TH Interview - Kevin Hagen on Corporate Responsibility at REI
REI (Recreational Equipment, Inc) have been the subject of many posts here at TreeHugger. This membership-based co-op has been selling affordable product for adventure sports since 1938. Yet in those seventy years it's really only been in the past few that REI have consciously focused of the sustainability aspects of their operations. You'll find a list of past posts, including reference to their 2007 Stewardship Report at the end of the interview. But for now we'd like to take the opportunity to introduce you to Kevin Hagen, REI's Corporate Social Responsibility Program Manager. Some months ago now Kevin shared with us just how this 'greening' is playing out, for an co-operative enterprise of more than 3 million 'members', over 80 stores and 8,000+ employees, with sales in excess of $1.3 billion USD. (Apologies to Kevin that this took so long to post, and please advise errors in transcription.)
We began by looking at why REI had chosen to select out of its line those product it could brand as EcoSensitive'.' Kevin told us that that there was strong interest from both customers and staff for offering products with reduced environmental inputs, but he was quick to add that there was "not huge a amount of enthusiasm for paying a premium" for such product. But he said, "That's okay." And Kevin went on to acknowledge that while customers might be willing to pay more from a premium brand, mostly what they are forking over their money for is a perceived increase in performance. And that the customer can justify, because they believe that are getting some cost effective benefits for their outlay. With eco gear that personal benefit is less tangible.
Kevin noted that selling environmentally preferred product was analogous to what he referred to as the 'Bulls Eye' model in the personal health market. Alluding to the concentric rings around the central target, customers are prepared to pay most for that core spot — 'What Is In Them' (eg, organic food), then a little less for inner ring 'What Is On Them' (eg, skincare, clothing, footwear, etc). And less again for outer ring 'What Is Around Them' (eg, everything else).
So when it comes to outdoor product stewardship Kevin was of the view that the best strategy lay in doing the right things, but he emphasised that REI "would not throw money at the problem." And this became a theme he would echo throughout our discussion: that like their customers REI had found by experience that wise business decisions often lead to both cost benefits and complimentary environmental improvements.
"I know that sounds counter intuitive, but innovative options have opened up to us this way."
Green Energy and Solar
Kevin cites the example of their decision to buy Green Energy, as well as taking energy efficiency measures. He tells us it was actually their Chief Financial Officer (CFO) that pushed to make that Green Energy purchase. Largely because it helped reduce their exposure to national gas prices. (REI have retail outlets in some 27 US states) "As a value proposition [marketing speak for the sum total of benefits provided] it saved us $100,000."
A while back we ran a story on REI's plans to install photovoltaic panels on the roofs of eleven stores. Surely this was mostly for altruistic reasons, because, as we've heard so often, it can take 25 to 30 years to get a pay-back on solar electricity panels. But again Kevin points out that this is no empty gesture, no token installation, but one based predominately on the numbers. "In this instance, financial engineering was the trick. We put all the different views on the table and it was our tax guy that showed the most interest."
Turns out that a complex cost benefits equation was run, that included the cost of electricity in the states of California, Oregon and Texas; whether REI owned or leased the store; the condition and size of the stores roof; and whether the neighbours building threw any shade on the REI roof. Such variables were all weighed against photovoltaic rebates and incentives and the benefit of effectively pre-purchasing electricity at a fixed rate in an otherwise fluid price market. In the end tax solutions for installing photovoltaics in the selected states made better cents than the straight cost of electricity.
Metrics-based Green Business
But REI didn't get these green business smarts overnight. Kevin says that years of 2004 and 2005 were a turning point in REI stewardship. The Co-op's staff and management decided to "make the shift from 60 years of random acts of kindness," as Kevin put it. Not that there was anything wrong with these actions he advised. "They were done with the right heart and were intuitively the right thing to do." But it wasn't enough.
If business decisions are made that aren't in keeping with a co-operative's values, then staff will be the first to confront this dichotomy as they'll know the truth and feel at odds with what is is being said and what is being done. Kevin told us that REI's millions of members assumed it was doing the right thing, simply because it was REI. But the co-op's management team of the time were were concerned. For as Kevin put it, "How do you live up to those expectations?" Management wondered what was going to happen when members found out that expectations may not have been met.
