Who will foot the bill? - environmentally safe products - Retailing & The Environment

Discount Store News, March 18, 1991 by Pete Hisey

Who Will Foot The Bill?

"It's a small world, and it smells funny . . .

I'd buy another if wasn't for the money . . ."

The Sisters of Mercy

And money is what it's all about. Money for collecting, money for converting, money for new capital equipment, money for new packaging, money for R&D, money for . . .

But who's going to pay the freight? That's the question haunting discounters. Retailers have found that consumers, apart from an activist minority, are unwilling to pay more for recycled, environmentally-friendly products.

According to a Roper poll commissioned by S.C. Johnson & Son, Americans as a whole are environmentally aware and understand the cost, convenience and quality issues surrounding green products. But in the matter of paying extra for green products, wealthier Americans say they will and poorer Americans say they won't. As for getting involved personally, only about 11%, which the report typifies as "true blue greens" are willing to spend time on environmental causes. Others say they are either too busy or don't care.

On the whole, Americans say that they are willing to pay 6.6% extra for green products, the poll reported. However, that figure dips to well under 5% among poorer and disaffected Americans.

And, what people say in polls is often at odds with their actual spending behavior. Retailers report that environmental products with a surcharge just don't sell. Office Depot chairman David Fuentes reports that his company's green program, among the most aggressive in the country, is doing "lousy." WORK-place executive vice president Jim Nakamura said his company will not take a leadership role in environmental products because his customers aren't interested and the chain doesn't feel that it should take the burden of double inventory with little opportunity for a fair return. "We'd like to see the government take a role here, perhaps by offering some sort of a tax credit," he said. "We'll be watching developments carefully."

Rajeev Seshedri, president of San Francisco-based Office Place, was even more combative. "We're the little guys here," he said. "Vendors suggest that we sell their products at no profit to keep the price points low. But why can't they take a loss for a while; they've got much deeper pockets than retailers do."

Manufacturers fire back by saying that their capital investment costs, in new machinery and separate production of green products, are enormous, and that until economies of scale kick in, a 10% or 15% surcharge is justified. "We're spending millions on machinery that will work with recycled paper," one paper producer said. "And it's costing us millions more for research and development, marketing, advertising and distribution. At best, [green products] are a break-even proposition, even looking down the road a few years."

According to the poll, 69% of respondents felt governmental regulation had not gone far enough in protecting the environment. That compares to 29% in 1979.

And in at least one area, Americans have reacted positively to governmental regulation. Nearly 50% report regular return of bottles and cans to recycling centers or stores. Otherwise, individual environmental effort ranges from light to undetectable.

But bottle bill results are encouraging. A well-designed program that encourages participation with an attractive "carrot" (the 5 cents per can refund) and a very mild "stick" (loss of same) can result in a high level of compliance. Urban recycling programs have sometimes failed in promoting compliance by making the downside too draconian ($50 fines for instance).

It's fairly clear that behavior will be similar for green products at retail. The consumer must receive at least some sort of carrot (if only the warm feeling of purchasing "friendly" goods) coupled with a mild stick (ideally, higher costs for non-recycled, non-environment-friendly products).

The situation today is exactly backwards. Consumers are penalized, often significantly, for patronizing earth-friendly products. Since the actual cost of the goods, at least for the foreseeable future, is higher than that of virgin goods, something will have to give.

What retailers and manufacturers alike would like to see is some sort of tax break for users of recycled goods, similar to recent tax credits for energy-proofing of houses. Alternatively, the credit could be extended to the manufacturer for selling such products at cost or at a loss, or to retailers for carrying the double inventory and selling at cost or at a loss.

Unfortunately, the government is unlikely to jump into such an arrangement. It is frantically looking for new sources of revenues, and while tax credits (particularly to consumers) might be politically advantageous, the revenue lost will have to be made up. Congress is in the process of soliciting views from major constituencies, and will hold hearings on this subject later in the spring.

Office superstore operators are particularly hard-hit by the logjam. As Office Place's Seshedri pointed out, most shoppers at superstores are, in effect, purchasing agents. "They have autonomy, but they also have accountability," he said. "That means that if they see something they hadn't thought of in advance, they'll feel free to buy it, because they can justify the purchase. But they'll have a tough time justifying a sudden jump in paper costs to their boss."