Consumer Industry Companies Increasingly Vulnerable to Natural Resource Scarcity and Price Volatility: World Economic Forum and Deloitte Report
NEW YORK, Sept. 10 /PRNewswire/ — 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 towards driving sustainable consumption.
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 $80 billion. It has 40 percent of its revenue tied up in covering the cost of resource-based inputs and the business has a profit margin of around 10 percent. A ten percent increase in its resource-based inputs cost will result in a 80 percent decline in profits, assuming the company will not be able to transfer the cost increase to the consumer.
Peter Capozucca, consumer business leader for Deloitte’s Enterprise Sustainability group in the U.S., said: “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.”
Sarita Nayyar, Senior Director and Head of Consumer Industries at the World Economic Forum, said: “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 to 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.
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 optimization 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.
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.
Lawrence Hutter, global leader of Deloitte Touche Tohmatsu’s Consumer Business group, said: “Consumer industry leaders are already adapting their business strategies in response to the very different economic situation in which we now find ourselves. 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.”
Notes to Editors:
About the Report
The report is a culmination of a 12 month process which began in January 2008 at the World Economic Forum’s Annual Meeting in Davos with a meeting of Chief Executives from leading global consumer products companies. It represents recognition by industry leaders that there is a need to go beyond the historical response to sustainability — largely focused on incremental improvements — to achieve a desired future state where human consumption is in balance with natural systems.
Following Davos 2008, a series of workshops took place involving over 100 consumer industry executives and experts in sustainability, business strategy and product design. The workshops addressed four issues:
- Global consumption is out of balance with demand for resources thereby outstripping supply;
- Consumer industries intensive use of resources is a major factor in the underpricing of natural resources;
- Consumer businesses are highly sensitive to resource price volatility and constraints;
- New business opportunities will emerge through a fundamental rethinking of what sustainable business models look like.
The findings of this report were presented in Davos earlier this year. Business leaders stressed the need to capture the systemic interlinkages and complexities of addressing sustainability through business-focused solutions. The initiative’s second phase taking place in 2009/10 is looking at consolidating discussions on sustainability in a way that is relevant to business, by identifying the role of each industry in realizing systemic solutions towards sustainable value chains.
Click here to download the report.
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