Walmart: Save Money. Live Better. Go Green?
An icon of consumerism profits from conservation.
With endless racks of cheap apparel, brightly lit mega-stores, and 18-wheelers unloading daily, Walmart has traditionally stood more for consumerism than conservation in the minds of most Americans. Thus, it may come as a surprise that Walmart is leading other retailers in its commitment to reduce greenhouse gas emissions from its owned supply chain and encouraging suppliers to follow suit.
Walmart’s motivation for reducing greenhouse gas (GHG) emissions centers around financial and operational success. First, reducing energy consumption improves Walmart’s profit margin by lowering utility costs. Innovations in trucking logistics that reduce transportation-related emissions—which comprise 14% of all GHG emissions—lower fuel costs.[1] Even small improvements in electricity and heating—which comprise 25% of GHG emissions—add up to significant emissions reduction and energy savings across 11,000+ global stores with over 1B square feet.[2],[3] Second, environmentally-friendly operations reduce Walmart’s vulnerability to potential future regulatory fees such as carbon taxes. For example, if the U.S. government imposes a fee equal to its estimated social cost of carbon ($36 per metric ton), the effective price of coal-powered electricity could double.[4],[5]
Along with reducing current energy costs and avoiding potential future fees, the company also has an interest in mitigating the decline in crop yields and increase in extreme weather, which could increase commodity prices or interrupt supply. With stores in in 28 different countries and over 100,000 suppliers, Walmart’s geographical interest in preserving environmental integrity are far-reaching.[6] This unparalleled size and reach also serve to magnify any altruistic motivation the organization has—i.e., any small change made to operations can have a large environmental impact—which may be in line with the values of the leadership team, or to ‘green’-minded shoppers and shareholders, or both.
How, then, have Walmart’s supply chain managers capitalized on energy savings opportunities? Major streamlining efforts began in 2016 when the company signaled to suppliers that they would be required to reduce delivery windows from four days to two days and reduce packaging mistakes. Under the new On-Time, In-Full (OTIF) program, suppliers will be required to meet these higher standards 95% of the time by February 2018.[7]
To support such precise delivery schedules, Walmart is standardizing supplier appointment scheduling systems throughout its distribution network. Reducing variability in delivery timing avoids backlogs of trucks at loading/unloading docks and worker downtime—i.e., blocking and starving. Supply chain management also revised the merchandise replenishment prioritization logic such that distribution center managers can more closely coordinate inbound cargo with a store’s “must-arrive-by-date.”[8] By reducing the throughput time between the production of merchandise to the shelving in stores, Walmart can reduce the inventory held throughout the supply chain. Indeed, 17Q2 results showed a slight decrease in inventory on the balance sheet compared to last year ($43.4B as of July ’17 vs. $43.5B as of July ‘16) despite an increase in quarterly revenue ($122.0B vs. $119.6B.).[9] This translates to lower warehousing costs—including energy savings—as well as savings from working capital improvements. In stores, Walmart reduced energy use by 20% between 2005 and 2016 for a run-rate savings of $1 billion per year.[10]
In addition to improvements in its own supply chain, Walmart has secured commitments from major suppliers to reduce the environmental impact of their own operations. In past years, eight of the world’s largest food companies pledged to eliminate six million metric tons of GHG and expand sustainable agriculture programs to eight million acres of farmland.[11] In partnership with P&G, Walmart is targeting a 25% reduction in water per dose for all liquid laundry detergent, which will reduce packaging and transportation costs and emissions.[12] Such product innovation and production process improvements increase the sustainability of all goods sold by these CPG companies, not just those on Walmart shelves.
Looking forward to a retail industry increasingly fueled by e-commerce, Walmart should shift their ‘greening’ efforts from the producer-to-shelf supply chain to the producer-to-doorstep supply chain. In a case study conducted by Walmart and Bain & Company, online orders shipped to the home produced more GHG emissions on average than store purchases, driven by smaller basket sizes for online orders (see figures 1 and 2).[13] To minimize emissions related to omnichannel retail, Walmart should encourage in-store pickup for online orders, which customers are likely to coordinate with other purchases and errands. It could also offer pickup locations in higher-traffic areas than its existing supercenter locations to avoid extra car trips.
