Consumer product firms risk reduced profitability: report

Posted by Daniel Palmer on 15th September 2009

Scarcity of natural resources will leave the consumer industry exposed to higher and more volatile pricing in little more than a decade. 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.

“Sustainability for Tomorrow’s Consumer”, a report published by the World Economic Forum in collaboration with Deloitte Touche Tohmatsu, suggests that these pressures could severely restrict the profitability of consumer industry companies. It 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. Industry leadership will meet at the World Economic Forum in Dalian from 10-12 September to discuss the next stage of the project toward driving sustainable consumption.

The report highlights the potential impact the rising price of resources could have on consumer industry companies.

Bales of Hay

One example in the report shows a consumer industry business with revenues of US$80 billion. It has 40 per cent of its revenue tied up in covering the cost of resource-based inputs and the business has a profit margin of around 10 per cent. A ten per cent increase in its resource-based inputs cost will result in an 80 percent decline in profits, assuming the company will not be able to transfer the cost increase to the consumer – which is becoming more difficult as retail power increases.

“Projected levels of consumption combined with supply shortages means that resource scarcity will be a common problem in the near future,” Peter Capozucca, consumer business leader for Deloitte’s Enterprise Sustainability group in the U.S., said. “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.”

Sarita Nayyar, Senior Director and Head of Consumer Industries at the World Economic Forum, added that an economic rebound will highlight the constraints on supply as the global population increases.

“Commodity prices may have declined at the beginning of the global economic downturn but the recent rebound reflects that long-term trends of rising demand and shrinking supply will endure beyond the current economic crisis, and so cannot be ignored. It is critical business leaders do not allow the urgent to overtake the important.”

The report outlines the following series of actions consumer businesses should begin to address to move the industry towards a sustainable future.

Collaborative innovation
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 ─ build, buy, bury ─ 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 optimisation resource utilisation.

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.

Consumer engagement
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.

Growing recognition

“Consumer industry leaders are already adapting their business strategies in response to the very different economic situation in which we now find ourselves,” Lawrence Hutter, global leader of Deloitte Touche Tohmatsu’s Consumer Business group, noted. “However, we are also seeing a growing recognition of the need to give greater priority to the sustainability of business models in the longer term.”

“The business-case for sustainability demonstrates both the direct imminent financial pressure on existing business models and the new opportunities which can be created. Ultimately, it’s all about engaging the consumer, and those businesses that can show the consumer that there is no need to sacrifice price and quality for sustainability will become the market makers of tomorrow.”