In 1989, Wal-Mart Stores Inc. launched one of the first major retail campaigns to sell environmentally safe products in recyclable or biodegradable packaging. The corporation promoted these products by labeling them with green-colored shelf tags. Although there were over 300 green products at its peak, Wal-Mart didn’t directly set or monitor supplier environmental standards.
This resulted in negative publicity for Wal-Mart when the public learned that a green-labeled brand of paper towels had only a recycled tube – the towels were virgin paper treated with chlorine bleach! The green tag program waned, and by the mid-1990s environmental issues seemed to have slipped off the company’s list of priorities.
Meanwhile, Wal-Mart’s reputation among consumers was also slipping. Issues surrounding its competitive practices and labor policies loomed large in the public eye. The company’s environmental record was nothing to boast about, either. Indeed, a 2005 McKinsey & Company study found that 2-8% of customers had stopped shopping at Wal-Mart because of the company’s practices.
Against this backdrop, Wal-Mart CEO H. Lee Scott Jr. unveiled a new plan to reduce the company’s environmental footprint. In an October 2005 speech broadcast to all 1.6 million employees in all 6,000-plus stores and shared with some 60,000 suppliers worldwide, he announced that Wal-Mart was initiating a sweeping "business sustainability strategy." The idea was to reduce the company’s impact on the environment through a commitment to three ambitious goals: "To be supplied 100% by renewable energy; to create zero waste; and to sell products that sustain our resources and the environment."
Wal-Mart also saw actively pursuing an environmental agenda as a way to differentiate from competition, maintain a license to grow, and make its supply chain dramatically more efficient. In other words, a good business sustainability plan would help Wal-Mart get even better at what it does best: drive down costs to generate profits.
To go green, Wal-Mart would have to think outside the "Bentonville Bubble." For years, the company had operated in relative isolation from external stakeholders – without much in-house expertise on sustainability and environmental performance, it would need to involve them in its new plan.
Moreover, as the paper towel incident illustrated, most opportunities for environmental improvements resided with suppliers. "If we focused solely on our own operations, we would limit ourselves to 10% of our effect on the environment, while eliminating 90% of the opportunity that’s out there," says Tyler Elm, Wal-Mart’s senior director of corporate strategy and business sustainability when the initiative launched.
And so Wal-Mart began to reach out to its external stakeholders. The corporation first identified areas of maximum environmental impact and then invited stakeholders to join 14 "sustainable value networks" – such as the seafood network and the packaging network. In return, network participants would gain information about and say in Wal-Mart’s operations.
By the end of the sustainability strategy’s first year, the network teams generated savings roughly equal to the profits generated by several Wal-Mart Supercenters.
Certified Seafood
In 2006, Science published a study predicting that all species of wild seafood would collapse within 50 years. That same year, Wal-Mart’s seafood business grew roughly 25%, to about $750 million. "I am already having a hard time getting supply," says Peter Redmond, vice president for seafood and deli and captain of the Wal-Mart seafood network. "If we add 250 stores a year, imagine how hard it will be in five years!"
Continuity of supply is the greatest challenge for Wal-Mart’s seafood network, explains Redmond. One way Wal-Mart could prevent further depletion of fish stocks while ensuring its continuity of supply is to buy fish that has been caught and processed using sustainable fishing practices.
By partnering with the Marine Stewardship Council (MSC), which manages the leading certification program in the field, Wal-Mart avoided criticism that its standards were not stringent enough while leveraging the established expertise of the MSC and its partners.
Wal-Mart committed to working with MSC-certified suppliers, which gave suppliers an incentive to seek certification – a time-consuming and expensive process. In 2006, Wal-Mart announced a highly ambitious goal to carry 100% MSC-certified wild-caught fish in its stores within 3-5 years. As the supply of MSC-certified fish is currently far from adequate to meet Wal-Mart’s demand, this public announcement was effectively a commitment to buy from all fisheries that become MSC-certified.
