retailers
  • The ESG agenda should now be a ‘top three’ issue for retailers’ boardrooms
  • Compared to some other sectors, retailing is playing catch up
  • Key stakeholders including shareholders, employees, regulators, policymakers, lenders and consumers are driving the ESG agenda
  • Retailers accept they need to take action now to define their purpose and enhance their reputation, but don’t necessarily know where and how to start
  • There is still a difference between the beliefs and the actions of consumers in environmental and social matters

 

The ESG agenda and the standards that a business sets itself and adheres to have taken too long to gain traction and are only now becoming more than a ‘tick box’ exercise. Progress is being driven by a combination of stakeholders, often with different interests, each looking to apply their own specific pressures on boardrooms to ensure that businesses are genuinely engaged in neutralising their impact on the environment and having a positive influence on society and their workforces.

At the latest KPMG/Ipsos Retail Think Tank meeting, members discussed the different aspects of a retailer’s ESG policy, what pressure stakeholders and external forces play on driving this agenda, and what retailers should be doing now to mitigate the risks and take advantage of the commercial benefits that an effective and far reaching ESG policy can deliver.

The ESG agenda encompasses a range of areas that retailers need to appraise – the environment, society and governance – and the RTT agrees that combining these very different areas into a single ESG policy will help drive more overall change in the sector.

Paul Martin, UK Head of Retail, KPMG, comments: “No matter their size, the ESG agenda has to be a top three boardroom topic for all retailers. Both new entrants and established players in the market must embrace ESG in order to strengthen their purpose and reputation. Bundling the three areas of the ESG agenda together is a very smart move, as it doesn’t allow businesses to think they can get away with not delivering on certain components. There will undoubtedly be a tug of war between the three agendas, but what is important for retailers to consider is the different demands of stakeholder communities, before planning, implementing and measuring progressive policies and communicating those clearly with those stakeholders.”

 

Drivers of the ESG agenda

1. Ownership structure and sources of investment

The RTT points to ownership structure and sources of investment available for retailers as one of the most important influences on enacting change.

Retailers in private or mutual ownership have, for a long time, been ahead of the game in terms of ESG implementation – especially in relation to environmental issues. RTT members point to retailers in family ownership as being able to plan and think longer term, and as such have at times been able to contribute to change on a greater level, in comparison to short-term driven public or private equity-owned retailers.

RTT members believe that contained ownership and/or shared philanthropic values provide more freedom to pursue longer-term visions, strategies and business goals. It helps explain why the likes of Aldi, Lidl and Iceland have been at the forefront of driving sustainability and supply chain efficiencies, where in contrast, non-private owned supermarkets are not as advanced in their strategies. M&S announced its “Plan A” eco-plan back in 2007, just before the financial crash, but with all its challenges, its business focus has been elsewhere, and progress has been slow.

Historically, there has been hesitance on the part of PLC CEOs and boardrooms to implement changes in ESG as it risked adding to costs, reducing profits and leading to lower share prices. PLCs are beholden to shareholders and responsible for maximising profitability and shareholder value – the environmental and social dimensions of the business risk being ‘nice-to-haves’. The UK corporate governance environment is set to undergo a complete overhaul, with the long-awaited Government white paper on corporate governance and audit reform published a few weeks back.

One of the far-reaching proposals is to hold directors, such as the CEO and CFO, personally responsible for having a robust control environment over the company’s financial statements, like US Sarbanes-Oxley (US SOx). It is expected that there will be significant penalties, fines and bans for major failures. Getting this right is imperative and therefore companies should act now.

However, the ESG agenda and profitability are not incompatible. Indeed, there is a growing correlation between ESG implementation and profits.

Mike Watkins, Head of Retailer and Business Insight, NielsenIQ, explains: “Sweeping changes to attitudes on the ESG agenda will really take hold when stakeholders start exerting pressure on boardrooms to enact change. I believe that this watershed moment is now, and we are at a tipping point for wider changes across the retail sector. Retailers understand that their customers are looking for them to lead on ESG issues, and are now driving change in this area in a way that many have not done before.”

Banks and other investors are also doing their bit to progress the ESG agenda by attaching ESG terms and clauses to their client contracts. Joules recently announced it had secured a new financing agreement that will see the retailer benefit from a lower interest rate margin if it delivers against specific ESG targets. The KPI’s that the retailer will be measured against not only include reducing carbon emissions and delivering 100% more sustainable materials in the manufacturing of its products, but also increasing its own employee engagement score. Moving beyond just environmental issues and encompassing more aspects of the ESG agenda into lending agreements will help borrowing retailers to advance their own policies, as it will penalise or exclude them access to equity capital without a well-executed ESG strategy.

As Nick Bubb, Independent Retail Analyst adds: “It usually isn’t customer reaction that forces businesses to jump through hoops to address its ESG inadequacies, it is the likes of pension fund managers, who have the long-term interests for their investments at heart. Deliveroo’s IPO, for example, was damaged by the company’s inadequacies over workers’ rights.”   

 

2. Employees

Determining what a retailer stands for and aligning its impact on the environment and society within its business DNA provide a focus for policy decision-making – retailers have to act on what they claim to represent and stand for.

A business is all about its people. Martin Newman, The Consumer Champion, takes up the point: “Colleagues in any business are a massively important stakeholder base and driver of change. They are the ones serving customers on the front line. and if they are not buying into the culture and purpose of the business, the danger is they could either leave their positions and seek new employment or be less likely to embody a retailer’s values and provide the best experience to customers.”

Purpose and reputation are also highly important in being able to attract the best new talent. Younger workers, which make up the future of the industry, are increasingly less motivated by salary alone and instead want to work for companies that have a positive culture, fair work life balance and deliver a progressive and positive impact on the environment and society. Retailers will come under increasing pressure from their HR departments and potential employees when recruiting, especially through graduate programmes, to ensure an ESG agenda is delivered and clearly communicated.

