Environmental legislation and climate changes could eat up as much as 47 percent of packaged goods companies' profits by 2018 if they don't adopt long-term sustainability measures, according to a new report released by A.T. Kearney.
The report, Rattling Supply Chains: The Effect of Environmental Trends on Input Costs to the Fast Moving Consumer Goods Industry, addresses long-term profitability of the packaged goods industry. The findings are based on "future analysis" of how much certain commodities will go up, including oil, cereal, soy and palm oil, and how they will fare under certain environmental, governmental policy and climate situations. The term used to describe these hypothetical scenarios is "ecoflation."
Companies that can reduce their reliance on materials like plastic or paper, through sustainability initiatives, can cut costs when economic pressures cause price increases, said Daniel Mahler, partner and global leader for sustainability practice at A.T. Kearney's New York office. In a down economy, cost cutting is particularly top of mind for many household and food and beverage manufacturers. "Companies are desperate to save because they can’t grow. The commodity price pressures have eased, but now the pressure is to save costs," Mahler said.
The report also outlines economic impacts on the packaged goods industry: Companies can expect a reduction of anywhere from 13 to 31 percent in earnings by 2013, and from 19 to 47 percent in 2018, if adequate sustainability measures are not taken. Assuming commodity costs hit an all-time high, "half of current profits will be erased" if companies continue standing by a "business-as-usual" approach, Mahler said.
Companies like Procter & Gamble and Nestle have already implemented sustainability strategies. Nestle is placing more emphasis on sourcing materials locally to cut down on transportation. Meanwhile, P&G is cross-leveraging research and design teams across different brand categories. For instance, a brand manager on Pantene might consult with a fellow colleague on Tide for best practices, such as using packaging that requires less plastic.
These are just a few examples of the extent to which many companies have considered going green. Oftentimes, retooling a supply chain to be more sustainable involves "rethinking the product itself," said Joel Makower, executive editor of GreenBiz.com, a site dedicated to all things green. "It has as much to do with improving business practices as it does with improving environmental practices. In fact, the two go hand-in-hand."