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Wal-Mart Must Include Adequate Return On Capital In Its Sustainability ‘Index’ Or It Will Do More Harm Than Good

Jim Prevor’s Perishable Pundit, August 5, 2009

Wal-Mart announced a major new sustainability initiative by holding a “Sustainability Milestone Meeting” and issuing a statement from Wal-Mart CEO Mike Duke:

Remarks as Prepared for Delivery by
Mike Duke, President and CEO of Walmart

SUSTAINABILITY MILESTONE MEETING

July 16, 2009

Thank you.

You know as I was listening to Leslie’s presentation, I was just struck by how far we’ve come over the last few years and how sustainability has become a part of everything we do.

We continue to learn so much from our network of partners …our suppliers, NGOs, and of course, our associates.

I appreciate that so many of you made the trip to be with us today. I also appreciate all of our associates watching from locations as far away as Brazil.

And I have to tell you what I most appreciate is what this record attendance says about our common commitment to sustainability.

It feels good to work together and make a difference, doesn’t it?

But you know, this wouldn’t be a Walmart meeting if I didn’t ask us to look beyond the headlights once again and take a long view into the future.

Most of you know that I’m a retailer at heart, but you may not know that I’m an engineer by training. My Georgia Tech roots run deep… And the engineer in me likes data. I like research. I like metrics. More than anything I love an elegant process for arriving at innovative solutions that are both profitable and sustainable.

As I look back at our progress over the past few years, I think the most difficult challenge has been to measure the sustainability of our products. It’s in this area where I believe we can truly accelerate and broaden our efforts in sustainability… with a more elegant, research-driven approach.

Today, I will lay out the groundwork of a major new initiative that can lower costs, raise quality and bring customers the products they need to save money and live better in the 21st century. And, in the process, make us a better business.

I believe this initiative will allow us to build on all we’ve already accomplished together. And it will enable us to get ahead of several shifts that are changing our businesses and our world.

Let me first talk about why we should get in front of these changes. And then I’ll move into the specifics of the announcement.

***

Society’s expectations of retail are changing in three fundamental ways.

First, the economic crisis is leading consumers toward a “new normal” where they not only want to save money… they are getting smarter about saving money.

Second, in this age of social networks and instant information, consumers increasingly expect more transparency on the products they buy. Today, there is no trust without transparency.

There’s a third…longer term shift. We’re living in a world of increasing population and decreasing natural resources.

6.7 billion people now live on this planet. Every second, four new human beings are born and the global population is expected to reach more than 9 billion by 2050.

That means new generations of consumers in both developed and developing countries will aspire to the middle class. More families at kitchen tables around the world will count on fresh foods and quality products to make their lives better.

At the same time, the human footprint… our use of natural resources for everything we grow, eat, drink, make, package, buy, transport and throw away… all of that is outpacing the earth’s capacity to sustain us.

As more people reach for a better life, there will be even greater pressure on the planet’s resources…with more energy usage, more carbon emissions and more waste.

Experts, like the World Wildlife Fund, say that if our environmental demands continue at the same rate, we will need the equivalent of two planets to maintain our standard of living in another 25 years.

Now does that mean we have to turn off the lights and move into caves?

Does it mean that all those people who aspire to the middle class, don’t deserve a better standard of living?

Of course not.

Fresh food…quality products…shouldn’t be available to only a privileged few, they should be available to all. That’s what we do. It’s who we are…our brand, our mission in this world.

What this does mean is that we have a responsibility to our customers and to society to keep the “live better” part of our mission relevant in a changing world.

Last week, I had a chance to visit one of our local return centers, and it was just amazing to see thousands of products that were defective or did not live up to the quality standards that customers expect from us.

I look at every item and I think of it as a disappointed customer. What could be worse for sustainability than having to buy the same product twice?

