From the “Earth Friendly Initiative” to a Corporate Social Responsibility Strategy Haas School...

From the “Earth Friendly Initiative” to a Corporate Social Responsibility Strategy

Haas School of Business4/25/07

Emily Poague Matt Evans

Haas School of Business

Pareen Shah – CSR Liaison, Manager, Business StrategyWarren Mazer - Director, Business Strategy

Orchard Supply Hardware

2

1. Project Scope

2. The “Green” Marketplace

3. Competitive Landscape

4. OSH Strategy: Increasing Share in a Growing Market

5. Green Product Category Recommendations

6. Long-Term Recommendations

7. Appendix

Agenda

3

Project Scope

• Evaluate how OSH competitors are engaging in “green” merchandising

– Pros and Cons of each approach

– Benefits being realized by competitors

– Key home improvement categories each plays in

• Evaluate which product categories it makes most sense for OSH to play in

– Recommendations for product categories to showcase/carry

– Approximate size of key products within those categories and 5 year forecast

• Assess opportunities for green product labeling

– Understand best practices to provide clarity and authenticity

Also included recommendations on how OSH can realize full potential of green product merchandising and its existing “Earth Friendly Initiative”

through alignment with a broader CSR strategy.

4

1. Project Scope






7. Appendix

Agenda

5

Size of Green Marketplace

• LOHAS stands for Lifestyles of Health and Sustainability

• Includes 5 key categories of products and services: Ecological lifestyles Sustainable economy Alternative healthcare Healthy lifestyles Personal development.

Most recent survey (2000) estimated LOHAS to be a $229 billion market; 2007 estimates to be published soon expected to be much larger*

There are still no agreed upon standards for defining the scope or size of the “green” marketplace, but the nonprofit organization LOHAS Journal and Forum made the first attempt to do so in 2001

See Appendix for an alternative 2006 market sizing around $500 billion

6

Types of “Green” Consumers

35 M

?? M

Source: Mintel Green Living Report, 2006

A 2005 survey segmented U.S. consumers by their frequency of green purchases.

Sometimes"Light Greens"

68%

Never"Never Greens"

20%

Frequently "True Greens"

12%

7

LOHAS Consumers

• LOHAS consumers have a “profound sense of environmental and social responsibility”*

• However, only 7-15% of LOHAS consumers are “dedicated” to ensuring their purchases reflect their values, roughly matching Mintel’s 12% “True Greens”

• Other LOHAS consumers sometimes align

their purchases with their values, but are influenced by other factors such as cost and convenience

• Nomadics, Centrists, and Indifferents may by green products, but not typically based on LOHAS values

?? M

While the frequency of consumers’ green product purchases is crucial information for understanding market potential, the LOHAS consumer segmentation provides important insight into consumer attitudes about healthy living and the environment.

Information on this slide from www.lohas.com and the Natural Marketing Institute Green Business Conference, 2005

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Drivers of Green Purchase Decisions

• The majority of the population beyond the “LOHAS Leaders” and “Frequent Greens” prioritizes tangible consumer benefits – such as cost savings, convenience, or their own health – over protecting the environment or the community

• Many “green products” do have these tangible benefits but are not often realized by the consumer

Growth of the Green Marketplace will be driven by increased visibility of the direct consumer benefits of green products especially, cost

savings and improved health.

Source: http://www.coopamerica.org/cabn/resources/greenmarketplace/

Even consumers who value healthy living do not always make purchases in-line with their values.

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1. Project Scope






7. Appendix

Agenda

10

Key Competitors

• Home Depot• Lowe’s• True Value• Ace Hardware

Defined competitive set as including both major OSH competitors, as well as key players in the green hardware/home improvement space.

Direct OSH Competitors

Major Green Players

• Walmart• Independent Green Hardware

Stores– Environmental Home Center– Environmental Building Supplies– Green Fusion Design Center– Real Goods

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Key Green Focus Areas

Competitor Green

Merchandise

Consumer Education

Store and Supply Chain Greening

Home improvement retailers have focused their “green efforts” in 3 key areas – 1) offering green products, 2) providing consumer education, and 3) greening their own stores and supply chain.

