Scarcity of natural resources will leave the consumer industry exposed to higher and more volatile pricing in little more than a decade, says a report published by the World Economic Forum in collaboration with Deloitte Touche Tohmatsu.
According to the "Sustainability for Tomorrow’s Consumer" report, by 2020 it is estimated there will be one billion more consumers worldwide, resulting in a fundamental consumption imbalance with demand for natural resources outstripping supply. These pressures could severely restrict the profitability of consumer industry companies, thus the report recommends immediate and decisive action to set consumer industry businesses on the path to a sustainable future.
The report is the first step in a concerted effort by the industry to meet an urgent problem. It suggests that unless businesses can rapidly redesign value chains to reduce resource use and decouple economic growth from environmental degradation, their ability to help economies grow, provide consistent shareholder returns, and meet the needs of consumers will be threatened.
"There is mounting pressure for the consumer industry to adopt new technological, business and management approaches to reduce pollution and promote sustainability," says Eric Tang, Consumer Business & Transportation Leader of Deloitte China. "Backed by their cost competitiveness, the emerging economies have become major producers of consumer goods for the world’s market. Yet, they are also faced with the challenges from environmental issues."
Citing an example, Tang attributes one third of China’s carbon emission to its production of exports. He says that "Green GDP," which incorporates the health and social costs of the environmental degradation, is estimated to have cost as much as 3% of China's 2004 economic output, equivalent to more than half a trillion yuan. "The amount could have been used to create jobs, increase consumption and encourage economic growth," remarks Tan.
The report highlights the potential impact the rising price of resources could have on consumer industry companies. One example in the report shows a consumer industry business with revenues of US$80 billion. It has 40% of its revenue tied up in covering the cost of resource-based inputs and the business has a profit margin of around 10%. A 10% increase in its resource-based inputs cost will result in an 80% decline in profits, assuming the company will not be able to transfer the cost increase to the consumer.
"Projected levels of consumption combined with supply shortages means that resource scarcity will be a common problem in the near future. This will lead to both higher and more volatile pricing for essential resources such as energy and water. For resource intensive businesses this will hit the bottom line unless companies shift towards a sustainable business model that is more efficient and less demanding of resources," says Peter Capozucca, Consumer Business Leader for Deloitte’s Enterprise Sustainability group in the U.S.
The report outlines the following series of actions consumer businesses should begin to address to move the industry towards a sustainable future.
Incremental improvements alone will not deliver the changes required to meet increasing demand with limited resources. Though often counter-intuitive, collaborative or "open source" innovation could help bridge this gap. Companies should embrace "open source" innovation. This can be a win-win situation for businesses offering critical mass, reducing risk to the first mover, and helping to set standards.
Closing the Loop
The traditional linear supply chain model â”€ build, buy, bury â”€ needs to be replaced with a model which enables resources to go full circle. Activities at every stage along the chain of sourcing, manufacturing, distribution, consumption and end-of-life will need to be revisited for optimization resource utilization.
Role of Policy
Business will need a more consistent and predictable regulatory environment. Regulation can level the playing field allowing businesses to take longer-term decisions without the risk of losing short-term competitive advantage.
Consumers are often confused or find sustainability considerations important only until money, availability or convenience gets in the way. Consumers do like ethical spending and fair trade practices, so long as it does not cost too much. Companies need to balance the growing interest in sustainable products with demands for convenience and price sensitivity.
"China is increasingly aware of the importance of environmental conservation and sustainability and it has pledged to cut carbon emission per unit of GDP by a notable margin by 2020 from the 2005 level. With the rise in environmental consciousness, there is a growing need for the Chinese consumer industry to reset their priorities and adopt the sustainability element into their business model," adds Tang.