Description
Innovest Strategic Value Advisors, a financial research firm based in New York, London, Paris and Toronto, analyzed relative energy efficiency and management performance in the retail merchandising sector.
Innovest Strategic Value Advisors
Energy Management Leaders Achieve
Superior Stock Market Returns in the
Retail Merchandising Sector
Summary Report*
E
EN NE ER RG GY Y M
MA AN NA AG GE EM ME EN NT T &
& I
IN NV VE ES ST TO OR R R
RE ET TU UR RN NS S
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February 2003
* This Summary Report does not provide company specific ratings
and profiles. This information is published in the full report, which
is available from Innovest at 1-646-237-0220 or
[email protected].
No part of this report may be reproduced in any manner without
the written permission of Innovest Strategic Value Advisors, Inc. The
information herein has been obtained from sources, which we
believe to be reliable, but we do not guarantee its accuracy or
completeness. All opinions expressed herein are subject to change
without notice. Innovest Strategic Value Advisors, Inc., its affiliated
companies, or their respective shareholders, directors, officers
and/or employees, may have a position in the securities discussed
herein. The securities mentioned in this document may not be
eligible for sale in some states or countries, or suitable for all types
of investors; their value and the income they produce may fluctuate
and/or be adversely affected by exchange rates. ©2003 Innovest
Strategic Value Advisors, Inc. All rights reserved.
New York Office: 4 Times Square, 3rd Floor, New York, NY 10036
(212) 421-2000 Fax (212) 421-9663
Toronto Office: 225 East Beaver Creek Road Suite 300, Richmond Hill
Ontario L4B 3P4 CANADA (905) 707-0876 Fax (905) 707-9084 .
London Office: 1 Cornhill, London EC3V 3ND, United Kingdom +44
20 7743 6162 Fax +44 20 7743 6163.
Paris Office: 1 Rue des Reservoirs, B605, 94340 Joinville-le-Pont,
France +33 01 48 86 03 69
www.innovestgroup.com
i
Contents
1.0 EXECUTIVE SUMMARY.......................................................................................1
1.1 ENERGY STAR PARTNERS: STOCK MARKET PERFORMANCE..................................3
1.2 THE BUSINESS CASE FOR ENERGY EFFICIENCY....................................................5
2.0 SECTOR ENERGY ISSUES..................................................................................8
2.1 THE FINANCIAL IMPACT OF ENERGY USE...............................................................8
2.1.1 The U.S. Energy Market..............................................................................8
2.2 RISK FACTORS...................................................................................................10
2.2.1 Uncertainty & Volatility..............................................................................10
2.2.2 Climate Change........................................................................................10
3.0 ANALYZING ENERGY MANAGEMENT PERFORMANCE.................................12
3.1 CRITICAL ELEMENTS OF AN ENERGY MANAGEMENT STRATEGY............................12
3.2 LEADING ENERGY MANAGEMENT PRACTICES......................................................14
3.2.1 Energy Management Capacity..................................................................14
3.2.2 Performance Trends.................................................................................16
3.2.3 Systems Management and Integration......................................................17
3.2.4 Technology Replacement/Installation.......................................................17
3.2.5 Building Design.........................................................................................19
3.2.6 Green Energy Purchasing.........................................................................20
3.2.7 Selling Energy Efficient Products..............................................................21
4.0 SUMMARY – DOES ENERGY MANAGEMENT ADD VALUE ?..........................23
APPENDIX A: THE ENERGY MANAGEMENT RATING MODEL.............................25
APPENDIX B: THE EPA’S ENERGY STAR PROGRAM...........................................27
APPENDIX C: ACTIVE ENERGY STAR COMPANIES VS. RETAIL INDEX.............28
APPENDIX D: REFERENCES & FOOTNOTES........................................................29
APPENDIX E: ONE PAGE COMPANY PROFILES………...…..…….…….………32-33
ii
Figures
Figure 1. Retail Merchandising Companies Examined in This Study...........................1
Figure 2. Stock Market Performance: Energy Management Leaders vs. Laggards.....2
Figure 3. Financial Performance: Energy Management Leaders vs. Laggards...........2
Figure 4. Retail ENERGY STAR Active Companies vs. Broad Line Retail Index............3
Figure 5. Average Monthly Commercial Electric Rates (1990-2001) by State.............9
Figure 6. Changes in Electricity Rates '90-'95 vs. '96-'01............................................9
Figure 7. Site Energy Use in Retail Buildings.............................................................18
Tables
Table 1. Innovest Energy Management Assessment Model ......................................26
Table 2. Companies Comprising the Dow Jones Broad Line Retail Index.................28
1
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1.0 EXECUTIVE SUMMARY
Innovest Strategic Value Advisors, a financial research firm based in
New York, London, Paris and Toronto, analyzed relative energy
efficiency and management performance in the retail merchandising
sector
1
. The study found that energy management leaders achieved
superior stock market and financial performance over the past five
years
2
.
Company-specific energy consumption data is usually not available
in this sector (in general, only the most proactive companies disclose
data in an effort to enhance stakeholder relations). To analyze
performance in the absence of data, Innovest selected twelve of the
largest retail merchandising companies (representing over 70% of the
market capitalization of the Dow Jones Broad Line Retail index). It
then analyzed the firms using a comprehensive rating model
comprised of over 30 quantitative and qualitative metrics shown in
Appendix A.
Figure 1 shows the scores for the twelve companies analyzed in this
report. (This summary report only identifies the two top rated
companies. The full report, which includes information on all twelve
firms, is available from Innovest at 1-646-237-0220 or
[email protected].)
Ticker Company Rank Rating Score
LOW Lowe's Companies Inc 1 AAA 1632
COST Costco Wholesale Corporation 2 AAA 1458
XX XXXX 3 AA 1321
XX XXXX 4 AA 1292
XX XXXX. 5 A 1163
XX XXXX 6 BBB 978
XX XXXX 7 BBB 893
XX XXXX 8 BB 671
XX XXXX 9 B 586
XX XXXX 10 CCC 340
XX XXXX 11 CCC 296
XX XXXX 12 CCC 259
Figure 1. Retail Merchandising Companies Examined in This Study
etail Merchandising Energy Analysis
2
Figure 2 shows that the six companies with above average energy
management performance, taken as a group, outperformed the below
average companies over the past five years by over 7100 basis points
(71 percentage points).
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Difference EM Leaders EM Laggards
Figure 2. Stock Market Performance: Energy Management Leaders vs.
Laggards
Figure 3 shows that the energy management leaders also
outperformed the laggards on price-to-earnings (13%), price-to-book
value (26%), return-on-assets (49%), return-on-equity (52%), return-
on-invested capital (16%) and Tobin’s Q, a measure of intangible
value (8%).
Figure 3. Financial Performance: Energy Management Leaders vs. Laggards
Ret urn On Asset s
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Pr ice Ear ningsRat io
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Pr ice - Book Rat io
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Ret ur n On Equit y Per Shar e
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Ret ur n On Invest ed Capit al
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Tobin' sQ
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Top Half Group Bottom Half Group
3
1.1 ENERGY STAR PARTNERS: STOCK MARKETPERFORMANCE
To further assess possible links between energy management and
stock market performance, a less complex analysis was performed. In
this analysis, retail merchandising companies actively involved in the
U.S. Environmental Protection Agency’s (EPA) ENERGY STAR®
program were compared to the Dow Jones Broad Line Retail index.
ENERGY STAR is a government program that is widely considered to
be successful in promoting improvements in national energy
management. The program works with industry to develop energy
efficiency standards for various residential and commercial products
as well as buildings. It awards the ENERGY STAR label to those
products and buildings that meet these standards. ENERGY STAR also
encourages strategic energy management practices for commercial
and industrial partners. Appendix B provides more information on
the ENERGY STAR program.
Figure 4 shows that, over the past five years, retail merchandising
companies actively involved in ENERGY STAR outperformed the Broad
Line Retail index by over 6000 basis points (60 percentage points).
Appendix C shows the companies included in the Dow Jones Broad
Line Retail Index. This summary report does not identify firms
considered to be active in ENERGY STAR. These are included in the full
report which is available from Innovest.
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Difference Active ES Companies DJ Index
Figure 4. Retail ENERGY STAR Active Companies vs. Broad Line Retail
Index
4
Accurately assessing corporate energy management performance is a
complex task, probably outside the expertise of most financial
analysts. Innovest’s research in many sectors indicates that
companies significantly involved in ENERGY STAR are usually leaders
in overall energy management. Therefore, assessing the level of
involvement in the ENERGY STAR program provides an easy way for
analysts to estimate relative energy management performance. In
Innovest’s comprehensive assessment of energy management
described above, ten of the twelve companies analyzed were involved
in the ENERGY STAR program. The companies rated most highly on
energy management were consistently the most active in the ENERGY
STAR program.
Since many factors influence financial performance, it is likely that
energy management is not the only driver of financial results in these
studies. Nevertheless, given the large differentials found, the proxy
value for management quality, and the significant financial benefits
accruing from improved energy performance, it is likely that
enhanced energy management does increase investor returns.
Management quality is a primary determinate of stock market
performance. Yet management quality is difficult to quantify since it
is subjective. Innovest has found in nearly every sector that
environmental leaders outperform in the stock market, mainly
because environmental performance is a strong proxy for
management quality. (Innovest’s primary business is conducting
comprehensive, financially-oriented assessments of corporate
environmental and social performance. Financial institutions such as
ABN-AMRO, Dreyfus, ING, Rockefeller & Co, Schroders, State Street
Global Advisors, T. Rowe Price and many others, use Innovest
research to develop investment products intended to outperform
mainstream funds—see www.innovestgroup.com for more
information.)
The environment is one of the most complex challenges facing
management, in part because there are high levels of uncertainty as
well as many stakeholders and complex issues to address. It is
implied that companies dealing well with this high level of
complexity have the sophistication to succeed in other parts of the
business and, thereby, earn superior returns. Energy management is
an important aspect of environmental performance which also poses a
complex challenge to management. As a result, it is likely that energy
management performance is also a strong indicator of management
quality and stock market potential.
5
1.2 THE BUSINESS CASE FOR ENERGY EFFICIENCY
The correlations found in the above study are partly explained not
only by the proxy value for management quality, but also by the
financial and competitive benefits that result from improved energy
efficiency. In the retail merchandising sector, companies reported
achieving the following benefits:
! Reduced Operating Costs. As a major cost area, several firms
covered in this report have increased profitability by
proactively reducing energy costs. In the retail sector, utility
expense is the third largest component of operating costs for
un-leased retail space and the fourth largest component of
operating costs for leased retail space
3
. In spite of aggressive
energy management by many firms, significant potential exists
in this sector to enhance profitability by further improving
energy efficiency. The body of this report, along with the
company profiles in Appendix E, details how companies are
improving energy efficiency.
! Increased Productivity and Sales. Improving energy
management usually enhances lighting and HVAC (heating,
ventilating and air conditioning) performance. Optimally
operating HVAC systems can contribute to reduced lost work
time related to illness resulting from inefficient heating or
cooling. Efficiency improvements may also enhance sales. For
example, installing skylights can significantly reduce energy
costs while promoting higher sales. In a study conducted on
behalf of the California Board for Energy Efficiency for the
third party program administered by PG&E, skylights were
found to be positively and significantly correlated to higher
sales
4
. All other things being equal, an average non-skylit
store would likely have 40% higher sales with the addition of
skylights; after the number of hours open per week, the
presence of skylights was the best predictor of the sales per
store of all variables considered in the study.
! Reduced Regulatory Exposure. Electricity generation
produces about two thirds of the sulfur dioxide emissions and
one third of the nitrogen oxides and carbon dioxide emissions
in the U.S. Under existing regulations, U.S. utilities will be
required to reduce sulfur dioxide and nitrogen oxides
emissions by as much as 70% over the next ten years.
Regulators in Europe are pressuring commercial users to
reduce emissions. With U.S. utilities facing growing pressure
to reduce emissions, it is likely that commercial firms will face
similar pressures over time, as are companies in Europe.
6
Energy management leaders will be less vulnerable to these
increasing regulations.
! Reduced Vulnerability to Energy Price Fluctuations.
Deregulation, Middle East turmoil, concerns about terrorism,
and other factors are increasing volatility in the energy
markets. California retail companies saw energy price
increases of up to 100% in 2001. Given tight margins, this had
significant negative impacts on profitability in many cases. To
protect earnings, companies such as Costco aggressively
developed emergency energy management plans. Ongoing
improvements in energy efficiency will minimize exposure to
volatile energy markets.
! Enhanced Public Image. As environmental problems such as
global warming continue to receive greater media attention,
consumers and the public in general are focusing more on
corporate environmental performance. In the face of this
trend, companies consistently report that improving
performance significantly enhances their reputation as a
responsible corporate citizen. Image enhancement is one of
the most common benefits reported by ENERGY STAR
participants. Most companies analyzed in this report are
expanding operations. Maintaining an image as a responsible
corporate citizen, in part by improving energy efficiency,
minimizes community opposition to opening new stores.
Once stores are opened, a positive environmental image
contributes to increased sales and enhanced community
relations.
! Enhanced Reputation within the Financial Community as a
Well Managed Company. As noted previously,
environmental performance consistently correlates with
financial performance. This occurs mainly because the
environment represents a complex challenge to management
and is therefore a good indicator of management quality, a
primary determinate of financial performance and a key
metric for the financial community. As indicated by this
study, energy management, a key element of environmental
performance, is also likely to be a strong indicator of superior
management and stock market potential.
! Enhanced Appeal to Socially Responsible Investors. SRI
funds have grown rapidly in North America, Europe and
Japan over the past five years. The Social Investment Forum
estimates that over $2 trillion of invested U.S. assets are
invested through some type of environmental or social
7
screen
5
. Many of the largest financial institutions in the world
have introduced SRI funds based on research provided by
Innovest and other organizations. When screening for
environmental issues, SRI researchers usually consider energy
efficiency to be a key element of environmental performance,
partly because it has a significant impact on global warming.
As the growing SRI market increasingly favors companies
with superior energy performance, upward pressure will be
placed on the returns of energy management leaders,
increasing the likelihood that they will earn market premiums.
! Market Opportunity for Energy Efficient Product Sales.
According to the Business Communications Co., Inc. study
Energy Conservation Review
6
, sales of high efficiency
products in the U.S. were $28.1 billion in 1999 and estimated to
grow at an average annual rate of 8.2% for the successive five-
year period, reaching $41.7 billion in 2004. The largest
segment of energy efficient products is residential products -
projected to be $17 billion in 2004 - followed by commercial
appliances, water heaters, lighting and HVAC systems. This
consumer trend presents significant opportunity for retailers
to establish themselves as the retailer with the widest
selection, most knowledge of the products and most rebates
offered; thus gaining significant market share.
