Playing offense on circularity can net European consumer goods companies €500 billion

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Forget linear; think circular. The consumer goods growth paradigms of the past were usually predicated on ever-rising volumes—producing more and faster was how to add value to the bottom line. But not anymore. The sustainable model of the future will be increasingly circular, meaning the useful value of products and resources will be maintained for as long as possible. This will significantly reduce high-emissions manufacturing, enable sustainable business models, and provide a powerful mechanism for companies to differentiate from their peers.

McKinsey estimates that portfolio transformation, green business building, green premiums, and green operations focused on circularity can help European consumer goods companies shift to circular value pools of more than €500 billion of annual revenues by 2030. The primary driver will be a shift in consumer demand, with younger generations in particular expressing their values in their purchasing choices. McKinsey research shows that sustainability is “highly important” for about 40 percent of European consumers, amid rising demand for recycled, refurbished, and reused products.1 Based on a 2021 survey, around 50 percent of consumers in Germany, France, and the United Kingdom have purchased preowned items. And as sustainability conscious Gen Zers get older, the proportion will rise.

From a sustainability perspective, the move to a more circular economy cannot come too soon. Each year some €2.4 trillion worth of material in fast-moving consumer goods (FMCG)—80 percent of the material value—is thrown away and never recovered.2 In a circular economy, more of this material would be used again in some form. The key to reducing such large-scale waste would be to drastically slow productive activity, which creates the vast majority of emissions in the product life cycle; in fashion and consumer electronics it is about 80 percent of the total.3

Until recently, this shift in consumer demand and slowdown of productive activity were sources of concern for consumer goods companies: How could companies continue to thrive in a world with declining new-product purchases by consumers? That orthodoxy, however, is fading. Given the business potential of circular consumer goods, successful players should no longer view circularity as a threat but rather an opportunity—one with significant potential to capture value. In short, they should “play offense.” As demand for circular consumer goods picks up, and capital flows accelerate in the wake of the pandemic, circular business models can create a valuable link between business logic and sustainability. The task for decision makers in this context is to focus, adjust, and take advantage.

From a linear to circular economy

There is no denying that energy use is a key lever for the sustainability transition. For example, in the fashion industry, McKinsey analysis shows that about 63 percent of emissions reduction potential lies in more efficient, cleaner energy. However, energy is not the whole story. Another 37 percent of reductions require alternative approaches. This is where circularity comes in. Extended product life cycles, changes in consumer behavior, circular business models, reduced overproduction, increased use of recycled materials, and other measures in line with circular-economy principles could contribute up to 654 million metric tons of fashion industry emissions abatement by 2030, which would close the emissions reduction gap. Similar equations can be applied across consumer goods industries.

In a circular economy, four key loops can facilitate extended product life cycles. These are repair, resale/rental, refurbishment, and recycling (Exhibit 1).

Four loops can keep products and materials in the system for as long as possible in a circular economy.

To incorporate the four loops into their operating models, consumer goods companies need to take action on several fronts. It is critical that they recalibrate their supply chains, which are the dominant source of emissions. That means thinking carefully about production volumes and materials and how to prolong the life of products by design. Companies should also focus on circular models for product usage, as increasingly seen in fashion and FMCG, where consumers can often resell, rent, and repair products, or reuse packaging. Many materials can now be recycled, and municipalities are ramping up recycling services. These advancements are indicators of the direction of travel with regards to extending product life. But more can be done, for example, to enable the disaggregation of products into original components and materials and to reuse as many as possible. The key for companies will be to tackle these challenges, while at the same time identifying and exploiting opportunities for growth.

Growth drivers for circular consumer goods

In addition to the shift in consumer demand, factors such as regulation, technological progress, infrastructure, supply-side activity, and the macroeconomic environment will drive growth in demand for circular consumer goods.

Governments are pushing hard, for example, by adopting initiatives such as the European Green Deal and Circular Economy Action Plan (CEAP), pledging billions of euros to net-zero enablers over the next ten years. One of CEAP’s key components is a proposal for eco-design focusing on product durability, reusability, upgradability, and a “right to repair,” as well as recycled content, remanufacturing, and high-quality recycling. The EU Commission’s recently published proposal for sustainable and circular textiles aims to put an end to misleading green claims. Meanwhile, several European nations have started to implement extended producer responsibility.4 These kinds of initiatives present significant financial carrots to companies seeking to transition to circular business models.