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The Home Depot EcoOptions Initiative

“The (EcoOptions) product line - expected to reach 6,000 products by 2009, or 12 percent of the chain's total - would become the largest "green" labeling program in American retailing and could persuade competitors to speed up similar plans.”

- International Herald Tribune, April 16th, 2007

13

Home Depot: Green Merchandising

• Merchandise grouped into 5 categories based on benefit to the environment

• 2500 Eco-Options products identified, with projected growth to 6,000 by 2009

• Key products include:

– Compact Fluorescent Bulbs (CFLs)– Insulation– Energy Efficient Appliances– Organic Fertilizer– Low Volatile Organic Compound

(VOC) Paints

“Eco Options: products that make it easy for you to make a difference, one choice at a time.”

• Merchandise grouped into 5 categories based on benefits

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1. Project Scope






7. Appendix

Agenda

15

OSH ‘s Commitment to the Environment

• OSH has already made significant contributions through it’s environmental efforts, most notably via its partnership with Our Water, Our World

• OSH was also quick to market with its promotion of green products and “Earth Friendly” labeling and greener distribution center practices

• OSH has the opportunity to tie these efforts to a larger Corporate Social Responsibility strategy that focuses first and foremost on promoting green merchandise and consumer education

Store GreeningConsumer Education

Green Merchandise

OSH can build on its existing efforts in the green space.

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LOHAS vs. OSH Consumers

26

19 20

62

52

17

13

0

28

18

2

3

0

10

20

30

40

50

60

70

Homeowners Married Age 55-64 Income 100K+

Graduate Ed Race: Asian

Ind

ex

% more likely to shop at OSH

% more likely to be LOHASConsumer

OSH’s current customers are more “green” than the overall population

• Based on similar demographics, it is likely that more than 23% of OSH consumers are LOHAS

• Moreover, customers on the West Coast are 9% more likely to buy recycled paper (standard proxy for LOHAS)

This positions OSH well for expanding further into the green market

How to read this chart: People with a graduate education are 52% more likely to shop at OSH than the average consumer. Those same people are 28% more likely to be Green consumers

Source: OSH Demographic Data, Qualitap Data from Scarborough, 2005 and Conscientious Consumerism and Corporate Responsibility, Packaged Facts and MarketResearch.com, January 2007

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Recommended Short-Term Strategy

1. Align Products by

Environmental Benefit

2. Investigate Product

Expansion Opportunities

3. Enhance Education on

Consumer Benefits

• 40% of consumers do not buy green products due to lack of availability

• Products across merchandising categories allow consumers to fully address needs (e.g. save energy)

• General perception that OSH has small product selection

• Helps consumer understand why

• Unifies green initiative

• Standard approach being taken by competitors

• Allow for cross-sell opportunities

• Immediate benefits such as cost savings and health benefits encourage purchases

• Bridge gap between values and purchasing habits of OSH/LOHAS consumers

While OSH should certainly focus on key green product categories with high expected growth, it is imperative to support these products with extensive consumer education and clarity in order to realize meaningful returns.

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1. Project Scope






7. Appendix

Agenda

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Product Category Recommendations

1GE Ecoimagination DepartmentPrioritization based on Mintel, Green Living 2006 Report’s data on consumer awareness of green product types

Energy Efficiency Indoor Air Quality Water Conservation Green Gardening

Experts believe that any green product category has the potential to grow 10-15% in the next 5 years, but positioning to consumers will determine whether they are successful1.

Product Criteria

• Caters to DIY consumers

• Aligns with existing OSH merchandising categories

• Currently sold at 1+ Key OSH competitor

Category Criteria

• Provides direct benefit to consumer themselves

Category Prioritization(High to Low)

• Degree of existing consumer awareness

• Ease in communicating direct consumer benefits

• Number of potential SKUs

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Energy Efficiency Market Growth

Expected Category Growth Rate

5-22%

Expected 5 Year Incremental Returns (PV)

$ 3 – 6 Million

Market Trends• Demand for EnergyStar products is

rapidly increasing– 68% of consumers state that the

EnergyStar label is important• Most traction has occurred in the light

bulb category, due to efforts by GE and Walmart

• In 2006, U.S. consumers spent about $1 billion to buy approximately 2 billion light bulbs (5.5 million per day)