 

3. The policymakers and regulators

The Government and regulators wield huge potential power to deliver change through legislation and tax reforms, and when they do, retailers have to act.

James Sawley, Head of Retail & Leisure, HSBC UK, said: “Of the many influencers on a retailer’s ESG agenda, the Government is one that can really drive meaningful change on a mass scale across the whole sector. To make such a big impact, like with the reduction in plastic bag usage, it will require co-operation from a complex mix of businesses. Legislation or tax reform will also be needed to align retailer’s specific policies and initiatives towards common goals.”

The Government’s position can often be compromised because while environmental, social and governance agendas cohabit, they don’t always gel. The UK Government, alongside the US, is taking an international lead on governance, but on the environmental and social sides, conflicting interests create a lot of noise, resulting in the Government taking more of a back seat. The reality is that while it is not making much of an impact, the debate really is how much of an impact should it make, and whether it should be down to policymakers to regulate or the industry to lead on.

RTT members advise that it would be in retailers’ interests to seize the initiative and champion the ESG agenda through self-regulation, rather than react to enforced change from the legislative and regulators. Ultimately retailers and manufacturers will be worse off if they have to comply to any new regulatory policies that make the UK a less competitive market to operate and trade in.

 

 

4. Consumers

The pandemic has been a wake-up call against conspicuous consumption and challenged consumers about what they value, their shopping attitudes and behaviours. The younger generations were already more engaged with aspects of environmental and social issues before COVID-19 struck, but the importance of the whole value system has arguably become more mainstream.

The RTT points out though that consumers often say one thing and do another – in reality it is estimated that today only 10% of consumers actually do what they think although this number is rapidly growing. While they may react angrily to news of poor working conditions, plastics’ pollution or climatic change, it takes time for these things to really resonate and lead to behavioural change by the masses. Boohoo’s social policy failure is a case in point – lampooned by the media and society, but largely unaffected in sales and share price. Maureen Hinton, Group Retail Research Director, GlobalData Plc adds: “The social ethics side is more difficult for consumers; you have to have the right budget to afford to be altruistic.”

Consumer shopping habits and buying decisions are gradually being oriented towards purpose as opposed to being driven by price. The influence of consumers on retailer’s ESG agendas will grow over time, particularly by the Millennials and Gen Zs as they become the predominant spenders. However, at present, the reality is too large a number of consumers, especially younger generations, either choose not to, or simply can’t afford to be selective in their purchasing decisions – for example the younger generations are some of the most wasteful and consumptive demographics of fast food, fast fashion and the biggest users of online shopping and home delivery services. RTT members agree that it is clear that price over purpose still dominates consumer shopping habits and buying decisions.

Consumers would like to feel good about where they shop and what they buy. Democratising environmental and social issues will result in more people being able to make ethical decisions when they shop. Ultimately the ESG agenda will be set by consumer’s needs, but the reality is that despite pressure from voices in the media and on social media, at present the mass consumer still expects and wants everything to be as cheap as possible. Until consumers reach that tipping point and the ESG agenda is really embedded within the retail sector, the RTT believes consumers will have a very limited influence on the overarching direction of travel that retailers will choose to take.

 

5. Societal pressures

Retailers also face the challenge of defining what ‘good’ looks like while also enacting ESG policies that work for their specific business. The route of direction that retailers are pressured to take with their ESG policies, and the social agenda especially, is very susceptible to ‘fashion’, politics and manipulation by pressure groups. There is more than one-side to any argument, and retailers shouldn’t feel pressured to make quick judgements and decisions in response to who has the loudest voice.

Martin Hayward, Founder, Hayward Strategy and Futures, suggests: “Societies focus on different topics and agendas often changes with the wind, and retailers need to think long and hard before enacting any changes to ESG policy. For example, veganism and the benefits it can bring to the environment is unquestionably fashionable at the moment. There are a large number of pressure groups and voices in the media calling for more change on this issue, but is that the right message for retailers to embody if their customers like eating meat and dairy – is the environmental damage caused by vegetable and fruit-based diets justified? Retailers have to tread carefully before assuming that just because a certain cause or theme is a hot topic, it is the right direction for their business to take – most consumers are pretty sensible and will make their own decisions, but they do not like being told what to think.”

 

 

Where retailers sit in the ‘ESG league table’

Delivering on the ESG agenda is not the responsibility of the retail sector alone; every business should be actively seeking out ways to define their purpose and improve their reputation. The RTT argues that at present the retail sector holds a lowly position in comparison to other sectors which have been far more active and vocal in the ESG eco-system.

Progress on ESG issues clearly requires investment, and the retail sector is hampered in this regard by its relatively low margins. Elsewhere, by contrast, higher margin industries such as technology, professional services and industrial manufacturers have been able to prioritise initiatives and implement change while protecting profits.

Take the oil and gas sector as an example; the amount of money being ploughed into energy transition and carbon neutral transformation is mind-blowing compared to any retailer’s revamped ESG plan. Thus far, retailers have had to address some of their practices through the likes of sugar taxes and plastic bag charges, but increasingly it will be those that want to address these issues that will survive and prosper. The RTT is under no illusion that this is a big challenge for retailers.

Key to this task for retailers is becoming higher margin businesses. One route forward is to become part of a platform ecosystem (a topic that the RTT has written about before in its white paper entitled ‘Retail 2025’ published in 2019). Change is not an option – as a global average, KPMG research shows that the profitability of legacy retailers has declined by 50% over the last 10 years.

The pandemic has accelerated the growth of the online channel, yet physical retailing could serve ESG credentials better if changes are not taken.

