The Next Big Thing- The Green Business Revolution

Move aside, tree huggers. More and more hardheaded entrepreneurs are tapping into the growing green market.

FORTUNE SMALL BUSINESS

By Cait Murphy

It’s 2040, and America’s corporate titans have convened for a conference boondoggle to compare net worth and catch up on the latest gossip. A mellow Bill Gates presides over it all with the kindly mien of an elderly uncle. But tech is not the star of the show. No, that guy chugging a brew was one of the first entrepreneurs to invest in fuel cells, the very ones that are used in every American car and that now constitute a multibillion-dollar industry. The lanky woman dancing on the deck, which is made of recycled plastic bags, is a much-feared solar baron. The burly guy with the bulging biceps? He’s made a fortune in real estate, building environmentally certified houses and condominiums. And the rude guest sniffing the food runs a chain of organic supermarkets that has Wal-Mart seriously concerned. The big economic winners of the past few decades, it turns out, have been those who decided that green is good–and a good way to get rich.

This scenario is fiction, of course, but not quite a fantasy. After years–in some cases, decades–of searching, businesspeople have finally discovered the existence of a green market. And it is growing, in some sectors phenomenally. Sales of organic foods are increasing 20% a year; the federal government’s General Services Administration is requiring all new buildings it authorizes to be energy-efficient; the sale of hybrid cars has cruised from zero to 36,000 in just a few years; and the share of venture capital going to green-energy technologies has tripled since 1999.

What’s more, we appear to be at the beginning of a major cultural shift–the kind that could finally make green businesses viable in the mass market in the next decade or so. The war in Iraq has put the spotlight once again on our fossil fuel crutch. Even some conservatives are raising concerns about global warming. Large corporations like General Electric are investing in wind power. Fuel cells have become a hot technology among Silicon Valley entrepreneurs. President Bush wants to allocate $1.2 billion to develop hydrogen-powered cars. And more than a dozen states are requiring utilities to increase their supply of green power. (Fifteen percent of Illinois’s power will come from renewable resources by 2020.)

But let’s not get too carried away. Last year Americans bought almost 17 million cars; 99.8% of them were not hybrids. Venture capitalists are happy to answer phone calls from green inventors, but green energy accounts for only 2.3% of investments, according to Joel Mackower, co-founder of Oakland-based Clean Edge Technology, an investing consultant. Yes, the green market exists; no, it won’t make you a millionaire overnight.

Market-research types like to talk about the "production-diffusion S curve." That is the idea that a successful product starts slowly, and after it secures itself in the market, sales begin to accelerate. A few green products, such as organic foods, have hit the accelerator; many more are still in the slow-growth stage and may never crawl out. Businesspeople who can identify the green products that are most likely to go from niche to mainstream to mass consumption–well, they just might be invited to that bigwig cocktail party in 2040.

How to get there? By being at least as good at business as you are committed to the environment. (To see 14 entrepreneurs who are doing just that, see their profiles, Here Comes the Gold Rush. http://www.fortune.com/fortune/smallbusiness/articles/0,15114,456088,00.html ) The U.S. market is very tough on products that are clean and green but that fail in regard to price, quality, or convenience. Even a company that prides itself on its green ethos, such as New Belgium Brewing Co. in Colorado, got rid of its water-saving urinals because–to put it bluntly–they reeked. If even the greenest companies won’t make that kind of sacrifice, it’s a safe bet that customers won’t either. "If you look at the green consumer," says environmental-marketing consultant Jacquelyn Ottman, the "consumer part is more important than the green part. People buy laundry detergent to get their clothes clean, not to save the planet." The trick is, if you can clean people’s clothes and the world at the same time, you’ll have a real competitive edge.

That view is confirmed by an annual survey of green attitudes conducted by the market researchers at RoperASW. Their findings: About 9% of Americans are "true-blue greens"; they are the most likely to "walk their environmental talk." Another 6% are "greenback greens"; they are folks who are likely to buy green but not at the expense of comfort or convenience (only a quarter of them bother to recycle). Another 31% are "sprouts"; they go back and forth on green issues. And the rest don’t really care. All told, only about one in five Americans participates in some form of environmental activity, ranging from recycling to donating money. The message, then, is that for business to make money out of greenery requires a steely-eyed recognition of reality–that people do not and will not weigh the social, ethical, and environmental consequences of every purchasing decision.