The preceding factors summarize the various ways in which superior
energy management can add value for shareholders. Beyond this,
with intangible value comprising a growing percentage of market
capitalization, investors are seeking greater clarity on the drivers of
intangible value. Energy management, as an indicator of
management quality and reputation, can be used as one indicator of
superior intangible value and stock market potential. Innovest’s
analysis found wide variations in corporate energy management
performance in the retail merchandising sector. These differentials
have strong implications for investors. Given the financial benefits
resulting from improved energy performance found in this study, it is
likely that incorporating energy management analysis into traditional
financial analysis will help investors uncover hidden value and
increase investment returns.
The following sections describe overall energy trends as well as how
companies are enhancing financial returns by improving energy
management in the retail merchandising sector. The company
profiles shown in Appendix E summarize the energy strategy,
management initiatives, profit opportunities and risk factors for each
firm.
8
2.0 SECTOR ENERGY ISSUES
2.1 THE FINANCIAL IMPACTOF ENERGY USE
Retail and service buildings are second only to office buildings in
energy spending at $14 billion per year. Energy expenditures in these
buildings account for 20% of all commercial energy expenditures and
use a total of 973 trillion Btu of combined electricity, natural gas, fuel
oil, and district steam or hot water
7
.
The financial impact of energy use on a retail merchandising
company can be quite significant in some cases, as illustrated by the
California energy crisis. As prices for natural gas rose dramatically,
the cost of generating electricity rose accordingly. Many companies,
such as Costco, realized significant financial value from improving
energy management. They have since extended many practices
developed in California to other regions.
2.1.1 The U.S. Energy Market
Electricity markets in the United States vary widely in terms of their
level of regulation and prices for commercial customers. Many of the
most desirable markets for retail stores are located in states with
above average energy prices (See Figure 5). Therefore, to be more
competitive in the largest markets, retail merchandising companies
often work aggressively to improve energy efficiency. Electricity
prices are set by each state. Many states have moved towards
deregulation of their electricity markets with the goal of reducing
energy costs. After the California debacle, several states are slowing
deregulation plans.
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Many of the largest markets for the retail
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electricity pricies. These states represent
41% of the US population. (Not all above
average cost states shown.)
Source: Dept.of Energy- Avg. Monthly Commercial Prices 1990-2001 by State
Figure 5. Average Monthly Commercial Electric Rates (1990-2001) by State
Figure 6 shows that some major markets, such as New York, have had
rising electricity prices over the last decade. As prices rise, energy
management investments become more attractive since payback
periods are reduced.
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r
Figure 6. Changes in Electricity Rates '90-'95 vs. '96-'01
This Chart shows states with
average energy price increases
in cents per kWh from the first
half of the 90’s (1990-95) to the
latter half (1996-2001)
10
2.2 RISK FACTORS
2.2.1 Uncertainty & Volatility
Many firms aggressively pursue energy management to reduce
exposure to price volatility. While energy forecasts often show stable
prices, the experience of those in California, New York and many
other states has been otherwise. Figure 6 above shows states with
rising prices over the past decade. As prices rise, the benefits of
efficiency rise with them. As Figure 5 illustrates, electricity markets
can be quite volatile. Retail merchandising firms that prepare in
advance for energy price fluctuations by increasing efficiency should
reap benefits when costs rise unexpectedly.
Energy management can help mitigate costs from energy price
increases, for example, by coordinating responses at all locations so
that short-term demand is reduced. New technologies such as fuel
cells, natural gas distributed generating units, photovoltaics, and
wind turbines may help retail merchandising companies further
reduce peak demand. While companies in this sector are not
currently actively pursuing these types of alternative energy
technologies, several leading companies indicated that they evaluate
the possibility on a regular basis and would move forward with the
technology as soon as the payback period shortens.
While energy costs in the U.S. are low compared to many
industrialized nations, several factors are placing upward pressure on
prices. One major factor is growing concern about the negative
environmental and public health impacts of electric power plant
emissions. These concerns have driven the implementation of federal
and state regulations that will require reductions of nitrogen oxides
and sulfur dioxide emissions of up to 75% over the next ten years in
many cases. Restrictions on mercury and carbon dioxide emissions
are also likely over the next ten years. Other factors driving prices up
include growing instability in oil markets and the failure of state
deregulation to deliver on price reductions. Companies aggressively
pursuing superior energy management will be better insulated from
price increases.
2.2.2 Climate Change
Climate change has broad implications for the whole economy. Most
affected, however, will be the electric utility sector. This is because
the combustion of coal, oil, and natural gas to generate electricity is
the largest source of carbon dioxide emissions. Carbon dioxide traps
energy from the sun in the earth’s atmosphere and causes it to warm
up. As the science
8
behind climate change begins to drive regulatory
11
policies, the ultimate impact of these initiatives on the price of
electricity remains undetermined.
Under the United Kingdom’s carbon pollution credits trading
program, the price for carbon is currently around $13 per ton (as of
August 21, 2002), which is up from $6 at the beginning of 2002
9
. Shell
currently estimates the future cost of carbon will be about $25 per ton.
As carbon costs are imposed on electricity generators, the cost of
generating electricity will rise accordingly, especially for coal- and oil-
based generators. Therefore, superior energy management can help
companies maintain profitability if cost increases were to materialize.
Should climate change-related cost increases materialize, cost
projections for capital investment options will favor more aggressive
energy management. Firms that are leaders would realize additional
gains from their investments in energy management in addition to
achieving a lower cost structure under normal business conditions.
Lowe’s is currently sourcing green power from the TVA where it is
available in an effort to lessen environmental impact from energy
consumption.
12
3.0 ANALYZING ENERGY MANAGEMENT PERFORMANCE
3.1 CRITICAL ELEMENTS OF AN ENERGY MANAGEMENTSTRATEGY
To assess the financial impacts of energy management in the retail
merchandising sector, Innovest developed a comprehensive
methodology for analyzing relative corporate performance (see
Appendix A). The model looks at corporate policies, performance
trends, savings estimates, technology assessment initiatives, training
programs, strategic profit opportunities and many other factors. Data
sources include government websites, third party research and
company-supplied information. This information is supplemented
with interviews with company executives. Innovest’s analysis
showed a wide range in the level of commitment to energy
management and the willingness of management to discuss energy
and environmental performance with stakeholders.
The following sections summarize several of the metrics considered in
this analysis. These metrics include energy management capacity,
performance trends, systems management and integration, extent of
technology replacement/ installation, building design, alternative
energy sourcing and strategic profit opportunities pursued.
Energy Management Capacity:
This metric broadly refers to the quality of processes in place to
ensure effective communication between individual stores and the
corporate energy team, as well as between the corporate energy team
and industry peers and external stakeholders. This is considered
important because it can gauge the strategic priority placed on energy
management at the corporate level. Participation in best practice
sharing, training of employees at all levels and a relatively longer-
term view of energy management are important indicators of high
energy management capability. This metric indicates to what extent
energy efficiency programs and practices are in place in the case
where quantitative data is lacking.
Senior management commitment to energy management is also a
primary factor determining the level of capability. Implementing a
proactive energy management system is a complex task. Even simple
eco-efficiency measures, such as installing energy efficient light bulbs,
require a strong commitment on the part of management to ensure
that such measures are consistently applied. Additionally, since some
of the benefits of improving energy efficiency are intangible and
difficult to quantify, such as enhanced image and productivity, not all
13
companies will act to improve performance. Therefore, this
complexity potentially makes energy management a good indicator of
management quality and thus stock market performance.
Performance Trends:
This metric generally indicates the implementation success of an
energy management strategy. Companies that take their energy
management strategy seriously are able to, at the least, compile data
on performance indicators such as percent decrease in total energy
consumption, the average load factor, unoccupied demand and the
energy consumption of an average store. The availability of this data
is important so that it can be compared with data before the energy
strategy was implemented and thus justify the existence of the energy
management team, efforts and expenditures within the company and
to external stakeholders. If performance trend data is not available to
prove the usefulness of the energy management program, the
program could be at risk of being perceived as ineffective and thus
receive less support from the executive level and external
stakeholders.
Systems Management and Integration:
This refers to the extent to which companies take a systems view of
energy management. Sector leaders implement sophisticated energy
management systems that allow system-wide monitoring of energy
performance. In addition, leaders seek to maximize the integration of
various systems and thereby minimize overall energy use.
Technology Replacement and Installation:
This refers to the extent to which energy efficient technologies such as
T8 lighting with electronic ballasts, high efficiency HVAC units,
efficient escalator motors and motion and occupancy detectors have
been installed in stores. Innovest analyzed the proactiveness of
technology replacement and installation by considering the tendency
to upgrade equipment versus maintain older, less efficient equipment.
This metric indicates whether the company is likely to be a first mover
or a follower in high efficiency technology replacement and
installation in the future. Less sophisticated companies make
investments in energy management based on simple cost-benefit
analysis. Leaders are better able to incorporate long-term financial
benefits and intangible factors into their investment decisions. This
means they might accept a longer payback period and larger upfront
expenses in return for greater financial benefits over the long term.
Integration of Energy Efficiency into the Building Design:
Integration of energy efficiency into the building design can strongly
signal the extent to which energy efficiency is viewed as a goal
throughout the entire company, not just in operations and/ or
facilities management. This is because it involves working with
14
construction and design, materials purchasing and real estate
purchasing/ leasing teams. Significant reductions in energy
consumption can be made via skylighting, high quality insulation,
solar reflective rooftops and strategic placement and design of
entrances and exits. Therefore, even if companies do not disclose
consumption data and trends, it can still be determined that stores
with these energy efficient design characteristics are likely to be more
energy efficient than stores without these features.
Green Energy Purchasing:
The ability to investigate and pursue renewable or green energy
supplies not only indicates a sophisticated energy management team
that is committed to environmental stewardship, but also means that
the company likely has lower exposure to future climate change
regulation as it is already in a position to purchase energy from
sources that will be favored by such regulation. Companies that
choose to meet their energy needs from renewable sources are
considered environmentally proactive.
Strategic Profit Opportunities:
If a company is not in the business of selling products that are
typically certified with the ENERGY STAR label (such as home
appliances, electronics etc.), it can still profit from its energy
management initiatives through market share gains made by
appealing to environmentally conscious consumers. Environmentally
conscious consumers tend to make decisions on where to shop based
on the perceived environmental stewardship of the company, given
all other factors are equal. If a company is able to make its efforts to
be energy efficient well known to the public through its annual
report, response to individual inquiries, website, store education or
public relations campaigns, it is likely to gain customer loyalty.
Retailers that sell products that could be labeled energy efficient may
also benefit from increased customer loyalty, as well as from the
additional market share and higher profit margins associated with
selling ENERGY STAR labeled products.
3.2 LEADING ENERGY MANAGEMENTPRACTICES
The following are leading practices in the retail merchandising sector
for each critical element explained above.
3.2.1 Energy Management Capacity
Leaders usually have a central energy management staff, which is
comprised partly of professional energy experts. This group co-
ordinates management activity at individual stores; informs and
15
trains regional managers and staff; and keeps tabs on technological
developments, tax breaks and tighter regulatory controls. It also
provides the important function of developing and deploying an
informed energy strategy. The coordinating function of a central staff
ensures the broadest application of best management practice. Both
Lowe’s and Costco exhibit signs of strong energy management
capacity in that they are willing and able to communicate with
internal and external stakeholders regarding energy management and
environmental stewardship.
At Costco, there is a corporate energy management team of four
individuals that sets the overall energy strategy, develops training
courses for individual store managers and employees, and tracks and
regularly reviews consumption data. In addition, this team
coordinates with the facilities management and construction teams to
integrate energy management into those functions. At the store level,
each store manager is ultimately responsible for energy expenditures
at a particular store. Stores in similar regions are benchmarked
against one another, with store manager compensation linked to the
local success of the energy management strategy as measured by
consumption levels. Tying energy use to management compensation
ensures that managers make a point of following through on
strategies and procedures.
Another sign of strong energy management is an ability to adapt and
respond to varying circumstances quickly and effectively. Costco not
only developed an emergency energy management scheme in
response to the California energy crisis but also had the prudence to
inform consumers of the scheme in an effort to boost corporate
reputation. This most likely would not have been accomplished
without a well organized and focused energy management team.
Leaders in energy management tended to be active in the EPA’s
ENERGY STAR program. The program provides advice and various
tools to retail merchandising firms on improving energy efficiency.
See Appendix B for more information on the EPA ENERGY STAR
program.
Leaders also tended to take greater advantage of tax credit and other
incentive programs promoting energy efficiency. For example, the
New York State Building Credit program gives tax credits to
qualifying projects with energy efficient technologies otherwise
known as “green buildings.” In addition, several states including
Massachusetts, Pennsylvania, and Rhode Island are developing
demand-side market/ tax incentives to reduce energy use. A number
of other states, such as California and Oregon, have tax credit
programs for renewable energy which could help defray the initial
costs for solar and fuel cell systems. These programs can change the
16
cost structures for equipment upgrades and new technology
investments.
Strong management capability is also signaled by participation with
non-profit organizations dedicated to energy management such as the
Alliance to Save Energy. The Alliance to Save Energy is a non-profit
coalition of business, government, environment and consumer leaders
that promotes energy efficiency worldwide to achieve a healthier
economy, a cleaner environment and energy security. More than 70
corporations and business trade associations work together through
the Alliance to promote greater investment in cost-effective energy
efficiency. Home Depot and Sears are Alliance Associates. Associates
participate in a range of programs and activities, including the
Federal Energy Productivity Task Force, the Summit on Energy
Efficiency, the Evening with the Stars of Energy Efficiency Awards
Dinner and policy breakfasts with decision makers and other noted
speakers.
3.2.2 Performance Trends
The largest component of operating costs is payroll and benefits,
followed by rent, advertising and then utility expense. Utility
expense is a larger percentage of operating costs than
communications, office supplies, packaging materials, repair services,
legal services, accounting and auditing services or data processing
and computer related services. As a result, many companies track
energy costs in detail.
Computerized monitoring and control equipment allows
management to track energy use throughout the company and
benchmark performance. This capability provides vital feedback on
the success or failure of various initiatives and alerts management to
problems, such as unusual spikes in usage. Monitoring is a key
element in the deployment of energy management plans since it
measures improvements and educates management about costs and
savings.