To date, Walmart’s climate-friendly agenda has been budget-friendly, but it’s unclear whether conservationist efforts that don’t translate directly to bottom-line benefits are feasible for the publicly traded company. Will shareholders tolerate lower returns for an environmentally-friendly investment? Or could Walmart pass on cost increases to customers—do Walmart shoppers care to go ‘green’? Walmart’s supply chain innovations may need to stay true to the motto: Save Money. Live Better. (798 words)
[1] “Climate Change 2014: Synthesis Report,” Intergovernmental Panel on Climate Change, 2014, pp. 47 https://www.ipcc.ch/pdf/assessment-report/ar5/syr/AR5_SYR_FINAL_All_Topics.pdf. Accessed November 2017.
[2] Ibid.
[3] Walmart Inc. (March 2017). Form 10-K. http://stock.walmart.com/investors/financial-information/sec-filings/. Accessed November 2017.
[4] “Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis – Under Executive Order 12866,” Interagency Working Group on Social Cost of Greenhouse Gases, US Government, August 2016, pp. 4 https://www.epa.gov/sites/production/files/2016-12/documents/sc_co2_tsd_august_2016.pdf. Accessed November 2017.
[5] “Coal Prices and Outlook” U.S. Energy Information Administration, https://www.eia.gov/energyexplained/index.cfm?page=coal_prices Accessed November 2017.
[6] Walmart Inc. (March 2017). Form 10-K.
[7] Edwin Lopez, “Behind the scenes of Walmart’s new on-time, in-full policy,” Supply Chain Dive, October 2017 https://www.supplychaindive.com/news/Walmart-OTIF-inventory-flow-ecommerce-supply-chain/507301/ Accessed November 2017.
[8] Ibid.
[9] Walmart Inc. (August 2017). Form 10-Q. Note: No causal link is explicitly reported between the OTIF and reduced inventory.
[10] Kelsey Lindsey, “Why Walmart is a retail sustainability leader (but doesn’t really want to talk about it),” Retail Dive, August 2016 https://www.retaildive.com/news/why-Walmart-is-a-retail-sustainability-leader-but-doesnt-really-want-to/423713/ Accessed November 2017.
[11] “Walmart asks suppliers to deliver supply chain innovation,” Consumer Goods Technology, April 2014. https://consumergoods.com/walmart-asks-suppliers-deliver-supply-chain-innovation Accessed November 2017.
[12] Ibid.
[13] Aaron Cheris, Casey Taylor, Jennifer Hayes, Jenny Davis-Peccoud, “Retailers’ Challenge: How to Cut Carbon Emissions as E-Commerce Soars.” Bain & Company Brief, April 2017 http://www.bain.com/publications/articles/how-to-cut-carbon-emissions-as-ecommerce-soars.aspx Accessed November 2017.
You bring up some tough questions. One can assume that sustainability efforts are meaningful to investors only to the extent they affect cash flows and reduce the threat of bad PR. As long as Walmart can position its environmental-friendly investments for the long-run business performance improvement (albeit at the expense of short-term profits), I believe there’s a world in which investors can be convinced.
BCG and MIT Sloan led a study to understand the impact of large-scale sustainability programs – almost 40% of the 2,600 executives interviewed identified sustainability efforts as a source of profit (+23% of last year) [1]. Additionally, companies that set tangible, publicly stated sustainability goals are 5x more likely to improve their financial and environmental performance (compared to firms that set none), according to white paper written by CH2M Mill [2]. I think Walmart should continue to push its sustainability agenda. As highlighted in its 2017 strategic plan, Walmart looks to use international expansion as a key driver of growth [3]. It’s much easier for an operation to “start green” than to “convert to green.” Walmart should use its international strategy as a way to critically evaluate the new supply chains.
I was glad to read in the essay that Walmart leveraged its relationships with suppliers, and got them to commit to reduce the environmental impact of their own operations. They should continue this conversation with more suppliers and hopefully create a movement that only improves the prospects of our environment, but also delivers bottom-line impact.
