors.

And so Wal-Mart pushes forward, absent a perfect strategy but determined to fulfill its goals. So far the company has proven it has the determination and many of the capabilities needed to become a completely sustainable, efficient company. There are still many who doubt Wal-Mart will fulfill that final aspiration, but even they don't deny the company will ultimately have a positive impact on the environment and on the retail industry.

“What I think Wal-Mart gets credit for is not pondering and pondering it forever, and then deciding to do something,” said Harvey. “They jumped into it. They're an action-oriented organization.”

BY THE NUMBERS

WAL-MART

340,000: Total products entered into Wal-Mart's packaging scorecard.

280,000: Number of Chinese farmers participating in Wal-Mart's Direct Farm local sourcing program.

4: Number of categories currently being mapped as part of Wal-Mart's Sustainability Index.

500: Number of trucks eliminated on roads as a result of a single brand — Hamburger Helper — reducing its packaging by 20%.

25,000: Tons of carbon emissions reduced when 20th Century Fox made its DVD packaging lighter.

300:Percent increase in driving miles for shopping since the 1970s.

37 million: Total square footage Wal-Mart expects to add in fiscal year 2011.

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— JW