Customers do want low prices, but not by sacrificing quality. They want products that are more efficient, that last longer and perform better. And increasingly they want information about the entire lifecycle of a product so that they can feel good about buying it. They want to know that the materials in the product are safe… that it was made well… and that it was produced in a responsible way.

We do not see this as a trend that will fade. Higher customer expectations are a permanent part of the future. At Walmart, we’re working to make sustainability sustainable, so that it’s a priority in good times and in the tough times. An important part of that is developing the tools to help enable sustainable consumption.

Now remember when I said that the engineer in me likes data and an elegant process? That’s what we need.

Despite all the work that’s been done, we see only bits of information, but not the full picture across the supply chain. We don’t know the patterns, hidden costs and impacts of the products we make and sell. Nor do we have a single source of data or a common standard for evaluating the sustainability of products.

If we want to help the customer of the future live better, we need that data. We need that big picture view.

***

So today, we’re announcing that we will lead the creation of a Sustainability Index. The Index will bring about a more transparent supply chain, drive product innovation and, ultimately, provide consumers the information they need to assess the sustainability of products.

If we work together, we can create a new retail standard for the 21st century.

We will roll out the Index in three main steps. Some of the work will start right away. We expect the rest to happen over the next five years.

As Step One, Walmart will ask all of its suppliers to answer 15 simple, but powerful questions on the sustainable practices of their companies. In the United States, we will ask our top-tier suppliers to answer quickly. And internationally, each country will work with its suppliers on developing timelines.

Like our customers, we now expect more of ourselves and our more than 100,000 suppliers around the world.

So as a first step in moving forward with the Index, our buyers will provide every supplier with a tool to assess their own sustainability.

We will ask questions around four areas:

1. Energy and Climate

2. Material Efficiency

3. Natural Resources

4. People and Community

Under these buckets you will see familiar questions. For example, you will see that we are asking our suppliers to know the location of 100% of their factories and we are asking if they’re measuring their greenhouse gas emissions.

You will also see some new areas that we are asking about, including water use and solid waste.

These are not complicated questions, but we have never systematically asked for this kind of information before.

You’ll hear more from John Fleming about this in a minute.

We see these questions as an important first step in assessing the sustainability of suppliers. But for true transparency, we need an additional, much larger tool for assessing the sustainability of products.

So today, we’re also announcing as a second step that Walmart is helping to create a consortium of universities that will collaborate with suppliers, retailers, NGOs and government to develop a global database of information on the lifecycle of products…from raw materials to disposal.

Walmart has provided the initial funding for this Sustainability Index Consortium, and we invite all retailers and suppliers to contribute. We will also partner with one or more leading technology companies to create an open platform that will power the Index.

Let me say this clearly. It is not our goal to create or own this Index. We want to spur the development of a common database that will allow the consortium to collect and analyze the knowledge of the global supply chain.

We think this shared database will generate opportunities to be more innovative and to improve the sustainability of products and processes.

It will shift us from traditional retail thinking that is centered around the things that we know we can control….like transportation, packaging and sales…to the invisible impacts on the environment. This will give us a much deeper understanding of the opportunities to making consumption more sustainable.

The third and ultimate step of the Index is to translate the information stored in the database into a simple tool that informs consumers about the sustainability of products.

This will provide customers with the transparency into the quality and history of products that they don’t have today. It will help put them in control and consume in a more sustainable way.

In a moment, our chief merchants for Walmart, Sam’s Club, and International will tell you more about what this means for them. You’ll hear more throughout this meeting about work that’s already underway. And you’ll learn about products that represent the kind of innovation we hope the Index will multiply.

Now I know that some of you may be thinking… the last thing we want is a series of new, costly scorecards that add little value …with hundreds of iterations for hundreds of different retailers.

I couldn’t agree more.

So, we will be working with all of you to develop the right information. We want to make sure the database focuses first on the product categories where we can get the most value and benefit. And information that is proprietary will remain that way.

***

I want to make an important point here.