[1] https://www.environmentalleader.com/2013/11/sustainability-leads-to-cost-savings-revenue-growth/
[2] https://www.environmentalleader.com/2013/07/setting-sustainability-goals-improves-bottom-line/
[3] https://news.walmart.com/2017/10/10/walmart-highlights-progress-on-strategic-initiatives-and-outlines-plan-to-win-with-customers-and-shareholders-at-its-meeting-for-the-investment-community
Really interesting piece. The kind of impact a major retailer such as Walmart, with such an extensive supply chain, can have is truly remarkable. While the previous comment did a great job explaining why/how investors may be willing to tolerate lower returns, I’ll assume they will not, thus causing Walmart to pass on the cost increases to customers. How will customers react?
A study by McKinsey found that, as expected, the number of customers willing to pay a premium for a similarly performing green product decreased as that premium increased. For all categories considered, automotive, building, electronics, furniture, and packaging, over 70% of consumers said they would pay a 5% premium but less than 10% of consumers would pay a 25% premium [1]. Interesting to consider if/how much economic factors or the typical Walmart customer could impact these results.
[1] https://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/how-much-will-consumers-pay-to-go-green
Great article Jen!
As Imran mentioned, these are certainly tough questions and while we can speculate how things pan out, only time will tell how customers really react considering unexpected innovations that may appear along the way, in addition to Amazon making long strides into the space.
To answer your question, I feel that while customers will certainly resist the increased costs and potentially affect the bottom line of Walmart, this will only be a limited term impact. There are 2 reasons for this opinion. First, operating with the premise that there will be much stricter regulation governing sustainability at some point in the future, Walmart’s competitors will have to do the same, hence increasing their prices too. In such a scenario, what alternative would Walmart’s customers have? Second, as mentioned by Imran, and in many other sources, sustainability leads to improvements in operating efficiency which would certainly materialize at some stage and mitigate the short term increase in costs.
Jen, thanks for a very interesting read. Your point about GHG emissions on eCommerce orders relative to store purchases raises an interesting tension between two of the megatrends we’re discussing: digitalization and sustainability.
Another interesting potential tension surrounds the company’s choices around how to incentivize customers to act sustainably. Your throughput time example is a great illustration of how Walmart creates both environmental and financial savings. It’s nice to see that a company’s emissions could be correlated to its costs, an idea which you spoke to and which Imran has also cited evidence for. With that said, I’m sure whether a company’s initiatives to save on customer emissions (such as your example of pickup in higher-traffic areas rather than supercenters) would be as linked to improved financial performance. It will be interesting to see how companies work to manage this potential tradeoff.
To your question about whether Walmart shoppers care to ‘go green’ or whether they are willing to pay a premium for low emissions, I also wonder whether, when making a purchase, customers think of their own emissions in the same way as they would those of a firm. In other words, are consumers as willing to pay more in order to reduce their own emissions?
Jen,
Thanks for your interesting insights. Your question, “Will shareholders tolerate lower returns for an environmentally-friendly investment?” has major implications for the investing world at large. A number of impact investing models have sprung up over the past few decades, with the Pay For Success model (which I know you are very familiar with given your time at Social Finance) coming to mind as one of the most unique. As younger generations call for stronger accountability for environmental protection and awareness (and other facets of the Environmental/Social/Governance model), investing models will need to continually adapt. Walmart, a major corporation, may find itself included in “socially conscious” asset classes and benefit from additional investment as a result. However, we see a strong counterargument continuing to drive decision-making as well, as many will continue to argue that a commitment to environmental protection over profitability is reason in and of itself to divest from a firm. So, what comes first-
As a result, I am curious to see where Walmart will fall in the ongoing debate between returns and resource protection. Walmart is already on the path to demonstrating that corporations that operate with ESG motives in mind are not necessarily acting irrationally [1]. I am hopeful that this mindset continues to spread across additional players with the ability to set and influence environmental corporate standards.
1. “Virtue is its Own Reward: Or, One Man’s Ceiling is Another Man’s Floor” AQR. May 18, 2017. https://www.aqr.com/cliffs-perspective/virtue-is-its-own-reward-or-one-mans-ceiling-is-another-mans-floor