Do You Have That in Green?

Even big-box Wal-Mart and Home Depot are embracing ecology

At Home Depot Inc.'s headquarters in Atlanta, associates' empty soda bottles are collected and filled with a worm-excrement mixture and sold as plant food.

This twist on recycling and sustainability, part of a partnership with vendor Terra Cycle, is just one small component of the No. 2 U.S. retailer's "eco options" program, which puts more than 2,500 products that it considers environmentally friendly on store shelves.

In addition to worm-generated garden nutrients, the Earth-friendliest items at Home Depot include natural insect repellent, energy-efficient washing machines, cellulose insulation and biodegradable planting pots.

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The environment is a growing concern for retailers across the country as they feel pressure to cut energy use, curb carbon emissions and slash waste, while in the process encouraging suppliers to develop eco-friendly products and practices and helping, or in some cases persuading, consumers to shop -- and live -- green. Initiatives range from reducing packaging and halting nonessential mailings to adopting more efficient store design and nontoxic building materials.

"I think the overall awareness of global warming is at the highest level it's ever been," said Ron Jarvis, Home Depot's vice president of merchandising (as well as the chain's vice president of environmental innovation), in a MarketWatch interview. "Suppliers are excited; they see us as a launching pad for new products they want to bring to market. We have a lot of well-recognized companies working on 'eco options' products for us that we'll be rolling out in the future."

And Home Depot is not alone. A handful of large retailers are taking up positions near the vanguard of the environmental movement, both in how they operate their stores and in the environmentally benign products they sell. The reasons are as varied as the products -- from political and economic to social and strategic.

"Retailers will have to change their business models in order to keep in lockstep with this movement because, ultimately, it's going to be legislated, and they're not going to have a choice," said Fred Crawford, managing director at Alix Partners. "Much like Sarbanes-Oxley or Y2K, it would be a very prudent thing for big retailers to begin the programs now."

Wal-Mart, Starbucks, Whole Foods

Wal-Mart Stores Inc., which has worked with farmers in Turkey to produce organic cotton, is rating its 60,000 suppliers on how well they conserve natural resources, and it recently announced a goal of selling sustainable electronics and slashing the amount of mercury in the compact fluorescent lightbulbs it sells.

Starbucks Corp. has strict sourcing guidelines for its coffee beans; offers commuting subsidies and perks for carpoolers, walkers and bikers at its headquarters in Seattle; is incorporating efficient building standards into store design; and teaches green living in an online virtual world.

Whole Foods Markets Inc. offsets 100% of its energy use by buying renewable-energy credits, is converting its truck fleet to biodiesel fuel, composts its food waste, and maintains recycling receptacles for cell phones and ink-jet cartridges in many stores.

And that's just the tip of the iceberg. The retail-industry initiatives have been both a response to consumer demands and aimed at long-term savings -- and they foreshadow what could be a seismic shift in both how companies operate and how consumers buy.

Green Revolution

Industry watchers chalk up the recent environmentalism boom to a combination of heightened public awareness after the release of the Academy Award-winning film "An Inconvenient Truth"; increased political and citizen activism; and advances in energy efficiency, as well as wider availability of alternative energies and fuels. Phenomena like the tsunami in late 2004, the hurricanes that slammed the U.S. Gulf Coast in 2005, and even the 70-degree temperatures experienced in the Northeast this January also have played a role.

"Consumers are thinking about it, and therefore retailers think they need to think about it as well," said Mary Brett Whitfield, senior vice president at consultant TNS Retail Forward. "Retailers have woken up to the idea that not only is this going to be good from a public-relations perspective but also from a profitability perspective. If a company can do things like switch to less expensive energy uses and reduce waste and packaging, there is a bottom-line benefit regardless of whether it wins them increased loyalty from the consumer."

It also doesn't hurt that the consumer who is most responsive to these kinds of initiatives tends to hail from a more educated and affluent demographic, and that's just whom the retailers would most like to lure to their stores.

Growing Green Market

Though attitudinal surveys have long shown a plurality of Americans consider themselves environmentally minded, even when they've shied away from action and sacrifice, the eco-oriented market segment is now clearly expanding. About 18% of shoppers now say they're interested in buying organic, green or eco-friendly products, up from 5% in 2000, according to a poll by market researcher NPD Group.

