Sustaining profits: The financial benefits of sustainability initiatives
As more companies embrace sustainability, the benefits have evolved from a feel-good reputation boost to something much more tangible: profitability.
"Sustainability" calls to mind environmental initiatives like water and energy conservation and how these bolster a company’s reputation. But for food and beverage manufacturers, sustainability offers much more.
"Companies are starting to realize that sustainability represents a way to both save money and also to generate added revenues," said Levi Stewart, consumer staple products sector analyst at Sustainability Accounting Standards Board.
Sustainability drives profits, whether that means adding to the top line or reducing bottom line costs. Sustainability measures for manufacturers extend into areas like packaging lifecycle management, ingredient sourcing, health and nutrition, and the social impact of production.
Race to the top (line)
Organic foods appeal to health-conscious and eco-conscious consumers. A certified organic label carries two financial benefits. It makes the product stand out from competitors, which can drive sales. Organic packaged and prepared foods saw double-digit sales growth from 2005 to 2014 as compared to just 3% growth for the overall food industry. Organic food sales are expected to increase by 14% each year from 2013 to 2018, which demonstrates a clear growth opportunity for processed foods companies.
General Mills recently confirmed its recognition of this trend. The company announced a plan to more than double its organic acreage sourcing to reach its $1 billion goal for net sales of natural and organic products by 2019, a year earlier than previously expected. Acquisitions in the space also reflect manufacturers’ acceptance of this trend, such as General Mills and Annie’s, Hormel and Applegate Farms, and ConAgra and Blake’s All Natural Foods.
An organic label also enables a manufacturer to charge a higher price for the product, which many consumers are still willing to pay because of the perceived higher quality of the product. According to a 2015 Nielsen survey, about 88% of respondents said they would be willing to pay a higher price tag for healthier foods. Another recent Consumer Reports survey found the same: 87% of respondents said they would pay more for "natural" foods.
Another recent Nielsen study reported that about two-thirds (66%) of consumers would pay more for products from companies that are committed to positive social and environmental impact, particularly millennials at 70%. Social impact includes measures regarding sound labor practices, including safe working environments and fair wages for employees, among others. The fast spread of companies announcing sourcing of cage-free eggs proves the growing importance of this area of sustainability.
Manufacturers, particularly in the beverage space, can commit to using recyclable or renewable packaging materials. Companies like Coca-Cola have begun looking into plant-based packaging materials or packaging made from paper or recycled materials.
Today and tomorrow's bottom (line) seekers
Energy needed to run equipment, facilities, and delivery trucks entails sizable energy costs for companies. The industry has installed more efficient equipment and utilities, optimized delivery routes, and implemented new protocols to otherwise limit electricity use.
But energy efficiency is about more than just a reduction of a utility bill. It’s about being proactive to protect the company from unexpected jumps in fuel costs long into the future.
"Focusing on efficiency reduces volatility issues as well as any sort of regulatory impact that you might see," said Stewart. "These initiatives that are taken now could avoid a long-term risk associated with cost, so it’s really mitigating those risks upfront as opposed to more retroactively."
From water reduction strategies to implementing zero-water facilities, companies in both food and beverage have committed to water conservation — and the savings that come along with it. Through water-efficiency projects in several of its plants, Hershey estimated savings of more than $900,000 a year beginning in 2014, according to the company’s 2013 Corporate Sustainability Report. PepsiCo reported cost savings of $15 million from water-related initiatives in 2013.
Water conservation is also a proactive measure, particularly for beverage producers. Water scarcity is a concern for many companies, if California’s multi-year drought is any indication.
By reducing water needs, companies mitigate the risk of losing their water supply. Those future cost savings may be intangible now, but the industry is starting to understand these effets.
Eco-friendly packaging may drive top-line growth, but packaging can also be a source of bottom-line benefits.
PepsiCo announced in September that its environmental sustainability efforts had saved more than $375 million since it established goals in 2010. Included in those efforts, PepsiCo eliminated 89 million pounds of packaging (both food and beverage) in 2014 versus the previous year. Stewart estimated that initiative to have amounted to savings of about $48 million.
Similar to mitigating risks of rising costs for energy, companies that reduce packaging or use renewable materials can also avoid spikes in packaging costs. These can arise from fluctuating commodities, such as oil used in making plastics.
"A lot of that is based on the cost of the commodity input," said Stewart. "Companies that are able to have a dynamic supply of packaging have the ability to reduce the volatility of cost in their packaging."
The resulting demand for increased sustainability will encourage more companies to innovate. With benefits to the environment, increased consumer trust and added profits, sustainability is a win-win-win for food and beverage manufacturers going forward.