Natural resources have an impact on all businesses, organisations and governments. All rely on secure supplies of resources to function. For the consumer goods industry an understanding of natural resource risks is particularly pertinent because of the importance of reputation to brand value. Natural resources are not all about risks though, fantastic opportunities are there for those who innovate across the value chain.
Commodity prices are low, so why should business be interested?
Knowledge of commodity prices and their future direction are crucial in a time of increased geo-political risk. Although, in historical terms, many prices are currently low, the price level itself isn’t always the issue. The challenge is in forecasting which way prices will go - because commodity price swings have a big impact on the overall cost structure of a business. Commodity price volatility can affect profits, supply chain and pricing strategy. Changes in prices of particular commodities can impact a wide-range of companies, not just the obvious ones – for instance steel price rises could have a large impact on a retailer expanding its geographic footprint; oil price rises have a big impact on food manufacturers; and the price of cotton on furniture manufacturers. They also have a direct impact on the spending power of consumers. In 2015, per capita consumer spending in the USA on the operation of personal transport equipment, a category which includes fuel, fell by 11.8% over the previous year in real terms, freeing up more resources for spending in other areas. The impact on the economies of commodity exporters also has an important flow-on effect on the spending power of consumers within those countries, again flowing on to consumer goods companies.
Food Price Increases July 2016
Why are natural resource risks so important?
Natural resource risks are multi-faceted and because of this can have a far-reaching impact on market share and brand value:
It’s hard to put a cash value on reputation, but it’s easy to understand the huge significance that it has for a brand. Reputational risk has a direct impact on brand value and revenue. It can put the brand under the regulatory spotlight but also, potentially even more damaging, under the consumer spotlight – in a connected world where news travels fast a brand’s short-comings can be widely communicated in a matter of seconds. Volkswagen offers a cautionary tale. The company has had to set aside €16.2bn for potential costs or recalls stemming from the emissions scandal, the company expects group sales to fall by up to 5% in 2016 and in May 2016 its shares were worth 40% less than in the same month of the previous year. A company’s use of natural resources and its attitude towards sustainability in general pose a considerable reputational risk for business. On the other hand, there are many good news stories: Levi Strauss has developed “Water<Less” finishing which cut water use in the finishing process by up to 96% in some products. Its Waste<Less collection is made of 20% recycled plastic bottles. Levi’s reputation has grown because of programmes like these and it was ranked third in Fast Company’s “Top 10 Most Innovative Companies Dedicated to Social Good” ranking in 2014. In 2016 the company has partnered with the World Bank Group to pilot a programme aiming to achieve reductions in water, energy and chemical use across the supply chain.
A lack of secure access to resources, natural disasters and meteorological conditions also have a direct impact on the operations of consumer goods companies. For instance, the Japanese earthquake earlier this year cost Sony US$1billion in lost profits, because it had to halt production of some component parts. A 2015 report by Ceres showed that Cargill reported a 12% fall in Q4 2014 profits as a four-year drought in the US Southwest damaged pastures used to raise beef and that the Campbell Soup Company saw a 28% drop in its California-based carrot division profits in early 2015 due in part to drought followed by intense rains.
Source: Euromonitor International Competitor Analytics Model
Governments may legislate to protect supplies of critical materials or prohibit the use of environmentally damaging resources – for instance, the European Union has specific directives on recycling, such as the Waste Electrical and Electronic Equipment Directive that sets collection, recycling and recovery targets for all types of electrical goods. In 2016, the French government introduced a law banning large shops from throwing away quality food approaching its best-before date. Supermarkets with a footprint of 400 sq metres or more now have to sign donation contracts with charities directing food waste to food banks and other charities. Another example is the ban on microbeads, plastic particles which have been found to damage marine life, in cosmetics from the end of 2017 in the UK and mid-2017 in the USA. The United Nation’s Sustainable Development Goals (SDGs) also provide challenges which some companies are meeting head on. SABMiller for example has instigated a sustainable development strategy called Prosper. This strategy, which incorporates five “shared imperatives” (a thriving world, a sociable world, a resilient world, a clean world, and a productive world) is aligned with 12 of the United Nation’s SDGs. This allows the business to track its contribution to the SDGs and is significant, as it enables SABMiller to be ahead of the curve in terms of future government legislation by aligning with government goals, and also to meet consumers’ demands. According to the PwC SDG Engagement Survey in 2015, 90% of citizens feel it is important for business to sign up to the SDGs.
