Lessons from REI on financing an energy agenda
As many retailers will tell you, one of the top challenges in implementing a successful energy management program is securing financing. The challenge is twofold: Energy professionals first have to understand their projects’ value through a purely financial lens using the right metrics and language. Then, they have to communicate those value drivers to the internal finance department while competing with numerous other business areas seeking capital.
The Retail Industry Leaders Association (RILA) recently sat down with retail energy veterans representing finance, energy management and construction perspectives to discuss how they recommend bridging the gap between energy and finance, and lessons learned. In this first of three interviews of the series, Mark Lester, divisional vice president of retail operations with REI, discusses energy management as a recent finance executive. Find the first interview, with Cole Haan's Bob Bedard, here, and the third, with Hudson's Bay Company's Gary Levitan, here.
Founded in 1938, REI is a national outdoor retail co-op dedicated to inspiring, educating and outfitting its members and the community for a lifetime of outdoor adventure and stewardship. It operates 145 stores in 36 states.
Erin Hiatt: Tell us a little about your position and background with REI.
Mark Lester: I started working for REI in 1999 as part of the finance team. For the past 16 years I’ve been involved in budgeting and financial forecasting. Most recently, all of the financial assessments for our energy investments went through me and my team, so I’ll be speaking to those experiences.
Earlier this year, I transitioned into a retail operations role. While I’m no longer in finance, my profit and loss responsibilities for stores include energy costs. In one case, an energy management solutions system upgrade project I was involved in while in my finance role is now being implemented in stores with me as the business owner, so now I’m seeing some of our projects from both the finance and the retail perspectives.
Hiatt: What were your responsibilities in relation to REI’s energy initiatives?
Lester: We advised the ultimate project decision makers on whether a project should go forward based on its financial merits. While we didn’t make the final call ourselves, our recommendations as the Financial Planning & Analysis (FP&A) Department were taken seriously.
As a co-op, we look to manage the business responsibly on behalf of our members, so there aren’t many projects that decision makers will implement if finance says, “This seems like a waste of money.”
Hiatt: As an outdoor recreation co-op, REI clearly has customers who have an appreciation for nature — how does that impact the financing approval process?
Lester: Our members and employees have a passion for the outdoors, and we feel a responsibility to lessen our environmental impact on their behalf. Energy initiatives are of course consistent with those values, too, but at the end of the day we still run a business.
Our board members are very in tune with how you run a strong company and are keenly aware of many of the financial challenges currently facing other retailers in the outdoor recreation market; we have to be aware of signals.
It’s important to us to be good corporate citizens, but we also have to run the business responsibly. I can’t think of an instance where the finance team told our senior executives a project didn’t make financial sense and they still wanted to pursue it.
For REI, we have discovered energy opportunities where there is natural alignment between our values and the business value. We are unique in that, if a project breaks even and is a wash financially, we’re more likely to be interested in still doing the environmentally responsible thing because it aligns with our values. Otherwise, financial merits matter just as much to us as any other company.
Hiatt: What convinced you that energy management is a solid investment opportunity for the business regardless of REI’s culture?
Lester: All it took was seeing the tangible results: We made energy investments that brought our costs down. And our sustainability team has delivered tangible results.
In some cases, outside monetary incentives made all the difference. It’s important to use those when they’re available, but plenty of these projects’ benefits stand on their own.
Hiatt: What does your energy management team do well that helps you see the value in their project proposals?
Lester: Our energy management team is completely willing to engage in a constructive dialogue They approach finance with the projected outcomes. If we have any questions or concerns, we begin a discussion. We recognize that it’s in everyone’s best interest to be completely honest when breaking down which numbers they know, which are based on assumptions, etc.
They’ve learned that it always helps to point to benchmarking they’ve done against other companies and to discuss those companies’ outcomes.
What’s still more fundamental than anything else, though, is the willingness to engage in conversation and build a relationship with finance so that everyone is on the same page with the particulars of a project.
Hiatt: What do you think are the biggest pitfalls energy managers can fall victim to when creating and pitching a proposal to the finance team?
Lester: Teams might present projects driven by personal passion versus focusing on business impacts and results, where finance will focus.
To start off in the right place, the key is shared understanding: Be honest and make finance play their part. That way you’re holding hands and jumping together into a new project — and when it turns out you were right and there’s a nice, soft landing down below, everybody will want to jump again.
Hiatt: What are the three things that you would recommend all energy managers make sure they do to improve the likelihood of their projects being approved?
Lester: One: build a relationship with the finance team. Talk to them; appreciate what they do. Learn what they’re looking for and how they like to see uncertainties presented.
Two: Know your stuff and how to talk about it. Be knowledgeable about the project and don’t expect finance to know about your area of expertise. They need to be able to see why it’s important without being an expert in your field.
Three: Be honest about the risks and downsides. Which parts do you know and which are you assuming?
Hiatt: What advice would you give finance teams at other retail companies who view energy primarily as an expense area?
Lester: They need to make sure they’re really listening. It’s easy for finance to jump to conclusions based on what they think they know. They need to poke holes while also being open to understanding why it might make sense. Always be willing to start a dialogue.
From what I’ve seen, the bottom line is that energy project investments are sound in most cases. The finance team should trust that if the energy team has done their homework, it’s going to end up making financial sense.
Hiatt: For you personally, what has been the most exciting project to work on with the energy team?
Lester: I can’t say too much yet, but I’m very excited about work we’re doing with our third distribution center that will open up in Arizona later this summer. It represents some very effective partnership work between the energy, supply chain and finance teams at REI, leading to an exciting result.
RILA later saw this sneak peak of REI’s net-zero distribution center in Goodyear, Arizona.