Bridging the ‘say to do’ gap on sustainability

Sustainability is a strategic imperative for retailers, it is however, a complex area where collaboration up and down the supply chain is key to make a meaningful difference for consumers, the industry and in tackling climate change. Making it as easy as possible for consumers to make sustainable choices and ‘nudging’ them in the right direction are key roles retailers can choose to prioritise. Consumers are increasingly motivated, and therefore looking to be more discerning, to do the right thing, but confusing information makes it harder for them to make the appropriate consumer choice.

Sustainability remains a strategic imperative

Sustainability remains a strategic imperative for the retail sector with significant government and public attention focused on topics such as single use plastics driving rapid change. Bain report that three in four (75%) retailers have incorporated sustainability as a formal part of their business strategies and the adoption of Science Based Targets (“SBTi”) for carbon reduction went up five-fold between 2019 and 2021.

Sustainability remains a driver of mergers and acquisition activity in the sector as niche players with strong ESG (“environmental, social, governance”) credentials are mopped up. In 2021, Bain also reported that there were 307 such deals, compared to only 14 a decade before.

Retailers need to make choices and embed change

One of the key challenges for retailers is the breadth and depth of sustainability issues facing the sector. For example, fashion alone accounts for more than 4% of Global Greenhouse Gas (GHG) emissions and to quote a founder of one fashion label, “the upcoming generation is extraordinarily focused on making sure that waste does not exist”.

This quote reflects customers' increasing concern for the environment and expectations for retails to be transparent on reporting their environmental credentials. Realistically retailers simply cannot address everything, and so important choices are required to not only prioritise certain initiatives but to also explain and defend the subsequent allocation of resources in reducing their environmental footprint.

As Bain states in its report, retailers have identified at least one or more of the following six areas listed below to focus their resources:

The answer to successfully translating strategy into action is by narrowing down efforts to a targeted list of ambitions. In our experience of working with clients, conducting a Materiality Assessment is a helpful step in better understanding organisational and stakeholder priorities and to justify where to focus limited resources. By targeting key ‘hot spots’, as Bain argues, organisations can identify areas that are disproportionately responsible to prioritise investment to address sustainability issues or consumer concerns.

What is the organisation’s ambition for sustainability? Do they feel the need to be a market leader, a follower or simply to comply with regulatory requirements? Finding answers to these questions will in large part be determined by their market positioning and what their competitors are committing to. One leading grocer is reported to have narrowed their plan down to four key projects: (1) healthy diets, (2) food waste, (3) plastic reduction, and (4) emissions reduction. By understanding that 80% of food waste comes from bakery, vegetable and dairy areas, they were able to focus down their efforts further. This; however, implies moving the sustainability agenda down from the corporate sustainability team level into day-to-day operations.

Boston Consulting Group (BCG) report that there is still much to do for businesses to drive an internal change in culture and behaviours. Having localised Key Performance Indicators (KPIs) that are linked to business planning and performance reporting is a critical step - what gets measured and incentivised often gets done - as there remains a significant challenge in capturing and analysing meaningful performance data in this area. Bain caution that commercial and operation teams need to take ownership to resolve these issues.

Having a clear focus will help reduce the sheer volume of noise around sustainability and enable managers to take practical and targeted action, allowing them to balance the trade-offs between competing issues.

Better harnessing of digital data does offer some hope in terms of driving change. Leading practice involves regularly sharing sustainability KPI performance internally and integrating this into business performance reviews. One home goods retailer has now tied executive remuneration to these sustainability performance metrics as a strong signal to the organisation.

Supply Chains and collaboration are both key

Clearly most retailers, whether selling food, clothing or household goods are dependent on complex and ever-changing supply chains and these are the ultimate source of many retailer’s carbon emissions.

Retailers sit in a critical role between consumers and suppliers in the overall value chain. Indeed, a recent survey by BCG concluded that although 40% of organisations are on track to meet their own Scope 1 and 2 GHG emission reduction targets, few have addressed their supply chain Scope 3 emissions. This is perfectly natural given that Scope 1 and 2 are within their direct control but this remains a significant issue given that Scope 3 emissions typically account for over 90% of a retail organisation’s environmental impact.

The conclusion is that with only 20% of organisations signalling their intention to plan and comprehensively address indirect emissions, there is still much to do to engage and work with suppliers. Bain suggests there is a growing alignment of interests as large consumer product companies are also under pressure to manage their own transition towards lower carbon emissions and waste reduction. McKinsey quoted one industry CEO as saying, “The only way we can scale up our efforts is by reaching out outside our own organisation.”

A good example is a relatively rapid switch towards reducing plastics consumption in personal care products, allied to rolling out refillable or reusable bottles, which is where retailers need to play a role in enabling this reuse cycle. Walmart for example is working with over 4,000 suppliers to drive down emissions by providing tools to enable them to track emission avoidance initiatives. Prada has also, for example, partnered with Aquafil to deploy a nylon recycled from plastics and fishing nets which lowered their clothing product impact by an astonishing 90% compared to virgin nylon sources.

However, given the number of green initiatives, brands and logos available it can be difficult for consumers to navigate. As McKinsey reports, there are now over 460 individual sustainability logos and schemes in existence, meaning there is a huge need to simplify signalling up and down the supply chains to build trust with consumers as they become more discerning.

Addressing the ‘say to do’ gap

Forbes raises the key dilemma of getting customers on board, quoting a First Insight study, they highlight that, in this case, people want their cake and to eat. The report says three quarters of customers across all demographic age groups want more sustainable products, but they don’t expect to pay more. Often what is needed are soft nudges to encourage and enable people to follow through on their intent. A simple example is how Costa Coffee’s loyalty scheme allows members to earn free coffees at twice the rate if they use reusable cups.

For younger people, according to Bain, sustainable shopping is a mainstream preoccupation - half of EU spending on sustainable insurgent brands is by millennials. However, there are barriers to enabling customers to make choices and these are largely concerned with non-price related issues such as product information, labelling, quality and availability. How retailers seek to address this depends in large part on their sustainability strategy and what position in the market they are seeking to secure in terms of early adopter versus follower.

Conclusion

Consumers are looking for more sustainable options but given the cost-of-living pressures they face, and not being able or willing to pay more for these products, retailers are in the ideal position between consumers and a wide variety of product suppliers to broker solutions and enable change by informing and encouraging consumers to make more sustainable choices. Retailers, therefore, need to focus on how to be more impactful.

Please get in touch with Alex Hindson or your usual Crowe contact for more information.