Big Change Fast: Walmart’s Sustainability Index
Seeks to Drive 60,000 Suppliers to be More HIP

Walmart, the world’s largest retailer at $400 billion in revenue and 7000-plus stores, the US’s second-largest employer with 1.8 million staff, and a leader in sustainability”“ has just launched a new, sustainability scorecard for the 60,000-plus suppliers across its global supply chain.

By one estimate, the total value of all goods and services sold by Walmart suppliers equals about one-third of global output. Yes, 1 in 3 dollars worldwide is associated with a company that does business with Walmart. So, if you shift Walmart and its suppliers, the global economy shifts with it.

The Value of Sustainability for Walmart

How can sustainability be profitable for Walmart? Let’s look at the income statement effects from implementing sustainability:

Higher Revenue: New products targeting existing customer needs can add to top-line sales. Suppliers like Clorox and its recent launch of its Green Works line of cleaning products has added $200 million of revenue for Clorox, and an associated margin in its retailers (including Walmart). Walmart’s LoveEarth Jewelry line, which allows customers to track where the source metals have come from online using Google Maps, is one of the fastest growing product categories in the chain. Walmart and its sister warehouse-store Sam’s Clubs have sold more than 260 million compact fluorescent light bulbs, a boost to top-line revenue and bottom-line profit.

Lower Costs: Walmart needs to move products from-warehouse-to-store while operating one of the largest fleets in the US. Overall efficiency in the fleet (e.g. fuel-efficient trucks, using batteries when parking, turning off the engines when unloading, packing more volume into the same trucks) has improved 38% since 2005. Walmart China’s stores have already reduced energy usage by 24% and water use by 35%. On the whole, Walmart has eliminated 91% of (formerly wooden) pallets for jewelry and made the remaining 9% of recyclable materials. All of these innovations reduce cost, reduce carbon emissions and are better for both the shareholder and the environment.

Lower Taxes: Where Walmart installs renewable power like solar panels, many government tax incentives exist at the federal, state and local levels, which are positioned to offset the company’s tax liabilities. These investments provide ecological value and reduce costs.

Higher Shareholder Value: During the recession, Walmart’s comprehensive selection and low prices have supported a higher shareholder value than many other enterprises and competitors. By establishing a continued pursuit of sustainability, Walmart is likely to continue its top-line revenue growth and bottom-line performance ““ while serving customers desire for more sustainable products that also benefit the environment.

So, What Is Walmart Implementing?

Walmart has defined three enterprise goals to deliver Human Impact + Profit based on the above factors:
(1)     Zero waste,
(2)     100% renewable energy, and
(3)     Sustainable products on the shelves for customers to purchase

Earlier this decade, Walmart introduced Sustainable Value Networks (SVNs), led by staff in collaboration with BluSkye consultants and other collaborators to improve specific categories related to the company’s goals including:

“¢ Packaging (e.g. no more toothpaste boxes, just sell the tube),
“¢ Cleaning products (e.g. eliminate 70% of phosphates),
“¢ Agriculture (e.g. facilitate re-capture of methane from cows to fuel energy plants)
“¢ Jewelry (e.g. track the gold and metals back to the source).

These initiatives created new products and revenue (e.g. Love Earth jewelry), decreased costs (e.g. square milk containers save shipping), and tapped into tax incentives for energy efficiency (e.g. solar panels).

In a 2007 test, Walmart found significant markets for 200 sustainable products (half of all products tested) and during Earth Month 2008, Walmart’s sustainable products sold so swiftly, many of the products sold out before the month-long promotions ended. This customer demand accelerated Walmart’s push for more sustainable products ““ and a way to showcase it to consumers.

In 2008, the Sustainability Index team sought to design a framework, process and “nutrition label” for products to communicate their overall environmental and social impacts to customers, to give individuals the products they wanted and the information they needed.

The Challenge: Suppliers are 90% of Carbon Emissions

Despite these impressive gains, when Walmart began calculating its global environmental footprint , it discovered that 90% of its carbon emissions (from transportation to manufacturing to farming) were from its suppliers, and only 10% from its own stores, staff and transportation.

What’s Next? The New Sustainability Index and Scorecard?

