June 17, 2009
The remodeling of a store is an ideal opportunity to capture the benefits of environmental sustainability in energy efficiency and recycling. A green remodeling program has incremental costs, but can deliver significant benefits in long-term profitability and consumer loyalty.
The timing to make this shift could not be better with a significant portion of federal stimulus money earmarked for building efficiency improvement, providing tax incentives to companies making green investments. State and local incentives are also available and range from a reduced state income tax bill to reduced property tax, sales tax rebates and even priority permitting. Permitting issues and on-site project re-engineering may be minimized as building efficiency standards such as Leadership in Energy and Environmental Design (LEED) are incorporated into local building codes.
A trend which has not been slowed by the current economic situation is shopper affinity with environmentally responsible retailers. A recent study by Deloitte and the Grocery Manufacturers Association (GMA) showed that retailers’ environmental reputation increased customer loyalty. The survey also revealed that consumers made a conscious decision to shop at retailers who were viewed as environmentally responsible. Based on these results, implementing a green remodeling program coupled with green branding efforts can help demonstrate real and measurable commitment to the environment.
The design strategies and building components that would be affected by a shift to green are often included in the typical remodeling schedule. These areas include lighting systems, waste disposal, refrigeration, and elements of the heating and cooling system and building envelope such as doors, temperature sensors and thermostats, or ductwork and ventilation systems. Incorporating greening into changes in these systems is made relatively simple by including sustainability as required criteria in product selection and design.
More core structural building components, such as windows, the roof or air handlers are often not part of the traditional remodel. However, these can be cost-effectively included since the costs of engineering, project management, general contracting, and, most importantly, the lost revenue during the remodel, are already factored into the traditional remodel budget. Research has shown that incremental costs for using green options in HVAC and lighting are typically less than 10 percent higher than the cost of a regular remodel.
One example of an easy-to-execute change in the remodel process is the store’s lighting system. Existing cornice and display lighting are often modified, which provides an opportunity to evaluate new, higher efficiency fixtures that offer equivalent or better color resolution and luminosity with lower energy consumption. Even if the existing fixtures are to remain, re-lamping at the time of the remodel with higher efficiency bulbs will still yield operational savings. Federal lighting efficiency tax incentives are available as part of the Energy Policy Act 2005 legislation extended through 2013.
Although upfront costs may not be onerous, even without incentives or rebates, they still pose implementation hurdles, particularly in the current economic climate. The federal government, in both ongoing programs and those associated with the stimulus package, is taking a leadership role to help offset these costs and help retailers justify and make energy efficient choices through a variety of programs. State and local governments along with certain utility companies also have programs using federal and other monies. Tax incentives, rebates, and other funding mechanisms vary by location, but by including a step in the remodel decision process to evaluate available incentives and factor their cost reduction opportunities into the payback analysis, the initial costs of the green remodel might be more than justified.
The flip side to incentive programs is the increasing trend of including energy efficiency and recycling standards in local building codes. The most well-known is LEED, developed by the U.S. Green Buildings Council which includes prerequisites for recycling and base-level energy efficiency. Since remodeling schedules are intentionally very tight—so as to reduce the impact on store operations—any delays caused by permitting issues and subsequent re-design can be costly from both lost revenues and contractor idling costs.
Retailers will need to overcome challenges to realize the benefits of a successful green remodeling program. The first is the myriad of opportunity areas and associated technologies available. Selecting the “best” focus areas, design strategies, and vendors to pursue the benefits can be overwhelming. This is further exacerbated by the tax and incentive landscape mentioned earlier, which not only changes by geography, but is also in a constant state of flux as incentive programs expire and new ones are created. There are also internal hurdles including the difficult decision to increase capital expenditures for future reductions in operational costs. Since this often affects two different departments within a retail organization, accommodations need to be made using senior decision makers. Finally, the benefits of a green store can be nullified if store personnel are not on board with the changes. Appropriate store design, job descriptions, and training may all be needed to ensure the investment does not become a nuisance to staff and eventually abandoned.
Despite the challenges inherent in adopting a green remodel program, there are benefits that retailers stand to gain by embracing trends in the marketplace and regulatory environment. Green remodeling warrants serious consideration by any retailer looking to manage real estate operations and impact profits.
Scott Bearse is a Director with Deloitte Consulting LLP, in Deloitte’s Retail practice and leads the organization’s sustainability efforts in the retail industry. He is a specialist in retail operations and understanding the impact of the retail operating model on the customer experience. Scott also leads the team that developed Deloitte’s “Green Remodel” service. Scott has 23 years of experience working with Deloitte’s largest retail clients to help them in their efforts to improve performance and operations as well as develop sustainable retail strategies.
Jenny Bravo is a Director with Deloitte Tax LLP, and the tax leader for Deloitte’s Enterprise Sustainability group. She helps clients in their efforts to navigate available federal, state and local credits and incentives to fund and advance sustainability initiatives in the areas including energy efficiency and alternative energy. Jenny has 15 years of tax experience working with some of Deloitte’s largest corporate clients.
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