This article is part of Bain's 2021 Energy and Natural Resources Report.
In discussions about making food and other input materials more sustainable, the fists banging the table have been forceful, but consumers have been more tepid in their response, mostly unwilling to pay for greener products.
That’s beginning to change: Nielsen research finds that 81% of consumers worldwide feel strongly that companies should improve the environment, with the feelings strongest among Gen X, Millennials, and Gen Z, and shared to a lesser extent by older consumers. And they’re walking the walk: A study by Sogeti Cap Gemini reports that 79% of consumers are changing purchase preferences based on social responsibility, inclusiveness, or environmental impact.
This is a big opportunity for food and other consumer product companies and others because this commitment suggests that customers will pay more for products that meet their requirements—although usually only 5% to 10% more. In some cases, that would be enough. If farmers could charge 10% more for wheat, they could invest that money in more sustainable practices, and the extra cost would increase the price of a $2 loaf of bread by only a penny (see Figure 1). The math is similar in packaging, which usually makes up about 10% of the cost of a product. Even a 50% increase in packaging cost, for example to cover the use of recycled plastic, would increase the total product cost by only 5%—within the range of what consumers say they’ll pay for greener products.
Farmers could invest in greater sustainability and be paid more, without significantly raising the price of the end product
However, the companies that sell directly to customers are usually several levels removed from the growers and manufacturers that could make the changes consumers want. For example:
- Growers are fragmented and focused on meeting product specifications that give them access to local and global markets. Most adopt new practices only if they lower costs or help them create a more premium product.
- Processors are focused on reducing costs by growing bigger and standardizing output.
- Brands want to reduce the cost per unit and may not fully understand the upstream challenges in greening products.
How can companies work together to deliver more sustainable products at prices that consumers are still willing to pay?
In the past, consumer product and food companies have tailored their products to changing customer preferences, often to reduce prices or make products more convenient. Today’s challenge is different: How can companies work together to deliver more sustainable products at prices that consumers are still willing to pay?
Successfully redesigning the value chain
Change is always hard in big companies, especially in sustainability. Bain’s 2018 study of nearly 300 sustainability-driven change efforts paints a stark picture. Only 4% of sustainability programs achieved their full ambitions, 49% achieved diluted results, and the rest were acknowledged as failures.
How can companies beat those odds? In our work with companies redesigning value chain dynamics, we’ve noticed three factors that appear to increase the chances of improving sustainability in their value chains.
It starts with getting a better understanding of what customers want to buy this week and next year. Consumer brands and retailers are closest to customers, and more likely to understand their preferences. But to make the equation work, they need to work closely with suppliers and other partners across the value chain to communicate those preferences and innovate collaboratively to come up with new products and packaging.
For example, while food and beverage companies have always partnered closely with packaging companies, we’re seeing better coordination now, as both sides develop packages that appeal to customers who want to see less waste. The result is lots of innovation in things like recyclable food trays for produce, recyclable coffee cups, and even refillable soda bottles—an old idea that’s come round again. Coca-Cola has been investing in upstream suppliers to improve its plastic recycling capabilities. In 2019, Coca-Cola worked with a recycling technology firm, Ioniqa Technologies, and one of its packaging suppliers, Indorama Ventures, to develop a bottle made with 25% plastic recovered from the seas.
A second factor is that companies will move up or down the value chain if they think it will help them meet customer demand. In beer, for example, brewers sometimes take control of hop production, either directly or through contracts, to maintain access to supply and quality of this integral ingredient. In plastics, to scale up recycling, producers will need a reliable supply of used plastic for feedstock. For example, in 2020, renewable diesel leader Neste of Finland and Unilever teamed up with Recycling Technologies to develop a program to ensure a more robust supply of feedstock for plastics recycling programs in the UK. Recycling Technologies turns the plastic waste into an oil that it delivers to Neste, which analyzes it and upgrades it into feedstock for new, virgin-quality plastics. Unilever brings its insight on customer preferences and its expertise on packaging design to the program.
Finally, everyone will need an incentive to change behavior. The benefits of sustainability, including premiums charged for it, have to be shared across the value chain. The Nature Conservancy worked with tuna suppliers in the western and central Pacific to create a seafood company, Pacific Island Tuna Provisions, that has end-to-end control to ensure sustainable practices, including reducing bycatch of other species. One of the company’s goals is to improve socioeconomic conditions among the Pacific Island communities that rely on sales of tuna. With electronic monitoring of its sustainable fishing practices, the company offers retailers and customers high visibility into its supply chain practices to ensure that it’s following sustainable principles, in exchange for long-term, mutually beneficial supply contracts.
If understanding the customer is the first principle in redesigning the value chain, a close second is figuring out future profit pools. As food and product companies respond to demand changes, how will that disrupt the value chain, and who will be the new winners?
Teasing out scenarios can help companies uncover new business opportunities. In some cases, companies will be able to act alone to seize a competitive advantage. But since sustainability is such a large issue, some of these changes will require industrywide coordinated action. For example, organizations like the Alliance to End Plastic Waste bring together consumer product companies, chemical manufacturers, energy providers, and technology firms to work on systemic solutions to the issues of plastic waste and recycling.
It will take breakthrough, innovative thinking and a mentality geared toward innovation and experimentation to pull this off. Some of the most forward-thinking and innovative companies are up to the challenge but have a long way to go. The opportunities are out there, and the urgency to act continues to grow.