The solution, although initially confronting, was rather simple: Come clean. Establish a measurement framework. Become metrics-based, rather than relying on those random acts. Prepare audits and show what had been achieved, and show what opportunities presented themselves to do more. Engage with both the membership community and the broader community.
When the 2006 Stewardship Reportcame out, Kevin informed us that management's fears were initially realised. "Some members said 'Is that all you're doing?'" But he was quick to point out that far more folks said, "we're happy that you're making improvements. And being authentic about it."
Bigger and Better
We wondered if REI's size was a help or hindrance in the tussle for hearts and minds, with many customers thinking it is the Big Box store of the outdoor industry. But Kevin has a ready response, "The bigger we get, the more good we can do." And bigger they are getting. They're on a 10% growth profile, with 6 to 8 new stores opening per year. But for Kevin Hagen, "it's not about growth, but about better quality. That's the difference between a co-op and business. We're here to serve members and the community."
Kevin believes that most of the membership would agree that Recreation Equipment, Inc takes a more altruistic picture than many businesses. And he highlights the low turnover of their 10,000 employees as evidence of such trust. (They've been listed as one of the "100 Best Companies to Work For" in the US by Fortune magazine every year since 1998.) It keeps us focussed. Our stewardship endeavours are about going beyond compliance."
And again he returns to the dominant theme of our discussion. That "looking through an environmental lens leads to better business outcomes."
Customer Service and Bike Servicing
In this regard, we talk about their water and sonic wave-based cleaning of bicycles. "As one of our main stewardship foci we were looking at our total hazardous materials sent to the waste stream." This highlighted items like batteries and compact fluorescent lights (CFLs) that didn't belong in landfill. But, as Kevin explained, "It also indicated that we were paying good money to properly dispose of the solvents used to clean bike parts." Approximately 4,000 gallons of the stuff. REI looked at a bunch of options to reduce this fiscal and environmental waste. When the sonic wave method was investigated, at first it seemed, as Kevin put it, "a big capital expense to save a small problem." But when they crunched all the numbers they discovered it was indeed cost beneficial. "It takes less time to clean bicycles, and our staff's greatest value is in front of customers, rather than out the back scrubbing bike parts." As well as reducing those employees' exposure to hazardous materials.
It is by this marrying of hard nosed business decisions with passionate environmental ethics that Kevin believes REI is achieving real practical outcomes in both realms. He gives another example. "We hired a packaging engineer to look at our entire delivery of that aspect of our business. In just one area alone, he informed us we were producing 92 tonnes of paper hang tags!" This is not only a cost issue for REI, but also has environmental impacts, including those related to the source of the raw material for all that paper. Now armed with the cold hard facts REI are actively pursuing creative solutions to this paper packaging conundrum, that will be mutually beneficial to both forests and the bottom line.
All this talk of better financial performance from an interview about stewardship? I could almost hear Kevin Hagen smile on the other end of the trans-Pacific phone line. He continues, after what appears to have been a moment of impish reflection, "When meeting with our business partners to discuss sustainability, many are surprised when the spreadsheets come out. They're not expecting that from us."
But, as he emphasised throughout our discussion, this metric-oriented approach to environmental stewardship is driving real green change for REI. Change that results both in improved environmental outcomes and enhanced fiscal results.
However, Kevin is keen to point out that sustainability is team sport and they can't run this race on their own. He notes that they share a lot with their compadres across the Canadian border, the 2.8 million strong membership-based, Mountain Equipment Co-op, adding "We love those guys." And gives strong kudos to Patagonia, the green outdoor apparel mavern, saying, "they took years off the learning curve."
At this point Kevin had to end the interview because his van pool colleagues were getting edgy, so not wanting to tarnish his badge of Corporate Social Responsibility Program Manager, we thanked Kevin for his generous time, and we let him go car pool home for the weekend.
But no doubt we'll soon be seeing more his work with REI as they continue to engage in work on environmental, social and corporate stewardship.