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Sticker Shock: Walmart’s labeling scheme will be costly, but will it be effective? Two views.

Posted on 17. Aug, 2009 by admin in FullContent

Eco-labeling is becoming globally hot, thanks in part to Walmart. Here are two perspectives. The first is from Stephen Stokes of AMR Research, by way of Climate Inc., edited by David Levy, Professor of Management at UMass, Boston.

Addressing climate change and other environmental issues requires real action at the facility and process level – just creating product labels may not be effective

Walmart’s product environmental labeling aspirations went public in the New York Times and the Wall Street Journal last month and sent ripples of fear and excitement considerably more widely. Excitement for software and service vendors who anticipate a lucrative business supporting Walmart’s product labeling program. Fear for its 100,000 suppliers who will be required to generate the detailed data needed for Walmart’s environmental labels. Walmart will soon be sending an initial survey to all its suppliers with questions regarding their sustainability practices.

Walmart plans to develop labels based on a standardized index of the environmental impact of every product on its shelves. This ambitious project demands that Walmart’s suppliers develop accurate and defendable estimates at the SKU level of the greenhouse gas emissions, water consumption, air pollution, and other measures for all the inputs required to source, manufacture and ship their goods. Walmart’s Chief Merchandising Officer John Fleming made clear that it would require participation from suppliers across the board.

In designing environmental initiatives, there is a need to pragmatically consider what’s achievable, what’s desirable, and what is likely to actually make a difference to the environment. Rushing to force a product labeling agenda too quickly will result in a lack of standards and expectations, and potentially lead to disappointing outcomes and a great deal of consumer confusion.

Transformation from the Grinch to the Gentle Green Giant

Walmart’s sustainability program has been transformational for the organization and delivered huge cost savings and performance improvements. It has created a virtual love affair with previously adversarial environmental lobby groups and a new relationship with the customer. Their programs have been holistically implemented across the global organization. Best practices in logistics, refrigeration, lighting, energy efficiency and packaging have prompted many to consider the Arkansas Grocer’s transformation to be the model of successful corporate sustainable transformation. Walmart’s vast supplier network and huge scale, approaching 8% of US retail sales, means that it has the power to change industry norms and practices not just in retail but also upstream in the value chain, in consumer goods industries.

But even the largest retailer in the world can stick their neck out too far in the confusing and complex world of product labeling. It’s great that Walmart is thinking ambitiously and comprehensively about environmental information, but I forecast that it will ultimately be unpopular and unsuccessful if pursued at a store-wide SKU level as currently planned.

Sacked (and Stacked) in the In(store) Zone

Here are some key issues that deserve evaluation prior to the implementation of product labeling.

Who has their eye on compliance costs?

Pepsico UK told us last year that the cost of carbon footprinting their highly publicized Walkers potato crisps (chips for Americans!) was well in excess of $40,000 and took more than four years to complete – for one SKU. Moving forward they are anticipating costs on the order of $10,000 to $12,000 per SKU. At 20,000 to 25,000 SKUs per typical supermarket that’s a $250M task just for carbon – and Wal-Mart Supercenters carry over 100,000 SKU’s.

What about the full product life cycle beyond the manufacturers control?

The full environmental impact of goods is frequently strongly influenced by consumer actions. More than half of the embodied carbon within an Apple MacBook Air for example is associated with downstream energy usage and disposal. The carbon footprint of Proctor and Gamble’s cold water tide can be reduced by a third if used at 30°C instead of 40°C, and reduced by a further third if used in France where low carbon nuclear electricity dominates grid supply. Should the labeling be based on cradle-to-gate versus cradle-to-cradle lifecycles? How will they change as consumers adapt their behavior with new environmental awareness?

Who will be able to judge environmental claims and performance?

An environmental label is not directly comparable to a nutritional label. A challenge to the accuracy of a nutritional claim can be readily verified via laboratory analysis of the contents concerned. There is no scope for direct back-calculation and tracking of carbon or environmental information once labeled and on the shelf. And the labels are trying to hit a moving target, because environmental impacts change as companies adjust their sourcing and processes. Manufacturing supply chains are dynamic and evolving systems whose impact or footprint cannot be quantified in a singular value.

Lets not forget the consumer.

Most of the more recent European research in this area indicates that significant (c. 44%) and increasing numbers of consumers would switch to greener products even if they carry a higher price tag. At the same time, 78% of consumers indicated an awareness of carbon labeling but only 20% saw it as a positive development – it is hard to make the case that this issue is being driven by pull from end customers. Most report confusion in their attempts to interpret carbon labels at the granulated product level; green branding seem to be more of a market force at the company level – like the Body Shop, Wholefoods, Apple and Dell.

What should be the functional unit for analyzing corporate environmental performance?

With limited budgets should firms spend much or all of it cataloguing and labeling performance on a product by product basis or actually invest in doing something about it? Manufacturers pursuing ongoing process and production improvement can rightly expect that the benefit over time will reach throughout the supply chain and through multiple SKUs. So should we not be tracking, evaluating and benchmarking corporations at the corporate, or at least, facility level? We think so.

