A Wal-Mart scheme even yuppies can love.

A Wal-Mart scheme even yuppies can love.

A Wal-Mart scheme even yuppies can love.

Moneybox
Commentary about business and finance.
Oct. 26 2005 5:03 PM

Green Is Good

Corporations finally learn that energy conservation is great for profits.

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Wal-Mart has a nasty habit of stepping on its own good news. Yesterday, CEO Leo Scott gave a visionary speech. He said Wal-Mart would become a better citizen. He said it would offer more accessible health care to its employees. He urged Congress to boost the minimum wage. Then today, the New York Times unearthed a memo in which an executive suggested ways to reduce employee benefit costs, in part by avoiding hiring workers who might get sick.

But the most surprising stuff in Scott's speech had to do with environmental issues. Scott pledged that Wal-Mart would reduce energy use in stores, increase the fuel efficiency of Wal-Mart's vast truck fleet, and generally figure out ways for the big boxes to make a smaller environmental impact.

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It's tempting to dismiss such a corporate pledge as a cynical public relations effort, like BP's feel-good-but-misleading Beyond Petroleum campaign, or as a savvy exercise to appeal to the upscale customers Wal-Mart covets. But what it really showed is how supremely out of it Scott and his Wal-Mart colleagues have been for the last few years and how they've strayed from founder Sam Walton's legendary cheapness.

For all that we are buying Priuses and installing extra layers of home insulation, it is giant corporations like Wal-Mart that have the most to gain by being more energy-efficient. That's the case today, when energy prices are high. But it's also been the case for the last 30 years. The intensity of energy use may differ across industries. Chemical manufacturers use much more energy than software companies. But energy is a huge chunk of operating costs for all businesses, from airlines to department stores to pencil factories to restaurants. Worse, when energy prices fluctuate beyond the control of management, they can wreak havoc with the bottom line. Just ask the CEOs of the airlines, all of which have been deeply hurt by sudden spikes in fuel prices.

That's why smart managers at all kinds of companies have been thinking about how to reduce energy use for decades. Manufacturers have led the way, in part to comply with regulations that required lower emissions, but largely to improve their profitability in relentlessly competitive markets. The giant chemical company DuPont claims that in the 1990s it not only reduced greenhouse gas emissions by half (a move that won management points with environmentalists) but it "also held energy consumption flat, despite a 36 percent increase in production volume." That saved millions of dollars and won management points with a far more important constituency: shareholders.

It's nice when companies pledge to buy renewable energy. But what really makes the economy more energy-efficient over time are the boring process improvements and small-scale innovations that allow corporate America to produce more stuff with the same amount of energy. Thanks to these kinds of efforts—and to the general shift from energy-intensive manufacturing to less-energy-intensive services—the U.S. economy has become significantly more energy efficient. As this Excel file from the Energy Information Agency shows, between 1980 and 2003 the energy consumption (measured in BTUs) per dollar of gross domestic product fell 37 percent, from 15,174 to 9,521. Because the U.S. economy is less energy-intensive than it used to be, the sharp recent increases in energy prices haven't pushed us into recession—as such spikes often did in the past. All of which makes the derogatory comments Dick Cheney made about energy conservation seem all the more stupid.

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Now energy-efficiency is migrating from manufacturing to service companies. Hilton Hotels has installed an efficient lighting program in rooms and asks customers if they'd like to forgo having their sheets washed daily, a move that saves water—and the energy used to power washing machines. The Loews Hotels chain is installing heat sensors to reduce heating and cooling costs. Building owners are looking into green roofs. The Solaire, an apartment building in New York City, comes with all sorts of eco-friendly bells and whistles. Toyota's marketing division in Southern California saves money by generating 20 percent of its own electricity with a gigantic array of solar panels. Federal Express is developing its own hybrid vehicles.

PR moves? Absolutely. But all these image-enhancing schemes either reduce—or have the potential to reduce—operating costs. And given a choice of two companies with similar businesses and business models, wouldn't you rather invest in the one that is making extra efforts to reduce one of its major costs?

What's amazing is that Wal-Mart, the world's largest retailer, and a company that invests gazillions in logistics and technology, didn't pick up on this sooner. Lee Scott yesterday proclaimed that "being a good steward of the environment and in our communities, and being an efficient and profitable business, are not mutually exclusive. In fact they are one in the same."

In a business of small margins and huge volumes, even marginal changes can have a significant impact on the bottom line. Think about how much electricity Wal-Mart uses throughout its 5,500 stores every day. Reducing the amount used by even a few percentage points would yield significant returns. Wal-Mart's truck fleet gets about 6.5 miles per gallon. "At today's prices, if we improve our fleet fuel mileage by just one mile per gallon, we can save over $52 million a year," Scott noted. That's why the company is also working on a futuristic truck. He also pointed to a prototype green store in McKinney, Texas, that is simultaneously attracting customers and using 10 percent less energy than a nearby Super Center.

Wal-Mart's stock hasn't budged an inch so far this decade, in part because investors have lost faith in the ability of the post-Sam Walton regime to continue to squeeze greater profits out of highly efficient operations. So far, Scott and his team have sought efficiency largely by clamping down on labor and benefit costs and by ordering more and more goods from China. But those efforts have stirred up a backlash. If Scott & Co. start devoting their considerable brains and resources to clamping down on energy costs, it would finally make yuppie Wal-Mart skeptics happy. More important, it might have the same effect on long-suffering shareholders.