Economics
stella17
Case4.pdf
UVA-QA-0862 Sept. 1, 2017
This case was prepared by Gerry Yemen, Senior Researcher, and Manel Baucells, Associate Professor of Business Administration. Copyright © 2017 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to [email protected].
To LED or Not to LED?
While in a car heading to the airport, Cindy Chen heard a familiar buzz and started doing the cell pat. Chen was director of marketing at a major big-box retailer in the United States. The buzz was notification that her flight was delayed. Now with time to fill, Chen asked the driver to stop at one of her employer’s local stores to do some ops—something she liked to do when she visited a new town. Walking the aisles often helped Chen observe any marketing, logistics, or customer service issues.
Once at the local store, Chen found herself pausing in the lighting department. Earlier in the week, she had listened to a creative director and his team pitch a campaign about light-emitting diode (LED) bulbs and her firm’s commitment to sustainability. She overheard a customer and a lighting specialist engaging each other. What she heard confirmed exactly why, whenever possible, she did pit stops like this one. Chen learned way more about sales, customers, and products by roaming through stores than working on her smartphone in the airport lounge waiting for a late flight.
In the Lighting Department
A chatty customer, Chris Whelan, was telling the lighting specialist the tight corner he and his partner were in. Whelan wanted to change 52 lightbulbs in his house to LEDs. But his partner did not, because four years earlier, Whelan had changed most of the bulbs in the house from incandescent to compact florescent lights (CFLs). Whelan said the arguments against upgrading from CFL to LED lighting were that it would cost more, that there were questionable green tradeoffs (CFLs were difficult to recycle and released mercury in trash disposal), and that LEDs were much more expensive. He had also been told that LED bulbs’ blue wavelength could adversely affect sleep and, in coastal towns, had attracted baby sea turtles to LED-lit parking lots when they should have been heading to the ocean.1 Chen smiled when she heard that one. Whelan continued, “And I just read an article that LED lighting in grocery store display cases turned milk sour.”2
Whelan then asked the lighting specialist for pricing as well as any data points he could provide to bolster the logic behind spending more money on switching to LEDs. It was clear to Chen that the specialist had heard the skepticism around replacing existing bulbs with LEDs before. The specialist invited Whelan to walk to the bulb section and gave several pieces of information along the way.
1 Kelly Hodgkins, “LED Streetlights Save Cities Millions, but Raise Health Issues—and Urban Residents Hate Them,” Digitaltrends.com, September
29, 2016, http://www.digitaltrends.com/cool-tech/people-dislike-blue-light-led/ (accessed Apr. 17, 2017). 2 Matt Hayes and Alina Stelick, “Consumers Sour on Milk Exposed to LED Light,” Cornell Chronicle, June 8, 2016,
http://news.cornell.edu/stories/2016/06/consumers-sour-milk-exposed-led-light (accessed Apr. 17, 2017).
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Page 2 UVA-QA-0862
The specialist told Whelan that the first step was to clear up misinformation by learning exactly how each bulb worked. Almost 90% of incandescent energy was heat, not light. Electric currents ran through incandescent bulbs and conducted with a thin piece of tungsten metal, heating it to 2,300°C, which became visible light. Incandescent bulbs had a typical lifespan of one to two years. Package specifications on a 40-watt bulb indicated 1,500 operating hours of average bulb life. For several years, the incandescent bulb had been scrutinized for its high energy demand. Government concerns around energy efficiency had caused targets to be set requiring lightbulbs to use less electricity to produce light. Indeed, by 2014, it had become impossible to buy incandescent lightbulbs over 40 watts (see Exhibit 1).
At this point, those looking for energy efficiency favored halogen incandescent bulbs. It seemed that customers wanted bulbs to integrate seamlessly with their existing light technology, so halogens gained popularity. The halogen bulbs operated the same way as the incandescents did (using a tungsten filament), except the filament was housed in a quartz envelope with a bromine vapor. That design resulted in a bulb that used 25% less energy than regular incandescent bulbs. When introduced, halogens cost, on average, $5 each, but had dropped in price since then. The lifespan of a 29-watt halogen incandescent bulb was similar to that of a regular incandescent bulb (1,500 operating hours). If used an average of three hours a day, the halogen had a one- to two-year lifespan.
In contrast to incandescents and halogens, CFLs converted power into light more efficiently. CFLs drove an electric current through a bulb containing argon (a gas) and mercury vapor to create ultraviolet light through the phosphor coating. Because of the small amount of mercury the bulbs contained, it was recommended that all CFLs be recycled or, if broken, cleaned up per EPA guidelines. The lifespan of a CFL, if used three hours a day, was roughly eight years.3 Packaging suggested that with general use, a CFL would last around 10,000 operating hours.4 Criticism of CFLs included incompatibility with dimmers or motion detectors and an inability to light instantly (see Exhibit 1).
