When vilifying big business, be careful what you ask for

by Yossi Sheffi

In May 2008 Walmart announced that it would cease stocking non-concentrated detergents. The announcement underscored the retail giant’s scale and market power—and its exceptional ability to force a market to adopt a major change for the good.

Previous attempts at persuading consumers to buy concentrated detergents had not met with much success. Introduced in 1987 in Japan by the Kao Corporation, Procter & Gamble attempted to sell the product to US consumers in 1990. Concentrated Ultra Tide powder, and liquid Ultra which appeared two years later, were based on the formula developed by Kao. Other manufacturers launched similar formulations that required just a quarter-cup of detergent to clean a load of laundry.

Following several years of mixed results, sales of concentrated detergents fell by 30 percent by 1994. American shoppers apparently were not willing to pay the same price for a smaller box or bottle, even if it got the same number of loads just as clean as traditional non-concentrated formula products did.

Furthermore, smaller packages meant less shelf space was taken up, which created a glaring merchandising disadvantage on store shelves
for concentrated products. Many detergent brands and retailers quietly curtailed their offerings of concentrated versions. As a result, concentrated detergents remained a curiosity in the American market until 2005.

In that year, Walmart began a major sustainability push and asked suppliers to reduce their packaging. Several manufacturers turned again to concentrated detergents. Three years later, in a display of Walmart’s scale and market power, the retail giant announced that non-concentrated detergents would no longer be stocked on its shelves.
Walmart’s announcement cemented the trend and allowed the retailer to advance its goal of reduced packaging. It estimated that the change would reduce water consumption by 400 million gallons and save more than 95 million pounds of plastic resin and 125 million pounds of cardboard a year.

Concentrated detergent was a viable, eco-efficient alternative for everyone in the supply chain. Yet competition for shelf space and consumer misperceptions had created a disincentive for any one brand to lead the way with smaller bottles of concentrated product. Only when Walmart forced the hand of all its suppliers did all the trading partners involved reap the financial and environmental benefits.

The story is just as relevant today as it was in 2008–perhaps more so in the current climate of vilifying large companies for their excessive market muscle.

Consider, for example, the recent announcement by Walmart US and Sam’s Club US to transition to a 100 percent cage-free egg supply chain by 2025. Every shell egg supplier to the retailers will have to be certified and fully compliant with United Egg Producers Animal Husbandry Guidelines or an equivalent standard by 2025. Compliance with the new standards will be monitored by a third party.

As the largest grocer in the US, Walmart wields huge influence in the food industry. Its announcement is a game-changer that will force egg producers to switch to cage-free production, even though the move adds cost to the supply chain and requires a significant change in working practices.

Market-leading companies such as Walmart are in a unique position to bring about large-scale positive change that would otherwise be difficult or even impossible to implement. Critics of their market power should remember this.

In the Presidential election campaign big companies have been vilified for exporting jobs. They are accused of evading taxes by moving their offices overseas. New rules introduced this month by the US Department of Justice seek to prevent such tactics, and claimed one casualty when drug company Pfizer abandoned a merger with Allergan PLC. Leading companies also are in the firing line for using their power to sway elections and policymaking, and monopolize markets.

Large enterprises can have a negative impact on society; the role of giant financial institutions in the 2008 economic meltdown is probably the best example in recent times. And their motives for imposing major change are not altruistic. Like any good business they are usually responding to shifts in customer demand, and have calculated the impact on both the bottom line and their brand equity.

But their role as change agents is irreplaceable. If we diminish it, then we all lose.

I call this phenomenon the Challenge of the Commons. The Tragedy of the Commons is an economic problem that arises when every individual tries to extract the greatest personal benefit from a shared resource.

The Challenge of the Commons is the inability to get to a good outcome when every player is worried about its own self-interest. As a result, society fails to achieve a positive outcome. In some cases government regulations or subsidies can help, but governments’ record is not stellar in pushing for marketplace change. It is important to recognize that large companies have an important role to play in moving society to better places.

Yossi Sheffi, is Elisha Gray II Professor of Engineering, MIT, Director, MIT Center for Transportation & Logistics.