Market risks can include changes in consumer trends and demands. Consumers may switch to a competitor’s more efficient or more sustainable products and services as a result of increasing awareness and interest in environmental matters. For instance, consumer demands for sustainable sources of palm oil have forced many food and drink manufacturers to switch to sustainable sources or alternatives to palm oil. In North America, sales of fair trade chocolate confectionary are set to grow twice as fast as the overall market for chocolate confectionary between 2015 and 2020.
Sales of Chocolate Confectionery in North America: 2015-2020
Source: Euromonitor from trade sources/national statistics
Note: Data refer to value sales in constant 2015 prices
Are natural resources all about risk?
In short, no – there are many opportunities for businesses that embrace sustainable business models or innovate to win new consumers with environmentally friendly products and services:
- US retailer Target launched its “Made to Matter – Handpicked by Target” initiative in 2014 to make sustainable products more accessible. To qualify, brands have to meet at least one of five criteria including reduced sugar, closing the loop, clean label, less packaging and reduced waste and dietary restrictions. According to the retailer, the brands included in 2015’s Made to Matter collection experienced an average of approximately 30% sales growth at Target, which was 1.5 times faster than anywhere else.
- Braskem, a petrochemical company, has introduced “I'm green” polyethylene, plastic made from sugar cane in place of oil. The material is used in rigid packaging applications, flexible, caps and closures and bags. The plastic is used by companies including L’Occitane, Electrolux and Natura. Sustainable packing is crucial for a company such as L’Occitane which trades on its premium, natural products. The company achieved global sales of US$1.2 billion in 2015.
Source: Euromonitor International Competitor Analytics Model
- Unilever has a range of water-saving products including Omo laundry detergent, Comfort One Rinse fabric conditioner, life buoy self-foaming hand wash and Lux self-foaming body wash which all reduce water-consumption; as well as a partnership with the Delta Faucet Company in the US, which has led to the introduction of the Delta Hydrafall showerhead, which reduces the volume of water used by 0.5 gallons per minute.
- Indian cities suffer from a severe air pollution problem caused by traffic, industry and the burning of biomass for fuel; in fact a 2014 WHO report found that 13 out of the world’s 20 most polluted cities were in India. The issue has been growing in the minds of consumers and the segment offers interesting growth potential. Japan’s Sharp Corp – a dominant player in Asia’s air purifier market – registered a 37.1% year-on-year market growth in 2015 (albeit from a low base), making India the fastest-growing air purifier market globally for Sharp Corp. Given continuing rapid urbanisation, air purifiers is set to be the fastest growing within air treatment products in India, with companies focusing on smaller/portable and more affordable air purifiers which could appeal to lower-income consumers in second tier cities.
Retail Sales and Market Growth of Sharp Air Purifiers: 2014 - 2015
Source: Euromonitor International’s Competitor Analytics Model
- Pollution also provides opportunities for innovation in skincare and has become a big trend in 2016 with claims that pollution prematurely ages the skin causing wrinkles and fine lines. AmorePacific, the seventh largest beauty player in Asia, launched the Lotus Micro Cleansing Line, containing cleansing properties that absorb air pollutants, while Laneige launched an All Day Anti-Pollution Defensor that acts against fine dust and an anti-pollution face mask. REN launched the Flash Defence Anti-Pollution Mist that can be worn over make-up and moisturisers. Other products abound from large players such as Clinique, Lancôme and Origins.
PM 10 Emissions: 2015
Source: Euromonitor International from EEA, Eurostat, OECD
- Recycling is cost-saving and can create new market opportunities. The Sony Group’s GO Recycling programme is a closed-loop recycling scheme with an emphasis on using waste as a substitute for the raw materials required for production. This should reduce the overall amount of virgin materials consumed, the amount of waste sent to landfill each year, or sent to be recycled to be used by other companies. In 2011, Sony also developed SoRPlas (Sony Recycled Plastic), which contains more than 99% recycled materials and is made with plastic waste generated both within and outside Sony sites. Since 2014, this material has also been sold externally.
- End-of-life recycling is a growing area which offers exciting opportunities for companies that are able to target consumers directly with take-back services. An example of a firm reaching out direct to consumers today is Mazuma Mobile – a UK-based online mobile phone reuse and recycling service launched in 2007. Mazuma Mobile buys second-hand handsets direct from consumers, refurbishes them and sells them to suppliers in emerging markets such as China, Africa, Pakistan and India. Not only do they sell them to suppliers in emerging markets, but also to insurance companies and phone retailers in the UK.