The World Wildlife Fund (WWF), which co-founded the MSC with Unilever, plays an integral role in the partnership by helping boat operators and processors prepare for certification by identifying problems that need to be fixed (e.g., strengthening management practices, rebuilding stocks, and reducing environmental impacts) before they can be certified. This helps fisheries become certified more quickly to keep pace with the sharp increase in demand for certified seafood.
Another benefit of certification is that it establishes a clear view of each fish’s chain of custody. "One of the problems we had was how much of our fish was coming to us third-, fourth-, or even fifth-hand," says Redmond. "Sometimes our supplier turned out to be nothing more than a packer who was going out to a market saying, ‘I need 50,000 lbs. of salmon no matter where it comes from.’"
Greater transparency in the seafood supply chain allows Wal-Mart to select better suppliers, simplify the chain of custody, minimize paperwork, reduce transaction and transportation costs, and improve the quality of the fish it receives – all while improving environmental outcomes.
The nonprofits in Wal-Mart’s seafood network win, too: Both the MSC and WWF are attracting suppliers who might otherwise have eschewed certification to capture or keep Wal-Mart’s business. And their programs have gained unprecedented levels of visibility through Wal-Mart’s involvement. This visibility helps them build clout with consumers and get other retailers interested in carrying more sustainable seafood.
Trustworthy Textiles
Unlike seafood, cotton is not in short supply. Yet farming conventional cotton creates millions of tons of pollution every year. In contrast, organic cotton farming is gentler on the environment and on farmworkers’ health.
With labels that appeal to parents by emphasizing the softness and chemical- free nature of organic cotton, Wal- Mart has generated strong sales of organic cotton baby clothes – among other products. Wal-Mart customers are typically unwilling to pay extra simply because a product is better for the environment. When customers think a product is better for their own or their family’s health, however, they’re more likely to dig deeper and pay for it.
Both Wal-Mart and its customers initially had to pay more for organic cotton. Beth Schommer, a former Wal- Mart divisional merchandise manager for infants and toddlers, describes the pricing strategy when the program first started: "A little organic shorts set was maybe $10.94, whereas a similar non-organic outfit would have been priced at $6.94. So, yes, there was a price premium compared to other Wal-Mart products. But when you compare it to a $10.94 organic shorts in the marketplace, it’s not expensive."
Still, Wal-Mart is trying to sell organic at prices closer to conventional cotton by expanding its organic cotton business. Nonprofits and government agencies are playing a significant role in this effort. The Organic Trade Association and Organic Exchange helped convince the company to adopt the USDA organic cotton standards – regardless of where the cotton is grown. They also advocated use of the Global Organic Textiles Standard for processing. "This is probably the toughest standard in the industry for organic processing and handling; it’s now the only certification process that can be followed for organic products coming to Wal-Mart," says Kim Brandner, senior brand manager of sustainable textiles.
By using external standards and accredited third-party organizations to certify practices at each link in the supply chain, Wal-Mart can guarantee that its products are, indeed, organic. The company also minimizes criticism that its involvement will dilute the stringent measures that organic products must meet (a concern raised by organic farmers, retailers, and NGOs alike). Relying on network partners allows the company to accomplish its objectives without major investments because suppliers absorb most of the costs of certification.
Like the seafood supply chain, the textile network has become more efficient with the advent of certification. "It used to be that if Wal-Mart was buying Champion T-shirts, [it] wouldn’t look past Sara Lee [which held the license for Champion products]. [It] didn’t think about the spinner, or the dyer, the ginner, or the farmer," says Diana Rothschild, a former Wal-Mart employee and Blu Skye consultant to the textiles network.