Jonathan De Mello, Equity Partner, CWM Retail Consulting LLP points out: “Though little research has been undertaken on the impact of the rise of online shopping on the environment, it is clear that this impact will be considerable – for the following reasons:

  • The packaging of individual goods – as opposed to the bulk purchases shoppers tend to make in physical stores.
  • Shorter delivery timeframes adding complexity to logistics requiring routes to be ‘speed-driven’ – increasing fuel consumption.
  • Purchases are increasingly split over multiple shipments to shorten individual delivery time frames – requiring multiple deliveries and individualised packaging.
  • Multiple delivery attempts if customers are not at home – increasingly relevant as workers start to return to the office.
  • High volumes of product returns – with some online fashion retailers up at c.40-50% return rates – whereas products returned in-store are packaged optimally for mass transit.”

Retailers need to think longer term about their purpose and reputation and consider the lifetime value of a customer to justify the investment that is required to drive forward ESG policies. During these exceptional times, it may be tempting in the short term for retailers to kick the can down the road by announcing a plan to be ‘sustainable by 2030’, and then justify it internally by arguing that it is too difficult and expensive to move any quicker. However, RTT members stress that this is no match for acknowledging that consumer attitudes are changing over green issues, social responsibility and inclusion and diversity, and making it part of their immediate business plan. The days are over for paying lip service to these issues and using PR spin to paper over ESG crises.

The retail sector has been slow to act, in part, due to the complexity and at times lack of transparency of the supply chains that feed it. Gaining meaningful and detailed insight on the myriad of different suppliers and supply chains associated with a major retailer, and then assessing how to make improvements to align with ESG policies is a mammoth task. The RTT believes that technology will have a major part to play in pushing the retail sector up the ‘ESG rankings’, and software that creates more transparency and accountability in the supply chain is already making a substantial contribution. Technology is helping to speed up the process by which retailers can conduct audit trails to measure the environmental impact and make more informed buying decisions based on provenance and purpose. As Ruth Gregory, Senior UK Economist, Capital Economics explains: “The pandemic has highlighted many supply chain deficiencies which may nudge retailers to reassess their supply chain networks in the context of their ESG goals.”

The retail sector clearly has a lot of work to do on the ESG agenda. Dr Tim Denison, head of retail analytics and insight at Ipsos, warns: “Businesses in other spaces are well ahead of the retail sector, forging ahead with change on a global scale. Brands and manufacturers have led the way on the ESG agenda, and if the wider retailer sector is to continue to act as the link between these companies and consumers, they have to step up ESG performance otherwise consumers and brands may seek to cut them out of the equation all together. Retailers are a key bridgehead and have a vital role to play in educating consumers about the story behind their products and where they are sourced. Responsible retailing is irrefutably here to stay, and UK retailers should be at its vanguard.”

 

 

How retailers should start to drive meaningful change

At face value, determining and delivering a progressive ESG policy is a big challenge for retailers of any size. In order to drive meaningful change, it’s important that CEOs and boardrooms are proactive and progressive with their ESG strategy, determining what is the right action for them as opposed to leaping from issue to issue in reaction to fluctuating stakeholder pressure and potentially conflicting interests.

Retailers have to show stakeholders that they care and are willing to put the time and resources into improving their ESG agenda, but it has to be done in a meaningful and strategic way that is right for each individual business.

The RTT agrees that where many retailers are struggling at present is in deciding where to start with their ESG agenda. Untangling the web of ESG issues can present retailers with a daunting set of challenges, but in order to begin driving meaningful change, Paul Martin provides five key steps that retailers should take to start their ESG journey:

  • Determine where your business makes the largest ESG impact.
  • Determine where your business can make the most significant impact on its impact.
  • Determine the KPI’s you are going to track to measure your progress.
  • Set stretching and realistic targets.
  • Communicate your approach, ambition and progress to all your stakeholders whilst being mindful of a different tone and focus area of messaging for shareholders, employees, customers, regulators and lenders and ask for their help and support on your journey.”

Throughout the ESG journey, keeping stakeholders updated on progress is key to gaining their support and seeing the commercial benefits of the ESG agenda come to fruition. RTT members agree that an important part of a retailer’s communications is taking the time to educate key groups. Speaking directly to individuals, especially the wider customer base, and educating them on issues facing the environment and society, before articulating the decisions a retailer has made through their ESG policy to reduce their impact, will result in greater buy-in from stakeholders.

This communication strategy should also be a two-way conversation with stakeholders. Most retailers don’t have visibility at board level of what consumer expectations are around the environment and sustainability. Gaining insights from Gen Z and the consumers of tomorrow would help retailers to confirm their objectives around ESG and guide their roadmap towards delivering it – this could even be in the form of reverse mentoring from Gen Z consumers. In conjunction with ideas such as setting up an ESG shadow board to provide insight, when aligned with specific targets and KPIs for each part of their business, retailers can start to drive fairly rapid transformation by ensuring everyone in the business is pointing in the same direction when it comes to ESG.

While it is important to initiate two-way communication with stakeholders, when enacting change RTT members do warn retailers against making kneejerk decisions – especially in relation to social or ethical policies – on the back of minority comments. Martin Hayward summarises: “Social policy is a very different beast to environmental issues, it is a matter of judgement and morals as opposed to being driven by hard science. Retailers have to be careful if they begin to take a stand on such issues. You can tell customers what you think and what you do, and why, but you cannot tell them what they should think. Retailers need to speak to their customers to find out what matters to them and what they’d like you to do. Without professional market research, retailers can fall into the trap of either trying to tell their customers what to think or basing ESG policy decisions on the social media echo chamber.”

 

Conclusion

Retailers risk losing the ability to remain competitive if they fail to place purpose and reputation at the heart of their decision-making. Despite the importance associated with ESG matters, RTT members find it curious that that some retailers still don’t feel morally obliged to ‘do the right thing’, such as being forthcoming in repaying Business Rates Relief if they have been fortunate enough to continue trading throughout the COVID-19 lockdowns.

Strategies to deliver change that respond to pressure from a wide range of stakeholders including shareholders, employees, regulators and policymakers and consumers, must be delivered if the retail sector is going to keep up with the wider business community, which in some areas is already forging ahead with environmental and societal initiatives.

