As sustainability rises up the public agenda, the consumer brands whose products fill our kitchen and bathroom cupboards are facing a fundamental issue. How can they stay relevant and profitable, in a world where the linear approach to consumption they have built their businesses on, is being called into question?
CDP’s new report, Fast Moving Consumers, the latest in our award-winning investor research series, ranks 16 of the largest publicly listed food & beverage and household & personal care companies on business readiness for the low-carbon transition.
The consumer goods sector has been somewhat overlooked in the climate arena.
Its direct emissions are relatively low in comparison to other high-impact sectors, like oil & gas or cement. But when you take a holistic approach to the sector’s environmental impact – including emissions in the supply chain and in the use of their products by consumers – the sector emerges as central to the global zero-carbon transition.
To succeed, FMCGs (fast moving consumer goods companies) must adapt to the emerging market disruption from climate change, water stress and deforestation.
They must also adapt to regulatory and consumer responses to these challenges.
This involves looking across their whole value chains and identifying the high-risk and high-impact areas with the most potential for improvement.
Building innovation with suppliers and consumers
It isn’t just about how much we consume, but what we are consuming that makes a difference.
Some materials are much more high-risk than others.The food and drinks sector, for example, relies on raw materials. As such, the environmental risks for these companies’ lie in their supply chains. Recognising this, leading companies are engaging with their supply chains, working on high-yield varieties and trying to grow crops in a more sustainable way.
For example, AB InBev is investing in cutting edge supply chain innovation. It is developing barley varieties that require 40% less water and using AI algorithms to find more sustainable barley growing regions around the world.
Other companies are responding to growing consumer demand for lower impact products by investing in innovation, such as alternatives to single-use plastics and meat intensive diets.
And with much of the environmental impact household & personal care companies concentrated in the consumer use phase, they are also working to help their customers to reduce their own impact.
Unilever runs a consumer education campaign called ‘WaterSavers’ to encourage more sustainable water consumption. Danone, meanwhile, is collaborating with local governments in areas with low recycling rates to improve recycling infrastructure and educate people on using it.
Some companies are also combining product innovation with consumer education initiatives. P&G, for example, has developed washing powders that work more efficiently in lower temperatures and is leveraging this with a ‘Turn to 30’ consumer education campaign.
M&A as a sticking plaster
Faced with shifting consumer preferences and market disruption, many FMCGs are also responding by acquiring smaller, sustainable brands.
75% of the companies we analysed have directed merger & acquisition (M&A) efforts towards the acquisition of niche environmental brands in the last five years. This type of activity has more than quadrupled over that time. Recent examples include Nestlé’s acquisition of Sweet Earth and Pepsico’s purchase of Bare Foods.
However, this approach will not be sustainable if companies’ fundamental business models - which are based on driving ever more consumption - remain unchanged.
M&A activity is a sticking plaster when what’s needed long term is full system transformation.
It’s encouraging to see many FMCGs innovating.
Yet much of this innovation is still small scale, focused on niche brands or in pilot programs. These companies are yet to rethink their main brands and business models.
In fact, almost 60% of the top 10 revenue-generating brands for each of the companies we analysed have failed to deliver low-carbon innovations in the last decade.
This matters. Most of these companies (88%) generate over half of their revenues from these key brands.
Ultimately FMCGs must scale up innovation across their value chains to drive meaningful decarbonisation by collaborating with suppliers and consumers.
In addition, they must ensure that low carbon propositions are tied to their core brands to ensure they are not left behind by the rise of the ‘conscious consumer’.