At Whole Foods' newest Manhattan store on the Lower East Side, all the organic waste is composted. This means that the fruit, vegetables, plant trimmings and other food waste being thrown away is segregated from the rest of the garbage, loaded into a separate truck and taken to a farm. The farm uses the compost as nutrition for tomato plants, and Whole Foods, in turn, sells the tomatoes at its stores.

"When I consider climate change and what a business's responsibility is in terms of mitigating their impact, I think of sustainability. It's about designing your business so it can continually perform operations without a negative impact for years to come," said Jennifer McDonnell, green-mission specialist for Whole Foods. "Most businesses are at the point where we're just starting to understand what that means operationally."

When retailers themselves go green, it can have an even greater impact than does the consumer-level trend. For a large chain, cutting energy use, waste disposal, packaging and greenhouse-gas emissions, while beefing up recycling, can have a striking influence because of the scale involved.

"Individuals want to use safe paints and carpeting in homes, but when you think about the scale of a business, the demand can be enormous," Whole Foods' McDonnell said.

The amount of waste generated by a household pales in comparison with the volume of garbage a business creates, making it even more important for green-minded businesses to get onboard operationally.

And recycled products can be found in some unexpected places. In the new Whole Foods store in lower Manhattan, a good deal of the construction concrete contains "fly ash," the material that's left over when coal is burned. Other materials used in store construction include marmoleum, a natural linoleum product made from linseed oil, wood flour, pine resin, jute and limestone; Dakota burl, a composite board made from sunflower seed hulls; and 100%-recycled-plastic restroom partitions.

Unexpected Environmentalist

Whole Foods' presence in the vanguard of the corporate environmental movement is unsurprising. The natural-foods retailer has helped to raise mass-market awareness of organic and health food and has a dedicated following of shoppers willing to pay a premium on many goods. Now, though, Whole Foods has an unlikely partner in its campaign for a greener tomorrow: Wal-Mart.

The behemoth retailer, which operates more than 4,000 U.S. stores and is the biggest private employer in the U.S. with more than 1.3 million employees, has spent several years grappling with slowing same-store sales, a slipping share price, discrimination lawsuits, and charges from critics that it underpays its workers and is also stingy with health coverage. Its annual sales are roughly equal to the gross domestic product of Finland.

Two years ago, the Bentonville, Ark.-based company started looking at how it could temper its environmental impact.

Janelle Kearsley, Wal-Mart's director of corporate strategy and sustainability, said the company thought it was already pretty efficient, but when it took a closer look it found lots of ways to change. "We looked at how to reduce energy, how to reduce waste and how to make our products more sustainable," Kearsley told MarketWatch. "We realized that there's a great environmental benefit, but there's also a huge business benefit."

Its three long-term environmental goals are to be 100% supplied by renewal energy, to become waste-neutral, and to sell products that sustain resources and the environment.

"Because of the nature of their size, and the challenges we have facing us, not just presented by global climate change but in terms of sustainability in general, Wal-Mart has a responsibility to make a difference and start taking steps in terms of the way they do business," said Paula Ivey, a marketing professor in the business school at the University of Texas in Austin and the founder of the CSR Group, a communications and consulting firm specializing in corporate ethics and social responsibility.

Reduce or Perish

In the near term, Wal-Mart's goals include cutting the gas used by its massive truck fleet by 25% over the next three years and doubling that percentage within 10 years, saving $310 million a year by 2015. It plans to slash solid waste from its U.S. stores by more than 25% in three years.

It audited its garbage and realized that it was putting things in the garbage, such as plastic, that should be -- and are now -- instead recycled.

"Before, we were throwing that material away in a landfill or having haulers take it away and paying them to take it away," Kearsley said. "Now we're actually recycling all that plastic ... [and] recyclers are actually paying us for the recycling revenue, and we're not paying those hauling fees as much anymore."

Managers then homed in on packaging, working with suppliers to design smaller or renewable packaging and carving waste out of the supply chain. Wal-Mart worked with one of its private-label suppliers to trim the size of the boxes containing its Kid Connection toys, saving about $3.5 million in transportation costs because fewer shipping containers were needed to get the toys to stores.

