Environmental sustainability, now at Wal-Mart

By Stephanie Rosenbloom and Michael Barbaro
Published: January 25, 2009

It was billed the Choice Meeting: a secret two-day conference in Arkansas in 2005 pairing Wal-Mart Stores, a symbol of scorched-earth global capitalism, with some of America's most influential environmentalists. And it began with a zinger.
"Tell me why I should care about an endangered mouse in Arizona?" asked H. Lee Scott Jr., the retail giant's chief executive, only partly in jest.
At the time, Wal-Mart was the target of a well-orchestrated assault focusing on its labor practices and environmental record. It was also straining to keep its legendary growth on track. Scott, hungry for ways to protect and transform his company, began to see environmental sustainability as a way to achieve two goals: improve Wal-Mart's bottom line and its reputation.
So he presented his colleagues with a radical option — the "choice" that gave the meeting its name — encouraging them to adopt a sustainability program to remake the entire company, from the materials used to build stores to the light bulbs stocked on its shelves. Although participants were conflicted, a vote on the initiative was unanimous: Wal-Mart, the world's largest retailer and biggest buyer of manufactured goods, would go green.
By virtue of its herculean size, Wal-Mart eventually dragged much of corporate America along with it, leading mighty suppliers like General Electric and Procter & Gamble to transform their own business practices.

Under Scott, who is retiring this month at the age of 59, the company that democratized consumption in the United States — enabling working-class families to buy former luxuries like inexpensive flat-screen televisions, down comforters and porterhouse steaks — has begun to democratize environmental sustainability.
For decades, many consumers felt that going green was a luxury, too, reserved primarily for those with enough money — and time on their hands — to buy groceries at natural food stores and organic clothing from specialty retailers.
Today, the roughly 200 million customers who pass through Wal-Mart's doors each year buy fluorescent light bulbs that use up to 75 percent less electricity than incandescent bulbs, concentrated laundry detergent that uses 50 percent less water and prescription drugs that contain 50 percent less packaging.
"If all this sustainability stuff is just for the well-to-do, it's not going to make a difference," said Jib Ellison, the founder of Blu Skye, a sustainability consultant who has worked with Wal-Mart.
As the saying goes, Wal-Mart has also done well by doing good. Along with the McDonald's Corporation, it was one of only two companies in the Dow Jones industrial average whose share price rose last year.
When Wal-Mart first embraced green initiatives, its fortunes were sagging. After blanketing the country with its giant, all-in-one stores, it began cannibalizing its own sales. Older stores looked tattered and tired, and Wal-Mart's flirtation with higher-end merchandise, like skinny jeans with fur trim, alienated low-income shoppers who preferred unadorned basics.
By renovating thousands of its stores, ratcheting down the pace of its breakneck expansion and all but abandoning its upscale ambitions, it turned around its lagging sales. But its deft financial rejiggering still didn't burnish its reputation, which had become a business problem, too.
A confidential 2004 report, prepared by McKinsey & Company for Wal-Mart, found that 2 percent to 8 percent of Wal-Mart consumers surveyed had ceased shopping at the chain because of "negative press they have heard." Wal-Mart executives and Wall Street analysts began referring to the problem as "headline risk."
So the company, known for bitterly rebutting critics or simply ignoring them, began working closely with activists to improve its labor, health care and environmental records.
It is hard to measure the financial return of a good image. But no one at Wal-Mart talks about headline risk anymore because the headlines have become largely positive.
Profits climbed to $12.7 billion in the 2008 fiscal year, from $11.2 billion in the 2006 fiscal year, while sales jumped to $375 billion, from $312.4 billion, during the same period. The percentage of employees on Wal-Mart's health insurance plan rose to 50.2 percent, from 44 percent.
And since the Choice Meeting, sustainability efforts have saved Wal-Mart hundreds of millions of dollars, according to people familiar with the company's environmental initiatives. Wal-Mart declined to provide exact figures about its savings.
"It wasn't a matter of telling our story better," said Scott said in recent interview. "We had to create a better story."
Wal-Mart, of course, didn't change overnight. It was pushed — or, more accurately, shoved — into wrenching reforms.
When Scott became chief executive in 2000, the company was a Wall Street darling. With nearly 4,000 stores and more than a million employees, it had edged out Goliaths like Sears and Kmart. But its size and success invited scrutiny. In 2005, two union-backed groups, Wal-Mart Watch and Wake Up Wal-Mart, set up shop in Washington and started a public relations assault against the company.
At one point, Wal-Mart Watch set up an automated phone system to recruit whistle-blowers to share secrets about the retailer.
In 2005, Wal-Mart Watch obtained an internal memorandum showing that 46 percent of Wal-Mart workers' children were uninsured or on Medicaid, a health care program for low-income families. The memo proposed further ways to cut employees' health and retiree benefits — at a time when the company was ringing up annual earnings of more than $11 billion.
Meanwhile, environmental groups accused Wal-Mart of being a polluter. Scott and his team hunkered down, hurling back a litany of statistics and facts in Wal-Mart's defense.
As the company's reputation unwound, so did its business. Its stock price fell roughly 20 percent between 2000 and 2005, a drop that executives and analysts attributed, in part, to investors' anxieties about Wal-Mart's image. Sales growth lagged behind that of its chief rival, Target, and Wal-Mart faced growing resistance to its expansion.
Inside Wal-Mart headquarters, in Bentonville, Arkansas, rumors swirled about Scott's future, and board members became restless. In the end, directors stood by Scott, but told him he had to overhaul Wal-Mart's image.

