World Economic Forum
This article originally appeared on World Economic Forum.
While many consumer goods companies have made solid gains towards promoting sustainability through such moves as reducing their carbon footprint and water usage, relatively few have made sustainability a major part of their brands. In our survey of senior executives of large consumer goods companies, 100% of participants said they made sustainability a priority and are devoting more time to achieving it, but only 21% of the companies are on track to deliver on their commitments.
The multiple rewards of building sustainable brands that drive real impact are well documented. Bain & Company’s recent consumer research showed that 75% are willing to pay more for sustainable varieties. The power of sustainability is reflected in the phenomenal growth of insurgent brands that often have more natural ingredients or green packaging. Embedding sustainability into their brands contributes to insurgents’ ability to grow over 10 times the average of the product categories in which they compete. Incumbent brands can use sustainability to reignite their relevance, provided their products and services are truly environmentally conscious.
Why are so many traditional brands late to the game? Executives surveyed cited three main barriers.
1. Challenge: Meeting consumer needs and expectations
Setting priorities, purpose: On the one hand, consumers want companies that both address sustainability issues and offer sustainable products. Yet consumers also have demonstrated an unwillingness to compromise on taste, convenience and quality. Consumer goods companies can overcome this fundamental obstacle by authentically making sustainability one of the reasons consumers love their brand. That starts with a commitment to true impact—a demonstrable contribution the product or service makes to reducing waste or investing in practices such as ethical hiring or manufacturing. Then embedding sustainability in the purpose of the brand, and asking a fundamental question: How strongly do we want to tie our brand purpose and proposition to sustainability?
There is a science that can help brands address this choice. To understand what underpins a consumer’s perception of value, we identified 30 fundamental factors that we call “Elements of Value”. These factors fall into four categories: functional, emotional, life-changing and global impact. Sustainability can help reinforce existing Elements of Value for a brand. For instance, with customers more natural ingredients could reinforce a product’s quality.
Our analysis of more than 8,000 consumers and over 60 brands and eight consumer goods categories in three European countries found that brands delivering the most environmental and social Elements of Value (such as “cares for Earth”, “invests in well-being” and “ethical”) generated five times the revenue growth of companies scoring lowest on sustainability Elements of Value. Comparing incumbents’ brands only, the ones embedding sustainability had twice the growth.
Delivering and communicating impact: After determining the ambition, winning brands decide which sustainability topics they want to actively engage with consumers on, and how they will make well thought-out changes within and beyond their product offerings to ensure their offerings are truly sustainable. The moves within an offering include portfolio adaptations to deliver more sustainable products: renovations to best-selling “hero” SKUs, core extensions, adjacencies, and even new business models. Changes inside the offering should represent as much as 90% of a company’s effort.
The remaining energy should be devoted to external activities such as community engagement programmes that demonstrate how the brand is lending its corporate might to advance sustainability to ensure this message reaches consumers.
The best brands engage with the broader community in ways linked to the issues they’ve prioritized. With those priorities firmly in place, they can develop the right consumer engagement strategy to drive that meaning home for consumers.
Our research found that consumers would like to get a clearer explanation of the real impact they make by choosing a certain product. To satisfy this requirement, brands must devote a higher share of voice to sustainability—in both volume and percentage—if they want to change consumer perception.
Setting truly sustainable pricing: Finally, there is the issue of pricing. Understandably, consumers will not pay more for a perceived “same” product, and retailers will not readily accept price increases they don’t understand. Still, the system change that accompanies more responsibly sourced, produced and delivered products can mean increased costs across the value chain to ensure these new changes are truly sustainable and can be maintained.
Several approaches can help tackle this tough issue. Some brands succeed by making gradual sustainability improvements and putting through price increases below the elasticity barrier. These can add up to a big change over a number of years. Others have found that retailers and consumers are more willing to accept rising prices if not all of it goes to a company’s margins—if part of the increase goes directly to farmers, for example. Others have priced up when they have made major product changes or delivered strong sustainability improvement in the value proposition or with the introduction of new sustainable product lines, educating their consumers and retailers with these shifts.
2. Challenge: Developing sustainable solutions
Beyond the consumer challenges above, a second major hurdle involves the difficulty of finding the right solutions at the right cost. Half of the executives interviewed said solutions are not available, and 75% said that added costs hurt the business case for sustainability.
The reality is that companies can position themselves to overcome these issues. Winners invest to ensure R&D efforts are suitable for sustainability, with the right capabilities within teams and provisions for such moves as open-source innovation. They explore all avenues for sustainable sourcing of raw materials. Moreover, they pursue digital solutions to help shape consumer behaviour, improve operational efficiency, or provide supply chain transparency and traceability.
To mitigate the cost impact from sustainability, the best companies explore three areas. They manage costs within the company, by taking a design-to-value approach, for example. They manage costs with the industry: one way is by defining higher industrywide minimum standards through industry associations. And they manage costs with innovative approaches along the value chain through such moves as pooling volumes to reduce overall sustainability costs.
3. Challenge: Existing operating models
A final major hurdle: existing operating models hold companies back. Employees cling to a financial-value mindset, and sustainability feels like the private domain of a separate team. Moreover, time horizons and incentives are not in line with sustainability targets.
The best brands take a cross-functional approach, embedding sustainability within divisions and business units while linking incentives to sustainability targets. They prioritize filling talent gaps. Perhaps most important, top leadership inspires a culture that fosters sustainability in brands.
When consumer products executives overcome sustainability’s three biggest hurdles, they typically watch the benefits multiply. Their brands outpace competitors in growth; they see older brands gain new relevance in consumers’ eyes; and their passion reignites employee engagement. These elements create a flywheel for change, ensuring that more responsibly designed and produced products have a long-term place in the market, helping the planet thrive in the process.