We can’t do this without partners. This cannot and should not be a Walmart effort. It can’t be a U.S. effort. To succeed, the Index has to be global. It has to involve many stakeholders as vital partners.

I want to call on all of us… retailers, suppliers, NGOs, and universities… to work together to create the Index, to share our information, and to shape it into a powerful tool.

In the end, it’s all about doing an even better job for our customers.

If we get this right…

…the Index will drive higher quality and lower costs.

…It will mean more innovative products that lower carbon output…that promote clean air and water…and that create a more transparent and responsible supply chain.

…And it will make us even stronger businesses, bringing us ever closer to our customers and what they need to live better …20…50…100 years from now.

Thank you for your partnership.

Wal-Mart also issued a press release, a fact sheet and a copy of the 15-question survey it is sending to vendors around the world.

The gist of the proposal is to do three things: First, ask 15 questions of suppliers; second, work to establish a consortium of universities that will establish a database of the lifecycle impact of products; and third, make this information available and meaningful to consumers.

We’ve spent a lot of time working on sustainability. In sister publication, PRODUCE BUSINESS we recently gave an award to Publix for its practice of sustainability. In the Pundit, just the other day, we were praising Gills Onions for “sustainability done right.”

We’ve heard that Mike Duke is a man of integrity, so we accept at face value that Wal-Mart means good for the world by promulgating this initiative.

It is, however, a train wreck waiting to happen and will probably do real harm to the world.

Partly the problem is with the initiative itself:

First, sustainability — dealing with three separate spheres of responsibility, the social, environmental and economic — is inherently complex and value-driven. Despite many attempts to posit an analogy between sustainability efforts and accounting balance sheets, there is no “triple bottom line” that can reasonably be said to represent sustainability efforts. We’ve lectured on this subject at Cornell University, as part of the Cornell University/United Fresh Produce Association Executive Development Program and have often referenced this academic paper that made the argument powerfully.

This means that any attempt to create an index meaningful to consumers at large will be inherently deceptive. One product may emit more carbon, but the company producing the product may not treat its employees well and may engage in tax-evasion… and there is no number or rank that can make those things add up.

Second, the data Wal-Mart hopes to collect literally changes all the time. Harvesting at different times of the day may impact carbon output; this week the plane carrying the product is a passenger jet, next week it’s a freighter. This week orders were low, so the shipment was an LTL that took a circuitous route; next week the orders were better, they filled a trailer and went direct.

Third, the focus on the product is itself deceptive. Very often the environmental impact of a product depends on the consumer. Do they drive in an empty car to pick up the item? What about the cooking and storage procedures in the house? It is very common for these things to account for 25% or more of the impact of the product on the environment.

Fourth, the initiative is biased against the economic sphere of sustainability, and this will make the world a poorer place. Take a look at the initial 15 questions being posed to Wal-Mart suppliers:

SUSTAINABILITY PRODUCT INDEX: 15 Questions for Suppliers

Energy and Climate:
Reducing Energy Costs and Greenhouse Gas Emissions

1. Have you measured your corporate greenhouse gas emissions?

2. Have you opted to report your greenhouse gas emissions to the Carbon Disclosure Project (CDP)?

3. What is your total annual greenhouse gas emissions reported in the most recent year measured?

4. Have you set publicly available greenhouse gas reduction targets? If yes, what are those targets?

Material Efficiency:
Reducing Waste and Enhancing Quality

1. If measured, please report the total amount of solid waste generated from the facilities that produce your product(s) for Walmart for the most recent year measured.

2. Have you set publicly available solid waste reduction targets? If yes, what are those targets?

3. If measured, please report total water use from facilities that produce your product(s) for Walmart for the most recent year measured.

4. Have you set publicly available water use reduction targets? If yes, what are those targets?

Natural Resources:
Producing High Quality, Responsibly Sourced Raw Materials

1. Have you established publicly available sustainability purchasing guidelines for your direct suppliers that address issues such as environmental compliance, employment practices and product/ingredient safety?