"What I would tell Lee is that there was a great deal of misunderstanding about the company and that we had to address it head on," said Jose Villarreal, a director from 1998 to 2006 and a partner in the law firm Akin Gump Strauss Hauer & Feld.
Scott — the son of a gas-station owner — joined Wal-Mart's trucking department in 1979 and rose to the CEO post in 2000. He acknowledged in an interview that while he was running Wal-Mart, his board "sensitized" him to critics.
He began meeting with minority groups, politicians and environmentalists. Some meetings were awkward; others were punctuated by tirades. But as it turned out, most critics did not want Wal-Mart to disappear. They wanted it to be better.
Scott used some of his opponents' ideas to make that happen, believing that sustainability could become an advantage — saving the company money, reinvigorating its culture, allowing it to sell better merchandise and attracting and retaining talent.
Engaging outside consultants and critics to help with that transformation was a huge change for the retailer, which prized its independence. To outsiders, it was a sign that Wal-Mart was adopting a new attitude.
"There was a time where people in business believed all they had to do was run their business," said David Glass, Scott's predecessor as CEO "But it doesn't work that way anymore. There is an accountability that goes way beyond that."
After the Choice Meeting, Scott went through a kind of Outward Bound phase, known within Wal-Mart as "Eat What You Cook" — a mantra that encourages executives to experience firsthand the impact of their decisions.
For Scott, that meant driving to a New Hampshire mountaintop to discuss climate change with scientists. He slept on a bunk bed in submarine-size quarters with visitors including Steven Hamburg, then an environmental studies professor at Brown University and author of a 1994 report criticizing Wal-Mart's environmental efforts.
Hamburg, now chief scientist for the Environmental Defense Fund, told Scott that Wal-Mart's earlier green initiatives were just window dressing. "So he challenged me back and said, 'Well, we've taken another run at this and we'd love to have your input,' " Hamburg recalls.
Shortly after that conversation, Scott told the world that Wal-Mart was embracing sustainability. He laid out ambitious, possibly unattainable, long-term goals for the company: running its operations solely on renewable energy, creating zero waste and selling products that sustain the earth's resources and environment.
Wal-Mart's suppliers had little choice but to follow its lead.
In came the fluorescent bulbs. In 2007 alone, Wal-Mart sold more than 100 million of them. For a manufacturer, selling a bulb that lasts longer means fewer sold. But it would hurt to lose Wal-Mart as a customer. So GE and others ramped up production of fluorescent bulbs.
By selling only concentrated liquid laundry detergent, an effort it began last year, Wal-Mart says, its customers will save more than 400 million gallons of water, 95 million pounds of plastic resin, 125 million pounds of cardboard and 520,000 gallons of diesel fuel over three years.
"Lee pushed me," said A. G. Lafley, chief executive of Procter & Gamble, and "we totally, totally changed the way we manufacture liquid laundry detergents in the U.S. and, now, around the world."
Wal-Mart says it now saves itself $3.5 million a year just by recycling loose plastic and selling it to processors. After changing the design of its trucks and how efficiently it loads them, its fleet had a 25 percent improvement in fuel efficiency. Amory Lovins, a MacArthur fellow and chairman and chief scientist of the Rocky Mountain Institute, a nonprofit research organization, said Wal-Mart would save nearly $500 million a year in fuel costs by 2020.
While environmentalists give Wal-Mart kudos for the changes it has made, they say that much of what it has achieved so far amounts to collecting low-hanging fruit. The company sells tens of thousands of products, and has demanded the overhaul of only a handful, they say. "The jury's out in the long term," Hamburg says.
Wal-Mart has revised health care plans and labor practices in recent years, also important facets of its makeover.
In the last few years, it has helped its employees get access to lower-cost prescription drugs and taken steps to prevent labor abuses. For years, some store managers forced employees to work without pay, after clocking out, according to scores of lawsuits. To prevent this, Wal-Mart has programmed cash registers to shut down after an employee has exceeded a certain number of hours. It has also told managers to make sure that employees take lunch and rest breaks.
Last month, Wal-Mart settled dozens of lawsuits contending that it forced employees to work off the clock. The settlement will cost Wal-Mart at least $352 million, possibly far more, according to the company.
Still, many activists, especially in the labor world, remain deeply dissatisfied.
A major class-action sexual discrimination lawsuit is pending against the company. And labor leaders argue that Wal-Mart has simply found new ways to fatten its profits without tangibly improving the lives of its employees. It pays its workers, on average, less than $20,000 a year, and many of them pay thousands of dollars a year in medical bills.
"He had the chance to be the Henry Ford of his generation, especially in the last few years, as the stock price soared," said Andy Stern, president of the Service Employees International Union, of Scott. "He could have found a way to share the wealth. Instead, he became the epitome of the greed that has brought our economy to where it is today."
Scott declined to comment. But Wal-Mart says that its average wage, $10.83 an hour for full-time workers, are competitive in the retailing industry, and that its health plans are accessible to a wider range of workers than those of some of its rivals.
Wal-Mart will need to keep building on its recent successes. While most retail chains have had double-digit declines during the current economic turndown, Wal-Mart had a 1.7 percent sales increase in December at stores open at least a year.
Yet that number was lower than analysts' expectations, leading some to predict more trouble ahead for Wal-Mart and the rest of the retail industry.
Come February, it will be the job of Michael Duke, 58, who has led Wal-Mart's international operations since 2005, to steer the company through the downturn.
As for Scott, he will serve as chairman of the executive committee of Wal-Mart's board until 2011. And he intends to increase the retailer's lobbying muscle in Washington, especially regarding health care, energy and sustainability.
"As businesses, we have a responsibility to society," he said this month, speaking to members of the National Retail Federation in his last public speech as Wal-Mart chief. "Let me be clear about this point. There is no conflict between delivering value to shareholders, and helping solve bigger societal problems."