Costco reduced total energy consumption by 10% after implementing
energy management programs. It is evaluating and testing new
initiatives that could yield much greater improvements. Target
Corporation reported that energy management initiatives
implemented in 2001 resulted in savings of 37 million kWh corporate-
wide ($2.6 million at seven cents per kWh). Similarly, Wal-Mart
reported it is achieving annual savings of about 250 million kWh as a
result of its energy management initiatives
10
($17.5 million at seven
cents per kWh).
17
3.2.3 Systems Management and Integration
Leading companies in the sector have developed management
programs focused on continuous improvement of store operations.
These programs include basic maintenance schedules, installing the
latest technology in older facilities, and centrally sourcing energy
efficient equipment for the whole company to ensure wide
implementation. Having clear day-to-day operating guidelines and
procedures ensures system efficiency is maximized. Through regular
maintenance, management can ensure that equipment is running at
peak performance and is providing the best return on investment
over its life. Seeking potential opportunities for retrofitting older
operations with new, more efficient equipment further ensures
system efficiency.
Integration of building operation and management systems is one of
the most effective energy management strategies available to
organizations. Systems integration facilitates optimized handling of
design issues - such as solar load and humidity, and right-sizing of
equipment, ultimately yielding tremendous capital and operations
cost savings.
With the help of the Electric Power Research Institute, Wal-Mart
developed an energy efficient, integrated water loop heat pump
system that increases ventilated air, lowers humidity, maximizes
refrigeration heat recovery and uses non-CFC refrigerants. The
204,000-square foot Eco-store is realizing a 22% energy savings over
the base HVAC system, equivalent to energy savings of $102,806
annually
11
.
3.2.4 Technology Replacement/Installation
The American Council for an Energy Efficient Economy (ACEEE)
conducted several major studies
12
that show potential financial
returns from various energy efficiency improvement initiatives. For
the commercial buildings sector, these included various
improvements to HVAC and lighting systems that could generate
returns of 25% or greater. Several of the most financially attractive
initiatives included:
" Integrated commercial building design.
" Integrated lighting fixtures with controls.
" Improved ducts and fittings.
" Improved heat exchangers.
" Integrated space/ water heating systems.
18
Many of the firms analyzed by Innovest are taking these measures.
Most firms focused their efforts on HVAC and lighting upgrades.
(Figure 7 shows that HVAC and lighting comprise over 75% of energy
expenditures in retail buildings.)
Water Heating
7%
Space Heating
40%
Cooling
8%
Misc.
10%
Off ice Equipment
4%
Lighting
31%
Figure 7. Site Energy Use in Retail Buildings
Lighting is an essential part of any management plan not only
because it comprises roughly 31% of energy use for retail operations,
but also because it is one of the quickest and most affordable
upgrades that can be done and usually requires no down time for the
store. There are many technological innovations that can increase
lighting efficiency, such as ballasts and controls that determine light
levels as well as more efficient bulbs. Many firms are switching out
less efficient T-10 lighting with T-8 lighting. Adding computer
controls and occupancy sensors can also maximize lighting efficiency
by turning off lights in unoccupied spaces. In addition, replacing
other types of lighting, such as metal halide HID, mercury vapor, or
high pressure sodium lights, with T-5 florescent lighting can improve
efficiency.
The following examples demonstrate how leading companies in the
sector are increasing the efficiency of store lighting systems. Home
Depot and Lowe’s are using a T5 lighting system in some stores and
offices. Recent improvements in Target stores around the country
include more efficient exit signs, lowered ceiling heights to bring
lights closer to merchandise, skylights and dimming systems to
reduce light use during day. In June 1993, Wal-Mart opened a
prototype store in Kansas, called an Eco-store, with a glazed arch at
the entrance for day-lighting and advanced lighting monitors to
enhance the effectiveness of the skylights. In 2001, Wal-Mart tested a
new lighting scheme to create a brighter shopping atmosphere and
reduce energy costs. The system utilizes T8 lamps, electronic ballasts
and a fixture with a staggered reflective lamp design. The design
expands the light spread from the fixtures, improves vertical and
Source: Energy Information Administration, 1995 Commercial
Buildings Energy Consumption Survey
19
horizontal light distribution, uses 40% less electricity and provides
60% longer life than the standard lamp design.
HVAC system performance has improved greatly over the past
decade, making retrofits of older systems an excellent opportunity for
investment. Additionally, there is large potential to integrate these
systems with other systems in the store to achieve higher levels of
efficiency.
The following examples demonstrate how leading companies in the
sector are increasing the efficiency of HVAC systems. Wal-Mart
utilizes a heating and cooling system (as noted earlier) that utilizes ice
storage and coordinates space conditioning, dehumidification,
ventilation, indoor air quality, heat recovery and refrigeration in some
stores. In all stores, Wal-Mart uses high efficiency HVAC units with
an energy efficiency ratio of between 10.1 and 11, compared to the
standard of 9.0. Target has decreased chiller sizes by adding
economizer controls to packaged unit fan systems and initiated staged
cooling in stores with centralized HVAC systems. Target regularly
replaces 30 to 40 HVAC systems a year, constantly fine tunes the
energy management systems in stores and regularly calibrates
thermostats. Other related aspects of retrofitted Target stores include
ceiling fans to reduce need for air conditioning and a solar water
heater for all the water needs in the food area.
3.2.5 Building Design
In addition to upgrading existing systems and stores, leaders in the
sector have outlined energy and environmental standards for new
facilities. This enables them to lock in efficiency gains over the long
term by making sure the best available technology and architectural
properties are incorporated into each new store.
For example, Wal-Mart has three Eco-stores to serve as testing centers
for the most advanced environmental innovations in building design.
Features of the stores include a recycled asphalt parking lot, electric
car charging stations and an ice storage system to reduce peak
demand of cooling energy. The California Eco-store has an 18-
kilowatt solar photovoltaic canopy in place of ordinary opaque
roofing. Annual energy savings as a result of the canopy are
estimated to be between $75,000 to $80,000, resulting in a three-year
payback on the technology; Southern California Edison, the local
utility, provided a $170,000 incentive that shortened payback to less
than one year.
Daylighting is the most common design element utilized to increase
building energy efficiency. Wal-Mart and Costco use daylighting
20
extensively. Every new facility Wal-Mart builds includes skylights
with a dimming system; there are currently around 600 facilities with
the system. Wal-Mart completed an in-house study in 1998
concluding that its daylighting system utilized 25% to 35% less energy
than the daylighting systems that other big box competitors have
implemented.
Costco started investigating the benefits of daylighting in the late
1980s because management wanted to increase light levels without
increasing operating costs. The company currently utilizes skylights
in most stores. A single photosensor is positioned in one of the
skylights and signals the daylighting controller to turn the electric
lights on or off. Electrical circuits are zoned so that light fixtures
directly adjacent to a skylight (about one-third of all light fixtures in
store) are turned off when light levels rise above a first set point. The
next third of fixtures turn off when light levels get above a second
point, and the remaining third are always on during hours of
operation. The set points can be adjusted remotely. In most Costco
stores, skylights cover about 4% of the roof area, evenly distributed
over the shopping area. They are constructed of acrylic-clad
fiberglass and are approximately 40% more efficient than standard
skylights, maximizing natural light transmission with minimum heat
gain. As a result of this advanced design, Costco has been able to
reduce indoor lighting by two-thirds in some stores during the day
13
.
In addition to daylighting, the most proactive companies utilize
leading-edge insulation technology in walls and roofs, for example by
making their rooftops solar reflective. Wal-Mart, Costco and Lowe’s
have store roofs that are coated with a white, cement-based material
to reflect heat, resulting in an estimated 20% savings in energy costs.
3.2.6 Green Energy Purchasing
Several companies said they were investigating green energy sources.
However, Lowe’s is the only firm currently purchasing green power.
The company is the largest purchaser of Green Power Switch (GPS),
the renewable energy program offered by the Tennessee Valley
Authority (TVA). Lowe’s green power purchases total about 3% of its
monthly electrical use at the 32 Lowe’s stores where GPS is currently
available. The Environmental Protection Agency recognized Lowe’s
for its purchase of green power through its Green Power Partnership,
a voluntary initiative to establish green power procurement as a best
practice of environmental management. “Using clean energy is part of
our corporate citizenship,” says Robin Nickles, Vice President of
Retail Facilities Management for Lowe’s.
21
3.2.7 Selling Energy Efficient Products
General merchandising firms impact national energy efficiency in two
ways: through the energy management of their own facilities and by
promoting and selling energy efficient products. The EPA’s ENERGY
STAR program provides a highly successful and widely used scheme
for labeling energy efficient products. (The ENERGY STAR program is
discussed in Appendix B.) Within the sector, Innovest found wide
variations in the promotion of ENERGY STAR products. Leading
companies in the retail merchandising sector, such as Sears and
Lowe’s, offer a large selection of energy efficient labeled products.
They also make significant efforts to promote these products and
educate consumers about them.
Sears was awarded the ENERGY STAR Retail Partner of the Year for the
third year in a row in 2002 for its leadership in selling and promoting
products that carry the ENERGY STAR label and its R&D of ENERGY
STAR products. In California, Sears doubled its sales of ENERGY STAR
refrigerators in 2001. Other efforts to promote energy efficient
products include offering rebates on ENERGY STAR appliances at all
Sears stores in recognition of “ENERGY STAR Month” at Sears every
April. Sears brought the most water- and energy-efficient brand of
laundry products to the market in 2000 through 2001 and has
committed marketing dollars toward consumer education on the
benefits of buying and using ENERGY STAR products, including in-
store information, advertising and nationally distributed print media.
Lowe's also aggressively markets ENERGY STAR products. It has an
"energy center" on its website, where it promotes ENERGY STAR
products, allows people to search for ENERGY STAR rebates, advertises
classes on energy conservation offered at Lowe’s stores, and provides
a virtual tour of the DOE's Energy Savers model home. Lowe’s
printed 700,000 copies of a 12-page ENERGY STAR solutions guide for
distribution throughout all retail store locations in 2001. Most stores
also hold energy efficiency clinics periodically, covering topics such
as installing insulation, ceiling fans and programmable thermostats.
Lowe’s issued a press release discussing techniques to increase energy
efficiency in homes, promotion of ENERGY STAR products and the
results of a consumer survey on the importance of energy efficiency.
The market for energy efficient products is growing, driven by forces
including energy price and availability concerns as well as
promotional efforts. A study conducted by The Northwest Energy
Efficiency Alliance
14
concluded that promotion and consumer
education were key driving forces behind recent increases in sales of
energy efficient products. The ENERGY STAR program helps retailers
increase sales by providing important promotion and consumer
22
education materials. Retailers also benefit since ENERGY STAR
products generally provide a higher profit margin than non-labeled
products.
23
4.0 SUMMARY – DOES ENERGY MANAGEMENT ADD VALUE ?
Companies rated by Innovest in the top half were picked due to their
energy management programs and their overall engagement with key
energy management issues. Transparency also played a role as those
firms with leading edge practices tend to communicate them to
stakeholders. Conversely, lack of information regarding energy
management and environmental performance indicates a company is
less proactive than peers on environmental and energy management
issues. This often indicates less sophisticated management that may
underperform the market.
Innovest’s analysis of twelve firms in the retail merchandising sector
produced results that strongly imply energy management has profit
enhancing properties and generates value for shareholders. With a
small sample size, it is likely that factors other than energy
management are also influencing financial results. Nevertheless,
given the differentials found in many measures of economic
performance, it is reasonable to assume that energy management is
adding some value for investors.
To recap, Innovest’s analysis found that leaders in energy
management:
! Outperformed in the stock market over the past five years by
7,100 basis points (71 percentage points).
! Outperformed on price-to-earnings by 13%.
! Outperformed on price-to-book by 26%.
! Outperformed on return-on-assets by 49%.
! Outperformed on return-on-equity by 52%.
! Outperformed on return-on-invested capital by 16%
! Outperformed on Tobin’s Q, a measure of intangible value, by
8%.
In addition, firms active in the ENERGY STAR program outperformed
in the stock market over the past five years by over 6000 basis points
(60 percentage points).
These results strongly indicate proactive energy management
increases shareholder value. Therefore, investors will likely increase
returns by considering energy management and ENERGY STAR
participation when making investment decisions.
24
25
APPENDIX A: THE ENERGY MANAGEMENT RATING MODEL
To analyze relative energy management in this sector, Innovest
developed a multi-factored model (shown below). Data was gathered
from many sources including government websites, industry reports
and company documents. This was supplemented by interviews with
senior corporate executives.
Quantitative data was not available for some of the metrics.
Nevertheless, Innovest has found in research of nearly 50 industry
sectors that using a multi-factor model allows the creation of accurate
ratings in the absence of some data. The comprehensive energy
management ratings generated by this model are intended to estimate
management quality overall and stock market performance potential.
As a result, the management related metrics in the model receive the
highest weighting.
Given the differences found in the financial performance of the
energy leaders and laggards in this study, it is likely that this model is
accurately using relative energy management performance to gauge
overall management quality.
26
Table 1. Innovest Energy Management Assessment Model
1) Energy Management & Strategy A. Company Energy Policy & Strategy
B. Integration with Core Business Strategy
C. Globally Consistent Energy Approach
D. Energy Management System
E. Corporate Energy Manager
F. Internal Engineering Staff
G. ENERGY STAR Purchasing Policy
H. ENERGY STAR Involvement
I. Training: Promotion of Energy Efficiency
Among Employees and Customers
J. Energy Supply/Consulting
2) Energy Risk & Performance A. Energy Consumption per $ of Revenue
B. Energy Consumption per Sq. Ft. Per
Year(kWh/ft2 -or- BTU/ft2)
C. Performance Trends
D. Energy Savings
E. Facility Risk
F. Fuel Type Risk
G. What % of Peak Demand is Unoccupied
Demand
H. Energy Related Emissions
I. Average Load Factor
3) Energy Efficiency Initiatives A. Technology Replacement
B. Investment Requirements
C. R&D/testing unit
D. HVAC Technology
E. Lighting Technology
F. Alternative/Renewable Energy Use
G. Building Design
H. Computerized Energy Management
Technologies
I. Equipment Maintenance
4) Strategic Energy Opportunities
A. ENERGY STAR Products Offered and Related
Marketing and Educational Programs for
Customers
B. Market Positioning
C. Percent Sales Attributable to Energy Efficient
Products
27
APPENDIX B: THE EPA’S ENERGY STAR PROGRAM
EPA introduced the ENERGY STAR Program in 1992 as a voluntary
initiative designed to identify and promote energy-efficient products
and energy management in residential and commercial buildings.
