Americas retail report Sustainability: A retail advantage or a necessity to compete?

April 2014

Sustain– ability

1Americas retail report Sustainability: A retail advantage or a necessity to compete?

Sustain– ability

Sustainability has been one of more perplexing buzz words making its way through the retail industry. Possibly what makes the term sustainability difficult to evaluate and measure is how all-encompassing the concept can be. Retail executives are often challenged to assess their organization’s progress in a wide variety of areas that make up “sustainable practices,” and complicating these evaluations is determining what truly resonates with their consumers and other key stakeholders, such as their own employees. In this edition of our Americas retail report, we look at sustainable practices through the eyes of US shoppers — what do they want and do sustainability practices impact how and where they shop?

2 Americas retail report Sustainability: A retail advantage or a necessity to compete?

3Americas retail report Sustainability: A retail advantage or a necessity to compete?

What is sustainability?Sustainability is a much misused, overused and often misunderstood term. According to the United States Environmental Protection Agency (EPA), sustainability is based on a simple principle: everything we need for survival and well-being depends, either directly or indirectly, on sustaining our natural environment. Sustainability creates and maintains the conditions under which people and nature can exist in harmony. It is part environmental, part social and part economic.

For shoppers, sustainability translates more pragmatically into three basic categories: good for me (e.g., natural or organic products), good for the community (e.g., foods produced locally, sponsors programs in local community) and good for the environment (e.g., recycles, has a small carbon footprint).

4 Americas retail report Sustainability: A retail advantage or a necessity to compete?

There are two topics reaching tipping points with US shoppers and moving sustainability more mainstream in retail today: American-made and healthy living, according to a new study commissioned by EY and conducted by WSL Strategic Retail.

According to the research with a nationally representative sample of nearly 1,800 men and women, four of the top five sustainability practices most important to their choice of where they shop fell into those two classifications.

Two sustainable areas that influence where shoppers shop

Important in choosing where to shop

Survey question: How important are these in choosing where you will shop? (Percent shows top three on a 10-point scale.)

Base: National sample of 1,781 women and men Total

Offers products that are made in the USA 54%Highlights giving fair salary and benefits to its employees

37%

Offers foods that are produced locally 48%Indicates products that are made of recycled materials

36%

Highlights nutritional value on products 44% Supports charitable causes important to me 35%

The store recycles 40%Is energy efficient, for example, turns off lights in aisles when no one is there

35%

Gives nutritional guidance 39% Offers a trade-in program for used products 33%

Indicates environmentally friendly products 39% Highlights allergen-free ingredients 32%

Helps me feel like a good citizen 38% Highlights having a small carbon footprint 29%

Offers products that are organic or natural 38% Allows me to make donations easily 27%

Sponsors programs in my local community 37%

5Americas retail report Sustainability: A retail advantage or a necessity to compete?

Of the 17 sustainability practices studied in the research, those that respondents said had the least impact on where they shopped were: “Allows me to make donations easily,” “Highlights having a small carbon footprint” and “Highlights allergen-free ingredients.”

6 Americas retail report Sustainability: A retail advantage or a necessity to compete?

What’s most important to whom?Although the most important sustainable retail drivers were consistent across all shoppers, there were standout segments worth noting: women with children (under 18 years of age) living at home felt more strongly about a wider range of sustainable areas than women without children in the home. Trade-in programs for used products, making donations more easily and feeling like a good citizen showed the biggest differences — and “added value” potential for retailers among women with kids at home.

More important to women w/children (<18 years of age) living at home

Women w/kids <18 in HH (n=365)

Women w/out kids in HH (n=543)

Sponsors programs in my local community 45% 37%

Helps me feel like a good citizen 45% 35%

Indicates environmentally friendly products 45% 37%

Offers products that are organic or natural 44% 35%

Is energy efficient 41% 33%

Supports charitable causes that are important to me 41% 35%

Offers a trade-in program for used products 40% 28%

Highlights allergen-free ingredients 35% 30%

Allows me to make donations more easily 35% 24%

Has a small carbon footprint 34% 27%

7Americas retail report Sustainability: A retail advantage or a necessity to compete?

The research also cited some differences between age groups: younger shoppers (Millennial and Gen X) favored stores that offered organic or natural products, as well as trade-in programs, more than Boomer shoppers. Boomers rated local and US-made goods as more important influencers.

More important to younger (Millennial and Gen X) versus Boomer shoppers

More important to Boomer versus Millennial shoppers

More important to lower-income shoppers

Millennial: 18 to 34 years old (n=513)

Gen X: 35 to 48 years old (n=578)

Boomer: 49 to 67 years old (n=650)

Offers products that are organic or natural 44% 39% 33%

Offers a trade-in program for used products 38% 34% 29%

Boomer: 49 to 67 years old (n=650)

Millennial: 18 to 34 years old (n=513)

Offers foods produced locally 50% 45%

Offers products that are made in the USA 59% 46%

Household income

< US$50k (n=804)

$US50k-$US99k (n=605)

> US$100k (n=372)

Sponsors programs in my local community 40% 35% 36%

Supports charitable causes that are important to me

38% 34% 32%

Lower-income shoppers said it’s important to them to shop at retailers who give back to the local community and support local charities they care about most.

