Finance & Investment
5 Ways Retailers Are Winning by Aligning Financial Performance, Sustainability

The cost of doing business is on the rise. Companies in every industry — especially food and grocery — are still grappling with a myriad of challenges spurred by the COVID-19 pandemic. Consumer needs and buying habits are changing, and 81 percent of global consumers now feel strongly that businesses are responsible for helping to address climate change. Grocers are stuck in a pressure cooker.

According to the Wall Street Journal, top food retailers including Walmart and Target said they, combined with other major retailers, shouldered more than $2 billion in increased operating costs — including “wages, bonuses and other benefits for workers during the early months of the pandemic.” The same can be said for small businesses, which according to McKinsey, spent up to 1 percent of revenue on cleaning products and additional labor. Adding insult to injury for the food industry, the global food price index rose by 6.5 percent from 2019, reaching a concerning six-year high.

Beyond rising operating expenses and food prices, grocers must also contend with the initial investments required to implement sustainability initiatives and growing pressure from consumers to double down on these efforts. One study estimated the cost of compliance with global government sustainability standards at $425,000 for small to mid-sized businesses — presumably much more for large, national and multinational chains. While these figures may be daunting, what’s often overlooked is that food, supply and product waste equate to financial waste. And conversely, reducing that waste reduces financial waste. So, while implementing sustainability efforts may require some large upfront costs with minimal short-term returns, there’s big potential over the long term — both in terms of ameliorating environmental issues, and strengthening the bottom line.

Many household-name brands are proving that businesses can grow, improve margins and bolster competitive advantage through investing in sustainability issues — even during a pandemic.

Target has done so through facing up to the realities of shrink in its fresh food departments. Supermarkets and grocery stores are among the leading contributors to food waste, which is made worse by the fact that many grossly underestimate their spoilage rates, or shrink. While stores often calculate their waste at being less than 15 percent, real rates are often much, much higher — up to 50 percent in some cases, when comparing fresh food delivered to fresh food sold.

Target recognized this issue; in response, it transformed its replenishment strategy to significantly reduce shrink. A key pillar in the company’s 2020 Corporate Social Responsibility Report is to invest in new methods and technologies that ensure stores don’t hold more food than they expect to sell, and stock only “what is relevant to a particular store and the guests it serves.”

With shrink persisting as the biggest problem hindering grocery margins and sustainability progress, Target’s approach serves as a prime example of aligning financial and environmental goals. AI technology that analyzes shrink and forecasts buying trends is a critical element in improving the accuracy of a store’s data. Through smart forecasting, ordering tools, merchandising solutions and offering guests discounts on food close to expiration, grocers can follow Target’s lead in reducing food waste and growing fresh food margins.

Kroger’s efforts at the nexus of food waste, hunger and waste diversion have helped its stores stay focused amid crisis. Many grocers drive sales by grossly overstocking fresh food displays — a major contributing factor to the US’s $160 billion food waste problem. In a departure from convention, Kroger is transforming logistics, urging partners to reduce waste, investing in hunger intervention for families, and shifting wasted food from landfills to other recycling methods or industrial uses — all with the aim of reaching zero food waste by 2025.

Steps grocers can take to replicate this effort include merchandising reforms and new ordering strategies such as scan-based trade. For example, an audit of first-in, first-out (FIFO) merchandising can help buyers determine which SKUs are properly merchandised. If more than 5 percent of products are not following FIFO, grocers have an opportunity to significantly reduce shrink and recover potentially tens of thousands of dollars by making simple merchandising adjustments. 

Similarly, grocers can hedge against the negative side effects of volatile customer demand and food pricing through models that provide an alternative to simply throwing away expired food. With scan-based trade, suppliers maintain ownership of inventory rather than the retailers themselves; so, anything that doesn’t sell is “bought back,” ultimately removing shrink (from spoilage, breakage and theft) from the margins. When supported by technology that examines buying trends, predicts demand and informs grocery buyers exactly how much to order, this approach makes it possible to keep shelves well-stocked while virtually eliminating the cost of shrink.

Scarborough, Maine-based Hannaford’s nearly 200 stores throughout the northeastern US are all certified as stewards for sustainability. The company only sells seafood harvested using legal methods in regulated environments, and encourages suppliers to invest in gear and farming technologies to reduce fishing’s adverse impact on the environment. Hannaford also identified energy consumption as an area for opportunity, both when it came to reducing environmental impact and increasing profit.

The company benchmarks energy consumption against Manomet’s Grocery Stewardship Certification, which has helped Hannaford save more than $100,000 in energy costs over the last year. These types of minor adjustments to the way resources are tracked and utilized are low-cost, high-impact solutions that retailers of all sizes can make to ensure a successful co-existence between profitability and sustainability.

Unilever is a prime example of how values can drive valuation. Under the leadership of Paul Polman, Unilever has executed a significant strategic turnaround in its approach to environmental stewardship. Once considered part of the problem, the consumer goods giant now operates under a comprehensive “Sustainable Living Plan” — which includes “shifting to 100 percent renewable energy, substantially reducing plastic waste and water use, achieving a deforestation-free supply chain by 2023, and pressing world leaders to adopt the Paris climate accord.” An unlikely environmentalist, Polman has been vocal about the importance of businesses “creating value through values, versus pursuit of value at any cost.” Despite some significant initial investments, this mindset has paid off. The company’s market valuation is up by nearly 50 percent, while other major players in the consumer goods sector are down; and the company says it has recovered significant revenue lost due to climate change.

Unilever’s example is an important reminder for grocers and retailers to drive business value through actual values. When social impact goals are given priority, costs decrease and valuations improve. Harvard Business Review reported on research that found more investors are betting on companies with strong environmental stewardship, and companies that are proactive on this front are bolstered against potential financial impacts of sustainability-related regulatory mandates.

Grocers and retailers can also turn to AI to evaluate the impacts of waste beyond their fresh foods departments. Panda Express found through waste audits that unused soy sauce packets were creating a significant environmental and financial impact on the company. One article reported that after the fast food chain reset its ordering and use of individual soy sauce packets, stores were seeing significant improvements in waste-related costs and diverting more waste from landfills.

With accurate, intelligently analyzed data about product ordering, use and waste, food businesses can gain clear insights into where they are losing money and use that data to inform effective waste-reduction strategies.

For most grocers, the opportunities to reconcile environmental values and business margins can be found in every cart, up and down every aisle. Through smart technology, better merchandising, innovative ordering strategies and values-driven changes, grocers can become leading environmental citizens, and improve profitability along the way.