Increased energy efficiency in consumer products and buildings leads
to reduced greenhouse gas emissions. The EPA works in partnership
with the Department of Energy (DOE) to promote the ENERGY STAR
label, with each agency taking responsibility for particular product
categories. In the commercial buildings sector, the ENERGY STAR label
is awarded to buildings that perform in the top quartile of energy-
efficiency for their space type. In 2001, the label was extended to
include retail food stores.
The following list describes the accomplishments of EPA’s ENERGY
STAR Program
15
:
! More than 9,600 organizations have partnered with the EPA to
improve their energy performance, committing over 12 billion
square feet or 17 percent of the total commercial, public, and
industrial building market.
! The EPA’s partners saved 38 billion kWh of energy and reduced
energy bills by $2.6 billion.
! Cumulative investments in energy-efficient technologies totaled
more than $6.3 billion.
! Participants prevented 7.4 million metric tons of carbon
equivalent (MMTCE) in 2001 alone.
! ENERGY STAR's partners comprise 30% of the stores and almost
15% of the floor space (1.8 billion square feet) of the retail food
industry.
28
APPENDIX C: ACTIVE ENERGY STAR COMPANIES VS. RETAIL INDEX
Table 2. Companies Comprising the Dow Jones Broad Line Retail Index
BON-TON STORES, INC. (THE) MAY DEPARTMENT STORES CO (THE)
RITE AID CORPORATION SEARS, ROEBUCK AND CO.
DILLARD'S, INC. FOODARAMA SUPERMARKETS, INC.
WINN-DIXIE STORES, INC. PERFORMANCE FOOD GROUP COMPANY
BUCKLE INCORPORATED (THE) FAMILY DOLLAR STORES, INC.
LONGS DRUG STORES CORPORATION RUDDICK CORPORATION
DUCKWALL-ALCO STORES, INC. WEIS MARKETS INC
SHOPKO STORES INCORPORATED EAGLE FOOD CENTERS, INC.
SANDERSON FARMS, INC. PRICESMART, INC.
WALGREEN CO TARGET CORPORATION
FRED'S INC DOLLAR GENERAL CORPORATION
VILLAGE SUPER MARKET, INC. MCKESSON CORPORATION
KROGER CO (THE) ARDEN GROUP INCORPORATED
SAFEWAY INC SMART & FINAL INCORPORATED
HARRY'S FARMERS MARKET, INC. COSTCO WHOLESALE CORPORATION
GREAT ATLANTIC & PACIFIC TEA CO INC (THE) BJ'S WHOLESALE CLUB INCORPORATED
ALBERTSON'S INC. VALUE CITY DEPARTMENT STORES, INC.
SUPERVALU INC. AMES DEPARTMENT STORES, INC.
WHOLE FOODS MARKET INC WILD OATS MARKETS, INC
STEIN MART
CASEY'S GENERAL STORES
INCORPORATED
WAL-MART STORES INC MAYS (J.W.), INC.
UNITED NATURAL FOODS INC FLEMING COS INC
MARSH SUPERMARKETS, INC. PENNEY [J C] CO INC
FEDERATED DEPARTMENT STORES,
INCORPORATE GREEN MOUNTAIN COFFEE, INC.
CVS CORPORATION 7-ELEVEN INCORPORATED
FRESH AMERICA CORP. DRUGMAX.COM INC.
HOMELAND HOLDING CORPORATION DAIRY MART CONVENIENCE STORES, INC.
INGLES MARKETS INCORPORATED K MART CORPORATION
PENN TRAFFIC COMPANY (THE) NEW WORLD RESTAURANT GROUP, INC.
QUENTRA NETWORKS, INC. UNI-MARTS, INC.
SYSCO CORPORATION HORIZON PHARMACIES, INC.
NASH FINCH COMPANY DRUG EMPORIUM, INC.
PHAR-MOR, INC.
The designation of active in the ENERGY STAR program was assigned
based on consideration of several factors including proactively using
ENERGY STAR tools and services to improve the energy efficiency of
facilities, receipt of an ENERGY STAR award, and aggressive promotion
and marketing of ENERGY STAR labeled products. Firms considered to
be active in the ENERGY STAR program are not shown in this summary
report. These firms are shown in the full report which is available
from Innovest.
29
APPENDIX D: REFERENCES & FOOTNOTES
1
The term “energy efficiency” is typically defined as intensity of energy use, or
energy used per unit of output. Since all firms did not provide energy use data,
Innovest used a comprehensive model (shown in Appendix A) to rate energy
management and impute energy efficiency;
2
Partial funding for this study was provided by the U.S. Environmental Protection
Agency;
3
1992 Census of Retail Trade, U.S. Department of Commerce, Economics and
Statistics Administration, Bureau of the Census;
4
Skylighting and Retail Sales: An Investigation into the Relationships Between
Daylighting and Human Performance, Heschong Mahone Group; August 1999;
5
1999 Report on Socially Responsible Investing Trends in the United States, Social
Investment Forum, 1999;
6
RDEC-97 Energy Conservation Industry Review, Business Communications
Company, Inc., November 1998;
7
1995 Commercial Buildings Energy Consumption Survey, Energy Information
Administration;
8
For more about climate change and likely outcomes and policies see: Climate
Change 20001 – the Scientific Basis; Intergovernmental Panel on Climate Change,
UNEP 2001;
9
Source: Natsource – a pollution credits trading firm that handles trades in carbon
pollution credits. For current pricing contact Michael Intrator, Managing Director at
1.212.232.5305 or [email protected];
10
Energy Efficiency Opportunities: Big Box Retail and Supermarkets, Rick Fedrizzi
and Jim Rogers, The Center for Energy and Climate Solutions, May 2002;
11
Dual-path Heat Pump System used in Superstore, Centre for the Analysis and
Dissemination of Demonstrated Energy Technologies, International Energy Agency &
the Organization for Economic Co-operation and Development, February 2000;
12
Emerging Energy Saving Technologies and Practices for the Buildings Sector,
American Council for and Energy Efficient Economy, Davis Energy Group, & E
Source , Dec. 1998;
13
Daylighting Initiative, Design Tools and Information from PG&E, Pacific Gas and
Electric Company, 1999;
14
ENERGY STAR
®
Residential Lighting Program No. 1, Market Progress Evaluation
Report, Report #EO2-101, ECONorthwest, June 2002;
15
2001 ENERGY STAR Annual Report, Environmental Protection Agency
APPENDIX E: ONE PAGE COMPANY PROFILES
RATI NG: RANKI NG:
New York: (212) 421-2000 London: +44 (0) 20 7743 8871 Toronto: (905) 707-0876 Paris: +33 1 4886 0369 www.innovestgroup.com
Energy Ri sk Fact ors
The company's overall risk is low relative to competitors, as it is on the leading edge of
implementing energy management techniques. For example, Lowe's is the largest
purchaser of Green Power Switch (GPS) - the renewable energy program offered by the
TVA. The company's green power purchases total about 3% of its monthly electrical use
at the 32 stores were GPS is available. Not only is this environmentally beneficial, but it
signifies the company's willingness to be a first mover on implementing new
technologies. As a result of investments in green power, combined with investments in
technology and energy efficiency education, the company's exposure to energy price
volatility is low relative to peers.
St rat egi c Prof i t Opport uni t i es
Lowe's has an "Energy Center" on its website, where it promotes ENERGY STAR
products, allows people to search for ENERGY STAR rebates and tour the DOE's
Energy Savers model home and lists schedules for energy conservation classes offered
at Lowe's stores. October 2002 was energy efficiency month at Lowe’s; the company
printed a 12 page ENERGY STAR solutions guide for distribution throughout stores and
most stores held energy efficiency clinics on weekends during the month. The clinics
covered topics such as installing insulation, ceiling fans and programmable thermostats.
1
Rel at i ve Energy Perf ormance
Company Overvi ew
Lowe' s Compani es I nc
LOW
Energy Management
AAA February-03 SECTOR: RETAI L
Lowe's is a $22 billion retailer of a complete line of home
improvement products and equipment; it is the world's
second largest home improvement retailer and the 14th
largest retailer in the U.S. The company is in the midst of
an aggressive expansion plan, opening a new store every
three days on average. The company's current store
prototype has a 121,000-square-foot sales floor with a
lawn and garden center averaging an additional 30,000
square feet. In 2001, Lowe's opened 115 new stores, the
majority of which were in metropolitan markets. In 2002,
the company plans to open 123 new stores and continue
its emphasis on cities with populations greater than
500,000.
Fi nanci al Perf ormance ( st ock pri ce change)
Energy Management & St rat egy
Lowe's leads the industry in integrating energy management into its overall business
strategy. Its energy management strategy focuses on equipment efficiency and central
automation of lighting and HVAC systems, complemented by an emphasis on energy
efficient building design and the use of green power in certain locations. Lowe's sells and
promotes a wide range of energy efficient products; promotional efforts include customer
workshops, easy access to highly trained employees and a TV commercial publicizing
the financial benefits of utilizing energy efficient products in the home. Unique to Lowe's
is its utilization of leading-edge technologies in office buildings, which is a sign of how
pervasive energy management is throughout the company. The corporate energy team
consists of six people; local store manager compensation is not linked with energy
management due to the high level of centralization.
Energy Perf ormance & I ni t i at i ves
Lowe's has had centrally automated lighting and HVAC systems since the mid 1980s,
with real-time information transfer. All stores have override capability; overrides are
monitored on a daily basis so that they can be kept to an absolute minimum. Lowe's
makes efforts to smooth spikes and peak demand, such as coordinating HVAC systems
with outdoor lighting and staged indoor lighting. Building design elements utilized include
daylighting, mostly in California and Arizona stores, and "cool" roofs in many stores
across the country. Most store lighting is T8 with electronic ballasts, although the
company is considering shifting to T5 lighting in the future. Energy management is an
important consideration in construction of new office buildings as well as stores. Energy
management initiatives at office buildings include lowered square footage per person,
daylighting, fretted glass, high efficiency chillers and boilers, T5 bulbs for indirect lighting,
occupancy sensors, dual switching and building commissioning to ensure high
performance of equipment.
This report is for information purposes and should not be considered a solicitation to buy any security. Neither Innovest
Strategic Value Advisors nor any other party guarantee its accuracy or make warranties regarding results from its usage.
Redistribution is prohibited without written permission. Copyright © 2003.
Strategic Opportunities
Green Energy Supplies
Technology Replacement
Building Design
Performance Trends
Energy Management Capacity
Below Avg. Avg. Above Avg.
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LOW
I n d. A v
Innovest
Strategic Value Advisors
RATI NG: RANKI NG:
New York: (212) 421-2000 London: +44 (0) 20 7743 8871 Toronto: (905) 707-0876 Paris: +33 1 4886 0369 www.innovestgroup.com
Energy Ri sk Fact ors
The company's overall risk is low relative to competitors. Energy management initiatives
and capital spending will ensure improved performance by lowering operating costs.
Although Costco has not significantly invested in renewable energy sources to date, it is
presently evaluating these options. As a result, the company will probably be well
positioned to integrate renewable energy options as costs decline. Costco's investments
in technology and energy efficiency education lower its exposure to energy price volatility
.
St rat egi c Prof i t Opport uni t i es
During the California energy crisis, Costco implemented an emergency energy
management scheme and reported to the California Technology, Trade and Commerce
Agency that it received positive feedback from its member shoppers after implementing
the procedures. Costco sells some ENERGY STAR products and highlights them on its
website. Industry leaders educate consumers on the benefits of purchasing the products
more comprehensively and offer rebates to subsidize the higher up-front costs.
2
Rel at i ve Energy Perf ormance
Company Overvi ew
Cost co Whol esal e Corporat i on
COST
Energy Management
AAA February-03 SECTOR: RETAI L
Costco Wholesale is the largest wholesale club operator
in the U.S., operating 385 membership warehouse stores
serving more than 36 million members in the U.S.,
Canada, Japan, Mexico, South Korea, Taiwan and the
UK. Stores offer discount prices on 3,700 to 4,500
products (many in bulk packaging), ranging from alcoholic
beverages and appliances to fresh food, pharmaceuticals
and tires. Certain club memberships also offer products
and services such as car and home insurance, mortgage
and real-estate services, and travel packages. Revenues
for the fiscal year ending August 2002 were $38.7 billion.
Fi nanci al Perf ormance ( st ock pri ce change)
Energy Management & St rat egy
Costco has a comprehensive energy management strategy in place that focuses
primarily on facilities management and technology upgrades. Facilities management
improvements are accomplished by educating employees at the store level,
implementing building management systems and tracking facility performance. Upgrades
of lighting, HVAC and refrigeration technologies are considered on a regular basis. In
response to the energy crisis in California, Costco adopted Emergency Conservation
Management Guidelines to be implemented nationwide. At the corporate level, there is a
team of four individuals responsible for implementing the energy strategy, with the
facilities, construction and purchasing departments involved at all levels of operation. At
a minimum, detailed reviews usually occur at least twice a year.
Energy Perf ormance & I ni t i at i ves
Stores are treated as separate profit centers with energy costs incorporated into the
facility's overall profit targets. As a result, each store manager is responsible for energy
management at the store level, with compensation tied to energy performance. Stores in
similar regions are benchmarked against one another. Costco has reduced total energy
consumption by approximately 10% as a result of its energy management programs. The
company's most widespread energy management initiative seems to be the integration of
daylighting into its stores; the installation of acrylic-clad fiberglass skylights, coupled with
photo sensors and zoned electrical circuits, is estimated to conserve 1.5 kWh/sq.ft./year
or $23,000 per store. The majority of stores have programmable building control systems
for HVAC, lighting and daylighting controls. Multi-site tracking is now operational at all
U.S. and Canadian sites, with one of the main functions being override monitoring.
Costco pursues construction incentives from local utilities promoting energy efficiency
technologies and state agencies for both new stores and retrofitting of old stores.
This report is for information purposes and should not be considered a solicitation to buy any security. Neither Innovest
Strategic Value Advisors nor any other party guarantee its accuracy or make warranties regarding results from its usage.
Redistribution is prohibited without written permission. Copyright © 2003.
Strategic Opportunities
Green Energy Supplies
Technology Replacement
Building Design
Performance Trends
Energy Management Capacity
Below Avg. Avg. Above Avg.
-30%
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COST
I n d. A v
Innovest
Strategic Value Advisors
doc_548829618.pdf
Innovest Strategic Value Advisors, a financial research firm based in New York, London, Paris and Toronto, analyzed relative energy efficiency and management performance in the retail merchandising sector.