– 5% (100 million) were CFLs• The state of California is seeking to

ban sales of incandescent bulbs • From 2004-2005, usage rates for EE

Windows and Solar Panels increased 17% and 18% respectively

Cost savings due to reduced energy consumptionConsumer Benefit :

Reduction of the C02 emissions leading to global warming

Environmental Benefit:

Sources: Mintel, Green Living 2006; www.fastcompany.com; Packaged Foods report

21

Indoor Air Quality Market Growth


15-20%


$ 2 – 3 Million

Market Trends• Household cleaners are expected to

grow at a rate of 15-20% YOY– Currently only 1% of sales at

mass merchandisers are “green” despite significant health benefits. Consumers are not yet educated on the health benefits of these products.

• Regulation is driving use of low-VOC in home building, raising consumer awareness about its benefits

• 26 new environmentally-friendly laundry products have been introduced in the past 5 years

Improved health for self and familyConsumer Benefit :

Reduction of chemicals and pollutantsEnvironmental Benefit:

Sources: Mintel, Green Living 2006; www.coatingsworld.com

22

Water Conservation Market Growth


15-20%


About $ 1 Million

Market Trends• Toilets require more water than any

other in-home source, and constitutate approximately 30% of total houeshold water use

– Low flow toilets reduce water consumption by 20%

– 56% of consumers are aware of low flow toilets

• Home Depot customers can on-staff sustainable gardening experts to do everything from landscape design to installing drip irrigation systems that allow water to seep slowly into the soil -- eliminating the need for wasteful sprinklers.

Cost savings on water billConsumer Benefit :

Increases water flow to bodes of water; preserves ecosystem by preventing drought


Sources: Mintel Report, Green Living 2006; Wall Street Journal, First Prize for Rainwater Harvesting Goes To, April 20, 2007

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Green Garden Market Growth


15-20%


$ 3 – 4 Million

Market Trends• “Scott’s Miracle Grow is currently

vowing to convert half of it’s fertilizers into Natural/Organic products by 2010”

• Currently 10% of American households use natural or organic fertilizers

Healthier and safer; save moneyConsumer Benefit :

Reduces toxins introduced into the environment, helps preserve ecosystem


Sources: Packaged Facts

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Projections Contingent on Consumer Education

To capture growth in green market, OSH must be able convey the direct benefits (as well as environmental benefits) to the consumer. Growth projections assume benefits are effectively communicated.

• Shelf talkers and literature that emphasize consumer benefits, and environmental benefits

• Product displays (shelf ends and front of store) potentially organized by key category (e.g. Water Conservation)

• Use of web and circulars to highlight consumer benefits such as cost savings and improved health

• Clear product labeling– Labels should indicate not only that a product is environmentally friendly, but why– Labeling on many products still fails to highlight key product benefits. OSH needs to

supplement with their own labeling that clarifies benefit to the consumer

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1. Project Scope






7. Appendix

Agenda

26

Long-Term Recommendations

• Further environmental in-store practices, such as solar panel installation, use of recycled materials, and programs such as Terracycle Recylcing

• Align charitable giving and voulnteer programs with key environmental organizations, such as Our Water Our World

• Pressure main product suppliers to develop more effective products and better labeling

• Support Employee Development programs that provide “green” education and allow for volunteer opportunities with environmental organizations

• Enhance consumer education on environmental issues through all communications channels

• Develop a CSR report which illustrates the cohesion and dedication of OSH’s efforts

2. To realize the greatest financial gain for OSH and obtain buy-in from consumers, Green Merchandising should be tied to a larger CSR strategy aligned with the company’s business objectives

1. Conduct further research to understand the attitudes of OSH consumer towards green products, especially given the limited data available within the industry

• Use surveys, focus groups, and in-store dialogues to understand the values and level of “green” education of OSH consumers, as well as their key barriers to purchase, preferred brands, and shopping cycles

• Promote the most relevant products and speak to products in a way that resonates with consumers• Understand the level of “LOHAS-ness” of OSH consumers to determine amount of consumer

education required• Work with suppliers to address key barriers to purchase, such as cost or quality• Obtain update 2007 LOHAS report to understand overall consumer perceptions of green

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Question and Answer

Thank You

Questions?

