The Melamine Messiah: Can Wal-Mart Go Green?

Being the world's largest retailer, Wal-Mart poses an outsized target for activists on traditional corporate social responsibility (CSR) fronts: labor and the environment. With regard to labor, Wal-Mart's strong preference for non-unionized labor is one of the major grievances alongside allegations of hiring undocumented migrants and sex discrimination. Wal-Mart fighting the Chinese government's insistence to allow union membership--albeit a state-sponsored, highly non-activist sort--is well-known as it creates a precedent others may follow elsewhere. With regard to the environment, Wal Mart's supply chain literally spans the globe. Hence, its supplier selection, product packaging and distribution have a significant effect on the environment. Does Wal-Mart's famous stinginess encourage a "race to the bottom" among its suppliers?

A few months ago, I discussed Wal-Mart's efforts to take on green challenges with regard to its China operations. Wal-Mart has brought the issue to the forefront again as of late; for example with CEO Lee Scott discussing it on the company's investor relations webpage. What's driving Wal-Mart's recent push on these issues? Let's consider the following -

• Wal-Mart wants to create a "halo effect" of being green to attract investors;
• Being heavily invested in China, Wal-Mart wants to distance itself from various product safety scares ranging from defective toys to melamine-tained milk products;
• The company is responding to its plentiful critics to shed its image as a CSR villain
• Efficiency gains from going green such as using less energy and packaging should benefit the firm's bottom line;
• Wal-Mart wants to gain the most benefits from the current slowdown as consumers tighten their belts by portraying itself as a consciencentious choice.

All these probably hold to a certain extent. What we will be better placed to judge in the near future is if Wal-Mart has made significant changes to its business practices. Although there will always be some who are dead set against the very idea of Wal-Mart, more pragmatic sorts should welcome the possibility of Wal-Mart raising its CSR consciousness. It certainly appears that Wal-Mart is placing a large burden on its suppliers in meeting these standards. Given that Wal-Mart's Chinese partners are already having difficulty coping with a global slowdown--witness the Chinese government reintroducing export incentives--it will be incumbent upon Wal-Mart to demonstrate that its commitments are becoming longer term. That is, if Wal-Mart wants Chinese firms to adopt green practices, then it should make assurances that it's going to do business with them beyond the near future.

Again from the Financial Times:

Wal-Mart, the world's biggest retailer, yesterday told its Chinese suppliers to meet strict environmental and social standards or risk losing its business. "Meeting social and environmental standards is not optional," Lee Scott, Wal-Mart's chief executive, told a gathering of more than 1,000 suppliers in Beijing. "A company that cheats on overtime and on the age of its labour, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honour its contracts - will ultimately cheat on the quality of its products."

Wal-Mart has been pursuing a drive to improve its reputation on environmental and social issues over the past three years, in response to growing criticism in the US over issues including labour conditions in its supplier factories.

The directive, which will be codified in a Wal-Mart suppliers' agreement, comes at a difficult time for China-based manufacturers, caught between rising production costs and the effect of the global financial crisis on consumer demand in their largest overseas markets.

The requirements include a clear demonstration of compliance with Chinese environmental laws, a 20 per cent improvement in energy efficiency at the company's 200 largest China suppliers, and disclosure of the names and addresses of every factory involved in the production process. The company will require a 25 per cent rise in the efficiency of energy-intensive products, such as flat-screen TVs, by 2011.

Mr Scott said the retailer also wanted to move away from the short-term focus that has characterised its relationships with Asian suppliers. "We have traditionally purchased in a very transactional manner," said Mr Scott. "We need deeper, longer-term relationships with suppliers so it is not based on the last penny."

Some suppliers grumbled about the conditions spelled out by Wal-Mart, which has a reputation for driving hard bargains. It is estimated that each year the company sells about $30bn-worth of China-made goods, giving it enormous negotiating power over suppliers. "It's going to make things a lot worse," said one manufacturer at the meeting, who asked not to be identified. Others were more relaxed. "If they don't like it, they are not going to be doing business with Wal-Mart," said one US-based Wal-Mart supplier who sources components from China.

Also see the Environmental Defense Fund (EDF) describing its participation in Wal-Mart's China effort.