Companies that relax their defensive postures and aim to create strategies that promote sustainability could experience a rise in innovation activity. This could drive adoption and, in turn, motivate investment. Chemical recycling, digital product passports, and scalable disassembly technologies are all attracting significant interest. There could also be a greater demand for solutions to support product resale, refurbishment, and recycling, with a particular focus on scalable material collection and take-back programs, reverse logistics, and automated material sorting and processing for recycling.

These evolutions are already happening amid a surge in supply-side creativity. However, the pace of the scale up will at least partly depend on exogenous factors such as the macroeconomic environment. An economic downturn, inflation, or geopolitical instability could slow the transition, while a more positive trajectory could have the opposite effect. In addition, severe weather events or natural catastrophes may be a catalyst for accelerated shifts in consumer attitudes and corporate strategies.

Creating value from circularity

The shift in demand will drive value pools away from the established take-make-waste model and toward circular alternatives delivered through a range of channel strategies, including traditional direct-to-consumer (D2C) models, consumer-to-business-to-consumer (C2B2C)—in which a business acts as an intermediary—and consumer-to-consumer (C2C). As a result of these advancements, the proportion of circular consumer goods could rise from today’s 10 percent to about 25 to 35 percent by 2030, McKinsey analysis shows. This could result in a €400 billion to €650 billion annual opportunity for European companies (Exhibit 2).

By 2030, European circular-economy product segments will grow at around 10 to 15 percent annually to reach around €400 billion to €650 billion.

The biggest circular segment overall is recycled, sustainably produced products, which account for the largest proportion of activity across consumer goods categories and are often driven by regulation and innovation. Through more recycling, companies have an opportunity to separate product innovation from energy and resource consumption. In FMCG, recycled and sustainably produced products are expected to see 15 to 25 percent annual growth (CAGR) until 2030, leading to an €85 billion to €140 billion opportunity. Recycling in fashion, meanwhile, is likely to see 15 to 30 percent annual growth, generating €45 billion to €110 billion of annual value.

The resale and rental-product segment is already well established in consumer goods categories. Many fashion brands, for example, offer both in-store and online options for resale, return, and trade-in. We expect this segment to see growth in the more modest 5 to 10 percent range, reflecting the segment’s maturity. However, it will still represent 7 to 10 percent of the total consumer goods market by the end of the decade.

The refurbished-products segment is particularly strong in the electronics industry. We predict average growth of 10 to 15 percent in this segment. Across consumer goods segments, growth potential in refurbishment will be contingent on the suitability of products for disassembly and restoration, given economic and physical constraints. To some extent, regulation (such as the EU’s right-to-repair rules), will be a driver, alongside consumer demand for convenient and sustainable ways to buy reliable products.

Potential by consumer goods category

Looking to 2030, there are significant opportunities for consumer goods companies to shift their business models toward billions of dollars of new capital. However, there is no single formula to gauge potential, and individual segments will be subject to specific growth drivers, reflecting the pace of change in consumer attitudes. The following are the key drivers and variables across industry segments:

