January 22, 2011

Why Wal-Mart Is Making Our Health Its Problem

The health problems caused by the consumption of salty and transfat-laden foods are the ultimate externality. That's the economist's term for any impact a business has on society that it is not obliged to factor into its cost accounting and decision-making. To be sure, sellers of packaged foods have to make sure that they don't cause acute illness in their buyers — that would run afoul of regulations as well as being terrible for sales. But if by developing a fondness for boxed pastries you eventually develop heart disease, well, that's your funeral. If your kids become obese on after school snacks and you expect the manufacturers to take responsibility, fat chance.

That's why it's significant that Wal-Mart is stepping up and taking on responsibility for improving the healthfulness of Americans' diets. As announced today, it has a plan to reduce the salt, sugar, and saturated fats in its private-label products, and to encourage its suppliers of branded goods to do the same. The goals it has established it expects to take five years to reach. Is the retailer legally obliged to take on this challenge? Not at all. Are its customers demanding it? Sadly, no. With no impact expected on profitability, it's hard to imagine shareholders are exerting pressure for the change either. So what's behind the initiative?

In a word: scale. In a recent article in HBR, Chris Meyer and I argued that we'll see companies taking more and more ownership of externalities they could ignore because of changing sensibilities and better sensors (meaning detection and reporting of impacts by third parties). But we also identified a third driver: the scale of modern business. Whereas in the past, a single grocer could not have much impact on society, in today's highly consolidated market, Wal-Mart touches a significant percentage of the nation's food intake. Once you reach a scale where your decisions have ramifications for millions, it is hard to pretend that the impacts, even as distant ripples, are not your problem.

But today's announcement from Wal-Mart proves that scale is not only part of the problem; it is part of the solution. It is because Wal-Mart has reached its gargantuan size that it feels able to take on the burden of making packaged food healthier. (The same is true of its earlier efforts to go green in its packaging and logistics, and to prod suppliers to do so in their operations.) As The New York Times put it, "because Wal-Mart sells more groceries than any other company in the country, and because it is such a large purchaser of foods produced by national suppliers, nutrition experts say the changes could have a big impact on the affordability of healthy food and the health of American families and children."

Indeed, the Times goes on to share an opinion, which I also hold, that "the company has almost as much power as federal regulators to shape the marketplace."

With that kind of power comes responsibility — and the essence of corporate responsibility is a constant, willing effort to internalize externalities. Bravo to Wal-Mart for stepping up to that.

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