The most influential Megatrends set to shape the world through 2030, identified by Euromonitor International, help businesses better anticipate market developments and lead change for their industries.Learn More
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.
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.
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.
Source: Euromonitor from trade sources/national statistics
Note: Data refer to value sales in constant 2015 prices
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:
Source: Euromonitor International Competitor Analytics Model
Source: Euromonitor International’s Competitor Analytics Model
Source: Euromonitor International from EEA, Eurostat, OECD