Retailers have to expect that talent and employees of tomorrow will demand progressive action from their employers to reflect changing values, and that consumers will also become more powerful in this equation. Ultimately, these key stakeholders will hold retailers and brands to account to prove that they are matching up to their ESG statements by living and breathing their declared purpose. As this happens, a tipping point that is rapidly approaching will be reached and the correlation between profits and purpose will align across the sector.

Martin Newman concludes: “Companies that do ESG well tend to have a strong culture and be purpose led. They tend to empower their people to look after their customers. When you do this well along with everything else, as they do at Hotel Chocolat, Home Depot, Patagonia and Kathmandu, for example, you’ll be successful.  Retailers have to build their businesses for the customers of tomorrow – Gen Z will ultimately vote with their feet, their mouse and their budget if retailers get this wrong. They have to realise that it’s not only the moral thing to do, but in the coming years, commercially it will be the right thing to do as well.”

 

 

PART II In detail – individual views of the KPMG/IPSOS Retail Performance Think Tank members

 

Dr Tim Denison, Director of Retail Intelligence – Ipsos Retail Performance

Before COVID-19 struck, public concern about climate change and the concomitant pressures on businesses to become more sustainable in their practices were building up a head of steam around the world. The state of play had already moved from pledge-making to action-taking for many organisations including retailers. The multifarious green initiatives underway in the retail sector centre mainly around operational practices (energy, resource usage and transport) and supply chain management (product production/sourcing, biodiversity preservation, waste/recycling and packaging) and are continuing to root vigorously, despite the disruptions causes by the pandemic. It is genuinely exciting to hear breaking news each week it seems about the innovative projects that retailers are developing – whether it be the likes of Tesco’s programme to increase the UK’s total electric vehicle charging network by 14% through the installation of an additional 2,400 charging points or H&M’s Looop, their garment-to-garment recycling machines, operating in one of its Stockholm stores, where consumers can see old clothes turned into new ones right before their eyes.

Collaboration is key to rapid progress because the solutions are complex and can cover complete value chains. There is a need for integrity from businesses, but also consistent leadership and initiatives from government and NGOs. Last month the Government proposed new measures to support the progress of sustainable fashion.  The 2019-2021 Environment Bill is working its way towards the statute books and will provide an ambitious framework for its governance.

One of the few silver linings of the pandemic has been the ways in which the social agenda has moved up the priority ladder in politics from grass roots and grown in status among businesses including retailers. Our experiences over the last twelve months have underlined the importance of having caring relationships with employees, suppliers, customers and communities, and of reducing inequalities, injustices and racism. Thanks in part to COVID-19, society appears to have re-set its values and retailers that fail to seize this moment to act will lose respect and, with it, custom. That understanding of the need for change is being seen. ‘Significant issues’ were exposed, for example, in Boohoo’s supply chain in and around Leicester last September. In March, the retailer announced plans to strengthen its corporate governance, compliance and monitoring processes, including unannounced audits at its suppliers over the last eight months.

Ultimately shoppers want to feel good about the retailers they buy from as well as what they buy. “Good for me and good for we” is how it is summarised in Ipsos’ Global Trends 2020 report. The evidence exists that businesses can support a greater good and still be able to make money. The manifestation of a retailer’s purpose, through its people and product policies and programmes, can go hand-in-hand with profit.

According to Coresight, approximately 10% of retailers in the US now tie executive bonuses to environmental and social KPIs, including Apple. Investors are increasingly using ESG criteria to evaluate companies. Financial backers help complete a virtuous circle and make ‘circularity’ become more than an ambition.

The past twelve months have shown us that we can act with urgency and great success through joined-up, concerted and planned strategy and effort. Now is the time for retailers to push the pedal to the metal with committed actions, education and communication with consumers and take a lead role in this 21st century mission. Responsible retailing is irrefutably here to stay, and UK retailers should be at its vanguard.

 

Paul Martin, UK Head of Retail – KPMG

Environmental, social and governance criteria provide new tests that retailers need to pass to survive and thrive.

Environmental, social and governance standards, popularly known by their shorthand acronym ESG, have come to the fore like never before. Defining a brand’s custodianship of our planet, its relationship with all its stakeholders (shareholders, direct and indirectly employed workforce,  customers regulators and lenders), and how it manages, controls and monitors its decision making have all become increasingly important to investors, consumers and talent. ESG for retailers is now an important battleground in determining the success of a business in the sector.

Since the start of the COVID-19 pandemic, there has been an acceleration in many existing market trends and specifically in ESG.  Across the financial markets, companies who entered the period with strong ESG credentials have rewarded their shareholders and stakeholder with a more robust performance:

  1. ESG fund investment flows were more resilient. The average growth rate of the shares outstanding of US-listed ETFs was 4.6 times higher for ESG at 1.28% compared to conventional funds at 0.28%. (Source: ECMI July 2020)
  2. Sustainable equity funds performed better than conventional funds, with four times more sustainable funds finishing in the best quartile of their categories. (Source: Morningstar April 2020)
  3. ESG investments were more resilient. In 94% of cases, funds tracking the performance of companies with better ESG ratings lost less money than those with worse ESG performance. (Source: The Guardian May 2020)

Whether a focus on ESG has helped these businesses to be more resilient in the eye of the storm or helped them be more agile in their decision making or secured them a greater emotional connection with their customers and employees is debatable. But given this performance, during what has been a very challenging year for all, the market is clearly rewarding those businesses that have embraced ESG

In a sector as visible and omni-present as retail, the sustainability challenge was never going to be silent for long. A challenge of our times that must be addressed, it is now, increasingly, viewed as a responsibility rather than an option for brands and the industry in general. Irrespective of what part of the sector you come from, be it fashion, food, technology or home or whatever your ownership structure – whether you are privately, publicly, or family owned: sustainability has to be on the agenda.