2. Have you obtained 3rd party certifications for any of the products that you sell to Walmart?

People and Community:
Ensuring Responsible and Ethical Production

1. Do you know the location of 100 percent of the facilities that produce your product(s)?

2. Before beginning a business relationship with a manufacturing facility, do you evaluate the quality of, and capacity for, production?

3. Do you have a process for managing social compliance at the manufacturing level?

4. Do you work with your supply base to resolve issues found during social compliance evaluations and also document specific corrections and improvements?

5. Do you invest in community development activities in the markets you source from and/or operate within?

Note that there is not one single question devoted to the supplier’s prosperity? No concern that capital might be wasted. Yet capital is always the scarcest of resources.

This is a crucial component of sustainability and one often neglected.

When we went to Oxnard to see the Gills Onions Advanced Energy Recovery System, we were thrilled but, not insignificantly, we were thrilled because Gills could convert this onion waste to energy and earn a 20%-plus return on doing so.

Before they encourage suppliers to waste money to score better on some metrics and thus impoverish the world, we hope that the executives at Wal-Mart would remember this: If Gills Onions had built the EXACT SAME system but it cost ten times as much, it would not be an example of sustainability. It would be a horrible waste of resources that could be used for many beneficial purposes.

Yet there is nothing in the way Wal-Mart proposes to go about this to make us think it would score against a company actively wasting money to get a better “mark” on this index.

In other words the index, if it ever happens, will not represent some kind of “natural” level of sustainability but, instead, the result of decisions to spend money to achieve a higher ranking. In many cases, however, this higher ranking will be achieved at the horrible, humanity impoverishing cost of wasted capital.

If Wal-Mart doesn’t change this, it will actively make the world poorer as capital is wasted to improve one’s grade on the test.

There should be a 16th question on that survey to suppliers. It is the most important question Wal-Mart could ask: “Are you earning a high enough return on capital that you can justify raising new capital to expand your business? This happens to also be the question Wal-Mart could most directly help its vendors with.

Beyond the specifics of the plan, it is sad to see that Wal-Mart executives have bought into some kind of Malthusian despair.

When Mike Duke says:

At the same time, the human footprint… our use of natural resources for everything we grow, eat, drink, make, package, buy, transport and throw away… all of that is outpacing the earth’s capacity to sustain us.

He is simply expressing the conventional wisdom. Yet such thoughts are not new. US Appellate Judge Alex Kozinski wrote a great review of The Skeptical Environmentalist for the Michigan Law Review, and he began it with a critique of the famous Club of Rome report:

Unless you’ve been frozen in carbonite or are hopelessly gullible, it must have occurred to you at some point during the last three decades that environmental activists are exaggerating just a bit when they claim that, unless we dramatically change our way of life, we’ll soon see the end of civilization as we know it.

I’m not sure when these doomsday predictions got started — probably they go back to Malthus and beyond — but I first became aware of environmental Jeremiadism in college in the early 1970s, when tout-le-monde were reading a little book called The Limits to Growth. Authored by a group of scientists going by the pretentious name “The Club of Rome,” the book was designed as a shrill wake-up call to a complacent humanity headed for environmental disaster.

Filled with charts, tables and diagrams, and supported by computer-generated predictions (a new-fangled tool at the time), The Limits of Growth made some very concrete and highly alarming predictions: “there will… be a desperate [arable] land shortage before the year 2000”; we would run short of gold by 1979, of silver and mercury by 1983, of petroleum by 1990, of zinc by 1988, of tin by 1985 and of natural gas by 1992.

The book’s forceful message was that we were headed for a world-wide calamity, and must fundamentally — and immediately — change the way we live. Nor was this merely a question of physical survival; at stake was humanity’s very soul: “The crux of the matter is not only whether the human species will survive, but even more whether it can survive without falling into a state of worthless existence.”

