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COASTWIDE LABS: PRODUCT AND STRATEGY
REDESIGN IN COMMERCIAL CLEANING PRODUCTS
Coastwide Laboratories provides an excellent example of a company that applied sustainability principles — in this case benign chemistry formulations for commercial and industrial cleaning products — to differentiate itself and expand sales and profits in a slow-growth market. A small firm located in the Pacific Northwest, Coastwide became a solution provider for customers that were increasingly concerned about regulations and the health and contamination effects of toxicants in commonly used cleaning products. Coastwide’s Sustainable Earth™ line of products, initially an experimental project that stood apart from the company’s main business, was so successful between 2002 and 2005 that the benign chemistry principles underlying the line were extended to all product lines. With that decision, sustainability was integrated into corporate strategy. By 2006 the company’s innovative positioning and growth trajectory had attracted national and international attention. That year the company was purchased by a European firm to expand its strategically aligned portfolio of high-growth, high potential companies.
For decades after its establishment in 1937, Coastwide’s product formulations, typical for the industry, were consistent with expectations for old-style “janitorial products.” The company made or bought cleaners, disinfectants, floor finishes and sealers, and degreasers, and provided a full line of sanitary maintenance equipment and supplies to schools, municipalities, property managers, commercial cleaning companies, and others. Performing the cleaning function was the primary product requirement. Other health and ecosystem impact considerations did not emerge until years later.
Serving the U.S. Pacific Northwest region, Coastwide competed in a growing market in the 1980s and 1990s that was driven by expanding high-tech oriented firms (Microsoft, Intel, Amgen, Boeing). Yet by the 1990s the growth of overall demand for cleaning products had tapered off and the products were essentially commodities from the buyers’ viewpoint. This meant that growth, improved sales, and profitability depended on increasing market share or offering value-added services. The commercial and industrial cleaning products industry remained fragmented in 2000, with many small companies less than $5 million in revenues competing as producers and/or distributors.
But this sleepy traditional industry was about to wake up. In August 2002, Coastwide, active as a commercial and industrial cleaning product formulator and distributor, introduced the Sustainable Earth line of products. This experimental line was designed for performance efficacy, easy use, and low to zero toxicity. By 2006 the line had grown to dominate the company’s strategy, positioning Coastwide as the largest provider in the region of safe and “clean” cleaning products, janitorial supplies, and related services. The fast-growing market for the line extended from southern Canada to central California and west to Idaho.
The Sustainable Earth line enabled Coastwide to lower its customers’ costs for maintenance by offering system solutions. Higher dilution rates for chemicals, dispensing units that eliminated overuse, improved safety for the end user, and less lost work time because of health problems associated with chemical exposure were reported. Higher dilutions also reduced the packaging waste stream, thereby reducing customer waste disposal fees. TriMet, the Portland, Oregon, metropolitan area’s municipal bus and light rail system, reduced its number of cleaning products from 22 to four by switching to Sustainable Earth. Initial cleaning chemical cost savings to the municipality amounted to 70%, not including training cost savings associated with the inventory simplification. In 2006 the Sustainable Earth line performed as well or better than the market category leaders while realizing a gross margin more than 40% higher than on the company’s conventional cleaners.
Perhaps most telling, Coastwide’s overall corporate strategy changed in 2006. That year the firm committed to implementing a corporate transformation to “sustainability” products. All cleaning product lines were to be replaced with sustainably designed formulations and designs. The economic benefits were clear and they carried Coastwide to a leadership position. Coastwide Labs had become a major player, creating and shaping the regional market to its advantage.
The company’s strategic roots were in its systems approach to meet customers’ full service needs, established long before environmental and sustainability vocabulary had entered the business mainstream. Coastwide had earlier tried to address its customers’ comprehensive maintenance and cleaning needs, which ultimately came to include sustainability features.
How complicated could cleaning product markets be? More so than you might suspect. There were several factors that shaped industry selling strategies. Customers needed multiple cleaning products and equipment for different applications. But buyers had more than cleaning needs. Fast-growing and large electronics manufacturers with clean rooms had to protect their production processes from contaminants or suffer major financial losses from down time, as much as a million dollars a day. In addition, a barrage of intensifying local, state, and federal regulatory requirements demanded safe handling, storage, and disposal of all toxic and hazardous materials. These legal mandates imposed additional costs such as protective clothing, training, and hazardous waste disposal fees. Adding complexity, historic buying patterns of customers fragmented purchase decisions. One facility maintenance manager might order a set of products from one supplier while a second ordered different products from another supplier. As a result, companies with geographically dispersed sites made nonoptimal choices from both a price and systems sense. As in all compartmentalized companies, jobs were divided with people working against each other, sometimes under the same roof. Maintenance bought the products, environment health and safety had responsibility for knowing what was in the products as well as workers safety and health, and manufacturing had to ensure pristine production.
Furthermore, all buyers contended with wastewater disposal regulations that forbid contaminated water from leaving the premises and entering the water supply system, but the requirements were different depending on the local or state regulations. Typically minimal or no training was given to maintenance staff members who actually used the hazardous cleaning chemicals. High janitorial employee turnover and low literacy rates made it expensive to hire and train employees. A 150% to 200% annual turnover rate was typical with this employee group, imposing its own unique costs and health risks to the employer. The low status of the maintenance and janitorial function didn’t help. The job was delegated down in the organization to the staff that did the cleaning work, or one supervisory level above. In other words, despite many small areas’ needing the customer’s attention as a complex system of interrelated factors, responsibility was either nonexistent or fragmented across different departments that traditionally had no incentive to communicate.