Using a narrower wavelength band than CFLs was the LED bulb, which used a semiconductor to convert electricity into light. The light produced was similar to daylight but came in several different options—soft white (warmer), bright white (neutral), and daylight (cooler). If used three hours a day, the typical lifespan of an LED bulb would be between 25 and 45 years. On the package, most LED bulbs were expected to last roughly 25,000 operating hours. When first introduced, LEDs cost considerably more than incandescent bulbs and CFLs, but when big producers like General Electric and Philips got in the game, LEDs became less expensive. The lighting specialist assured Whelan that the “hundred-bucks-per-bulb price tag” was gone, and that what he needed in LEDs would run around $8 per bulb with tax (see Exhibit 1).
Whelan also learned that the local utility company charged 11.4 cents per kilowatt hour (kWh) for residential use. The state of Virginia, where he and his partner lived, generated 47% of its electricity through nuclear energy, 26% from coal, 25% from natural gas, and 2% from renewables. Lighting made up 15% of energy demands in the United States.5 The lighting specialist gave Whelan a price-and-energy chart to share with his partner so that they could calculate energy cost per year with each type of bulb (see Exhibit 2).
3 Noah Horowitz, “Your Guide to More Efficient and Money-Saving Light Bulbs,” https://www.nrdc.org/sites/default/files/lightbulbguide.pdf
(accessed Mar. 3, 2017). 4 The life hours were based on a 100W equal 2700K warm white bulb from 1000Bulbs.com, https://www.1000bulbs.com/product/6781/FC23-
801023.html (accessed Mar. 3, 2017). 5 Matt Rogers, “Energy = Innovation: 10 Disruptive Technologies,” McKinsey, 2012.
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Page 3 UVA-QA-0862
Back to Corporate
The overall story Chen was forming about the local store was positive. Not only was Chen impressed with the lighting specialist, she was fascinated by the customer’s approach to his energy use and household lighting. Just as she was about to continue her surveillance elsewhere in the store, she heard Whelan ask:
So would you help me with one last thing? Last time I changed out all the bulbs in the house at the same time. That way, lighting in our house was the same color. My partner fought me on that too— suggesting instead that we replace bulbs as they burn out. If we do that this time, every room in the place will have a different light tone! What would you recommend—all at once or one at a time?
Chen sensed an opportunity to promote the replacement of incandescent and halogen lightbulbs with LEDs back home. While a large majority of households were willing to buy efficient lightbulbs to replace burned-out incandescent ones, not many seemed eager to dispose of old lightbulbs that were still in working condition. She needed to run some cost-benefit calculations to understand the exact reasons for such reluctance. If the change was economically sensible, the program would be good for consumers, for Chen’s business, and for society at large. What would be the right approach to encourage consumers to change to LEDs?
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Page 4 UVA-QA-0862
Exhibit 1
To LED or Not to LED?
Types of Bulbs
Incandescent (left), LED (middle), and CFL (right).
Source: Author photograph.
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Page 5 UVA-QA-0862
Exhibit 2
To LED or Not to LED?
Price-and-Energy Chart
Lumens and Watts1
Lumens Standard
incandescent Halogen
incandescent CFLs LEDs
450 40W 29W 10W 5W
800 60W 43W 13W 10W
1100 75W 53W 16W 15W
1600 100W 72W 20W 19W
Costs per Bulb2
Lumens Standard
incandescent Halogen
incandescent CFLs LEDs
450 $0.62 $1.17 $1.43 $4.99
800 - $1.49 $2.12 $5.99
1100 - $1.33 $2.38 $7.83
1600 - $1.75 $2.63 $15.99
Energy Cost per Year (est. three hours per day)
Lumens Standard
incandescent Halogen
incandescent CFLs LEDs
450 $5.34 $3.87 $1.34 $0.67
800 $8.02 $5.74 $1.74 $1.34
1100 $10.02 $7.08 $2.14 $2.00
1600 $13.36 $9.62 $2.67 $2.54
1 Unless otherwise stated all table data was sourced from Noah Horowitz, “Your Guide to More Efficient and Money-Saving Light Bulbs,”
https://www.nrdc.org/sites/default/files/lightbulbguide.pdf (accessed Mar. 3, 2017). 2 All prices are 2017 U.S. dollars gathered from 1000Bulbs.com retailer.
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