Innovest Strategic Value Advisors
Energy Management Leaders Achieve
Superior Stock Market Returns in the
Retail Merchandising Sector
Summary Report*
E
EN NE ER RG GY Y M
MA AN NA AG GE EM ME EN NT T &
& I
IN NV VE ES ST TO OR R R
RE ET TU UR RN NS S
:
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February 2003
* This Summary Report does not provide company specific ratings
and profiles. This information is published in the full report, which
is available from Innovest at 1-646-237-0220 or
[email protected].
No part of this report may be reproduced in any manner without
the written permission of Innovest Strategic Value Advisors, Inc. The
information herein has been obtained from sources, which we
believe to be reliable, but we do not guarantee its accuracy or
completeness. All opinions expressed herein are subject to change
without notice. Innovest Strategic Value Advisors, Inc., its affiliated
companies, or their respective shareholders, directors, officers
and/or employees, may have a position in the securities discussed
herein. The securities mentioned in this document may not be
eligible for sale in some states or countries, or suitable for all types
of investors; their value and the income they produce may fluctuate
and/or be adversely affected by exchange rates. ©2003 Innovest
Strategic Value Advisors, Inc. All rights reserved.
New York Office: 4 Times Square, 3rd Floor, New York, NY 10036
(212) 421-2000 Fax (212) 421-9663
Toronto Office: 225 East Beaver Creek Road Suite 300, Richmond Hill
Ontario L4B 3P4 CANADA (905) 707-0876 Fax (905) 707-9084 .
London Office: 1 Cornhill, London EC3V 3ND, United Kingdom +44
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Paris Office: 1 Rue des Reservoirs, B605, 94340 Joinville-le-Pont,
France +33 01 48 86 03 69
www.innovestgroup.com
i
Contents
1.0 EXECUTIVE SUMMARY.......................................................................................1
1.1 ENERGY STAR PARTNERS: STOCK MARKET PERFORMANCE..................................3
1.2 THE BUSINESS CASE FOR ENERGY EFFICIENCY....................................................5
2.0 SECTOR ENERGY ISSUES..................................................................................8
2.1 THE FINANCIAL IMPACT OF ENERGY USE...............................................................8
2.1.1 The U.S. Energy Market..............................................................................8
2.2 RISK FACTORS...................................................................................................10
2.2.1 Uncertainty & Volatility..............................................................................10
2.2.2 Climate Change........................................................................................10
3.0 ANALYZING ENERGY MANAGEMENT PERFORMANCE.................................12
3.1 CRITICAL ELEMENTS OF AN ENERGY MANAGEMENT STRATEGY............................12
3.2 LEADING ENERGY MANAGEMENT PRACTICES......................................................14
3.2.1 Energy Management Capacity..................................................................14
3.2.2 Performance Trends.................................................................................16
3.2.3 Systems Management and Integration......................................................17
3.2.4 Technology Replacement/Installation.......................................................17
3.2.5 Building Design.........................................................................................19
3.2.6 Green Energy Purchasing.........................................................................20
3.2.7 Selling Energy Efficient Products..............................................................21
4.0 SUMMARY – DOES ENERGY MANAGEMENT ADD VALUE ?..........................23
APPENDIX A: THE ENERGY MANAGEMENT RATING MODEL.............................25
APPENDIX B: THE EPA’S ENERGY STAR PROGRAM...........................................27
APPENDIX C: ACTIVE ENERGY STAR COMPANIES VS. RETAIL INDEX.............28
APPENDIX D: REFERENCES & FOOTNOTES........................................................29
APPENDIX E: ONE PAGE COMPANY PROFILES………...…..…….…….………32-33
ii
Figures
Figure 1. Retail Merchandising Companies Examined in This Study...........................1
Figure 2. Stock Market Performance: Energy Management Leaders vs. Laggards.....2
Figure 3. Financial Performance: Energy Management Leaders vs. Laggards...........2
Figure 4. Retail ENERGY STAR Active Companies vs. Broad Line Retail Index............3
Figure 5. Average Monthly Commercial Electric Rates (1990-2001) by State.............9
Figure 6. Changes in Electricity Rates '90-'95 vs. '96-'01............................................9
Figure 7. Site Energy Use in Retail Buildings.............................................................18
Tables
Table 1. Innovest Energy Management Assessment Model ......................................26
Table 2. Companies Comprising the Dow Jones Broad Line Retail Index.................28
1
R
1.0 EXECUTIVE SUMMARY
Innovest Strategic Value Advisors, a financial research firm based in
New York, London, Paris and Toronto, analyzed relative energy
efficiency and management performance in the retail merchandising
sector
1
. The study found that energy management leaders achieved
superior stock market and financial performance over the past five
years
2
.
Company-specific energy consumption data is usually not available
in this sector (in general, only the most proactive companies disclose
data in an effort to enhance stakeholder relations). To analyze
performance in the absence of data, Innovest selected twelve of the
largest retail merchandising companies (representing over 70% of the
market capitalization of the Dow Jones Broad Line Retail index). It
then analyzed the firms using a comprehensive rating model
comprised of over 30 quantitative and qualitative metrics shown in
Appendix A.
Figure 1 shows the scores for the twelve companies analyzed in this
report. (This summary report only identifies the two top rated
companies. The full report, which includes information on all twelve
firms, is available from Innovest at 1-646-237-0220 or
[email protected].)
Ticker Company Rank Rating Score
LOW Lowe's Companies Inc 1 AAA 1632
COST Costco Wholesale Corporation 2 AAA 1458
XX XXXX 3 AA 1321
XX XXXX 4 AA 1292
XX XXXX. 5 A 1163
XX XXXX 6 BBB 978
XX XXXX 7 BBB 893
XX XXXX 8 BB 671
XX XXXX 9 B 586
XX XXXX 10 CCC 340
XX XXXX 11 CCC 296
XX XXXX 12 CCC 259
Figure 1. Retail Merchandising Companies Examined in This Study
etail Merchandising Energy Analysis
2
Figure 2 shows that the six companies with above average energy
management performance, taken as a group, outperformed the below
average companies over the past five years by over 7100 basis points
(71 percentage points).
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Difference EM Leaders EM Laggards
Figure 2. Stock Market Performance: Energy Management Leaders vs.
Laggards
Figure 3 shows that the energy management leaders also
outperformed the laggards on price-to-earnings (13%), price-to-book
value (26%), return-on-assets (49%), return-on-equity (52%), return-
on-invested capital (16%) and Tobin’s Q, a measure of intangible
value (8%).
Figure 3. Financial Performance: Energy Management Leaders vs. Laggards
Ret urn On Asset s
6.09
9.08
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00
Pr ice Ear ningsRat io
17.75
20.10
0.00 5.00 10.00 15.00 20.00 25.00
Pr ice - Book Rat io
2.78
3.49
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
Ret ur n On Equit y Per Shar e
11.58
17.61
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00
Ret ur n On Invest ed Capit al
11.06
12.82
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00
Tobin' sQ
2.13
2.29
0.00 0.50 1.00 1.50 2.00 2.50
Top Half Group Bottom Half Group
3
1.1 ENERGY STAR PARTNERS: STOCK MARKETPERFORMANCE
To further assess possible links between energy management and
stock market performance, a less complex analysis was performed. In
this analysis, retail merchandising companies actively involved in the
U.S. Environmental Protection Agency’s (EPA) ENERGY STAR®
program were compared to the Dow Jones Broad Line Retail index.
ENERGY STAR is a government program that is widely considered to
be successful in promoting improvements in national energy
management. The program works with industry to develop energy
efficiency standards for various residential and commercial products
as well as buildings. It awards the ENERGY STAR label to those
products and buildings that meet these standards. ENERGY STAR also
encourages strategic energy management practices for commercial
and industrial partners. Appendix B provides more information on
the ENERGY STAR program.
Figure 4 shows that, over the past five years, retail merchandising
companies actively involved in ENERGY STAR outperformed the Broad
Line Retail index by over 6000 basis points (60 percentage points).
Appendix C shows the companies included in the Dow Jones Broad
Line Retail Index. This summary report does not identify firms
considered to be active in ENERGY STAR. These are included in the full
report which is available from Innovest.
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Difference Active ES Companies DJ Index
Figure 4. Retail ENERGY STAR Active Companies vs. Broad Line Retail
Index
4
Accurately assessing corporate energy management performance is a
complex task, probably outside the expertise of most financial
analysts. Innovest’s research in many sectors indicates that
companies significantly involved in ENERGY STAR are usually leaders
in overall energy management. Therefore, assessing the level of
involvement in the ENERGY STAR program provides an easy way for
analysts to estimate relative energy management performance. In
Innovest’s comprehensive assessment of energy management
described above, ten of the twelve companies analyzed were involved
in the ENERGY STAR program. The companies rated most highly on
energy management were consistently the most active in the ENERGY
STAR program.
Since many factors influence financial performance, it is likely that
energy management is not the only driver of financial results in these
studies. Nevertheless, given the large differentials found, the proxy
value for management quality, and the significant financial benefits
accruing from improved energy performance, it is likely that
enhanced energy management does increase investor returns.
Management quality is a primary determinate of stock market
performance. Yet management quality is difficult to quantify since it
is subjective. Innovest has found in nearly every sector that
environmental leaders outperform in the stock market, mainly
because environmental performance is a strong proxy for
management quality. (Innovest’s primary business is conducting
comprehensive, financially-oriented assessments of corporate
environmental and social performance. Financial institutions such as
ABN-AMRO, Dreyfus, ING, Rockefeller & Co, Schroders, State Street
Global Advisors, T. Rowe Price and many others, use Innovest
research to develop investment products intended to outperform
mainstream funds—see www.innovestgroup.com for more
information.)
The environment is one of the most complex challenges facing
management, in part because there are high levels of uncertainty as
well as many stakeholders and complex issues to address. It is
implied that companies dealing well with this high level of
complexity have the sophistication to succeed in other parts of the
business and, thereby, earn superior returns. Energy management is
an important aspect of environmental performance which also poses a
complex challenge to management. As a result, it is likely that energy
management performance is also a strong indicator of management
quality and stock market potential.
5
1.2 THE BUSINESS CASE FOR ENERGY EFFICIENCY
The correlations found in the above study are partly explained not
only by the proxy value for management quality, but also by the
financial and competitive benefits that result from improved energy
efficiency. In the retail merchandising sector, companies reported
achieving the following benefits:
! Reduced Operating Costs. As a major cost area, several firms
covered in this report have increased profitability by
proactively reducing energy costs. In the retail sector, utility
expense is the third largest component of operating costs for
un-leased retail space and the fourth largest component of
operating costs for leased retail space
3
. In spite of aggressive
energy management by many firms, significant potential exists
in this sector to enhance profitability by further improving
energy efficiency. The body of this report, along with the
company profiles in Appendix E, details how companies are
improving energy efficiency.
! Increased Productivity and Sales. Improving energy
management usually enhances lighting and HVAC (heating,
ventilating and air conditioning) performance. Optimally
operating HVAC systems can contribute to reduced lost work
time related to illness resulting from inefficient heating or
cooling. Efficiency improvements may also enhance sales. For
example, installing skylights can significantly reduce energy
costs while promoting higher sales. In a study conducted on
behalf of the California Board for Energy Efficiency for the
third party program administered by PG&E, skylights were
found to be positively and significantly correlated to higher
sales
4
. All other things being equal, an average non-skylit
store would likely have 40% higher sales with the addition of
skylights; after the number of hours open per week, the
presence of skylights was the best predictor of the sales per
store of all variables considered in the study.
! Reduced Regulatory Exposure. Electricity generation
produces about two thirds of the sulfur dioxide emissions and
one third of the nitrogen oxides and carbon dioxide emissions
in the U.S. Under existing regulations, U.S. utilities will be
required to reduce sulfur dioxide and nitrogen oxides
emissions by as much as 70% over the next ten years.
Regulators in Europe are pressuring commercial users to
reduce emissions. With U.S. utilities facing growing pressure
to reduce emissions, it is likely that commercial firms will face
similar pressures over time, as are companies in Europe.
6
Energy management leaders will be less vulnerable to these
increasing regulations.
! Reduced Vulnerability to Energy Price Fluctuations.
Deregulation, Middle East turmoil, concerns about terrorism,
and other factors are increasing volatility in the energy
markets. California retail companies saw energy price
increases of up to 100% in 2001. Given tight margins, this had
significant negative impacts on profitability in many cases. To
protect earnings, companies such as Costco aggressively
developed emergency energy management plans. Ongoing
improvements in energy efficiency will minimize exposure to
volatile energy markets.
! Enhanced Public Image. As environmental problems such as
global warming continue to receive greater media attention,
consumers and the public in general are focusing more on
corporate environmental performance. In the face of this
trend, companies consistently report that improving
performance significantly enhances their reputation as a
responsible corporate citizen. Image enhancement is one of
the most common benefits reported by ENERGY STAR
participants. Most companies analyzed in this report are
expanding operations. Maintaining an image as a responsible
corporate citizen, in part by improving energy efficiency,
minimizes community opposition to opening new stores.
Once stores are opened, a positive environmental image
contributes to increased sales and enhanced community
relations.
! Enhanced Reputation within the Financial Community as a
Well Managed Company. As noted previously,
environmental performance consistently correlates with
financial performance. This occurs mainly because the
environment represents a complex challenge to management
and is therefore a good indicator of management quality, a
primary determinate of financial performance and a key
metric for the financial community. As indicated by this
study, energy management, a key element of environmental
performance, is also likely to be a strong indicator of superior
management and stock market potential.
! Enhanced Appeal to Socially Responsible Investors. SRI
funds have grown rapidly in North America, Europe and
Japan over the past five years. The Social Investment Forum
estimates that over $2 trillion of invested U.S. assets are
invested through some type of environmental or social
7
screen
5
. Many of the largest financial institutions in the world
have introduced SRI funds based on research provided by
Innovest and other organizations. When screening for
environmental issues, SRI researchers usually consider energy
efficiency to be a key element of environmental performance,
partly because it has a significant impact on global warming.
As the growing SRI market increasingly favors companies
with superior energy performance, upward pressure will be
placed on the returns of energy management leaders,
increasing the likelihood that they will earn market premiums.
! Market Opportunity for Energy Efficient Product Sales.
According to the Business Communications Co., Inc. study
Energy Conservation Review
6
, sales of high efficiency
products in the U.S. were $28.1 billion in 1999 and estimated to
grow at an average annual rate of 8.2% for the successive five-
year period, reaching $41.7 billion in 2004. The largest
segment of energy efficient products is residential products -
projected to be $17 billion in 2004 - followed by commercial
appliances, water heaters, lighting and HVAC systems. This
consumer trend presents significant opportunity for retailers
to establish themselves as the retailer with the widest
selection, most knowledge of the products and most rebates
offered; thus gaining significant market share.