Other aspects of the industry’s history magnify the systems thinking that was increasingly required to meet customer needs. In the late 1990s, buyers wanted stockless systems with just-in-time delivery and single source purchasing to avoid dealing with seven or eight companies for 90 cleaning items. Coastwide had designed its first system-solution contract — not a green strategy yet — in the late 1980s when it contracted with Tektronix, a test, measurement, and monitoring computer equipment producer, then the largest Oregon employer and a high-tech company with a dozen operating locations. Coastwide offered to supply all Tektronix maintenance needs, including training personnel to use cleaning products safely. Getting Tektronix’s business required knowing the company’s different facilities, various manufacturing operations requirements, and maintenance standards. It also meant Coastwide presented the analysis to show the client the economics of why it made sense to outsource the company’s system needs. Coastwide had to understand the buyer’s internal use and purchasing systems, including their costs and chemical vulnerabilities.
Roger McFadden, Coastwide’s chemist and senior product development person, took on the additional job of keeping a list of chemicals the buyer wanted kept out of its facilities due to clean room contamination risks. McFadden saw this as an opportunity to look at a variety of suspect chemicals on various health, safety, and environmental lists. The lists were growing for the customer and with regulatory agencies. Eventually Coastwide was asked to handle the complete health and safety functions for this customer and later for others because it could do so at lower cost with customized analyses presented to each buyer. A honed systems perspective optimized efficiencies across linked system parts and tagged areas for continuous improvement. In the more complicated world of the 21st century, the term “environmental” for Roger McFadden had expanded to include product contamination, increasing regulation, customers’ workers’ compensation and injury liability, chemical compound toxicity thresholds, and even cancer rates.
To compete with foresight, Coastwide had to stay current on and continuously adapt its solutions services to accelerating and increasingly more pressing trends. McFadden served on the Governor’s Community Sustainability Taskforce for Oregon, and in the process gained more information about the science of toxicity, state regulatory intentions, and changing government agency purchasing practices. This led to expanded sales to state and city government agencies and to Nike, Hewlett-Packard, and Intel. Involvement with broader community issues translated for Coastwide into flows of information to senior management that helped the firm position itself and learn despite constantly moving customer and market terrain.
McFadden’s first step was to rethink the cleaning product formulations. The product had to work, but at the same time it could not pose a risk or threat. The second step was to expand the product line so that customers would sole source a range of products from Coastwide, a step that provided buyers with assurance that all cleaning products met uniform “clean” and low- or zero-toxicity specifications. Next, to be consistent throughout its offerings, Coastwide extended its “cleaner cleaners” criteria out to auxiliary products. For example, PVC-containing buckets were rejected in favor of safely reusable polyethylene. Used ones were picked up by Coastwide’s distribution arm, with the containers color-coded to ensure no other containers (for which the company would not know the materials inside) would inadvertently be brought back.
Coastwide was in a better position than its competition when Executive Order 13148 — Greening the Government through Leadership in Environmental Management — appeared. This order set strict requirements for all federal agencies to “reduce [their] use of selected toxic chemicals, hazardous substances, and pollutants… at [their] facilities by 50% by December 31, 2006.”
By 2006 most of the major institutional cleaning products companies across the country had “green” product offerings of some sort. But Coastwide was already well along the learning curve and ahead of them. Building service contractor and property manager customers told Coastwide they were awarded new business because of the “green” package they offered. Some buyers used the Sustainable Earth line as part of their marketing program to differentiate and enhance the value of their services. The city of San Francisco specified Coastwide’s line even though the company did not have sales representatives in that market (sales in the area were through distributors). Inquiries from the U.S. Midwest, South, and East Coast increased in 2006, and Roger McFadden and the firm’s corporate director of sustainability were frequently invited to talk in various U.S. and Canadian cities outside their market area.
Here was a situation where not only was the environmentally preferred product superior at a comparable price for the buyer, but also the financial returns were impressive for both Coastwide and the customer. The products performed as well or better than the category leaders (from equal to 63% more effective in soil removal using ASTM tests conducted by an independent testing laboratory). Coastwide’s market share grew to about 16% of the regional market, making Coastwide the largest firm in the geographic area. New customers rose 35% in 2005 largely attributable to the Sustainable Earth product lines. In the International Sanitary Supply Association 2005 Distributors’ Profitability Report (based on 2004 data) Coastwide ranked in the top quartile of the 143 responding companies for:
- Profit margin
- Return on assets (pretax)
- Return on equity (pretax)
- Operating profit
- Sales per employee
Net operating income averaged double to triple the industry norm. Sales in 2005 rose 8% largely, due to segments where most of the Sustainable Earth products were sold (education, property management, health care and cleaning contractors), while operating profits increased by an even larger percentage.
Most commercial cleaners offered little real product differentiation and were viewed as commodities in the eyes of the customer. The Sustainable Earth line stood apart. The demonstrable advantages of Sustainable Earth permitted the company to realize a gross margin of more than 40% higher than on its conventional cleaners. Customer retention and longer contract commitments contributed financial advantage as well.
Precise data were not yet available in 2006, but it was assumed lower risk through use of benign products would ultimately translate into lower insurance premiums, lower handling costs, fewer sick days, less expense for protective equipment, lower regulatory burdens and expenses, elimination of hazardous material handling training, and lower waste disposal costs. TriMet and a few school districts had already reported a reduction in the number of sick days ascribed to chemical-related injuries or sickness.