BY LEE COKER
The Slow Food movement, initiated by Carlo Petrini in Italy more than two decades ago to contest the arrival of the fast-food chain McDonald’s into Rome, is now thriving worldwide and accelerating in the USA. Slow Food’s mantra today is “good, clean and fair” – good, healthy food; grown and processed in an eco-friendly, clean manner; and fairly compensating the farmers and food workers.
As consumers and investors alike begin to realize that our daily food decisions affect our health, wealth and earth – and those of the suppliers and employees in the industry – there is increased pressure for our nation’s major grocers to become “sustainable” and “green.” Customers are now asking three questions of their grocers:
- “Are you selling good, fresh produce in urban and suburban areas?”
- “What is your company doing to clean up its carbon footprint?”
- “How are you spreading the wealth fairly in your supply chain?”
The largest grocers ““ from Whole Foods to Walmart ““ are adapting to the changing market with smaller stores in more locations, increased investment in clean technology, and innovative programs for enhancing their supply chain.
However, creating an integrated strategy that encompasses the HIP (Human Impact + Profit) methodology ““ setting and achieving goals for positive human impact that drive increased profit ““ is moving slowly for the players so far. By incorporating concepts of sustainability into the heart of their business model, and linking them to their billions of dollars in expenditures, these businesses have the opportunity for significant growth and increased status amongst consumers, investors, and employees.
For grocers to truly maximize Human Impact + Profit, they have to transform lone practices into one cohesive strategy. The grocery industry has a unique, important role to play in the move to sustainability and they can further the process by focusing on three distinct areas of their business:
1) Good, Healthy Foods ““ Access, education, promotion. Providing access and education, and promoting healthy foods, can directly benefit customers, employers, and shareholders. By improving customers’ and employees’ personal health, grocers can reduce their own healthcare costs and those of their stakeholders, and profit directly from a growing market need for nutritious foods. Through education initiatives and increased supply, they will generate additional demand, creating a virtuous cycle of healthy eating. In addition, healthy foods, such as fresh fruits and vegetables, are on average lower in carbon emissions, food miles, packaging, and resource use than processed foods and meats ““ which brings overall environmental and operating costs down.
A recently released study from the Department of City Planning in New York City found that over 3 million New York residents (37% of the population) live in areas with a high need for a grocery store or supermarket. The study used metrics that included high population density, low access to a car, low income, high rates of diabetes, high rates of obesity, and low consumption of fruits and vegetables. It estimated the potential for over 100 new stores with anticipated revenue of $1 billion in New York City alone.
This is an issue that has been largely overlooked by the industry, and Whole Foods Market is a prime example. With their practice of only locating stores near a “large number of college educated residents” and with prices that clearly seek to serve affluent consumers, it is hard to see how their mission to “change the way the world eats” can be accomplished. With only 27% of the US adult population holding a college degree, the strategy of a nationwide food company to focus on that segment of the market is inherently narrow and drives a lower HIP score in the Equality metric (access for customers of all income levels). This has also amplified financial problems, with a continuous slide of their stock value since the end of 2005 and a loss of more than 50% over the past year. It seems CEO John Mackey is slowly figuring it out: “With the price of gasoline right now, … people aren’t driving as far, as frequently to our stores as they used to,” Mackey said during a recent investor conference call.
There is a direct correlation between the problems of access and overall health and life expectancy. A recent Harvard Medical School report found that the life expectancy of Americans with less than 12 years of education is 7 years less than those with more than 12 years of education. That gap in lifetime has actually widened since benchmarks set in 1990. Less education equals less income, and as the graph above (originally published in the New York Times) shows, it also leads to higher rates of obesity. These human problems do have market-based solutions–and provide an excellent opportunity for grocers to enhance profits.
For the fundamental issue of access to be solved it may take a “British Invasion”. The United Kingdom’s largest retailer and the world’s third largest, Tesco, recently entered the U.S. market with an innovative chain called “Fresh and Easy”. Their stores, mostly located in high need areas, are 1/6th the size of an average grocery store. They have posted the highest sales nationwide in the produce and prepared food categories, largely because they are providing access to healthy foods in places that typically lack it. Tesco’s Fresh and Easy recently opened the first new grocery store in Compton, California in over three decades. With their neighborhood strategy they have been committed to being good neighbors by refusing to sell tobacco products or non-wholesale quantities of alcohol, reducing noise on their trucks by 66%, and adopting a zero noise policy after 9pm.
While their strategy targets profitability, they have experienced some setbacks early on; Tesco expects to post a $200 million loss in the U.S. the first two years. With investors like Warren Buffett (who owns 4% of Tesco) continuing to support the investment and seeing strong returns overall, Fresh and Easy is still a promising venture. Tesco has succeeded in one thing at least: awakening American retailers to the fundamental issues of access. U.S. retailers are following their lead, with Safeway and Wal-Mart piloting similar store models in proximity to the already existing Fresh and Easy stores.