The preceding factors summarize the various ways in which superior
energy management can add value for shareholders. Beyond this,
with intangible value comprising a growing percentage of market
capitalization, investors are seeking greater clarity on the drivers of
intangible value. Energy management, as an indicator of
management quality and reputation, can be used as one indicator of
superior intangible value and stock market potential. Innovest’s
analysis found wide variations in corporate energy management
performance in the retail merchandising sector. These differentials
have strong implications for investors. Given the financial benefits
resulting from improved energy performance found in this study, it is
likely that incorporating energy management analysis into traditional
financial analysis will help investors uncover hidden value and
increase investment returns.
The following sections describe overall energy trends as well as how
companies are enhancing financial returns by improving energy
management in the retail merchandising sector. The company
profiles shown in Appendix E summarize the energy strategy,
management initiatives, profit opportunities and risk factors for each
firm.
8
2.0 SECTOR ENERGY ISSUES
2.1 THE FINANCIAL IMPACTOF ENERGY USE
Retail and service buildings are second only to office buildings in
energy spending at $14 billion per year. Energy expenditures in these
buildings account for 20% of all commercial energy expenditures and
use a total of 973 trillion Btu of combined electricity, natural gas, fuel
oil, and district steam or hot water
7
.
The financial impact of energy use on a retail merchandising
company can be quite significant in some cases, as illustrated by the
California energy crisis. As prices for natural gas rose dramatically,
the cost of generating electricity rose accordingly. Many companies,
such as Costco, realized significant financial value from improving
energy management. They have since extended many practices
developed in California to other regions.
2.1.1 The U.S. Energy Market
Electricity markets in the United States vary widely in terms of their
level of regulation and prices for commercial customers. Many of the
most desirable markets for retail stores are located in states with
above average energy prices (See Figure 5). Therefore, to be more
competitive in the largest markets, retail merchandising companies
often work aggressively to improve energy efficiency. Electricity
prices are set by each state. Many states have moved towards
deregulation of their electricity markets with the goal of reducing
energy costs. After the California debacle, several states are slowing
deregulation plans.
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Many of the largest markets for the retail
sector exist in states that have above average
electricity pricies. These states represent
41% of the US population. (Not all above
average cost states shown.)
Source: Dept.of Energy- Avg. Monthly Commercial Prices 1990-2001 by State
Figure 5. Average Monthly Commercial Electric Rates (1990-2001) by State
Figure 6 shows that some major markets, such as New York, have had
rising electricity prices over the last decade. As prices rise, energy
management investments become more attractive since payback
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Figure 6. Changes in Electricity Rates '90-'95 vs. '96-'01
This Chart shows states with
average energy price increases
in cents per kWh from the first
half of the 90’s (1990-95) to the
latter half (1996-2001)
10
2.2 RISK FACTORS
2.2.1 Uncertainty & Volatility
Many firms aggressively pursue energy management to reduce
exposure to price volatility. While energy forecasts often show stable
prices, the experience of those in California, New York and many
other states has been otherwise. Figure 6 above shows states with
rising prices over the past decade. As prices rise, the benefits of
efficiency rise with them. As Figure 5 illustrates, electricity markets
can be quite volatile. Retail merchandising firms that prepare in
advance for energy price fluctuations by increasing efficiency should
reap benefits when costs rise unexpectedly.
Energy management can help mitigate costs from energy price
increases, for example, by coordinating responses at all locations so
that short-term demand is reduced. New technologies such as fuel
cells, natural gas distributed generating units, photovoltaics, and
wind turbines may help retail merchandising companies further
reduce peak demand. While companies in this sector are not
currently actively pursuing these types of alternative energy
technologies, several leading companies indicated that they evaluate
the possibility on a regular basis and would move forward with the
technology as soon as the payback period shortens.
While energy costs in the U.S. are low compared to many
industrialized nations, several factors are placing upward pressure on
prices. One major factor is growing concern about the negative
environmental and public health impacts of electric power plant
emissions. These concerns have driven the implementation of federal
and state regulations that will require reductions of nitrogen oxides
and sulfur dioxide emissions of up to 75% over the next ten years in
many cases. Restrictions on mercury and carbon dioxide emissions
are also likely over the next ten years. Other factors driving prices up
include growing instability in oil markets and the failure of state
deregulation to deliver on price reductions. Companies aggressively
pursuing superior energy management will be better insulated from
price increases.
2.2.2 Climate Change
Climate change has broad implications for the whole economy. Most
affected, however, will be the electric utility sector. This is because
the combustion of coal, oil, and natural gas to generate electricity is
the largest source of carbon dioxide emissions. Carbon dioxide traps
energy from the sun in the earth’s atmosphere and causes it to warm
up. As the science
8
behind climate change begins to drive regulatory
11
policies, the ultimate impact of these initiatives on the price of
electricity remains undetermined.
Under the United Kingdom’s carbon pollution credits trading
program, the price for carbon is currently around $13 per ton (as of
August 21, 2002), which is up from $6 at the beginning of 2002
9
. Shell
currently estimates the future cost of carbon will be about $25 per ton.
As carbon costs are imposed on electricity generators, the cost of
generating electricity will rise accordingly, especially for coal- and oil-
based generators. Therefore, superior energy management can help
companies maintain profitability if cost increases were to materialize.
Should climate change-related cost increases materialize, cost
projections for capital investment options will favor more aggressive
energy management. Firms that are leaders would realize additional
gains from their investments in energy management in addition to
achieving a lower cost structure under normal business conditions.
Lowe’s is currently sourcing green power from the TVA where it is
available in an effort to lessen environmental impact from energy
consumption.
12
3.0 ANALYZING ENERGY MANAGEMENT PERFORMANCE
3.1 CRITICAL ELEMENTS OF AN ENERGY MANAGEMENTSTRATEGY
To assess the financial impacts of energy management in the retail
merchandising sector, Innovest developed a comprehensive
methodology for analyzing relative corporate performance (see
Appendix A). The model looks at corporate policies, performance
trends, savings estimates, technology assessment initiatives, training
programs, strategic profit opportunities and many other factors. Data
sources include government websites, third party research and
company-supplied information. This information is supplemented
with interviews with company executives. Innovest’s analysis
showed a wide range in the level of commitment to energy
management and the willingness of management to discuss energy
and environmental performance with stakeholders.
The following sections summarize several of the metrics considered in
this analysis. These metrics include energy management capacity,
performance trends, systems management and integration, extent of
technology replacement/ installation, building design, alternative
energy sourcing and strategic profit opportunities pursued.
Energy Management Capacity:
This metric broadly refers to the quality of processes in place to
ensure effective communication between individual stores and the
corporate energy team, as well as between the corporate energy team
and industry peers and external stakeholders. This is considered
important because it can gauge the strategic priority placed on energy
management at the corporate level. Participation in best practice
sharing, training of employees at all levels and a relatively longer-
term view of energy management are important indicators of high
energy management capability. This metric indicates to what extent
energy efficiency programs and practices are in place in the case
where quantitative data is lacking.
Senior management commitment to energy management is also a
primary factor determining the level of capability. Implementing a
proactive energy management system is a complex task. Even simple
eco-efficiency measures, such as installing energy efficient light bulbs,
require a strong commitment on the part of management to ensure
that such measures are consistently applied. Additionally, since some
of the benefits of improving energy efficiency are intangible and
difficult to quantify, such as enhanced image and productivity, not all
13
companies will act to improve performance. Therefore, this
complexity potentially makes energy management a good indicator of
management quality and thus stock market performance.
Performance Trends:
This metric generally indicates the implementation success of an
energy management strategy. Companies that take their energy
management strategy seriously are able to, at the least, compile data
on performance indicators such as percent decrease in total energy
consumption, the average load factor, unoccupied demand and the
energy consumption of an average store. The availability of this data
is important so that it can be compared with data before the energy
strategy was implemented and thus justify the existence of the energy
management team, efforts and expenditures within the company and
to external stakeholders. If performance trend data is not available to
prove the usefulness of the energy management program, the
program could be at risk of being perceived as ineffective and thus
receive less support from the executive level and external
stakeholders.
Systems Management and Integration:
This refers to the extent to which companies take a systems view of
energy management. Sector leaders implement sophisticated energy
management systems that allow system-wide monitoring of energy
performance. In addition, leaders seek to maximize the integration of
various systems and thereby minimize overall energy use.
Technology Replacement and Installation:
This refers to the extent to which energy efficient technologies such as
T8 lighting with electronic ballasts, high efficiency HVAC units,
efficient escalator motors and motion and occupancy detectors have
been installed in stores. Innovest analyzed the proactiveness of
technology replacement and installation by considering the tendency
to upgrade equipment versus maintain older, less efficient equipment.
This metric indicates whether the company is likely to be a first mover
or a follower in high efficiency technology replacement and
installation in the future. Less sophisticated companies make
investments in energy management based on simple cost-benefit
analysis. Leaders are better able to incorporate long-term financial
benefits and intangible factors into their investment decisions. This
means they might accept a longer payback period and larger upfront
expenses in return for greater financial benefits over the long term.
Integration of Energy Efficiency into the Building Design:
Integration of energy efficiency into the building design can strongly
signal the extent to which energy efficiency is viewed as a goal
throughout the entire company, not just in operations and/ or
facilities management. This is because it involves working with
14
construction and design, materials purchasing and real estate
purchasing/ leasing teams. Significant reductions in energy
consumption can be made via skylighting, high quality insulation,
solar reflective rooftops and strategic placement and design of
entrances and exits. Therefore, even if companies do not disclose
consumption data and trends, it can still be determined that stores
with these energy efficient design characteristics are likely to be more
energy efficient than stores without these features.
Green Energy Purchasing:
The ability to investigate and pursue renewable or green energy
supplies not only indicates a sophisticated energy management team
that is committed to environmental stewardship, but also means that
the company likely has lower exposure to future climate change
regulation as it is already in a position to purchase energy from
sources that will be favored by such regulation. Companies that
choose to meet their energy needs from renewable sources are
considered environmentally proactive.
Strategic Profit Opportunities:
If a company is not in the business of selling products that are
typically certified with the ENERGY STAR label (such as home
appliances, electronics etc.), it can still profit from its energy
management initiatives through market share gains made by
appealing to environmentally conscious consumers. Environmentally
conscious consumers tend to make decisions on where to shop based
on the perceived environmental stewardship of the company, given
all other factors are equal. If a company is able to make its efforts to
be energy efficient well known to the public through its annual
report, response to individual inquiries, website, store education or
public relations campaigns, it is likely to gain customer loyalty.
Retailers that sell products that could be labeled energy efficient may
also benefit from increased customer loyalty, as well as from the
additional market share and higher profit margins associated with
selling ENERGY STAR labeled products.
3.2 LEADING ENERGY MANAGEMENTPRACTICES
The following are leading practices in the retail merchandising sector
for each critical element explained above.
3.2.1 Energy Management Capacity
Leaders usually have a central energy management staff, which is
comprised partly of professional energy experts. This group co-
ordinates management activity at individual stores; informs and
15
trains regional managers and staff; and keeps tabs on technological
developments, tax breaks and tighter regulatory controls. It also
provides the important function of developing and deploying an
informed energy strategy. The coordinating function of a central staff
ensures the broadest application of best management practice. Both
Lowe’s and Costco exhibit signs of strong energy management
capacity in that they are willing and able to communicate with
internal and external stakeholders regarding energy management and
environmental stewardship.
At Costco, there is a corporate energy management team of four
individuals that sets the overall energy strategy, develops training
courses for individual store managers and employees, and tracks and
regularly reviews consumption data. In addition, this team
coordinates with the facilities management and construction teams to
integrate energy management into those functions. At the store level,
each store manager is ultimately responsible for energy expenditures
at a particular store. Stores in similar regions are benchmarked
against one another, with store manager compensation linked to the
local success of the energy management strategy as measured by
consumption levels. Tying energy use to management compensation
ensures that managers make a point of following through on
strategies and procedures.
Another sign of strong energy management is an ability to adapt and
respond to varying circumstances quickly and effectively. Costco not
only developed an emergency energy management scheme in
response to the California energy crisis but also had the prudence to
inform consumers of the scheme in an effort to boost corporate
reputation. This most likely would not have been accomplished
without a well organized and focused energy management team.
Leaders in energy management tended to be active in the EPA’s
ENERGY STAR program. The program provides advice and various
tools to retail merchandising firms on improving energy efficiency.
See Appendix B for more information on the EPA ENERGY STAR
program.
Leaders also tended to take greater advantage of tax credit and other
incentive programs promoting energy efficiency. For example, the
New York State Building Credit program gives tax credits to
qualifying projects with energy efficient technologies otherwise
known as “green buildings.” In addition, several states including
Massachusetts, Pennsylvania, and Rhode Island are developing
demand-side market/ tax incentives to reduce energy use. A number
of other states, such as California and Oregon, have tax credit
programs for renewable energy which could help defray the initial
costs for solar and fuel cell systems. These programs can change the
16
cost structures for equipment upgrades and new technology
investments.
Strong management capability is also signaled by participation with
non-profit organizations dedicated to energy management such as the
Alliance to Save Energy. The Alliance to Save Energy is a non-profit
coalition of business, government, environment and consumer leaders
that promotes energy efficiency worldwide to achieve a healthier
economy, a cleaner environment and energy security. More than 70
corporations and business trade associations work together through
the Alliance to promote greater investment in cost-effective energy
efficiency. Home Depot and Sears are Alliance Associates. Associates
participate in a range of programs and activities, including the
Federal Energy Productivity Task Force, the Summit on Energy
Efficiency, the Evening with the Stars of Energy Efficiency Awards
Dinner and policy breakfasts with decision makers and other noted
speakers.
3.2.2 Performance Trends
The largest component of operating costs is payroll and benefits,
followed by rent, advertising and then utility expense. Utility
expense is a larger percentage of operating costs than
communications, office supplies, packaging materials, repair services,
legal services, accounting and auditing services or data processing
and computer related services. As a result, many companies track
energy costs in detail.
Computerized monitoring and control equipment allows
management to track energy use throughout the company and
benchmark performance. This capability provides vital feedback on
the success or failure of various initiatives and alerts management to
problems, such as unusual spikes in usage. Monitoring is a key
element in the deployment of energy management plans since it
measures improvements and educates management about costs and
savings.