Need more evidence? The Toronto-based International Institute for Sustainable Development figures that no more than 2% of North American consumers are "deep green"–that is, willing to seek out and pay for environmentally superior products. If that seems low, it’s because you’ve probably seen surveys (much loved by green groups) in which people announce they’d be willing to pay more for green products. About half of all respondents told that to RoperASW, for example, when they were asked about purchasing cars, power, homes, and appliances. How to explain the disparity? Not to put too fine a point on it, but those respondents are lying.

Take a look at power. More than 300 utilities in 32 states now offer "green pricing." In those programs consumers can decide to have some or all of the power they pay for generated by renewable technologies such as wind, landfill gas, geothermal, hydropower, solar, and biomass. For about $21 a month–about the price of a Starbucks Frappuccino once a week–an average American home could green its entire power supply.

Nearly half of all electric consumers have access to such programs, says Lori Bird, senior energy analyst at the National Renewable Energy Laboratory, but only about 425,000 have signed up. That’s less than 1%. The most successful utility, Moorhead Public Service in Minnesota, has enrolled almost 6% (Minnesota always seems to be first in these things). Green pricing is new and hasn’t been marketed particularly well. Still, it’s hard to look at this example and conclude that there exists a huge market, clamoring for the opportunity to spring for greenery.

The key for green entrepreneurs, then, is not to rely on consumer virtue but to compete on price and quality. For instance, Philadelphia’s White Dog Cafe is about as green as it gets, running tours to local farms and taking care to source its products from responsible vendors. But at heart the White Dog is about serving good food. Only after delivering on its core product can it sell environmentalism as an added value. Green entrepreneurs are most successful not when they get people with a tortured social conscience to buy but when they also sell to those who don’t really give a damn–and that requires getting the price down.

That’s an issue that wind-power companies have begun to face head-on. The combination of an environmental push from state governments interested in diversifying their power supply and the economic pull of falling prices has made wind the country’s fastest-growing power source. In fact wind power may be less than a decade away from affordability. Solar-power companies, however, are still lagging behind. Much of the industry remains heavily dependent on subsidies and do-goodism. Successful solar companies like PowerLight say they welcome the challenge of weaning themselves from government largesse, and solar costs, too, have dropped substantially. But even though solar in some respects is greener than wind–windmills kill birds and take up a lot of land–the comparative economics mean it is much further from joining the mainstream.

One sector that has had success selling green goods to the great unwashed is the building industry. Green building–construction that emphasizes energy efficiency, resource conservation, indoor air quality, and the use of environmentally sensitive materials and techniques–is still in the minority. At best, say real estate market researchers American LIVES, less than 2% of new homes meet any kind of green ethos. (Some 1.6 million new homes are built a year in the U.S.) America’s first green residential high-rise is only now being built: the Solaire, a 27-story luxury building in New York’s Battery Park City, a stone’s throw from ground zero.

What’s interesting, though, is not the state of the green building industry now, but where it is going. And it is charging headfirst into the mainstream. Says John Knott Jr., a South Carolina-based developer: "There is not a single major manufacturer that does not have a major focus on green design features. You cannot find one that does not have a major initiative in this area." As recently as five years ago such a statement would have been ridiculous.

Places that have been most systematic about encouraging green building are seeing tremendous growth. This year 1,000 of Atlanta’s 40,000 housing starts will be EarthCraft-certified–a designation awarded by the Southface Energy Institute for buildings that meet various environmental requirements. A similar program in Colorado, known as Built Green Colorado, already has a 12% market share of new residential construction. There are rating systems in 15 other states, and more are in the works. And commercial developers have gone greener faster, thanks to national guidelines known as LEED (Leadership in Energy and Environmental Design), which is probably just a few years away from becoming standard.

Why are so many builders flocking to meet those requirements? Because once they do, they are able to charge a premium for their homes. Sure, green buildings may cost more to construct, but the public has been convinced that they will receive health benefits and a sturdier home, things that they’re willing to pay for. So developers can get their price without ever appealing to the buyer’s sense of environmental guilt. In fact, green builders tend to emphasize not the green aspects of their work but the ancillary benefits, such as lower energy costs, better construction, and improved indoor air quality.