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1. The Green Marketplace

2. Meet the “Green Consumer”

3. Green Home Improvement Sector





8. Appendix

Agenda

29

Green Is No Longer a Niche Phenomenon

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Healthy Products, Healthy Planet (HP2) Marketplace Sizing

• Defined in 2004 by Environmental Business Journal and Nutrition Business Journal• Incorporates both consumer and industrial segments• HP2 broadly defines green products: includes organic food, green hardware, etc. • More inclusive of both waste management and homebuilding products

HP2 2006 market estimate: $500 billion HP2 has grown at steady rate over the past 4 years

U.S. Sales of Green Products(in billions of dollars)

$410 $436 $465$500

$0

$100

$200

$300

$400

$500

$600

2002 2003 2004 2005

6.3% 6.6% 7.5%

Source: Mintel Report, Green Living 2006

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No Standard Definition of “Green”

“A green business is one that considers profit as merely one part of a triple bottom line—one that emphasizes people, the planet and profits.”

-Mintel Report, Green Living ‘06

“Goods and services that minimize the impact to the environment through:

– Use of recycled materials– Absence/reduction of harmful

chemicals and solvents– Use of organic/pesticide-free methods – Use of reduced energy/water – Use of forestry products from

sustainable woods – Products that create less

waste/pollution”

-Twin Cities Green Guide

OSH “Earth Friendly”

“Environmental responsibility is not only the right thing to do, but it also makes financial sense in today’s marketplace”

• Recyclable

• Less/Non Toxic

• Organic

• Energy and Resource Conservation

• Biodegradable

Industry Experts

-Spring Seasonal Meeting Presentation, January 2007

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Education Is Required for Growth

“Three consumer areas offer a key to understanding future trends—natural and organic products, green cleaning supplies, and green

homebuilding. Though varied in their success, these three segments exemplify the challenges and opportunities in the green marketplace. For

example, many natural and organic products have succeeded in capturing mainstream consumers and distribution. Yet, green

homebuilding and home supplies, driven by the benefits of energy efficiency as well as improved health and comfort, are only just beginning

to capture consumers’ attention.”

-Mintel Report: Green Living, 2006

Key home improvement players are shaping their “green” strategies accordingly.

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Actual vs. Perceived Benefits of Green Products

Perceived Benefit to Consumer

Actual Benefit to Consumer

Natural/Organic Foods• Clear health benefits• Grew 26% from 2003-20052

Organic Clothing• May have health benefit• Insignificant growth

Fuel Efficient Cars• Significant long-term cost savings• Greater consumer education lead

28% growth in 20061

• Health benefits• Lack of consumer

awareness• Immediate Cost

Savings• Lack of consumer

awareness Consumer education and strategic positioning are needed to increase the perceived benefit of these key OSH categories

Home Improvement

Cleaning Products

All these products benefit the environment, but most consumers do not realize the products’ direct benefits to themselves

1http://www.msnbc.msn.com/id/17346041 2Mintel Report, Green Living 2006

34

Green Home Improvement Sector

• 20% increase in the number of green homes in 2005 and an estimated 30% in 20061

• 10% of all new home construction is forecasted to be built according to green standards by 2010

• Both LOHAS and non-LOHAS consumer spend in key home improvement categories grew substantially from 2004 to 2005

Trends in the building and Do-It-Yourself segments suggest that purchases of green hardware, building, and home improvement products are growing.