Although there is still a gap between what consumers say and what they do in this area, consumer awareness and sentiment is evolving quickly. The number of consumers who say that their shopping habits are informed by a brands credentials in ESG and sustainability is increasing rapidly.  I am not suggesting we are seeing the end of fast fashion but certainly the era of the conscientious consumer beckons and fast fashion brands that embrace ESG and sustainability will steal a march on their rivals.

The challenge for many starts with untangling the “alphabet soup” of rapidly evolving ESG eco-system. There are a few easy steps that a business can take as it starts the journey:  Showing the world that you care is crucial. Review what you are already doing – many businesses are doing more than they think.

  1. Determine where your business makes the largest ESG impact
  2. Determine where your business can make the most significant impact on its impact
  3. Determine the KPI’s you are going track to measure your progress
  4. Set stretching and realistic targets
  5. Communicate your approach, your ambition and your progress to all your stakeholders whilst being mindful of a different tone and focus area of messaging for shareholders, employees, customers, regulators and lenders and ask for their help and support on your journey

Showing the world you care is crucial for both short term and long term success. Embracing ESG and sustainability will strengthen your reputation, and reward you with increased frequency of purchase, and brand loyalty. Whether you are a business that’s comparatively new or are among the players who have been in the market for ages, your brand recipe cannot miss ESG.

 

 

Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd

Marks & Spencer recently announced that it was launching a “Plan Bee”, as part of its campaign to improve product quality standards in British farming. Noting that bees contribute to a third of the food we eat, M&S is introducing 30m bees to 28 of its “UK Select Farm Sites” this summer across the country.

But if that news gives you a nice warm feeling and makes you want to rush out and buy more food from M&S, it is sobering to remember that it launched its much-vaunted “Plan A” to improve its sustainability as a business over 14 years ago…When the then CEO Stuart Rose launched Plan A at Marks and Spencer at the beginning of 2007, he said “we’re doing this because it’s what our customers want us to do. It’s also the right thing to do”. But doing the right thing has not apparently helped the business to prosper since then, as M&S has continued to lose market share, despite its reputation for quality.

Ironically, Primark, one of the fast-growing clothing competitors that has done the most damage to the M&S business, was badly hit 8 years ago by a major scandal over the poor working conditions in some of its clothing suppliers, when the Rana Plaza factory collapsed in Bangladesh. But there is no evidence that Primark’s UK customers really knew or cared about the shocking revelations on how its clothing was manufactured in Bangladesh and the business has gone from strength to strength since 2013, expanding across the world selling cheap clothing.

Fast forward to 2020 and another fast-growing purveyor of cheap “fast fashion”, Boohoo, was hit by a major scandal over the poor working conditions in the factories of its clothing suppliers in Leicester. And yet again there is no evidence that the row affected customer perceptions, with trading continuing to boom.

But Boohoo certainly treated the allegations about the poor controls in its clothing supply chain very seriously, launching an “Agenda for Change” programme to improve the transparency and sustainability of its business. And Boohoo was clearly mindful of the damage done to its share price by the supply chain scandal and the increasing power of ESG-focused fund managers in the City.

More recently, the IPO of Deliveroo was not helped by allegations about its cavalier attitude to the employee rights of its delivery drivers and, although the successful boycott of the float by many UK fund managers was driven by other considerations, ESG campaigners will mark the slump in the Deliveroo share price as a victory.

Quoted UK retailers can probably reply on their customers to shrug their shoulders when they hear about environmental or ethical disasters, but they now know that UK fund managers don’t take these ESG issues so lightly. It is disappointing, therefore, that two employee-owned supermarket businesses, the Co-op and Waitrose, have so far chosen not to take the principled stance of their major competitors and return the Business Rates relief provided by the Government, despite the sales boom they enjoyed during the pandemic lockdowns. The average Co-op or Waitrose customer may not know or care much about the morality of the Business Rates relief issue and the management teams of the two businesses don’t face any problems with how their share price will react…So the ESG movement has some way to go to reach every part of the UK retail sector.

 

 

Martin Hayward, Founder – Hayward Strategy and Futures

Most great companies, including retailers, have always been very clear what they stand for. This is nothing new and ESG is merely the latest acronym we use to describe it.

Focussing particularly on retailers, there have been some hugely powerful and successful positions taken that have driven growth and customer approval.

From Harry Gordon Selfridge who knew that ”….the recollection of quality remains long after the price is forgotten”, through Marks and Spencer’s commitment to British manufacturing until the 1980’s and more recently Morrison’s focus on provenance of food, Waitrose’s commitment to Organic farming, Marks and Spencer’s Plan A to protect the environment, there are many examples of retailers taking a stand on important issues.

To quote Harry Gordon Selfridge again, “People will sit up and take notice of you if you will sit up and take notice of what makes them sit up and take notice.

However, no retailer ever told its customers what they should think or which customers were welcome – they laid out their stall and their values, confident that if they built it, the shopper would come.

Despite the arguably increasing importance of corporate reputation for all major businesses in an increasingly transparent world, something has however gone horribly amiss for many retailers over the last few years.

The problem seems to be that the parameters of purpose and reputation are being shifted away from what the actually company does, to what the company believes its customers should think.

Retailers have started to stray into moral judgement of their customer’s views even trying to proscribe what they should read, and which type of customers are welcome in their stores.

This is very dangerous indeed, not just for the retailers but for society and free speech as a whole.

A few examples spring to mind.

Paperchase allowed a pressure group to dictate that it shouldn’t advertise in the Daily Mail. Paperchase said:

We’ve listened to you about this weekend’s newspaper promotion. We now know we were wrong to do this – we’re truly sorry and we won’t ever do it again. Thanks for telling us what you really think and we apologise if we have let you down on this one. Lesson learnt.

The Mail is the second largest circulation newspaper in the country.

The basis of its decision? Was it a sensible market research survey of its customer base? No, it was a review of a few hundred tweets received over a few hours.