Costco reduced total energy consumption by 10% after implementing
energy management programs. It is evaluating and testing new
initiatives that could yield much greater improvements. Target
Corporation reported that energy management initiatives
implemented in 2001 resulted in savings of 37 million kWh corporate-
wide ($2.6 million at seven cents per kWh). Similarly, Wal-Mart
reported it is achieving annual savings of about 250 million kWh as a
result of its energy management initiatives
10
($17.5 million at seven
cents per kWh).
17
3.2.3 Systems Management and Integration
Leading companies in the sector have developed management
programs focused on continuous improvement of store operations.
These programs include basic maintenance schedules, installing the
latest technology in older facilities, and centrally sourcing energy
efficient equipment for the whole company to ensure wide
implementation. Having clear day-to-day operating guidelines and
procedures ensures system efficiency is maximized. Through regular
maintenance, management can ensure that equipment is running at
peak performance and is providing the best return on investment
over its life. Seeking potential opportunities for retrofitting older
operations with new, more efficient equipment further ensures
system efficiency.
Integration of building operation and management systems is one of
the most effective energy management strategies available to
organizations. Systems integration facilitates optimized handling of
design issues - such as solar load and humidity, and right-sizing of
equipment, ultimately yielding tremendous capital and operations
cost savings.
With the help of the Electric Power Research Institute, Wal-Mart
developed an energy efficient, integrated water loop heat pump
system that increases ventilated air, lowers humidity, maximizes
refrigeration heat recovery and uses non-CFC refrigerants. The
204,000-square foot Eco-store is realizing a 22% energy savings over
the base HVAC system, equivalent to energy savings of $102,806
annually
11
.
3.2.4 Technology Replacement/Installation
The American Council for an Energy Efficient Economy (ACEEE)
conducted several major studies
12
that show potential financial
returns from various energy efficiency improvement initiatives. For
the commercial buildings sector, these included various
improvements to HVAC and lighting systems that could generate
returns of 25% or greater. Several of the most financially attractive
initiatives included:
" Integrated commercial building design.
" Integrated lighting fixtures with controls.
" Improved ducts and fittings.
" Improved heat exchangers.
" Integrated space/ water heating systems.
18
Many of the firms analyzed by Innovest are taking these measures.
Most firms focused their efforts on HVAC and lighting upgrades.
(Figure 7 shows that HVAC and lighting comprise over 75% of energy
expenditures in retail buildings.)
Water Heating
7%
Space Heating
40%
Cooling
8%
Misc.
10%
Off ice Equipment
4%
Lighting
31%
Figure 7. Site Energy Use in Retail Buildings
Lighting is an essential part of any management plan not only
because it comprises roughly 31% of energy use for retail operations,
but also because it is one of the quickest and most affordable
upgrades that can be done and usually requires no down time for the
store. There are many technological innovations that can increase
lighting efficiency, such as ballasts and controls that determine light
levels as well as more efficient bulbs. Many firms are switching out
less efficient T-10 lighting with T-8 lighting. Adding computer
controls and occupancy sensors can also maximize lighting efficiency
by turning off lights in unoccupied spaces. In addition, replacing
other types of lighting, such as metal halide HID, mercury vapor, or
high pressure sodium lights, with T-5 florescent lighting can improve
efficiency.
The following examples demonstrate how leading companies in the
sector are increasing the efficiency of store lighting systems. Home
Depot and Lowe’s are using a T5 lighting system in some stores and
offices. Recent improvements in Target stores around the country
include more efficient exit signs, lowered ceiling heights to bring
lights closer to merchandise, skylights and dimming systems to
reduce light use during day. In June 1993, Wal-Mart opened a
prototype store in Kansas, called an Eco-store, with a glazed arch at
the entrance for day-lighting and advanced lighting monitors to
enhance the effectiveness of the skylights. In 2001, Wal-Mart tested a
new lighting scheme to create a brighter shopping atmosphere and
reduce energy costs. The system utilizes T8 lamps, electronic ballasts
and a fixture with a staggered reflective lamp design. The design
expands the light spread from the fixtures, improves vertical and
Source: Energy Information Administration, 1995 Commercial
Buildings Energy Consumption Survey
19
horizontal light distribution, uses 40% less electricity and provides
60% longer life than the standard lamp design.
HVAC system performance has improved greatly over the past
decade, making retrofits of older systems an excellent opportunity for
investment. Additionally, there is large potential to integrate these
systems with other systems in the store to achieve higher levels of
efficiency.
The following examples demonstrate how leading companies in the
sector are increasing the efficiency of HVAC systems. Wal-Mart
utilizes a heating and cooling system (as noted earlier) that utilizes ice
storage and coordinates space conditioning, dehumidification,
ventilation, indoor air quality, heat recovery and refrigeration in some
stores. In all stores, Wal-Mart uses high efficiency HVAC units with
an energy efficiency ratio of between 10.1 and 11, compared to the
standard of 9.0. Target has decreased chiller sizes by adding
economizer controls to packaged unit fan systems and initiated staged
cooling in stores with centralized HVAC systems. Target regularly
replaces 30 to 40 HVAC systems a year, constantly fine tunes the
energy management systems in stores and regularly calibrates
thermostats. Other related aspects of retrofitted Target stores include
ceiling fans to reduce need for air conditioning and a solar water
heater for all the water needs in the food area.
3.2.5 Building Design
In addition to upgrading existing systems and stores, leaders in the
sector have outlined energy and environmental standards for new
facilities. This enables them to lock in efficiency gains over the long
term by making sure the best available technology and architectural
properties are incorporated into each new store.
For example, Wal-Mart has three Eco-stores to serve as testing centers
for the most advanced environmental innovations in building design.
Features of the stores include a recycled asphalt parking lot, electric
car charging stations and an ice storage system to reduce peak
demand of cooling energy. The California Eco-store has an 18-
kilowatt solar photovoltaic canopy in place of ordinary opaque
roofing. Annual energy savings as a result of the canopy are
estimated to be between $75,000 to $80,000, resulting in a three-year
payback on the technology; Southern California Edison, the local
utility, provided a $170,000 incentive that shortened payback to less
than one year.
Daylighting is the most common design element utilized to increase
building energy efficiency. Wal-Mart and Costco use daylighting
20
extensively. Every new facility Wal-Mart builds includes skylights
with a dimming system; there are currently around 600 facilities with
the system. Wal-Mart completed an in-house study in 1998
concluding that its daylighting system utilized 25% to 35% less energy
than the daylighting systems that other big box competitors have
implemented.
Costco started investigating the benefits of daylighting in the late
1980s because management wanted to increase light levels without
increasing operating costs. The company currently utilizes skylights
in most stores. A single photosensor is positioned in one of the
skylights and signals the daylighting controller to turn the electric
lights on or off. Electrical circuits are zoned so that light fixtures
directly adjacent to a skylight (about one-third of all light fixtures in
store) are turned off when light levels rise above a first set point. The
next third of fixtures turn off when light levels get above a second
point, and the remaining third are always on during hours of
operation. The set points can be adjusted remotely. In most Costco
stores, skylights cover about 4% of the roof area, evenly distributed
over the shopping area. They are constructed of acrylic-clad
fiberglass and are approximately 40% more efficient than standard
skylights, maximizing natural light transmission with minimum heat
gain. As a result of this advanced design, Costco has been able to
reduce indoor lighting by two-thirds in some stores during the day
13
.
In addition to daylighting, the most proactive companies utilize
leading-edge insulation technology in walls and roofs, for example by
making their rooftops solar reflective. Wal-Mart, Costco and Lowe’s
have store roofs that are coated with a white, cement-based material
to reflect heat, resulting in an estimated 20% savings in energy costs.
3.2.6 Green Energy Purchasing
Several companies said they were investigating green energy sources.
However, Lowe’s is the only firm currently purchasing green power.
The company is the largest purchaser of Green Power Switch (GPS),
the renewable energy program offered by the Tennessee Valley
Authority (TVA). Lowe’s green power purchases total about 3% of its
monthly electrical use at the 32 Lowe’s stores where GPS is currently
available. The Environmental Protection Agency recognized Lowe’s
for its purchase of green power through its Green Power Partnership,
a voluntary initiative to establish green power procurement as a best
practice of environmental management. “Using clean energy is part of
our corporate citizenship,” says Robin Nickles, Vice President of
Retail Facilities Management for Lowe’s.
21
3.2.7 Selling Energy Efficient Products
General merchandising firms impact national energy efficiency in two
ways: through the energy management of their own facilities and by
promoting and selling energy efficient products. The EPA’s ENERGY
STAR program provides a highly successful and widely used scheme
for labeling energy efficient products. (The ENERGY STAR program is
discussed in Appendix B.) Within the sector, Innovest found wide
variations in the promotion of ENERGY STAR products. Leading
companies in the retail merchandising sector, such as Sears and
Lowe’s, offer a large selection of energy efficient labeled products.
They also make significant efforts to promote these products and
educate consumers about them.
Sears was awarded the ENERGY STAR Retail Partner of the Year for the
third year in a row in 2002 for its leadership in selling and promoting
products that carry the ENERGY STAR label and its R&D of ENERGY
STAR products. In California, Sears doubled its sales of ENERGY STAR
refrigerators in 2001. Other efforts to promote energy efficient
products include offering rebates on ENERGY STAR appliances at all
Sears stores in recognition of “ENERGY STAR Month” at Sears every
April. Sears brought the most water- and energy-efficient brand of
laundry products to the market in 2000 through 2001 and has
committed marketing dollars toward consumer education on the
benefits of buying and using ENERGY STAR products, including in-
store information, advertising and nationally distributed print media.
Lowe's also aggressively markets ENERGY STAR products. It has an
"energy center" on its website, where it promotes ENERGY STAR
products, allows people to search for ENERGY STAR rebates, advertises
classes on energy conservation offered at Lowe’s stores, and provides
a virtual tour of the DOE's Energy Savers model home. Lowe’s
printed 700,000 copies of a 12-page ENERGY STAR solutions guide for
distribution throughout all retail store locations in 2001. Most stores
also hold energy efficiency clinics periodically, covering topics such
as installing insulation, ceiling fans and programmable thermostats.
Lowe’s issued a press release discussing techniques to increase energy
efficiency in homes, promotion of ENERGY STAR products and the
results of a consumer survey on the importance of energy efficiency.
The market for energy efficient products is growing, driven by forces
including energy price and availability concerns as well as
promotional efforts. A study conducted by The Northwest Energy
Efficiency Alliance
14
concluded that promotion and consumer
education were key driving forces behind recent increases in sales of
energy efficient products. The ENERGY STAR program helps retailers
increase sales by providing important promotion and consumer
22
education materials. Retailers also benefit since ENERGY STAR
products generally provide a higher profit margin than non-labeled
products.
23
4.0 SUMMARY – DOES ENERGY MANAGEMENT ADD VALUE ?
Companies rated by Innovest in the top half were picked due to their
energy management programs and their overall engagement with key
energy management issues. Transparency also played a role as those
firms with leading edge practices tend to communicate them to
stakeholders. Conversely, lack of information regarding energy
management and environmental performance indicates a company is
less proactive than peers on environmental and energy management
issues. This often indicates less sophisticated management that may
underperform the market.
Innovest’s analysis of twelve firms in the retail merchandising sector
produced results that strongly imply energy management has profit
enhancing properties and generates value for shareholders. With a
small sample size, it is likely that factors other than energy
management are also influencing financial results. Nevertheless,
given the differentials found in many measures of economic
performance, it is reasonable to assume that energy management is
adding some value for investors.
To recap, Innovest’s analysis found that leaders in energy
management:
! Outperformed in the stock market over the past five years by
7,100 basis points (71 percentage points).
! Outperformed on price-to-earnings by 13%.
! Outperformed on price-to-book by 26%.
! Outperformed on return-on-assets by 49%.
! Outperformed on return-on-equity by 52%.
! Outperformed on return-on-invested capital by 16%
! Outperformed on Tobin’s Q, a measure of intangible value, by
8%.
In addition, firms active in the ENERGY STAR program outperformed
in the stock market over the past five years by over 6000 basis points
(60 percentage points).
These results strongly indicate proactive energy management
increases shareholder value. Therefore, investors will likely increase
returns by considering energy management and ENERGY STAR
participation when making investment decisions.
24
25
APPENDIX A: THE ENERGY MANAGEMENT RATING MODEL
To analyze relative energy management in this sector, Innovest
developed a multi-factored model (shown below). Data was gathered
from many sources including government websites, industry reports
and company documents. This was supplemented by interviews with
senior corporate executives.
Quantitative data was not available for some of the metrics.
Nevertheless, Innovest has found in research of nearly 50 industry
sectors that using a multi-factor model allows the creation of accurate
ratings in the absence of some data. The comprehensive energy
management ratings generated by this model are intended to estimate
management quality overall and stock market performance potential.
As a result, the management related metrics in the model receive the
highest weighting.
Given the differences found in the financial performance of the
energy leaders and laggards in this study, it is likely that this model is
accurately using relative energy management performance to gauge
overall management quality.
26
Table 1. Innovest Energy Management Assessment Model
1) Energy Management & Strategy A. Company Energy Policy & Strategy
B. Integration with Core Business Strategy
C. Globally Consistent Energy Approach
D. Energy Management System
E. Corporate Energy Manager
F. Internal Engineering Staff
G. ENERGY STAR Purchasing Policy
H. ENERGY STAR Involvement
I. Training: Promotion of Energy Efficiency
Among Employees and Customers
J. Energy Supply/Consulting
2) Energy Risk & Performance A. Energy Consumption per $ of Revenue
B. Energy Consumption per Sq. Ft. Per
Year(kWh/ft2 -or- BTU/ft2)
C. Performance Trends
D. Energy Savings
E. Facility Risk
F. Fuel Type Risk
G. What % of Peak Demand is Unoccupied
Demand
H. Energy Related Emissions
I. Average Load Factor
3) Energy Efficiency Initiatives A. Technology Replacement
B. Investment Requirements
C. R&D/testing unit
D. HVAC Technology
E. Lighting Technology
F. Alternative/Renewable Energy Use
G. Building Design
H. Computerized Energy Management
Technologies
I. Equipment Maintenance
4) Strategic Energy Opportunities
A. ENERGY STAR Products Offered and Related
Marketing and Educational Programs for
Customers
B. Market Positioning
C. Percent Sales Attributable to Energy Efficient
Products
27
APPENDIX B: THE EPA’S ENERGY STAR PROGRAM
EPA introduced the ENERGY STAR Program in 1992 as a voluntary
initiative designed to identify and promote energy-efficient products
and energy management in residential and commercial buildings.