But now Wal-Mart is forging ties much further upstream in its supply chain to become more efficient and reduce costs. "We used to buy cotton from Turkey, ship it to China for spinning and knitting, and then ship it again to Guatemala to be cut and sewn," explains Brandner. "Now … we’re finding opportunities to do things like eliminate the shipment to China and have all processing done in Guatemala." Going directly to Guatemala not only saves time and money for Wal-Mart, but also further reduces the company’s impact on the environment by lessening the amount of fuel and other resources used in shipping.
Wal-Mart is also cultivating closer relationships with its suppliers. Previously, textile buyers selected manufacturers on the basis of the cost and product quality. Relationships with suppliers therefore tended to be transactional and short-lived. Now Wal-Mart employees interact with more suppliers, more often, more directly, and for a greater duration, creating closer relationships that are necessary to sustain initiatives like the organic cotton project.
A major transformation within Wal-Mart has made it easier to have closer relationships with suppliers. In the past, textile buyers had been generalists, handling a variety of responsibilities. Now the textiles network divides the buyer role into four different job categories so that some buyers are dedicated to maintaining long-term relationships with suppliers. These employees are encouraged to hold their positions for many years, as opposed to the 12-18-month rotations that Wal-Mart buyers typically complete.
According to Brandner, these organizational changes, backed by the company’s focus on sustainability, have not only supported the objectives of the textile network, but also led the team to ask better questions. "It’s helping us become smarter merchants," he says.
Another way that Wal-Mart is using its network is to build bridges between suppliers and environmental nonprofit organizations. For instance, when the Chinese government threatened to shut down a number of textile dye houses in Beijing, including one of Wal-Mart’s suppliers, to reduce pollution in time for the 2008 Olympics, Wal-Mart immediately took action.
"We put the dye house in touch with one of the NGOs in our network, which helped it formulate a more environmentally friendly process that reduced its toxic output very quickly," says Brandner. "Although other retailers were negatively affected by the shutdown of their Chinese dye suppliers, we did not have any of our production capacity cut with this vendor."
To boost supplies of organic cotton and help more farmers make the transition from conventional to organic farming, Wal-Mart has begun making longer-term commitments. For example, rather than working season to season, as the company has done in the past, it made a five-year commitment to buy organic cotton from a group of farmers. "It gives them confidence and stability," says Lucy Cindric, senior vice president and general merchandise manager of Wal-Mart’s ladies wear division and captain of the textiles network.
The company is also helping farmers manage some of organic farming’s challenges. "Organic farmers can’t grow cotton in the same field for an extended time because it depletes the soil of nutrients," explains Rothschild. This forces farmers to alternate cotton with legumes, vegetables, and other crops to rejuvenate the soil. To meet organic standards, however, farmers must grow their alternate crops organically. Because alternate crops are not as lucrative as organic cotton, "this creates the temptation for farmers to turn to non-organic farming," she says.
To help solve this problem, Wal-Mart agreed to purchase some of the organic cotton farmers’ alternate crops – an initiative that was synergistic with the efforts of the company’s sustainable value network focused on food and agriculture.
Eco-Friendly Electronics
In 2004, the U.S. exported 80% of its electronic waste to developing countries, where the waste led to pollution levels hundreds of thousands of times higher than those allowed in developed countries. Despite this, computers and other electronics still account for 40% of the lead in U.S. landfills.
One of the objectives of Wal-Mart’s electronics network is to reduce these environmental impacts by recycling or disposing of e-waste more safely, as well as by designing electronics that don’t contain hazardous materials in the first place. Another objective is to increase the energy efficiency of its electronics.
The network has encountered challenges in managing e-waste because of the complexity of electronics design and sourcing, the difficulty of measuring the hazardous content of electronics, and the necessity of consumer behavior change to accomplish recycling and safe disposal of used electronics. In contrast, the network has more readily increased energy efficiency because this outcome is easier to measure and to market to consumers.
The sheer complexity of electronic products and the electronics supply chain makes certifying they are free of hazardous materials costly and difficult. Most electronic products contain sophisticated components sourced through complicated, multilevel supply chains. One set of suppliers sources raw materials, another set assembles those materials into components, yet another set aggregates these components into more complex parts, and so on.