As many are learning slowly, Twitter is not the world though.

Recently, the CoOp apologised to the Spectator magazine after its social media manager claimed on Twitter they would never advertise in the publication again after an activist asked them not to because it ran an article they didn’t agree with. (Spectator subscriptions went up). Once the CEO was informed the CoOp sensibly updated their values to include the following and ran an ad in the next edition of the Spectator.

‘We will not seek to affect the editorial independence of publications or channels. We will not undermine the commercial value of our society for our members. We will ensure our values and principles are clear and undiminished regardless of surrounding content.’

Possibly the most risky example of a retailer responding too quickly to Twitter without pause for calm thought was the Sainsbury’s social media team last year. When challenged by some customers about their extensive support of Black History month and setting up of Black only “safe spaces” they responded.

We proudly represent and serve our diverse society and anyone who does not want to shop with an inclusive retailer is welcome to shop elsewhere”

Whether you agree or not with the sentiment, there is a degree of immaturity and aggression in this response that is likely to have alienated as many customers as it may have reassured.

Most ESG decisions are taken in the boardroom after extensive analysis and thought, but Social Media teams are left to respond on the hoof to major positioning issues, seemingly without supervision. This has to change.

A society cannot operate fairly or democratically without free speech, and retail CEO’s need to be very cautious about positions being taken by their marketing teams.

Social media is not a substitute for proper market research and we must all be aware of small voices being made big by Twitter and other platforms.

As Voltaire may or may not have said:

“I don’t agree with what you say but I will defend to the death your right to say it”.

 

 

Maureen Hinton, Group Retail Research Director, GlobalData Plc

Sustainability used to be just about saving the planet. Today it has morphed into an umbrella term for environmental, social, and governance (ESG) issues and while some companies are making concerted efforts to improve their ESG performance, others are simply paying lip service to the concept of sustainable profits.

The reluctance of many CEOs to fully engage with ESG can be attributed to the age-old view that it will hurt profits. The performance of CEOs is still based on their ability to hit quarterly earnings targets rather than their ability to build sustainable businesses. However, this is becoming an outdated concept – a sustainable business that incorporates the ESG agenda is one that can survive in the long term not just from quarter to quarter.

Social inequality, corruption, tax avoidance, and a lack of action on climate change are just some of the ESG issues that companies must now address head-on, as consumers, investors, regulators, and the media turn the spotlight on them creating reputational issues.  Deliveroo’s recent IPO highlights how the view of investors regarding company governance and employment practices can harm its value.

Environmental performance measures the energy a company consumes, the waste it generates, the natural resources it uses, and the consequences. Apart from the reputational benefit, dealing with its environmental performance can result in a more efficient business – think how much money retailers have saved on the production of plastic bags for instance. Therefore, it is an essential component of future performance.

Social performance assesses a company’s engagement with its workers, customers, suppliers, and the local community. It covers human rights, diversity and inclusion, health and safety and community impact. Social injustices created by big business – whether from poor workplace health and safety, discrimination, or the failure to engage with local communities – can quickly generate negative publicity. Boohoo and its lack of oversight of its Leicester suppliers led to massive negative media coverage.  However, it did little to impact sales as its customer base is primarily buying on price and if you are on a budget can you afford to be altruistic?  Getting the balance right is the issue because a public company has to account to shareholders as well as its customers.

Consumer data from surveys we run at GlobalData show that the impact of the pandemic and the hit to consumer confidence and incomes, led to changing priorities regarding sustainability.  In 2018 48% of global consumers said that how ethical/environmentally-friendly/socially-responsible a product or service was, influenced their buying decision, but by 2020 , in the middle of the global pandemic this had dropped to 44%, highlighting how changing circumstances can influence consumer actions.

Furthermore, an ethical supply chain can lead to other issues when it involves a superpower such as China, as witnessed by the boycott of H&M and others over their stance on the reported forced Uighur labour in Xinjiang. The combined sales of H&M, Inditex, Nike, and Adidas alone in China accounted for around USD7bn in 2020, and the potential for future sales is huge, therefore trying to maintain a business in a developing country with different attitudes becomes a major challenge.

Finally, governance assesses how a company’s internal controls are used to inform business decisions, comply with the law, and meet moral obligations to external stakeholders. Repeated failures in corporate governance – from aggressive tax avoidance to corruption, excessive executive remuneration, and relentless lobbying – has meant that society is losing trust in big business. But in this case it is investors and other financial stakeholders that have the power to make an impact on change rather than consumers.

There is a new generation, aged between 14 and 29, and often referred to as Generation Hashtag, which has been brought up with a greater sense of responsibility for the world into which they were born. They are using social media to hold companies to account for their ESG performance.  As they move up the workforce, they will have greater influence, but are also likely to amend their views. That said, despite a moderation in view, the trend for corporate action and accountability will not reverse. Therefore, to survive, companies must combine their traditional profit motive with sustainable practices.

 

 

Martin Newman, The Consumer Champion

My concern about the ESG agenda is that as is often the case with social responsibility and diversity that it becomes another boardroom tick box exercise. Rather than the business focusing on its purpose, culture and how to build a credible reputation with consumers it instead concentrates upon what it thinks investors want to hear. Subsequently, they will fall short and this won’t help to address both the moral and commercial imperatives that are the drivers for this agenda.

Consumer sentiment is most definitely changing, and we are gradually moving from an era of mass consumption to conscious consumption. However, as is the case with any significant trends there are innovators and early adopters and those who are late to change their behaviour.  And in the middle will be the early and late majority of consumers.

In relation to seeing any meaningful changes in consumer behaviour and a consistent focus on our carbon footprint, I believe we’re still in the early adoption phase and about to move into the early majority. You only have to look at the number of electric cars on the road to get a sense of where we’re at. With electric vehicles making up an estimated 6.6% of the total car market in the UK, they’re still very much in the minority and in the early adoption phase.