1Nation Builidng News, “Green Building Barrels into the Mainstream Market, March 20, 20062Nation Building News, “Green Building to Skyrocket”, April 2, 2007

Gen Pop LOHASNon-

LOHAS

Compact Fluorescent Light Bulbs 22% 38% 16%

Energy Efficient Windows 18% 35% 10%

Solar Panels 17% 44% 13%

Natural Household Cleaning Products 13% 29% 5%

Usage Growth Rates of Select Environmentally-Friendly Products (% change in usage for each product by consumer segment, 2004-2005)

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Home Depot: Education

Extensive in and out of store communications consistently focus on the benefit to the consumer as well as to environment

Web

TV Ads

Online Tools, Clinics, and Calculators

In Store Placeholder

36

The Home Depot: Pros and Cons

Criterion Status Result Pro/Con

Timing 2nd mass merchandiser, 1st home improvement store to move

Helps tie brand to “green” and give top-of-mind status

Consumer Education

Centered around benefit to consumer; infused throughout all communication vehicles

Bridges gap between values and purchasing habits to drive sales

Product Display

Group and display products based on environmental benefit

Provides clarity and convenience; cross-selling opportunities

Labeling New introduction of Eco-Options

labeling on product themselvesProvides education, convenience for consumers ?

In-Store Greening

Limited to date, but XOverall CSR Strategy

• No visible strategy or CSR report• However, does tie Eco Options to

larger efforts, such as carbon offsets program, use of recycled materials, greening of supply chain, and partnerships with key nonprofits

Could result in perceived lack of authenticity X

37

Lowe’s “Green” Program

Green Merchandising

• Lowe’s list green merchandise in its 2005 CSR report but does not feature them anywhere:

– Rubber mulch– Cellulose insulation– Sustainably grown lumber and

ChoiceDek™, – Organic gardening products– Drip and mist irrigation systems– Native plants (low water, drought

resistant) – ENERGYSTAR® Appliances and

Lightbulbs

Consumer Education

• Limited information on Energy Efficiency online (see Appendix B)

Store/Supply Chain Greening

• Lowe’s procurement policy ensures wood products are harvested responsibly and come from companies that use sustainable forestry practices.

• Solar rooftop panels in 4 stores in California

• High-efficiency heating, air conditioning, and lighting systems

Lowe’s lags behind Home Depot in most aspect of its green program.

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Lowe’s Website Snapshot

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Lowe’s: Pros and Cons


Timing Early with their CSR report, but limited action has allowed Home Depot and Walmart to be seen as first movers

Lacks top of mind status for green product purchases X

Consumer Education

Lacking education in both in and out of store communications

Creates confusion on value of green products; lost sales X

Product Display

Has yet to implement Fails to provide clarity and incentive to buy X

Labeling Has yet to implement Fails to provide clarity and incentive to buy X

In-Store greening

Has taken many steps, such as solar panel installation, to green its own corporate and store practices

Promotes authenticity if aligned with broader strategy

Overall CSR strategy

• Only player to offer a CSR report • However, report does not

promote a strategy and is limited in content

Helps communicate actions to stakeholders

Results in potential perception of lack of authenticity; failure to support bottom line

X

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Ace and True Value Hardware

Green Merchandising

• High variability from store to store, but majority of locations carry nothing “green” but CFLs

• Stores in high-LOHAS traffic areas carry a greater green product selection

• Green products are provided primarily via the supplier “Plan-It Hardware”

• Key Plan-It Hardware products include:• Irrigation kits• Fertilizers• Tankless Water Heaters• Low VOC Paints• Energy Star Appliances• Non-toxic Household Cleaners• Green Laundry Products

Consumer Education

• Plan-It Hardware provides consumer education materials (in-store signage, product brochures, and end-cap displays) to Ace and True Value stores

• Also provides “Greener-Choice” stickers that can be applied directly to products


• All independently owned, so varies by store

• No evidence of any store green to date

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Walmart’s Green Efforts

Green Merchandising• Walmart, in conjunction with GE, plans

to sell CFL to all 10 million of its consumers by end of year 2007

• Focused more on Food and Consumer Durables than Hardware.

• Organic Foods• Marine Stewardship Council

certified Seafood• Potential to significantly alter American

consumption in products it already sells, especially cleaning products

Consumer Education• Website• Prominent display of CFLs and

education materials (picture below)

Store/Supply Chain Greening• Switched to ultra-efficient LED lighting

on storefronts• Goal: Double the efficiency of vehicle

fleet by 2015• Encouraging other retailers to follow

suit to further drive down the cost of green products

Walmart has positioned itself as an environmental leader, focused on ensuring its up and downstream supplier follow suit.

