Sustainability & Profitability

Introduction

Before covid-19, the sustainability agenda was the top issue for the food industry but the pandemic put that on hold as our attention was pulled onto more immediate concerns. Despite the pandemic, there was minimal concern that retailers would take their focus off the sustainability agenda. For sure, there may be some loss in momentum but this would only be a brief detour for two reasons:

1. The sector is huge, and so the big grocery retailers are in a unique position to drive sustainability initiatives and influence what and how consumers are consuming. They recognise this leadership position and, to their credit, the big retailers have developed ambitious sustainability strategies with clear targets and timescales. They have put their commitments on the record and give progress reports at least annually.
2. Grocery retailers operate in a highly competitive environment with wafer thin profit margins so they have always been particularly enthusiastic about initiatives that reduce consumption of materials, resources or energy since these savings are good for the planet but also go straight to the bottom line of their P&L

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Sustainable Retailers

So as we approach the end of 2021, the grocery retailers have much to be proud of regarding sustainability. Their strategies are directly linked to UN SDGs and are detailed, robust and independently verifiable. Here are some headlines and highlights.

In September 2021 Tesco announced that they would achieve net zero emissions for their own operations by 2035. And, recognising that their suppliers play a huge role too, they also announced that they would achieve net zero emissions across their overall supply chain by 2050. Tesco Ireland have made a good start by reducing their electricity consumption by 25% whilst also committing to support suppliers in their work to achieve net zero emissions. In 2020, Tesco Ireland started using store-level food?waste for anaerobic digestion, creating renewable gas which the business purchases to power six of its stores.

Lidl announced in August ’21 that they would be carbon neutral by 2025 and would reduce emissions by 46% by 2030. They have made substantial progress in reducing energy usage by retrofitting stores with LED lighting and energy efficient refrigeration alongside their investment in solar panels on warehouse and stores. Many Lidl stores now have EV charging points which is a significant investment for them but clearly demonstrates their long-term vision and underlines the fact that sustainability is now a key competitive territory when attracting loyal shoppers. Lidl have also been systematically replacing single-use plastics with biodegradable alternatives and were the first retailer in Ireland to introduce customer recycling stations for plastic.

In late 2019 the Irish Government appointed Musgrave as one of only twelve ‘SDG Champion’ businesses. Under their ‘Taking Care of Our World’ strategy, Musgrave have set a goal of becoming the most trusted and sustainable business in Ireland. That really is ambitious when we consider the impact of food and drink and the processing, packaging, transport and agriculture elements on an end-to-end basis. Musgrave will be a net zero business by 2050 so it would appear that, for now at least, Musgrave are focusing on their own business and its direct sustainability impacts. This is different to big multinational operators like Tesco who have now set net zero targets for their scope-3 emissions i.e. those in the overall supply chain that are outside their control but within their influence. Musgrave’s supply chain is shorter, more local and less complex than an operator like Tesco, so end-to-end supply chain commitments are less relevant for them. But they are the most embedded retailer in Irish society. They feed 1 in 3 Irish people every day so they recognise that their influence is best harnessed in demonstrating the role of individuals and communities, doing their bit for the climate crisis. Musgraves are working hard on helping Irish shoppers make healthier choices both through product reformulations and in-store merchandising. Their association with ‘Tidy Towns’ is truly innovative since it is a community-based way of advancing the sustainability agenda, not just on litter and single use plastics, but also on biodiversity.

Aldi have committed to delivering a sustainability strategy that is fully aligned to the 17 UN Sustainable Development Goals. In March 2021 they launched their Global Corporate Responsibility Strategy and Vision for 2030. In practice, the vision is that sustainability should be made affordable for customers by harnessing the discounter principle of ultra-efficient supply chains and operations. Aldi Ireland plans to plant 100,000 trees by 2024.

Dunnes Stores’ sustainability strategy centres around the five pillars of Employees, Sustainable Sourcing & Circular Economy, Internal Resource Management, Food Safety, Health & Community. Dunnes haven’t published their strategy yet but they are currently recruiting a ‘Head of Sustainability’ whose responsibilities will include external communications so hopefully we will see more soon. This is important because shoppers are actively making choices based on the values of the business they buy from, their commitment to make positive change in the world and their ability to substantiate claims.

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Sustainable Supply Chains

As we draft this article the COP26 summit is ongoing but, regardless of what the international community agrees, we can be satisfied that our grocery retail industry is doing its bit. Can’t we?

Actually there is a major challenge bubbling under the surface currently. As we listened to the RTE News headlines on 14th October we learned that inflation had increased to 3.7% as measured by the Central Statistics Office’s consumer price index. This was driven by transport (+11.4%), electricity, gas & other fuels (+9.0%), alcohol & tobacco (+4.9%) and restaurants & hotels (+2.7%), in turn driven by the increased cost of food and drink sold in these establishments. What struck me wasn’t the inflation number which was being headlined as a 13 year high. Rather, it was the side note that food and non-alcoholic beverages was only +0.4% year on year. How could this be?

Global Food Inflation

In June 2021 my IPLC colleagues and I held an online seminar on the topic of food inflation. It was attended by 160 industry professionals, primarily manufacturers from around the world. When polled, they told us that 100% of them had taken cost increases across all of their key inputs in the previous 6 months, including food ingredients, packaging, energy, transport and labour.

