One of the most fascinating cases in environmental economics and business is Walmart. Over the past five years, Walmart has turned their famous supply-chain management sights on reducing the environmental impact of the products they sell while still keeping their costs, and therefore retail prices, as low as before. This Fortune magazine article on Walmart’s sustainability efforts is a good summary of how the retailer is aligning economic and environmental incentives along its supply chain. Their efforts to create a credibly sustainable supply chain in the fish they buy have been particularly successful:
Up in Bristol Bay, Alaska, the world’s largest wild sockeye salmon fishery, fishermen are also cheering Wal-Mart because the retailer has agreed to feature their catch as part of its sustainable seafood initiative. They’re running newspaper ads in Alaska thanking Wal-Mart for promoting the frozen wild salmon.
Wal-Mart agreed to support the Bristol Bay fishery as part of a commitment made in 2006 that within five years, all of the wild-caught fresh and frozen fish it sells in North America would be sourced from fisheries that are independently certified as sustainably managed. Elsewhere, wild salmon populations have declined from over-fishing.
“This will increase the demand for Bristol Bay salmon, boost fish prices and keep more dollars in Bristol Bay,” said Bob Waldrop of the Bristol Bay Regional Seafood Association, an industry group.
Note the reference to the “independently certified” aspect of the transaction. This illustration is an example of a partnership strategy that Walmart has used very effectively: independent third parties like the Marine Stewardship Council work with scientists, industry, consumers, and environmental groups to develop a set of criteria by which to evaluate fishing practices. The bottom-up, voluntary, collaborative development of these independent criteria lead to a third-party eco-label that has credibility and meaning. Walmart’s work with the MSC, and with its fish suppliers to adapt their fishing practices so they could get MSC certification, means that the largest retailer in the world is now selling sustainably-harvested fish with no increase in retail prices to consumers.
Another famous example is the change in laundry detergent concentration and packaging. Have you stopped to think about why all of the liquid laundry detergent brands now market themselves as being “triple concentrated” and why you have to use so much less than you did previously? It’s because in the old formulations, the top ingredient in the detergent was water, because each firm had an incentive to enlarge their product to make it look like you were getting better value from them than from the competitors. Then Walmart approached the firms in the industry and said that if they wanted to continue to be carried at Walmart, they would have to reduce the physical footprint of their packaging; Walmart’s incentive here is not just reducing resource use and environmental cost, but also reducing their inventory costs. And because it’s just too costly to retain different production lines for the products sold to Walmart and the products sold to other outlets — voila! All laundry detergents are now sold in smaller, more concentrated formulations and packaging.
Walmart is rightly unapologetic about the economics of this strategy: they are doing it primarily to save costs and to keep their prices low, and that will keep their business thriving and keep that shareholder value high. But this strategy does another thing: it diffuses some of the negative publicity that Walmart receives about other controversial aspects of their business model.
I have been fascinated by this business model for years, and I think it has a lot of lessons for other businesses in ways to align economic and environmental interests.