We also have to take into account that what consumers say and what they do are often not the same thing. For example, off the back of Boohoo’s supply chain scandal in 2020, where workers were being hugely under-paid, a significant number of consumers voiced their concerns of the issue. However, it doesn’t appear to have stopped many from buying from Boohoo and has not affected their sales performance. To the contrary, sales were up 40% across the group in the four months to January 2021.

All of this said, consumers are increasingly looking to buy more consciously and with a focus on sustainability, retailers will need to offer more than just brand-new products. Products to rent, upcycled and vintage/second-hand items will become an on-going part of the range architecture.

I believe that purpose, social responsibility and reputation are hugely important and will ultimately play a key role in determining a retailer’s long-term sustainability as a business.

In this respect, the majority of retailers have a lot of catching up to do.

 

 

Mike Watkins, Head of Retailer and Business Insight – NielsenIQ

Its not an overstatement to suggest that the pandemic has changed how we live, work, shop and purchase. And empirical data from NielsenIQ supports the view that this is a once in a generation structural change with much of the newly learned shopping behaviour irreversible, such as the embracing of online. However the other big shifts are towards localism – supporting local suppliers and communities and helping to provide local jobs and employment opportunities – and perhaps significantly, a re setting of how shoppers` value what is important to them in terms of orientation towards brands and retailers, and then what they buy or consume as part of their very personal lifestyles.

This consumer reset is more that a re awkenened concern about protecting the planet and sustainability even though 75% of UK shoppers are now saying that buying sustainably sourced food is more important – up from 50% pre pandemic.           (NielsenIQ Homescan Survey January 2021).

It`s also about the core values and purpose of a business. Or to put simply, `feeling comfortable` spending money at a retailer having thought about how employees and supply chains are `looked after` aswell considering the corporate responsibility `to do good`(distinct from do no harm it should be said). This is not just about the business model of plc, private or mutual or how pension funds invest. The ESG agenda has become a reputational pre requisite to doing business post pandemic and cuts across all stakeholders.

Retailers ignore or mis understand this groundswell of opinion change at their peril as it`s driven not just by the so called younger generation or GenZ – about to become economically active (we hope) – who are the influencers of today where this is always top of mind and are of course the consumers of tomorrow. But also by all shoppers who are aged 45 or under with kids or other dependents and these account for over a half of all (food )retail spend. There is also a greater awareness with all other cohorts it must be remembered as lifestyle and attitudes and not lifestage shape retail spend.

So retailers must embrace a greater openness at a strategic level, be more understanding of differences of opinion within their customer base and be seen to be accountable to consumers. Marketing and communications must be authentic and balance personalisation and privacy against profit. And more than ever, retailers must practice what they preach when it comes to work ethics. All of which probably means a rethink of how they deliver value to shareholders.

 

 

Jonathan De Mello, Equity Partner, CWM Retail Consulting LLP

The retail sector generates a substantial carbon footprint – both physical retailing and online. In terms of physical retailing, according to the Building Energy Efficiency Survey (BEES), retail ranks as the top energy consumer, accounting for 17% of total energy used by non-domestic building stock. Small high street stores cumulatively generate some of the highest levels of energy demand, followed by large grocery stores, with heating, lighting, and refrigeration the biggest sources of consumption, representing 79% of energy usage.

From a property perspective retail lags significantly behind offices in terms of ESG progress – a survey by PERE found 80% of investors saw ‘significant or moderate’ progress on ESG within the office sector, compared with just 7% in retail. Whilst much of this will be down to the significant travails faced by physical retailers due to COVID restrictions, clearly this is a statistic that can and must be improved upon as the shops start to reopen.

From a property owner perspective Hammerson is a good exemplar of ESG transparency; recently highlighting the financial benefits of implementing energy and water efficiency measures in its shopping centres. They revealed that c.£900,000 of annual savings were generated from a 31% reduction in emissions – stating that this saving made their investment in ESG ‘worthwhile’.

However, given a large spike in retail business failures due to COVID, the main focus of the vast majority of landlords is on securing rental income. Whilst securing tenants with strong ESG credentials is clearly a laudable goal, the reality is that many landlords will focus on ‘rent at all costs’ given they are facing tough times themselves due to significant bank debt – against a backdrop of falling property values and rents.

COVID has driven many shoppers to online channels given enforced closure of non-essential retail over much of the past year. Paradoxically, brick and mortar stores could actually prove to be an asset to retailers seeking to boost their ESG credentials. Though little research has been undertaken on the impact of the rise of online shopping on the environment, it is clear that this impact will be considerable – for the following reasons:

  • The packaging of individual goods – as opposed to the bulk purchases shoppers tend to make in physical stores
  • Shorter delivery timeframes adding complexity to logistics requiring routes to be speed driven – increasing fuel consumption
  • Purchases are increasingly split over multiple shipments to shorten individual delivery time frames – requiring multiple deliveries and individualised packaging
  • Multiple delivery attempts if customers are not at home – increasingly relevant as workers start to return to the office
  • High volumes of product returns – with some online fashion retailers up at c.40-50% return rates – whereas products returned in-store are packaged optimally for mass transit

Whilst the rationale for some pure-play online retailers to open physical stores in order to build brand equity is clearly there, physical stores make sense from an ESG perspective too – and should certainly be part of the mix when evaluating whether to ‘go physical.’

 

 

James Sawley, Head of Retail & Leisure, HSBC UK

Sales and profits have governed retail since the dawn of time, and since the 17th century global capitalism has only amplified this notion. For the vast majority of consumers, price has always been the single most important criteria when making a purchase. Recent negative coverage regarding ESG issues in the sector has had little obvious impact on Company revenues reaffirms the inconvenient truth that, still, price is King. We all want to live in a fair, safe and clean world, and we want to ensure that our kids do too, this means living more sustainably and treating people better…..but at what cost? Before now consumers have had the luxury of being blissfully unaware of the damage we’re doing to our planet and many of its inhabitants as a result of the way we live, eat and shop. But thanks to social media, 24/7 news and a wave of media content, information regarding the darker side of capitalism is now right in front of our eyes…..and the tide is (slowly) turning.