Effectively, all of the big-ticket cost items in the manufacturer P&L were heading north. Some of us will remember that a similar food commodity cost spike happened in 2008 around the global crash, and again in 2011 around the sovereign debt crisis. But this time, the food commodity inflation is heightened by the additional cost spikes on energy, packaging, transport, covid protocols and low labour availability.

Further, in 2008 we saw the food commodity cost spike reversed within a year, but in 2011 it took 4 years for the cost inflation to fall back, so who could predict what might happen this time? Add to this the fact that discounters have grown strongly. In 2008 they had combined 10% share whereas in 2021 they have >25% share of the market. Since 2008, the mainstream retailers have developed strategies to counter the discounters, focusing on private label core ranges and EDLP price matching. As a result there has been a de-facto price freeze on the highest volume, highest value PL products which now constitute six out of every ten packs put in the Irish trolley. So it is incredibly hard for suppliers to achieve a cost increase when the buyers are required by their bosses to hold steady on retail prices. The greatest challenge is that the majority of the category buyers that suppliers are dealing with are less than 30 years old and have no memory of the cost spikes in ’08 and ’11. They have only known deflationary price changes in the last 10 years.?

In June 2021, over 70% of polled suppliers had already requested a cost increase from their retail customers, but 54% were feeling downward cost pressure in response. And for those that achieved a cost increase in mid-2021, the problem is now that they will need to go back and request another since the costs have continued to rise and show no real signs of stopping.

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Sustainable Profit

An Irish dairy farmer once told me that the number one priority within their sustainability strategy was sustainable profitability. If there’s no profit, then there’s no business and no jobs. Grocery retailers globally tend to operate on 2-3% net profit so if the product costs are rising, their margins are too tight to take the hit and not pass it on to consumers. The +0.4% inflation number on food and non-alcoholic beverages would suggest that one of three things is happening:

1. Suppliers are not requesting the necessary cost increases. This would seem a risky and unsustainable strategy given what we know about tight margins in food and drink production. Very few manufacturers have the reserves to indefinitely postpone cost increases of this magnitude.
2. Retailers are paying cost increases to their suppliers to help maintain good long-term relationships and on-shelf availability, but they are holding back on passing these on to consumers for fear of losing their competitive position. Again, this would seem unsustainable, especially if the cost inflation hasn’t yet peaked and could take several years to fall back.
3. Retailers are refusing to accept supplier cost increases and suppliers are selling below cost and crossing their fingers, hoping for their input costs to fall in early 2022.

In reality there’s a mix of all three options happening but all are risky, even in the short to medium term. We know there is a climate crisis and that global warming will cause sea levels to rise. This is already reducing the amount of suitable land available for food production due to saltier soils and flooding. We also know that climate change events will make crop yields much more unpredictable. And we know that the human population will increase by 25% in the next 30 years. So, if on-shelf availability is a challenge right now, then food security is going to be the emerging problem in the next few decades.

The Cost of Cheap Food?

The big picture would suggest that the days of cheap food over. And if you think there isn’t a cost to cheap food, then think again. Take the chocolate category where the raw material is cocoa. Cocoa is grown by millions of smallholder farmers and is processed by a much smaller number of giant chocolate processing companies. Tony’s Chocolonely, a sustainable chocolate company founded in Holland states that the big chocolate companies are:

“keeping the price of cocoa as low as possible. As a result, farmers are forced to live in poverty. And that leads to illegal child labour and modern slavery”

Tony’s are endeavouring to create a world where all chocolate is ‘slavery free.’?You can now buy their ethical supply chain chocolate range in Tesco and SuperValu in Ireland. But it does make you wonder about the rest. If I can pay a little more for ‘slavery free’ chocolate should it even be an option to pay less for the alternative?

The challenge remains for the overall food and drink supply chain to make sustainable profitability a priority at all levels. And this is eminently possible if an honest and transparent approach is taken. And if retailers claim that consumers simply won’t pay more for food then think about how we got to our current situation. Prices haven’t deflated over the last 10 years because consumer were unwilling to pay. Prices have deflated due to retailers fighting for continuous sales growth and market share. And a portion of the money saved by consumers was simply re-allocated for spending on food and drink in cafés, restaurants and hotels instead!

In future, our grocery retailers are going to have to find new ways to compete other than price. Otherwise, local suppliers will go out of business, farmers around the world will exist in poverty, and sustainable employment will be lost in the communities in which they operate. Remember March 2020 when suppliers moved mountains to keep up with the demand prompted by panic buying and lockdowns? Well, 18 months later, those suppliers need their retail customers to exercise that same collaborative spirit, paying a fair price that recognises the inflationary crisis we're in.

If you would like to find out more about the food inflation challenge, and what you can do to protect your bottom line then please register for the free IPLC Webinar on 3rd December 2021: "Surviving the Cost Crisis": https://lnkd.in/dt-RMJ99 from 10:00 to 11:00 (UK & Ireland).

Malachy O’Connor is the founder of Food First Consulting and Partner at both IPLC (International Private Label Consult) and the Uspire Group. Malachy specialises in providing insights into the world of grocery retail, negotiation skills training and strategy development support. To make contact, email him on [email protected] .