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• Stores are models of green construction practices

• Passive heating/cooling, solar panels• Give priority to suppliers with green

supply chains

Specialty Green Hardware and Home Design

Specialty Green Hardware stores are a growing niche, with currently less than 1% of the market. They are focused primarily on Home Design and cater to “LOHAS Leaders”.

Green Fusion Design Center

Green Merchandising

• Stores feature products that are environmentally friendly or reduce resource use

– Bamboo Housewares– Sustainably grown lumber and

ChoiceDek™, – ENERGYSTAR® Appliances and

Lightbulbs

Consumer Education

• Education closely tied to merchandise• Knowledgeable sales people, excellent

service

43

Ace and True Value: Pros and Cons


Timing Late to market Lacks top of mind status; especially a concern vis-à-vis niche players

X

Consumer Education

Limited, inconsistent across stores, but stores that have it do it well but using Plan-It

Fails to reach consumers beyond LOHAS leaders X

Product Display

Limited, inconsistent across stores

Fails to promote green product and their benefits as alternatives X

Labeling Limited, inconsistent across stores, but relies on reputable Plan-It Hardware certification

Promotes validity, consistency In-Store greening

Non-existent Gives appearance of not being committed X

Overall CSR Strategy

Non-existant Gives appearance of being insincere X

44

Walmart: Pros and Cons


Timing 1st mover Results in top of mind status, associates brand with “green”

Consumer Education

Extensive education online and in ATL channels, and via partners like GE

Bridges gap between values and purchasing habits to drive sales

Product Display

Green products, like CFLs are being highlighted in store

Makes Walmart relvevant in home improvement category

Labeling Limited Could result in consumer confusion as green product base expands

XIn-Store greening

Solar panel installation, clean vehicle suite

Reinforces Walmart’s overall commitment; gives authenticity

Overall CSR Strategy

Fully integrated into business objectives and larger efforts and communicated via web and pess

Reinforces Walmart’s overall commitment; will provide long-term positive business results

45

Green Specialty Stores: Pros and Cons


Timing Ahead of the “green” movement Obtained loyalty of LOHAS leaders

Consumer Education

Supplier provided educational materials, knowledgeable employees

Education reinforces green buying habits, justifies higher prices

Product Display

Promotions and features focus on green attributes less often than price

Increases buying, maintains higher margins

Labeling

In-store greening

Stores model the green technology that they sell

Authenticity, customers persuaded by example

Independent Stores – Not Chains

Stores attempt to attract already green customers, few resources to bring in “sometimes greens”

Market share isn’t growing as quickly as it could

X

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Strategy Aligned with OSH Value Proposition

Convenience

Service

Selection

• Aligns with OSH goal of deepening consumer relationships and guiding consumer through store

• Employees could be equipped to covey how consumers can improve an aspect of their lives, similar to how they help them complete a project

• Offering a range of green products across departments in each “benefit” category will improve perception of availability

• Provides buyers with distinct criteria for selecting SKUs in order to stock those most relevant to consumers

• Displays by product benefit will enable consumers to shop for a variety of products which may address their needs

• Clearer labeling by benefit will drive purchases

Selection

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Slide of Forecasting Methodology

Growth Rates

• Industry predictions existed for a small # of product types

• Used growth rates that were readily available (e.g. for CFLs) to predict growth rates of other products, adjusting for qualitative trends, price, frequency of purchase

Base Line Sales/Starting Point

• Used 2006 OSH data for Earth-Friendly SKUs as a baseline where possible

• For green products that OSH does not currently sell, used 2006 sales data for non green products in the same category (e.g. toilets, instead of low flow toilets) and predicted baseline sales using 12% #

48

Best Practices in Green Labelling

EcoOptions:• Products follow accepted standards (Forestry Stewardship Council)• Products have environmental claims confirmed by independent certifier• Home Depot ultimately decides what receives the EcoOptions label• Where does label go?

Plan-It Hardware Greener Choice label:• Plan-It Hardware carefully reviews products • Recommends the Greenest alternatives, claiming only that the products are

greener than others

Independent 3rd Party Certifiers (e.g. Green Seal)• Provide the most credibility• Set standards based on environmental and public health criteria• Certifies products that meet standards• Seal goes directly on packaging

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