Increased energy efficiency in consumer products and buildings leads
to reduced greenhouse gas emissions. The EPA works in partnership
with the Department of Energy (DOE) to promote the ENERGY STAR
label, with each agency taking responsibility for particular product
categories. In the commercial buildings sector, the ENERGY STAR label
is awarded to buildings that perform in the top quartile of energy-
efficiency for their space type. In 2001, the label was extended to
include retail food stores.
The following list describes the accomplishments of EPA’s ENERGY
STAR Program
15
:
! More than 9,600 organizations have partnered with the EPA to
improve their energy performance, committing over 12 billion
square feet or 17 percent of the total commercial, public, and
industrial building market.
! The EPA’s partners saved 38 billion kWh of energy and reduced
energy bills by $2.6 billion.
! Cumulative investments in energy-efficient technologies totaled
more than $6.3 billion.
! Participants prevented 7.4 million metric tons of carbon
equivalent (MMTCE) in 2001 alone.
! ENERGY STAR's partners comprise 30% of the stores and almost
15% of the floor space (1.8 billion square feet) of the retail food
industry.
28
APPENDIX C: ACTIVE ENERGY STAR COMPANIES VS. RETAIL INDEX
Table 2. Companies Comprising the Dow Jones Broad Line Retail Index
BON-TON STORES, INC. (THE) MAY DEPARTMENT STORES CO (THE)
RITE AID CORPORATION SEARS, ROEBUCK AND CO.
DILLARD'S, INC. FOODARAMA SUPERMARKETS, INC.
WINN-DIXIE STORES, INC. PERFORMANCE FOOD GROUP COMPANY
BUCKLE INCORPORATED (THE) FAMILY DOLLAR STORES, INC.
LONGS DRUG STORES CORPORATION RUDDICK CORPORATION
DUCKWALL-ALCO STORES, INC. WEIS MARKETS INC
SHOPKO STORES INCORPORATED EAGLE FOOD CENTERS, INC.
SANDERSON FARMS, INC. PRICESMART, INC.
WALGREEN CO TARGET CORPORATION
FRED'S INC DOLLAR GENERAL CORPORATION
VILLAGE SUPER MARKET, INC. MCKESSON CORPORATION
KROGER CO (THE) ARDEN GROUP INCORPORATED
SAFEWAY INC SMART & FINAL INCORPORATED
HARRY'S FARMERS MARKET, INC. COSTCO WHOLESALE CORPORATION
GREAT ATLANTIC & PACIFIC TEA CO INC (THE) BJ'S WHOLESALE CLUB INCORPORATED
ALBERTSON'S INC. VALUE CITY DEPARTMENT STORES, INC.
SUPERVALU INC. AMES DEPARTMENT STORES, INC.
WHOLE FOODS MARKET INC WILD OATS MARKETS, INC
STEIN MART
CASEY'S GENERAL STORES
INCORPORATED
WAL-MART STORES INC MAYS (J.W.), INC.
UNITED NATURAL FOODS INC FLEMING COS INC
MARSH SUPERMARKETS, INC. PENNEY [J C] CO INC
FEDERATED DEPARTMENT STORES,
INCORPORATE GREEN MOUNTAIN COFFEE, INC.
CVS CORPORATION 7-ELEVEN INCORPORATED
FRESH AMERICA CORP. DRUGMAX.COM INC.
HOMELAND HOLDING CORPORATION DAIRY MART CONVENIENCE STORES, INC.
INGLES MARKETS INCORPORATED K MART CORPORATION
PENN TRAFFIC COMPANY (THE) NEW WORLD RESTAURANT GROUP, INC.
QUENTRA NETWORKS, INC. UNI-MARTS, INC.
SYSCO CORPORATION HORIZON PHARMACIES, INC.
NASH FINCH COMPANY DRUG EMPORIUM, INC.
PHAR-MOR, INC.
The designation of active in the ENERGY STAR program was assigned
based on consideration of several factors including proactively using
ENERGY STAR tools and services to improve the energy efficiency of
facilities, receipt of an ENERGY STAR award, and aggressive promotion
and marketing of ENERGY STAR labeled products. Firms considered to
be active in the ENERGY STAR program are not shown in this summary
report. These firms are shown in the full report which is available
from Innovest.
29
APPENDIX D: REFERENCES & FOOTNOTES
1
The term “energy efficiency” is typically defined as intensity of energy use, or
energy used per unit of output. Since all firms did not provide energy use data,
Innovest used a comprehensive model (shown in Appendix A) to rate energy
management and impute energy efficiency;
2
Partial funding for this study was provided by the U.S. Environmental Protection
Agency;
3
1992 Census of Retail Trade, U.S. Department of Commerce, Economics and
Statistics Administration, Bureau of the Census;
4
Skylighting and Retail Sales: An Investigation into the Relationships Between
Daylighting and Human Performance, Heschong Mahone Group; August 1999;
5
1999 Report on Socially Responsible Investing Trends in the United States, Social
Investment Forum, 1999;
6
RDEC-97 Energy Conservation Industry Review, Business Communications
Company, Inc., November 1998;
7
1995 Commercial Buildings Energy Consumption Survey, Energy Information
Administration;
8
For more about climate change and likely outcomes and policies see: Climate
Change 20001 – the Scientific Basis; Intergovernmental Panel on Climate Change,
UNEP 2001;
9
Source: Natsource – a pollution credits trading firm that handles trades in carbon
pollution credits. For current pricing contact Michael Intrator, Managing Director at
1.212.232.5305 or [email protected];
10
Energy Efficiency Opportunities: Big Box Retail and Supermarkets, Rick Fedrizzi
and Jim Rogers, The Center for Energy and Climate Solutions, May 2002;
11
Dual-path Heat Pump System used in Superstore, Centre for the Analysis and
Dissemination of Demonstrated Energy Technologies, International Energy Agency &
the Organization for Economic Co-operation and Development, February 2000;
12
Emerging Energy Saving Technologies and Practices for the Buildings Sector,
American Council for and Energy Efficient Economy, Davis Energy Group, & E
Source , Dec. 1998;
13
Daylighting Initiative, Design Tools and Information from PG&E, Pacific Gas and
Electric Company, 1999;
14
ENERGY STAR
®
Residential Lighting Program No. 1, Market Progress Evaluation
Report, Report #EO2-101, ECONorthwest, June 2002;
15
2001 ENERGY STAR Annual Report, Environmental Protection Agency
APPENDIX E: ONE PAGE COMPANY PROFILES
RATI NG: RANKI NG:
New York: (212) 421-2000 London: +44 (0) 20 7743 8871 Toronto: (905) 707-0876 Paris: +33 1 4886 0369 www.innovestgroup.com
Energy Ri sk Fact ors
The company's overall risk is low relative to competitors, as it is on the leading edge of
implementing energy management techniques. For example, Lowe's is the largest
purchaser of Green Power Switch (GPS) - the renewable energy program offered by the
TVA. The company's green power purchases total about 3% of its monthly electrical use
at the 32 stores were GPS is available. Not only is this environmentally beneficial, but it
signifies the company's willingness to be a first mover on implementing new
technologies. As a result of investments in green power, combined with investments in
technology and energy efficiency education, the company's exposure to energy price
volatility is low relative to peers.
St rat egi c Prof i t Opport uni t i es
Lowe's has an "Energy Center" on its website, where it promotes ENERGY STAR
products, allows people to search for ENERGY STAR rebates and tour the DOE's
Energy Savers model home and lists schedules for energy conservation classes offered
at Lowe's stores. October 2002 was energy efficiency month at Lowe’s; the company
printed a 12 page ENERGY STAR solutions guide for distribution throughout stores and
most stores held energy efficiency clinics on weekends during the month. The clinics
covered topics such as installing insulation, ceiling fans and programmable thermostats.
1
Rel at i ve Energy Perf ormance
Company Overvi ew
Lowe' s Compani es I nc
LOW
Energy Management
AAA February-03 SECTOR: RETAI L
Lowe's is a $22 billion retailer of a complete line of home
improvement products and equipment; it is the world's
second largest home improvement retailer and the 14th
largest retailer in the U.S. The company is in the midst of
an aggressive expansion plan, opening a new store every
three days on average. The company's current store
prototype has a 121,000-square-foot sales floor with a
lawn and garden center averaging an additional 30,000
square feet. In 2001, Lowe's opened 115 new stores, the
majority of which were in metropolitan markets. In 2002,
the company plans to open 123 new stores and continue
its emphasis on cities with populations greater than
500,000.
Fi nanci al Perf ormance ( st ock pri ce change)
Energy Management & St rat egy
Lowe's leads the industry in integrating energy management into its overall business
strategy. Its energy management strategy focuses on equipment efficiency and central
automation of lighting and HVAC systems, complemented by an emphasis on energy
efficient building design and the use of green power in certain locations. Lowe's sells and
promotes a wide range of energy efficient products; promotional efforts include customer
workshops, easy access to highly trained employees and a TV commercial publicizing
the financial benefits of utilizing energy efficient products in the home. Unique to Lowe's
is its utilization of leading-edge technologies in office buildings, which is a sign of how
pervasive energy management is throughout the company. The corporate energy team
consists of six people; local store manager compensation is not linked with energy
management due to the high level of centralization.
Energy Perf ormance & I ni t i at i ves
Lowe's has had centrally automated lighting and HVAC systems since the mid 1980s,
with real-time information transfer. All stores have override capability; overrides are
monitored on a daily basis so that they can be kept to an absolute minimum. Lowe's
makes efforts to smooth spikes and peak demand, such as coordinating HVAC systems
with outdoor lighting and staged indoor lighting. Building design elements utilized include
daylighting, mostly in California and Arizona stores, and "cool" roofs in many stores
across the country. Most store lighting is T8 with electronic ballasts, although the
company is considering shifting to T5 lighting in the future. Energy management is an
important consideration in construction of new office buildings as well as stores. Energy
management initiatives at office buildings include lowered square footage per person,
daylighting, fretted glass, high efficiency chillers and boilers, T5 bulbs for indirect lighting,
occupancy sensors, dual switching and building commissioning to ensure high
performance of equipment.
This report is for information purposes and should not be considered a solicitation to buy any security. Neither Innovest
Strategic Value Advisors nor any other party guarantee its accuracy or make warranties regarding results from its usage.
Redistribution is prohibited without written permission. Copyright © 2003.
Strategic Opportunities
Green Energy Supplies
Technology Replacement
Building Design
Performance Trends
Energy Management Capacity
Below Avg. Avg. Above Avg.
-40%
-20%
0%
20%
40%
60%
80%
100%
S
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LOW
I n d. A v
Innovest
Strategic Value Advisors
RATI NG: RANKI NG:
New York: (212) 421-2000 London: +44 (0) 20 7743 8871 Toronto: (905) 707-0876 Paris: +33 1 4886 0369 www.innovestgroup.com
Energy Ri sk Fact ors
The company's overall risk is low relative to competitors. Energy management initiatives
and capital spending will ensure improved performance by lowering operating costs.
Although Costco has not significantly invested in renewable energy sources to date, it is
presently evaluating these options. As a result, the company will probably be well
positioned to integrate renewable energy options as costs decline. Costco's investments
in technology and energy efficiency education lower its exposure to energy price volatility
.
St rat egi c Prof i t Opport uni t i es
During the California energy crisis, Costco implemented an emergency energy
management scheme and reported to the California Technology, Trade and Commerce
Agency that it received positive feedback from its member shoppers after implementing
the procedures. Costco sells some ENERGY STAR products and highlights them on its
website. Industry leaders educate consumers on the benefits of purchasing the products
more comprehensively and offer rebates to subsidize the higher up-front costs.
2
Rel at i ve Energy Perf ormance
Company Overvi ew
Cost co Whol esal e Corporat i on
COST
Energy Management
AAA February-03 SECTOR: RETAI L
Costco Wholesale is the largest wholesale club operator
in the U.S., operating 385 membership warehouse stores
serving more than 36 million members in the U.S.,
Canada, Japan, Mexico, South Korea, Taiwan and the
UK. Stores offer discount prices on 3,700 to 4,500
products (many in bulk packaging), ranging from alcoholic
beverages and appliances to fresh food, pharmaceuticals
and tires. Certain club memberships also offer products
and services such as car and home insurance, mortgage
and real-estate services, and travel packages. Revenues
for the fiscal year ending August 2002 were $38.7 billion.
Fi nanci al Perf ormance ( st ock pri ce change)
Energy Management & St rat egy
Costco has a comprehensive energy management strategy in place that focuses
primarily on facilities management and technology upgrades. Facilities management
improvements are accomplished by educating employees at the store level,
implementing building management systems and tracking facility performance. Upgrades
of lighting, HVAC and refrigeration technologies are considered on a regular basis. In
response to the energy crisis in California, Costco adopted Emergency Conservation
Management Guidelines to be implemented nationwide. At the corporate level, there is a
team of four individuals responsible for implementing the energy strategy, with the
facilities, construction and purchasing departments involved at all levels of operation. At
a minimum, detailed reviews usually occur at least twice a year.
Energy Perf ormance & I ni t i at i ves
Stores are treated as separate profit centers with energy costs incorporated into the
facility's overall profit targets. As a result, each store manager is responsible for energy
management at the store level, with compensation tied to energy performance. Stores in
similar regions are benchmarked against one another. Costco has reduced total energy
consumption by approximately 10% as a result of its energy management programs. The
company's most widespread energy management initiative seems to be the integration of
daylighting into its stores; the installation of acrylic-clad fiberglass skylights, coupled with
photo sensors and zoned electrical circuits, is estimated to conserve 1.5 kWh/sq.ft./year
or $23,000 per store. The majority of stores have programmable building control systems
for HVAC, lighting and daylighting controls. Multi-site tracking is now operational at all
U.S. and Canadian sites, with one of the main functions being override monitoring.
Costco pursues construction incentives from local utilities promoting energy efficiency
technologies and state agencies for both new stores and retrofitting of old stores.
This report is for information purposes and should not be considered a solicitation to buy any security. Neither Innovest
Strategic Value Advisors nor any other party guarantee its accuracy or make warranties regarding results from its usage.
Redistribution is prohibited without written permission. Copyright © 2003.
Strategic Opportunities
Green Energy Supplies
Technology Replacement
Building Design
Performance Trends
Energy Management Capacity
Below Avg. Avg. Above Avg.
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
S
e
p
1
9
9
9
N
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v
1
9
9
9
J
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2
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M
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COST
I n d. A v
Innovest
Strategic Value Advisors
doc_548829618.pdf