Price will always be the number one factor in a purchasing decision but just as ‘service’ has grown in importance, ‘purpose’ is playing an increasingly vital role. A growing section of consumers are choosing to spend their money with brands whose Purpose resonates with their own, retailers therefore need to get the balance right between price, service and purpose to capture maximum market share in the future. It also needs to be authentic, consumers are very savvy and they will see straight through green washed products and marketing campaigns, especially as education and momentum continue to build.

As with historical revolutions within industry, technology and innovation in the financial markets will play a major role, alongside government. Thanks to technology (which remains nascent), supply-chain transparency is increasing, aiding buying decisions, and products that will ultimately end up in landfill are far more evident. The ability to select products on sustainable credentials is now widespread, and a growing proportion of consumers are willing to pay more to ensure ESG status. This crucially means retailers can generate sufficient margins to make ESG a financially viable aspect of their proposition. Economies of scale and the cost/availability of tech should dictate that once momentum is generated, these products will be more prevalent and more economic to produce. Take the EV market, they’ll be an inflection point soon when owning an EV makes complete economic and practical sense and everyone will suddenly want one! The financial market is also playing its part in providing finance specific to the green and circular economy agenda. HSBC and other banks can provide finance with pricing linked to measurable ESG targets, i.e. interest rates can decrease/increase on an annual basis depending on performance against pre-determined sustainability targets. Critically, these targets must be ambitious, and be those most material to business operations. Investors, particularly pension funds, are also thinking long term as they look to match long term liabilities with long term assets, and become increasingly conscious of the risks associated to the transition towards a net-zero economy. Companies may find themselves unable to access equity capital without a well-constructed and executed ESG strategy. It all starts however with good old Jo Public. Consumers need facts, information and to be conscientious of ESG related issues when purchasing products, this is where the government and education needs to play its role.

 

 

Ruth Gregory, Senior UK Economist, Capital Economics

As the domestic economy reopens, the focus for retailers will be on rebuilding and recovery. But the key to surviving in the post-pandemic world lies in adapting to shifts in consumer expectations. So the pandemic may yet prove to be the spark that ignites the ESG agenda.

With environmental and social issues increasingly at the forefront of peoples’ minds, retailers’ ESG values not only has the potential to affect their ability to retain jobs and hire new talent, but crucially according to a recent Deloitte survey, environmental values and ethical credentials are translating into consumers’ shopping behaviours.

ESG values are now also firmly on the radar of market participants investment decisions, affecting firms’ ability to raise credit. Even the Bank of England’s Corporate Bond Purchasing Scheme has not slipped under the radar, with the Chancellor in March’s Budget saying that the Bank of England should support the government’s environmental aims. In response the Bank has said that it would adjust its Corporate Bond Purchase Scheme “…to account for the climate impact of the issuers of the bonds we hold, with a view to adapting our approach by the time of our next scheduled round of reinvestment operations in 2021 Q4”. In other words, reinvestments are likely to be skewed towards environmentally responsible corporates and away from fossil-fuel intensive sectors in future.

Moreover, the pandemic has highlighted many supply chain deficiencies which may nudge many retailers to re-assess their supply chain networks in the context of their ESG goals. Admittedly, where widespread shortages have emerged, for example the current global semiconductor shortages, that appears to be largely the result of a strong revival in demand for goods rather than pandemic-related supply disruptions.

What’s more, the lesson from previous supply chain shocks is that they don’t lead to significant “reshoring” or reorganisation. The 2011 Tōhoku earthquake and tsunami in Japan caused huge disruption particularly to the auto sector around the world. For example, the world’s only producer of a certain paint pigment was located near to the Fukushima nuclear plant and had to close. Carmakers responded by trying to increase the resilience of their supply chains. But the most striking aspect of the supply chain response to the Tōhoku disaster and similar events, like the Thai floods later in 2011, is how small it was overall. Supply chain managers have to weigh the risk of occasional disruption against the other benefits that supply chains bring. They are a powerful tool for raising efficiency. And supply chains have proved resilient last year.

So contrary to the argument heard frequently during the early stages of the pandemic, the crisis may not push firms to reshore their production. Indeed, as the chart shows, the initial flurry of interest in reshoring in June 2020 now appears to be fading.

Chart: Google Searches for “Reshoring” (Normalised Index, Maximum = 100)

 

graph1

 

 

 

Sources: Google, Capital Economics

This is not to say that supply chains won’t shift over coming years in light of the ESG agenda. Just that concerns about their fragility in the face of the pandemic might not be the catalyst. Other factors could be, such as Brexit or firms trying to anticipate shifts in the business landscape which may include higher tariffs or requirements that some products are not manufactured in China etc. Prior to the crisis, the growth of global supply chains had been propelled by the twin drivers of technology (container shipping, the internet) and politics (support for increased economic integration). But neither of these is static. And trends in both technology, including the widespread use of industrial robots in previously labour-intensive sectors like textiles, and politics, including the decoupling of the US and Chinese economies will cause shifts in supply chains. So while the direct impact of the pandemic on the long-term future of global supply chains may be smaller than many initially thought, it may accelerate the decoupling of China and other major economies.

Overall, the shifting expectations of consumers has shone a spotlight on the ESG agenda. But it does not only present retailers with challenges, but with opportunities too. The key lies in adapting to change. Those that are able to adjust quickly and effectively are more likely to thrive than those who do not.

 

 

 

Retail Health

Outlook for 2021

UK retailers should prepare for a brighter outlook for the second half of 2021, with sales growth expected between flat and +3% for the year The competition with the hospitality and leisure sector for pent-up spend will be fierce as restrictions are eased Shifts in consumer behaviour likely to impact the grocery sector permanently Urgent…

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