The building trade offers some useful tips for other businesses that want to break out of the green ghetto. One lesson is that agreed-upon standards can help. Before the various rating programs, homebuyers couldn’t easily evaluate claims to greenery; a recognized certification does the work for them. Second, green works best when it is linked to other values, like health and quality. Third, consumers are likelier to try going green when it’s easy and convenient for them to do so.

Like the building industry, organic food has made it into the mainstream, not so much by selling the environmental benefits of free-range chickens or pesticide-free soil but as a healthy alternative to factory-farmed "Frankenfoods." "While we do our best not to use negative stories to accelerate sales," says Bob Scowcroft, executive director of the Organic Farming Research Foundation, consumer interest "spiked around organic every time a major news story came out" regarding subjects like mad cows or infected milk. The Department of Agriculture, which implemented standards in 2002 to label organic foods, is careful to say that there is no proof that organic food is healthier. But despite those efforts, people tend to think it is, which works in the industry’s favor. So does the idea–generally true, in fact–that organic foods are grown by small-scale salt-of-the-earth family farmers, not massive agribusinesses. So to the typical consumer buying organic doesn’t just mean buying green; it also means choosing healthier food and supporting a near-extinct way of life.

Since 1990, says Heather Givens of the Organic Trade Association, the market for organic foods has increased some 20% a year, reaching $11 billion in 2002. At least one in five U.S. households buys organic occasionally or more often. To be sure, that’s still only a drop in the food bucket–about 2% of the nation’s grocery bill. But with organic sales growing five times as fast of those of conventional food, market share will undoubtedly expand.

Organic producers will not be able to compete on price anytime soon; a cruise through a local market found that organic apples cost $4 a pound (vs. $2.50 for conventional ones), organic milk $3.39 for a half-gallon (vs. $1.99), and so on. Until the price gap narrows considerably, America’s grocery carts are not going to be brimming with organics; for a family of four to go totally organic would cost an extra $2,800 a year. But the market is still nowhere near peaking. For one thing, organics are easier than ever to buy, no longer requiring a pilgrimage to some dingy co-op on the edge of town. Almost 40% of organic food is sold through conventional grocery outlets like Safeway and Krogers, not natural-food stores or farmers’ markets. Heck, Wal-Mart sells organic.

Conventional food producers are also getting into the act, a clear sign that the industry is hitting critical mass. Danone bought a major share of Stonyfield Farm; Heinz bought a piece of Hain Celestial; General Mills bought Small Planet Foods; Kellogg bought Worthington Foods; Philip Morris (!), now Altria Group, bought Boca Foods; PepsiCo’s Frito-Lay division is testing organic snacks. That’s virtually a shopping list for Middle America.

I’m afraid the touchy-feely days of the industry are over," mourns a participant in an organic foods Internet chatroom. But for those who want to build a big and vibrant green market, that’s precisely the point–to make the jump from movement to mass, from touchy-feely to normal capitalism. Whole Foods Market, an organic supermarket chain (page 82), didn’t get to $2.7 billion in annual sales by limiting itself to the lentils-and-Birkenstocks brigade; it went after yuppies and soccer moms, and the whole organic industry has benefited.

What it comes down to, then, is that the best way to tap into the green dollar is indirectly. Don’t limit your vision to the true believers. Sniffs Jeff Seabright, director of Green Strategies, an environmental consultant: "Owners of SUVs are not green consumers." That’s exactly the wrong attitude to have. The fact is, they are–just take a peep at the gas-guzzlers that fill the parking lot of any suburban Whole Foods Market.

That’s a lesson the 14 companies we profile over the next several pages are taking to heart–and turning into exciting, promising businesses. You’ll also find an interview with Geoffrey Ballard, the opinionated pioneer of the fuel-cell industry, as well as our take on green investing. If smart businesses approach this growing market intelligently, they should see plenty of green–both environmental and the other kind.

http://www.fortune.com/fortune/smallbusiness/articles/0,15114,456225,00.html