Note: Of the total sample (1,781), 40 participants were beyond the Boomer age range of 49 to 67 years old and were not included in this total.

8 Americas retail report Sustainability: A retail advantage or a necessity to compete?

Sustainable practices noticed by shoppers in-storeMore retailers have begun to offer and promote sustainable practices in their stores and shoppers have noticed, although they may not consciously make the connection between these practices and the term “sustainability.” The top three sustainable efforts noticed in-store include products that are organic or natural, made in the USA and foods produced locally.

Top three sustainable practices noticed in-store

Bottom three sustainable practices noticed in-store

Offers products that are organic or natural 65%

Offers products that are made in the USA 59%

Offers foods that are produced locally 56%

Highlights having a small carbon footprint 20%

Highlights giving fair salary/benefits to employees 24%

Offers a trade-in program for used products 33%

Survey question: Which of the following have you noticed in any of the stores you’ve shopped?

9Americas retail report Sustainability: A retail advantage or a necessity to compete?

The top three sustainable efforts noticed in-store include products that are organic or natural, made in the USA and foods produced locally.

10 Americas retail report Sustainability: A retail advantage or a necessity to compete?

Shoppers’ expectations of sustainable retailWhile sustainable practices are not the main drivers that bring shoppers into stores (price, convenience and selection remain as the most important drivers), there is an expectation among a majority of respondents that retailers will and should do more to help them feel good and do good. Of the respondents, 59% said they believe companies have an obligation to protect the environment, and 53% said companies have an obligation to give back to the local community.

11Americas retail report Sustainability: A retail advantage or a necessity to compete?

Retailers address sustainability opportunities Certainly there has been high-profile retail activity in all areas of sustainability in 2013, beginning with more retailers (from mass to specialty) leveraging American- made propositions and offering more US-made products. Now that the financial benefits of manufacturing and sourcing products overseas are less, more retailers and brands are seeing the economic benefits in American- made products.

In August 2013, a leading national retailer held a “Made in America” summit bringing together speakers from government and industry to encourage the development of more American-made goods over the next decade.

Retailers certainly represent one of the largest occupiers of physical space in America, from malls to stand-alone stores to warehouses and distribution centers. These physical locations continue to be a priority for retailers to maximize energy efficiency for all the obvious reasons. In November 2013, one of the nation’s leading drug chains opened “the first ever net zero energy store” in Evanston, IL. The building was designed to help protect the environment by producing as much or more energy than the store consumes.

More retailers are catering to health-conscious consumers. A recent study conducted by market research company Mintel found that 70% of US adults are trying to make conscious decisions regarding health and wellness. As a result, retailers are working to make it easier for more shoppers to do so. In 2013, one of the nation’s leading grocery chains opened its first smaller format grocery store (22,000 square feet), in Detroit, MI to bring healthier, organic, local and more affordable food to the struggling downtown community.

12 Americas retail report Sustainability: A retail advantage or a necessity to compete?

• Target the right message to the right shopper segments. Targeting the right sustainability message and product offers to the right segment of shoppers is the most effective approach to maximizing your sustainability efforts. While it’s important to have a corporate point of view on all three key sustainability categories (good for shoppers, good for the community, good for the environment), innovation, product offering and marketing around the issues that are top of mind and motivating to your shoppers will deliver the greatest impact — awareness and loyalty.

• Make it easy. There are a growing number of examples of how some retailers are making it easier for consumers to shop a category, such as putting all healthy, sustainable products under one roof or on one website. Others have created systems such as a legend of icons that indicate sustainable attributes (e.g., made locally, no harsh chemicals, etc.) so shoppers can easily pick and choose what matters to them most, and do so in a comparative and informative manner.

Implications for retailers

And what about human rights?

While a bit removed from the immediate touch point of the consumer, the significant issue of human rights in the retail supply chain is still top of mind for retailers. Following a recent spate of health and safety tragedies - and the associated media attention - retailers and others are asking significant questions about the effectiveness of programs to monitor and manage human rights abuses within the contract manufacturing sector.

Many companies have explored innovative approaches for improving performance, however, the recent wave of human rights controversy has sparked a wholesale review of the prevailing social compliance paradigm. This continues to reveal persistent human rights abuses, despite the enormous volume of factory audits currently performed.

It’s likely that the result will mean significant change in the way retailers engage with their supply chains, as well as the methods they use to understand the reality of human rights issues in their supply chains around the world.

In the years ahead, we expect to see new reporting frameworks and audit protocols define a new direction in human rights. In the short term, we urge you to use your compliance functions, including internal audit, to assess your current social compliance programs, and ask yourselves: are they effectively managing reputational risks?

To dig deeper into this subject, download our report: Human rights and professional wrongs: rethinking corporate social compliance in the supply chain at ey.com/humanrights.

• Sustainable efforts are expected. Research indicates that more shoppers are watching for and taking notice of sustainable practices by retailers. While sustainability practices may not be the primary reason to choose a store, a lack of noticeable and valuable practices may be a reason shoppers leave a store.

• Educate shoppers about the value of sustainability. Retailers need to communicate the value of their sustainability efforts in a way that’s relevant to shoppers (e.g., healthier, in support of local businesses).

For more information contact:

Dan Valerio Americas Retail Leader daniel.valerio@ey.comwww.ey.com/Industries/Consumer-Products

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