Despite Environmental Initiatives, Wal-Mart’s Fuel Usage Still High

A story in today’s edition of the Northwest Arkansas Morning News details just how much fuel Wal-Mart’s trucking fleet uses every year. The company’s highly-touted environmental initiatives have mainly focused on forcing supplier companies to change their business practices. Wal-Mart has actually done very little to address its own environmentally-damaging practices, and this article is a glaring example of that. According to this article, the company spends billions of dollars on truck fuel every year, and lots of dollars translates into a lot of fuel.

This is definitely an area where Wal-Mart could apply its “Environmentalism is good for business” philosophy. Will the retailer be able to cut down its carbon emissions?

Wal-Mart Pays Big For Fuel Costs [NW Arkansas Morning News]

If consumers think they feel the pinch of rising gas prices, they can at least take some comfort that they don’t have to foot the bill for more than 6.3 billion gallons of diesel fuel.

That’s the approximate domestic fuel usage of the world’s largest retailer, Wal-Mart Stores Inc., which also owns one of the nation’s largest private trucking fleets.

The retailer won’t say much about the impact rising diesel fuel prices are having on its fleet of 7,200 semi tractor-trailers that traveled up to 900 million miles in its most recent fiscal year. In fact, the retailer declined to comment at all on how fuel prices were impacting transportation costs for this story.

But Eduardo Castro-Wright, chief executive officer for Wal-Mart Stores division, said in a fourth quarter conference call that the company was experiencing pressure from increased transportation costs. Castro-Wright said fuel prices presented a “potential headwind” if costs continued to rise above projections.

“As fuel prices spike, the relative cost of trucking to shippers also rises, causing shippers to exceed their anticipated freight transportation budgets,” said John G. Larkin, a transportation and logistics analyst with Baltimore, Md.-based Stifel Nicolaus. “The nearly $4 price tag on each gallon of diesel fuel has succeeded in threatening the financial viability of many truckload carriers.”

Innovations to its trucking fleet are underway, some which have already increased fuel efficiency by 20 percent to 7.1 miles per gallon. But paying more than a dollar more per gallon than this time last year on billions of gallons of gas is still a painful bill.
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A gallon of diesel fuel cost $2.67 this time last year and has since risen almost 50 percent to $4 per gallon this week.

However, the open market price for diesel is higher than what a company of Wal-Mart’s size pays for diesel. The retailer gets a volume discount of about 50 cents, according to transportation industry officials.

Based on those calculations, that would mean Wal-Mart’s fuel bill at this time last year was up to $13.86 billion, compared to today’s prices which would put the grand total as high as $22.36 billion.

Ouch.

That estimated $8.5 billion in extra diesel fuel costs is more than 66 percent of the company’s net income - $12.73 billion - in its most recent fiscal year.

Unfortunately, it’s not quite that simple. That estimated fuel cost figure could be higher or lower based on fuel surcharges, hedging costs and innovations to its trucking fleet.

In addition to Wal-Mart’s massive trucking fleet that hauls general merchandise, it also contracts private carriers to transport most perishable and dry grocery materials. Those carriers are likely collecting a fuel surcharge of $1.50 per gallon in addition to standard carrier costs, transportation officials estimated.

Hedging would be another option for Wal-Mart to lower fuel costs. If they gambled on fuel prices increasing, company officials could lock in the current price of fuel for a given period of time by hedging. Wal-Mart may or may not be exercising this option.

“(Chief Executive Officer) Lee Scott came out of logistics and there has been some criticism that he should have known to buy fuel by hedging,” said Patricia Edwards, fund manager for Seattle-based Wentworth, Hauser and Violich. “I’ve heard that they were not and should have been, and so they may be doing that at this point.”

And suppliers pick up some transportation costs, according to Wal-Mart’s year-end earnings report.

Wal-Mart reported that in fiscal 2008, approximately 81 percent of the Wal-Mart Stores segment’s purchases were shipped through distribution centers. The balance of merchandise purchased was shipped directly to stores from suppliers.

The retailer estimates that at current fuel prices, an improvement to fleet fuel mileage of one mile per gallon would save more than $40 million per year.

Posted by Media Team on Monday, April 07, 2008