2) Clean, Environmental Approaches to the Earth. The dramatic increase in stakeholders’ concerns about the carbon footprint of their food, as well as exponentially rising energy costs, demand that companies get serious about energy efficiency and supply chain management. In addition, a likely forthcoming “cap-and-trade” system for Greenhouse Gases (GHGs) could reward the most efficient grocers. There are many “low hanging fruit” energy reductions that companies can make, and such initiatives, many of which have short-term paybacks (lighting sensors, LEDs), have the potential to significantly cut operating costs.
Walmart has been an active leader in this arena since October 24, 2005 when CEO Lee Scott made his now infamous speech that Wal-Mart would strive for three goals: zero waste, be powered by 100% renewable energy, and sell only sustainable products. While many of the grocers have struggled through the slowing economy and rising commodity and energy costs, Wal-Mart’s stock price has risen 25% since the day of that speech. Many of the initiatives and results that came out of that vision helped to drive this increased profit. One of the most recent examples is Wal-Mart’s mandatory switch to sell only concentrated laundry detergent. Over three years in the United States, the commitment is expected to save more than 400 million gallons of water, 95 million pounds of plastic resin and 125 million pounds of cardboard. This move will also provide a shareholder return since Walmart will save on transport and storage costs.
Safeway also has quantifiable targets around energy initiatives. Joe Pettus, Senior VP of Fuel and Energy, told HIP Investor: “Let’s define what green means at Safeway. Green for us is less carbon. We can have it measured by outside auditors and see our progress. What you can’t measure, you can’t manage.”
Safeway is currently the only retail member of the Chicago Climate Exchange, which supports legally binding obligations in pursuit of greenhouse gas reduction targets. Safeway has committed to reducing its emissions by 6% from its year 2000 levels by 2010 ““ or to buy the equivalent carbon offsets. In January of 2008, the retailer converted virtually its entire transportation fleet to B20 ethanol (20% ethanol, 80% conventional diesel) to prevent 75 million pounds of CO2 from being emitted this year. It has implemented the Smart Fleet model with its fleet of 1,000 trucks, using software and driver education to save 19.5 million in fuel costs in 2006. As the price of fuel persists at record levels, these savings will continue to pay dividends.
In addition, Safeway produces around half of its necessary power with natural gas generators through an intermediary company and uses the money it saves bypassing the utilities to purchase 90 million kilowatt-hours in wind energy credits.
3) Sharing Wealth Fairly Among Suppliers and Employees: Grocery chains experience very low profit margins, with 95% to 99% of grocery stores’ revenue going predominantly to labor, product on the shelf, and real estate operation, including energy. However, the stores that ask, “How can we use our money in a way that increases the long term value of the company’s infrastructure, suppliers, employees, and customers?” will have a greater chance for increased long term profits. While the idea of voting with your dollars empowers many of us, following your monetary impact through your food’s supply chain may leave you bewildered. How the five companies we assessed in our scorecard — Wal-Mart, Whole Foods Market, Tesco, Kroger, and Safeway — leverage their collective total revenue of $624 billion has the power to drive worldwide markets and directly impact the lives of millions of people.
Whole Foods currently has the most innovative monetary policy. They loan $10 million annually to improve and localize their supply chain at interest rates between 5% and 9%. Whole Foods makes loans to local producers that sell value-added products, produce, and other natural items. This provides Whole Foods with improved public perception and additional incremental revenue. It also results in greater supplier efficiency, which should translate to lower costs for consumers.
(In addition, on the charitable side, since launching the Whole Planet Foundation in 2005, they have donated over $5 million to high-impact microfinance projects in the communities from which they source their goods. The money is used to provide loans to micro-entrepreneurs and once paid back is loaned to someone else in the same community with the mission of lifting the entire community out of poverty. The impact is similar to that of their loan program, with entire communities in Latin America and India increasingly able to provide value added goods at reasonable prices. This is an innovative way to participate in charitable giving that spurs innovation and entrepreneurship in developing nations, while also driving stronger financial returns for the donor.)
Overall, grocers that apply the three HIP strategies above — increase access to good, healthy food; pursue clean, environmental approaches to the earth, and share wealth fairly among suppliers and employees ““ should expect to keep current customers loyal and gain new ones, inspire employees, and generate higher returns for shareholders. Focusing on boosting human impact leads to higher profits, and that is how your grocer can be both “green” and “HIP”.
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To see how Safeway, Wal-Mart, Whole Foods, Kroger, and Tesco measure up on the HIP scorecard and where you should consider “voting” with your consumer dollars or investment portfolio, CLICK HERE: http://www.hipinvestor.com/hip-perspectives/whats-hip-and-not-so-much-about-your-grocer-by-lee-coker/ .
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