At each link in the supply chain, suppliers have technical expertise and proprietary information that Wal-Mart can’t access. When Wal-Mart can’t ensure that all components in a product are free of hazardous materials, the company cannot promote the product as "green" to customers.
For example, Wal-Mart wanted to be the first retailer in the United States to sell personal computers that complied with the European Union’s Restriction on Hazardous Substances (RoHS). And so the retailer negotiated a deal with Toshiba to supply RoHS-compliant com- puters to Wal-Mart stores. In exchange for buying 12 weeks’ worth of these computers (as opposed to a typical 4-week commitment), Wal-Mart procured the environmentally preferable PCs at no additional cost.
Nevertheless, because the company had no way of guaranteeing that the computers did, in fact, meet RoHS standards, Wal-Mart decided to play it safe and not promote the computers’ environmental benefits.
Another way to reduce e-waste is to encourage consumers to recycle their electronics. Yet recycling offers no immediate personal benefit to consumers, and instead requires additional cost and effort. Because changing consumer behavior without palpable benefits is extremely difficult, the electronics team has not gained much ground on the recycling front.
In the area of increasing energy efficiency, the electronics network has had more success – largely because Wal- Mart can easily test product performance. The nonprofit Green Electronics Council (GEC), which works with electronics manufacturers and other stakeholders to improve the environmental and social performance of electronic products, helped.
With the GEC, Wal-Mart designed an Internet-based scorecard on which suppliers indicate how environmentally sustainable their products are. This scorecard includes measures of energy efficiency, durability, and end-of-life solutions. The GEC and Wal-Mart are also co-sponsoring a contest to design consumer electronics that excel on all of the scorecard’s metrics. Wal-Mart will carry the winner’s product in its U.S. stores.
A New Kind of Networking
At the heart of Wal-Mart’s business sustainability strategy is a shift from generating value through price-based, transactional interactions toward generating value from longer-term, collaborative relationships with nonprofits, suppliers, and other external stakeholders.
Through its sustainable value networks, Wal-Mart gains a whole-system perspective that helps the retailer find profitable ways to address environmental issues such as fishery depletion, climate change, and pollution. In exchange, nonprofit network members stand to make giant leaps toward their missions because of the scale of Wal-Mart’s operations. And suppliers enjoy not only the stability that closer relationships with the retail giant brings, but also the assistance and guidance of Wal-Mart’s nonprofit partners.
Although Wal-Mart’s sustainability strategy appears to be off to a promising start, the company must proceed carefully as it seeks to sustain and expand its network approach. First, Wal-Mart must carefully manage its partnerships to avoid increasing its costs. The company’s reputation is on the line as it makes ambitious promises – for example, to sell only MSC-certified wild-caught fish. Because Wal-Mart depends on suppliers to fulfill those promises, they may try to leverage their improved position of power to negotiate higher prices, particularly in times of scarcity.
More dependent on longer-term relationships with fewer suppliers, Wal-Mart might also lose its ability to buy products from lower-cost sources. In addition, as its ties with nonprofit organizations deepen, Wal-Mart may face pressure to reduce its environmental impacts in ways that increase production costs.
To resist upward pressure on costs, Wal-Mart can become still more efficient. It can also continue to partner with nonprofits to develop and implement innovations. And in its relations with suppliers, it can keep prices for green products low by committing to purchase greater quantities on the front end, rather than paying price premiums on the open market.
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Erica Plambeck is an associate professor at the Stanford Graduate School of Business and a senior fellow at the Woods Institute for the Environment at Stanford. She received the Presidential Early Career Award for her research on relational contracting in supply chain management.
Lyn Denend is a research associate at the Stanford Graduate School of Business, where she works with faculty members to develop case studies in a variety of fields.
Adapted from Stanford Social Innovation Review, a SustainableBusiness.com Content Partner.
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