Going Behind the ROI of Sustainability
More Sustainability Coverage
Sustainability has become a driving force for good in the grocery industry in recent years. Initiatives surrounding food waste diversion, carbon footprint, emissions reduction, and more have proliferated, and the need to prove the return on investment (ROI) of these programs is becoming increasingly pressing.
Doing so, however, has been a perennial challenge for food retailers.
According to Christina Lampert, director of growth and innovation at Brooklyn, N.Y.-based sustainable food-rating company HowGood, the major retailers she works with have identified an inability to convey streamlined communication about efforts being made as one of the main challenges of proving the ROI of sustainability. Different certifications, non-standardized agricultural practices and other claims are well and good, but they can often leave grocers in the lurch.
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“If you think about a retailer who is procuring so many different types of CPG products, for example, all of these brands are talking about their own different sustainability initiatives, and it’s then up to the retailer to explain it to the shopper,” Lampert explains. “And what retailers are really struggling with is the fact that there’s no way to standardize all of that into one simple, digestible message for the shopper.”
Lampert also notes that many retailers have extremely low-carbon products on their shelves, such as seaweed snacks or pumpkin seeds, but they don’t necessarily qualify for a standard or certification. “There’s a huge opportunity there, but it’s just a challenge to identify what’s what in a unified manner,” she observes.
Measurement is definitely a challenge, agrees Corey Rochkin, principal at New York-based management consulting firm Oliver Wyman, especially since most of the emissions tied to a grocer are scope 3 emissions, which are generated by other players in the value chain through the production, delivery and use of the products the grocer sells. This means grocers often must rely on their suppliers and partners to measure and reduce these emissions.
Overcoming the Challenges Through Data
While challenges persist, Lampert says that it’s important to look at different types of data in an effort to inform sustainability initiatives. NYU’s Stern Center for Sustainable Business, for example, found that sustainability-marketed products grew twice as fast as conventionally marketed products, and in retail, sustainability-marketed products enjoyed a price premium of 28 versus their conventionally marketed branded counterparts. Additionally, products marketed as sustainable were less susceptible to price sensitivity.
“From this perspective, it’s in the retailer’s best interest, strictly from an ROI perspective, to actually enable their category buyers with this information to understand what they can market as sustainable and therefore retrieve these business benefits associated with that, whether it’s long-term or short-term margin,” Lampert says.
Gathering data on in-store sustainability initiatives can also be a good way to start the journey forward with category buyers. Lampert believes having hard data from pilot programs can help retailers make more informed decisions and help buyers know what’s best for their individual businesses. “I think it’s exciting for everyone once that data is put in place to kind of inform some of those future buying decisions,” she notes.
Andre Patenaude, director of solution strategy at St. Louis-based climate solutions provider Copeland, agrees that data can be crucial to making truly effective sustainability decisions, especially since higher ESG scores can often be correlated with companies’ receiving higher average annual returns.
“Even if this is not always the case in the supermarket sector, many companies leverage this data as a competitive differentiator,” Patenaude explains.
Initiatives That Help Drive Financial ROI
Banking on the fact that the majority of a retailer’s greenhouse-gas environmental impact comes from scope 3 emissions, which are largely dependent on all of the products that their buyers choose to source, Lampert believes this is exactly where the opportunity for financial ROI lies. Since this subset of emissions arises from operations across the value chain, companies must work together with suppliers, farmers and others to make a true difference.
Daniella Vega, global SVP of health and sustainability of Zaandam, Netherlands-based Ahold Delhaize, explained in a Deloitte report that the company is taking several steps to reduce its scope 3 emissions over the next several decades, including focusing on plant-based proteins in its private brands, and including its farmers and growers in its Better For program, which consists of transparent long-term agreements on climate, carbon reduction, sustainability, animal welfare and fair earnings.
“Our scope 3 target is to achieve net zero by 2050, with a 37% reduction achieved by 2030,” Vega wrote in the report. “We shortlisted the levers that we would need to pull to support reaching this decarbonization target. We chose to focus on supporting the supply chain to decarbonize, on livestock and regenerative agriculture, and on providing a sustainable diverse assortment through, for example, the shift to more plant-based proteins.”
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As the regulatory environment and investor expectations evolve, retailers may find that their ability to measure emissions, including scope 3, could have a direct impact on their financing costs, Rochkin notes. “Leading retailers are making this a core part of their supplier engagement model and are building dedicated data and analytics capabilities,” he says.
Rochkin adds that sustainability programs focusing on waste reduction are another avenue where retailers can generally find a strong return.
“This can take the form of programs to drive demand for products that otherwise would become waste, such as produce with imperfections, or store capabilities improvements that eliminate over-ordering and over-production,” he explains. “These programs benefit from both their positive environmental impact and reducing a retailer’s shrink cost.”
For its part, Phoenix-based Sprouts Farmers Market is seeing sustainability initiatives pay off behind the scenes. Lampert notes that the grocer recently closed a $700 million revolving credit line connected with its ability to meet goals related to sustainability initiatives. As such, the company is able to incur lower borrowing costs under the loan facility if it achieves objectives for the sale of socially and environmentally sustainable products and the diversity of its board directors.
Taking a different tack, Pittsburgh-based Giant Eagle recently relaunched its Nature’s Basket private label brand and, in doing so, focused on offering products that are responsibly sourced and offer high-quality ingredients. The grocer teamed up with HowGood to evaluate the environmental and social impact of each item in the Nature’s Basket line and to provide a comprehensive sustainability rating for its customers to consider.
Lampert explains that the HowGood Impact Ratings and Impact Attributes like those given to a selection of Nature’s Basket products can be added to shelves as a means to differentiate the store experience, enhance loyalty, and prompt the sale of products that introduce better margins and lessen exposure to price sensitivity, all while decreasing scope 3 emissions.
When it comes to sustainability initiatives that affect heating, ventilation and air-conditioning (HVAC) systems, Patenaude believes that improving energy efficiency is one of the biggest opportunities for long-term ROI. Since energy efficiency is a scope 2 goal focused on lowering indirect greenhouse-gas emissions from all sources of energy consumption, having modern systems in place that are smarter, more automated, and optimized for specific applications and operating conditions can help greatly reduce energy costs.
Going Beyond the Dollar
While financial ROI is obviously incredibly important to a food retailer’s bottom line, sustainability initiatives can also provide ROI in different ways. Rochkin believes these programs are increasingly important to attract and retain talent, and he’s also seeing brands begin to include a retailer’s sustainability agenda as a criteria when deciding product placement and funding levels.
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Patenaude also stresses the fact that sustainability programs can help to garner credibility in the food retail sector, where many consumers and investors are more aware of, and often prefer, companies that pursue more sustainability activities. “Companies with formalized ESG programs that can demonstrate progress along their sustainability journeys are well positioned in the retail marketplace,” he asserts.
Not having a firm grasp on sustainability can have quite the opposite effect, Lampert warns, explaining that brand reputation can be tarnished if and when certain on-shelf products are formulated with ingredients from areas that have been flagged for child labor, forced labor or other socially unacceptable practices.
“If the retailer is unaware or does not consider this within their category buying decisions, then they could introduce this risk, should something come out about the brand or even ingredient,” she cautions.
