From Trend to Reality: Sustainable Retail

From Trend to Reality: Sustainable Retail

The environmental footprint of the industry

Over the last year, e-commerce has gained a lot of popularity. This has allowed brands and retailers to exponentially increase the reach of their products and brought consumers a new world of choice. But besides the many benefits of global trade, the environmental impact of supply chains is worsening. In fact, retail supply chains are responsible for a carbon footprint equivalent to 200 million tonnes of carbon dioxide. This impact is also visible in urban areas, where the increase in the number of vehicles circulating for deliveries has caused an average increase of 11 minutes in traffic.

Given these worrying figures, sustainability has gained importance for businesses, not only from managers' point of view but also from consumers. About 6 in 10 consumers are willing to change their shopping habits to help reduce their environmental footprint. This is not just a trend among Generation Z and Millennials, it expands to Boomers and Generation X as well. Additionally, 70% of these consumers are willing to pay an average premium of 35% to purchase products that are sustainable.

In response to this preference for products with a low environmental impact, there are numerous examples of companies that have adapted their business processes to ensure that their environmental footprint is positive. The IKEA chain has transformed its 2020 Black Friday into Buy Back Friday, encouraging consumers to sell their used furniture, by giving it a new life and promoting a circular economy. In addition, the retailer has committed to using only renewable and recyclable materials, and to cut each product's footprint by 70% by 2030. Fashion retailers have also been a strong presence in sustainability efforts, such as Levis, which develops, applies, and shares water-saving techniques in garment production, and H&M, which promotes collections with 50% recyclable or reusable materials.

Purpose-driven retail

The initiatives undertaken by retailers across industries are in line with consumers' preferred choice of purpose-driven retailers. Encouraged by consumers, businesses are including in their strategy pillars of positive contribution not only environmental concerns, but also socio-economic issues. Businesses now gain a strong social activist component, with the ability to catapult behaviour change through their influence on consumers.

However, despite all the evidence, there is still a cost (rather than benefit) paradigm around sustainability initiatives. This mindset stems from previous experiences with similar initiatives, where the main objective was regulatory compliance, with very limited scope and impact and without the measurement and monitoring of ROI and other key indicators. Additionally, in complex retail value chains, where raw materials suppliers, manufacturers, transporters and retailers work towards different goals, the ability to collaborate for a common good presents structural challenges.

Now sustainability initiatives are gaining a new stage, away from regulatory compliance, and with a focus on adding value to products and increasing consumer satisfaction. Retailers who see sustainability as a central strategic pillar will take the lead in consumer preference and experience significant gains in sales and cost savings.

Where to find opportunities?

The initiatives to be developed cover a wide range of options, and may focus on products and components, the structuring of the supply chain, supplier relations, after-sales services, or even the organisation's internal processes. To truly build initiatives with significant impact, it is necessary to analyse the entire supply chain.

Overstocking is one of the main problems encountered in retail. This causes an increase in the number of items wasted as they become obsolete/unusable due to over-handling. This problem has worsened with the proliferation of omnichannel retailing, as consumers have become less permissive to out-of-stocks or long delivery times. Retailers' reaction to this demand is often an undifferentiated increase in stocks. To address this, retailers should:

  • Plan to stock locally articles with high demand variability and centrally articles with low demand variability. This allows for gains in centralisation, without compromising the use of actual local demand data from each point of sale.
  • Improve goods handling methods and train teams effectively in order to reduce problems with damaged goods during handling and storage.
  • Collaborate with suppliers to ensure an integrated and flexible stock and delivery planning that enables dynamic adjustments to be made in response to changes in demand.
  • Re-evaluate the materials used in packaging and consumables, aiming to use recyclable and reusable materials.

The omni-channel retail has also brought a significant increase in the number of trips made for transport and delivery of products. The number of delivery vehicles in the world's top 100 cities is expected to increase by 36% by 2030 with a 32% increase in emissions caused by parcel transport. There is a need to find solutions that ensure convenience for the consumer without compromising the carbon footprint:

  • Bringing inventory closer to the end consumer through the multiplication of large logistics centres into capillary locations. Making use of the infrastructure already available, reusing space and optimising layouts.
  • Encouraging customers to collect rather than having it delivered to their home. This is accomplished with convenient pick-up locations, fast service, partnerships with third-party pick-up points and promotional incentives.
  • Optimising routes by bundling parcels and opting for more sustainable vehicles or fuels. Order bundling can be optimised through reliable routing algorithms that adapt in real-time to the mix of orders currently on hand.

Retailers can earn consumers' trust if they transparently share their efforts for sustainable products and operations. The journey to reducing retail's environmental impact is one that retailers and consumers are on, side by side. Offering different service options that have trade-offs between operational costs, convenience and environmental impact will help educate the consumer and drive retailers' transition. Successful transformation also requires sustainability to be part of the organisation's medium-to-long-term strategy that needs to be contemplated in all nodes of the value chain.

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