At AMR Research we have been analyzing the increasing environmental agenda in manufacturing for some time. Picking a small subset of SKUs to deep dive into full life cycle impact assessment has merit and will deliver knowledge for process improvement. Labeling of all SKU’s is overkill, however. The compliance costs associated with the exercise have been mentioned above. Pepsico were able to reduce energy use (and potential emissions) by more than 11% based on the knowledge they gained in the footprinting exercise. The actions taken by Pepsico depended on this detailed and rigorous knowledge, not a simplified aggregate environmental rating. Moreover, this knowledge can be rolled out where applicable throughout their snack food lines without subjecting each SKU to the same detailed and rigorous analysis.

Forcing portfolio-wide cataloguing at the SKU level may well siphon funding away from reinvestment in efficient technologies and processes. As energy price volatility continues to increase and continuous improvement forces year-on-year searches for waste and resource reduction, we can reasonably assume that all SKUs under some company or process or production line will over time benefit from the process improvement and investment. In any case, labels at the SKU level require estimating and allocating company and facility level environmental impacts, generating data that are not always useful for management trying to reduce these impacts.

Falling Off the Shoulders of Giants – the Future of Environmental Information Should be Where it can be Accurately and Effectively Traced at the Corporate Level

Environmentally responsible products are produced by environmentally responsible organizations. Green brands reside at the corporate level, and only rarely with specific products. Walmart’s decision to drive its supply chains to environmental labels at the SKU level is beyond the level of production utility, of achievable accuracy given limited resources, and of utility to consumers – green or otherwise. What is key for the future is the collection of accurate and transparent environmental information that is not just meaningful for consumers but helps management to take the necessary action.

The smallprint of the Walmart program, which has been less widely circulated, plots a 5+ year course for a green index which migrates from a supplier-based evaluation to a product-based one. There is much merit in pursuing environmental performance at the supplier level. Walmart, like all successful corporations in the newly emerging economy, will wish to do business wherever possible with like-minded, sustainable and environmentally cognizant organizations. They and their supply chain partners should converge on an appropriate and rationally-based level of environmental information – fixed at the corporate and plant level to ensure transparency and ongoing environmental and sustainable performance. SKU-based commitments promise to deliver high compliance costs, out of scope and inaccurate data, and market confusion.

[JR: The second perspective is from the CAP, with a post titled "The Meaning of Eco-Labels."]

Everything we buy has a life story. Our stuff is extracted from the earth, molded into shape, shipped across the world, used, and thrown away. Each step in this process has an environmental impact, whether it’s using natural resources to make the products or emitting pollution by transporting them. Businesses may be responsible for this impact by bringing products to consumers, but it’s consumers that ultimately drive the process. A lack of awareness about these hidden costs, and of useful information at the point of purchase, prevents consumers from becoming agents of sustainability.

Eco-labeling informs consumers about a product’s environmental footprint. In essence, it empowers them to vote with their dollar—rewarding companies that reduce their impact and pushing the rest to do the same. Eco-labels have to the potential to drive innovation in the products we buy and in the processes that make them if they’re properly designed and widely adopted.

So far, most eco-labeling efforts have relied on voluntary certification of particular products. Examples include EnergyStar for electronics, the Forest Stewardship Council for wood, and USDA organic for produce.

But the labels are gaining stream, encompassing ever more products and environmental impacts. Last year, international retailer Tesco slapped carbon emission labels on some of its products. The British government is considering a green labeling system for all the country’s food. And Japan has already started moving in this direction.

An ideal eco-label should convey all of the environmental and social impacts of a product across its entire lifecycle—from extraction and manufacturing to transportation, use, and disposal. These impacts should include greenhouse gas emissions, pollution, ocean acidification, ozone layer depletion, eutrophication (an increase in chemical nutrients in an ecosystem), habitat destruction, desertification, land use, and resource depletion. Design is key—to be effective, the label must be informative and intuitive enough to guide good choices without confusing shoppers.

Of course, labels require data, and data demands a lot of painstaking research. At present, most companies simply don’t know the environmental footprint of their products. Lifecycle assessments can be difficult to apply to goods with long supply chains, whose constituent parts may be manufactured by a dozen suppliers in as many countries.

Walmart, in an attempt to burnish its green image, recently announced an ambitious plan to develop a comprehensive sustainability index to measure the lifecycle environmental impacts of every product it sells. This could be a game changer.

The index is intended to stimulate a “race to the top” by helping consumers make informed decisions and cut through false eco-labeling, assisting Walmart to choose between suppliers, and even enabling manufacturers to identify areas for improvement.

A comprehensive sustainability index for all of Walmart’s products is still years away, however. So far, the company is sending out a 15-question survey to each of its 60,000 suppliers. The questions, which cover four areas—climate and energy, natural resources, material efficiency, and people and communities—refer to the company but not its products.

Eventually, every one of those manufacturers will have to dig its way back through its supply chain and measure the environmental impacts of its production processes and distribution systems.

Once the index gets off the ground, Walmart plans to turn it over to a nonprofit. The company partnered with universities and even competing retailers and set up a consortium to establish the tricky scientific standards needed to measure the sustainability of its consumer products. This is a gargantuan project that few other companies could take on, and Walmart is serious enough to make it open source. These steps signal that the company is in it for the long haul, despite the legitimate concerns of many environmentalists.

The world’s biggest retailer sells so many products that if these standards are indeed made “credible, transparent, and user-friendly” as Walmart hopes, and if other major retailers adopt them, it may usher in universal eco-labeling. This would go a long way to remaking the way we make things.

This piece originally appeared in Climate Progress