Wal-Mart also persuaded Unilever PLC to manufacture a superconcentrated -- and, it turns out, wildly successful -- version of the laundry detergent All. The resultant 32-ounce container of All Small & Mighty can launder as many loads as a 96-ounce jug. Procter & Gamble Co. followed suit and recently rolled out a tiny Tide, which was included in Wal-Mart's Earth Day advertising alongside energy-efficient lightbulbs and organic-cotton pajamas.

Scaled-down packaging, while flying in the face of the excess-is-best approach that shoppers have grown accustomed to witnessing at discount stores, makes a lot of sense.

Take the smaller laundry detergent, for example: It costs less to transport; retailers can fit more on the shelves; and the shelves have to be restocked fewer times, cutting down on labor costs -- and it's less likely an employee will be injured in the stocking process. From a consumer perspective, the product costs the same, if not a little less, is lighter and takes up less space at home.

As retailers go, so go their suppliers. The creation of a large-scale market for eco-friendly and organic merchandise means long-term development dollars go toward initiatives rolling out sustainable merchandise and modest packaging.

Suppliers are already feeling the heat. Wal-Mart developed a packaging scorecard that will rate its 60,000 suppliers relative to peers on conservation and waste reduction.

"When you bring the capabilities of the entire supply chain together, the ability to make a difference really pops," Wal-Mart's Chief Executive Lee Scott said when the initiative was announced last year.

The message to suppliers: Meet the metrics if you want to keep doing business with Wal-Mart. And, since Wal-Mart is the biggest customer for many of the world's biggest manufacturers, they can be expected to climb onto the green bandwagon.

Peering Overseas

And there's more to come. As growth for U.S. retailers moderates domestically, they will be forced to look to international expansion to maintain their trajectories. Since the U.S. lags most parts of the world in terms of its environmental report card, retailers are going to have to adopt more stringent environmental regulations to operate in many parts of the world.

European retailers, such as Tesco PLC and Marks & Spencer Group are already well ahead of their U.S. peers in terms of addressing climate change and enacting environmental initiatives.

Efficient and popular public transportation, the common use of reusable cloth bags for shopping, and widespread recycling are all the norm for many consumers overseas. Some of that is attributable to space constraints, as well as an acceptance of a wider governmental role in environmental regulation.

Despite a slow start, though, some industry watchers believe it's just a matter of time before the U.S. consumer is on par with his or her European analogue. "I think you'll see people start to adopt it, and then it'll move at Internet speed," said Scott Bernhardt, head of sales and marketing for Planalytics, a weather consultancy for the retail industry. "The Internet took forever to get started here, but, once it caught on, it was like a rocket."

Green at the Register

Consumers have demonstrated they like to buy from retailers that make them feel good -- whether it's supporting campaigns like Gap Inc.'s "red" initiative, which gave a portion of profits to charity, or shopping at a store that uses special heating or cooling systems that aren't as damaging to the environment.

"Going green is something that helps consumers differentiate between retailers. If it's not about price, it's got to be about something," National Retail Federation spokeswoman Ellen Davis said. "For many consumers, feeling good about companies that they give their money to is very important. It makes sense that green initiatives could help some consumers be more loyal to one retailer over another."

But all of this depends on whether the consumer believes a retailer's or manufacturer's claim. A recent study by Alix partners showed that just 6% of consumers utilized manufacturers to get information about products.

"Consumers cast a very jaundiced eye toward messaging from retailers and are even less believing of the messages from manufacturers," Alix's Crawford said. "But big retailers have to keep up with the Joneses when it comes to environmental initiatives. If they don't keep up and it becomes a major story, it can impact consumer psychology toward the brand."

If the retail industry's environmental push starts costing shoppers money, consumers might push back and reject the premium pricing, no matter how good the cause.

"It's a hard pill to swallow on the front end for consumers," the NRF's Davis said, "and retailers are in the tough position of trying to determine whether they should make millions of dollars of investments in initiatives and how that's going to pay off in the long run."

Angela Moore is MarketWatch's consumer editor based in New York.