“Wow! Heavy!,” as we used to say in those days. The book definitely made you feel guilty about taking a trip in your gas-guzzling, air-polluting, resource-wasting Millennium Falcon to go hiking in the Great Outdoors. It was almost enough to make you walk the twelve parsecs to the Forest of Endor and back.

With the benefit of hindsight, we know that The Limits to Growth was a bunch of hooey; virtually nothing the Club of Rome predicted with such alarm has come to pass. Of course, its members did not then come out with a big press release: “Oh what fools we were! We apologize for worrying the world unnecessarily.”

Instead, doomsday predictions proven wrong by the passage of time are quietly forgotten, denying the public the important lesson that one ought to be wary of predictive models because they often reflect, not reality, but the preconceptions of the model’s creators.

We’ve been through all this before. Julian L. Simon and Paul Ehrlich entered into a famous wager. Ehrich, author of The Population Bomb, like Mike Duke today, believed that we were going to run out of everything and that our use of resources was “outpacing the earth’s capacity to sustain us.”

Yet Julian Simon, a business professor at University of Maryland and a Senior Fellow at the Cato Institute, knew better. He proposed a wager:

The face-off occurred in the pages of Social Science Quarterly, where Simon challenged Ehrlich to put his money where his mouth was. In response to Ehrlich’s published claim that “If I were a gambler, I would take even money that England will not exist in the year 2000” — a proposition Simon regarded as too silly to bother with — Simon countered with “a public offer to stake US $10,000 … on my belief that the cost of non-government-controlled raw materials (including grain and oil) will not rise in the long run.”

You could name your own terms: select any raw material you wanted — copper, tin, whatever — and select any date in the future, “any date more than a year away,” and Simon would bet that the commodity’s price on that date would be lower than what it was at the time of the wager…

Ehrlich and his colleagues picked five metals that they thought would undergo big price rises: chromium, copper, nickel, tin, and tungsten. Then, on paper, they bought $200 worth of each, for a total bet of $1,000, using the prices on September 29, 1980, as an index. They designated September 29, 1990, 10 years hence, as the payoff date.

If the inflation-adjusted prices of the various metals rose in the interim, Simon would pay Ehrlich the combined difference; if the prices fell, Ehrlich et al. would pay Simon…

Between 1980 and 1990, the world’s population grew by more than 800 million, the largest increase in one decade in all of history. But by September 1990, without a single exception, the price of each of Ehrlich’s selected metals had fallen, and in some cases had dropped through the floor. Chrome, which had sold for $3.90 a pound in 1980, was down to $3.70 in 1990. Tin, which was $8.72 a pound in 1980, was down to $3.88 a decade later.

Many opinion leaders somehow look at people and only see mouths to feed, when people also have hands with which to build and brains with which to discover. Natural resources are not really natural at all. Oil was a worthless inconvenience until people figured out how to use it.

Onion waste was just an inconvenience until some smart folks figured out how to make it into electricity.

We wish Mike Duke had taken a different tack; instead of bemoaning limits we supposedly are living under, we wish he had directed the initiative toward cultivating the natural resource of intelligence in children wherever Wal-Mart operates.

For the future will be sustainable not because we tread lightly on the earth, but because geniuses yet unborn will find ways to overcome obstacles. We will find ways to make what now looks like useless sea or barren planets a cornucopia of resources for mankind.

It is perfectly obvious that with new coal plants going up every week in China and a growing middle class all over the world, we are not going to reduce carbon output sufficiently to make an important difference in global temperatures. But, through the application of intelligence we can certainly mitigate the problems.

Wal-Mart’s gift to the world has been to make living easier for many people close to the waterline. We wish it would run a kind of talent search throughout that customer base, not to find the best singers, but to find children with the highest IQs, who could most benefit from a fantastic education paid for by Wal-Mart and who, if given the chance, will build a great, and sustainable, future for us all.

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