Building from the positive internal momentum and demonstrated customer demand, Walmart worked with experts like BluSkye Consulting, the Environmental Defense Fund, academics and sustainability metrics experts like HIP Investor to design a new Supplier Sustainability Index. The first version of this “supplier scorecard” is rolling out now to all 60,000 suppliers and asks 15 questions in four categories.

“¢ Energy and Climate ““ using less fuel and saving greenhouse gas emissions
“¢ Material Efficiency ““ consuming less, processing less, reusing and recycling, and ultimately moving to zero waste
“¢ Natural Resources ““ higher quality production with fewer inputs (like water), which could be certified according to standards
“¢ People and Community ““open communication and increased transparency about sourcing, and its impact in the local society.

These four categories are designed to serve customers with sustainable products, operate at lower cost and impact to society, and deliver value for both shareholders and stakeholders.

You can download Walmart’s 15 questions for suppliers in 2009, and additional information on the latest milestones here: http://walmartstores.com/FactsNews/NewsRoom/9277.aspx

How Has Walmart Embedded This In Management Practices?

Details of Walmart’s systematic pursuit of sustainability and the decision groups it has organized can be found at http://walmartstores.com/Sustainability/.

As Walmart has rolled out the Index internally, it has aligned the buying criteria of its purchasing agents. In addition, buyers are rewarded for contributing to the big 3 goals of zero waste, 100% renewable energy and sustainable products.

Walmart overall has become more HIP by embedding sustainability into five areas of its management practices:

1)   Vision (”Save Money. Live Better.”)
2)   Performance Measures (balanced scorecard of eco-metrics as well as profit)
3)   Financial Alignment (understanding the value to the top- and bottom-lines)
4)   Accountability (support at the Board, executive, manager and staff level ““ and incentives and rewards for performance at each level)
5)   Decision Making (the Index criteria focused on environment and society operate alongside the traditional financial go/no-go evaluations)

Who Is Responsible for Sustainability Success at Walmart?

Success has many parents ““ and at Walmart, this is certainly true. Chair of the Board Rob Walton (son of founder Sam Walton) is committed to sustainability, including his founding $250 million investment in renewable power firm First Solar (FSLR). Former CEO Lee Scott and current CEO Mike Duke are leading the charge internally to highlight the new mission, “Save Money. Live better.”

SVP Sustainability Matt Kistler, who first sold fair-trade coffee in response to Yale U. students on-campus demands for it, is heading the multiple initiatives inside Walmart and broad outreach to all stakeholders. Director Rand Waddoups was on point for the development of the Index with many Walmart team members, and continues to help drive them forward ““ as well as openly blog about the successes and challenges of implementing sustainability at Walmart.

And many thousands of Walmart staff are engaged in sustainability for customers or their own behalf as part of a voluntary program called a Personal Sustainability Plan (PSP), originated by Adam Werbach of Saatchi and Saatchi S (formerly Act Now Productions).

The Future of Sustainability at Walmart

With this new sustainability index, Walmart is introducing a new system to quantify impacts, link it to business value and communicate these results to customers, staff and stakeholders. This new approach is poised to transform the global economy and integrate sustainability measures as an everyday tool for better buying, innovative company practices, and more sustainable supply chains.

How Can You HIP Your Life?

“¢ Buy Sustainably. Whether at Walmart or other retailers, when your purchase rings up at the register, those daily revenues are recognized by companies seeking growth, market share and financial performance. Your choices can help shape which products you are offered.

“¢ Innovate at Work. You don’t need to be in charge of sustainability to be sustainable. Implement small (or large) changes where you are ““ in your group, department or location. Success catches on fast ““ and will be recognized if its’ HIP.

“¢ Invest for the Future. Seek out companies that are embedding HIP into their company, and research what companies are actually accomplishing that is quantifiable. Then, allocate your portfolio to align with those sustainability results ““ these are the new fundamentals of 21st century investing.

Disclosure: HIP Investor Inc. was one of several advisors to Walmart on the design of the Sustainability Index. HIP Investor and its clients may hold a position in Walmart, including as part of the HIP 100 Index. This overview is intended to describe the value of sustainability and its impact on shareholder value overall. This analysis is not intended as an investment recommendation. This is not an offer of securities.