  • Fashion and luxury. McKinsey analysis indicates that the main driver of the €115 billion to €200 billion market for circular fashion and luxury in 2030 will be an up to tenfold increase in recycled, sustainably produced products, which will contain a high share of recycled synthetic fibers or alternatives such as recycled natural or man-made cellulose fibers. Leading players will leverage technological advancements such as chemical recycling to boost the availability and quality of recycled fibers. Used products will likely expand two- to threefold, driven by online B2C, C2B2C, and C2C platforms, with the majority coming from resale models. Digital attackers, incumbent fashion retailers, and leading brands will all have opportunities. We expect growth in the refurbished segment to mainly come from premium and luxury products, where product quality and originality are particularly important to consumers.
  • Electronics. The €65 billion to €90 billion market for circular electronics in 2030 will be driven primarily by refurbished products. We see continued fast growth in the refurbished smartphone segment, as well as in laptops and tablets. Small, branded home appliances will see increased activity, driven mainly by premium products. High logistics costs are associated with refurbishment of major home appliances (such as refrigerators and washing machines), so these categories are more suitable for maintenance and repair services. Growth in sustainably produced products will depend on leading players’ ability to fully recycle components and materials at scale—from aluminum, plastic, and glass to rare earths—while maintaining their properties and quality. There will also be rising pressure on designers and manufacturers to build in repairability and energy efficiency.
  • Home and living. The €35 billion to €45 billion market for circular home and living in 2030 will be driven primarily by sustainably produced furniture using wood certified by the Forest Stewardship Council (FSC) and homeware containing a high share of recycled synthetic fibers or alternatives. The resale segment will manifest primarily in C2C platforms, whereas in the refurbished segment, premium, luxury home, and office furniture will play a major role.
  • Sports. The €30 billion to €50 billion market for circular sports in 2030 will be driven by recycled, sustainably produced apparel and footwear products. The refurbished, resale, and rental segments will see strong growth from sports equipment and accessories (for example, ski and board sport rental). Consumer demand for refurbished and used products will be mainly driven by the motivation to try new sports in a more cost-conscious and sustainable way.
  • FMCG. The €85 billion to €140 billion market in circular nonfood FMCG in 2030 will be shaped by the ability of players to produce sustainable FMCG products with packaging that is made from 100 percent recycled or biodegradable material and/or that is refillable.5 Although sustainability will be table stakes, some brands may struggle to meet consumer demand. Ingredients, manufacturing, and packaging will come under scrutiny, and some medium and small brands may struggle amid intense competition for key inputs such as recycled plastic. In addition, our research shows that 70 percent of consumers do not want to compromise on quality and functionality. Hence, the winning formula will be products that meet both “better for the planet” and “better for me” criteria.
  • Additional growth will come from sustainably produced books and toys, using FSC-certified wood, recycled plastics and fibers, and natural plastic alternatives and fibers. We expect to see speedy adoption of used products, driven by online book, video game, and media resale platforms, but safety concerns will likely dampen demand for toys. Finally, there will be fast adoption of refurbished and used DIY products, with a focus on power tools and rental models.

In addition to circular products, circular services will be a significant growth area. Maintenance and repair services, such as fashion mending, battery replacement, and sports equipment servicing, will see significant jumps in demand. The €50 billion to €70 billion market for these services in 2030 will be driven mainly by providers operating at scale. Brands or retailers will be at the vanguard, alongside specialty providers such as tailors or smartphone repair shops. Others will enable consumers to repair themselves, offering instruction and spare parts. To accelerate adoption, repair services may be increasingly subsidized by governments and state agencies.

Next steps for consumer goods companies

As regulation and consumer demand drive growth of circular business models, engagement is becoming less of an option and more of an imperative. With that in mind, a natural strategic step should be to step back from insulating businesses against sustainability and look instead to generate value. In short, companies must move from defense to offense. We see four critical moves that will help support value creation.

Portfolio strategy: Define where to play

An established convention is that value creation is a function of where a company plays and how it allocates capital. Therefore, consumer goods companies should calibrate their portfolios toward segments and categories with the biggest circularity opportunities. In one example, German fashion platform Zalando complemented its retail offering with the dedicated resale business Zircle. Key portfolio success factors for this strategy will be to understand the dynamics of segments and categories and to approach the optimization challenge strategically, considering potential synergies and the probable trajectory of demand.

Green business building: Capture new markets

There is an opportunity for consumer goods companies to build entirely new green businesses around circular products and services. This may encompass a range of business models, from traditional D2C distribution to C2B2C and C2C. Among standout examples is refurbed, the fast-growing start-up that built a marketplace for refurbished electronics products. Key business-building success factors will include a compelling proposition and commitment to providing the funding required to capture first-mover advantage.

Green premiums: Win in existing markets

Consumer goods companies can differentiate their offerings with circular products and value propositions in existing markets. This will win share and command price premiums. Apple was able to capture growth on the back of a consumer-, performance-, and sustainability-driven proposition with a strong focus on recycling and energy efficiency. Key success factors will be to link sustainability to the value proposition and effectively communicate with target customers.

Green operations and supply: Enable circular consumer goods

Consumer goods companies can make a huge difference to the lifetime value of products by improving the sustainability of their supply chains and operations. Through sustainable production and logistics, recycling, take-back reverse logistics, refurbishment, and digital platforms, they can help their customers extend the life of products and find new owners. In one fashion industry example, Sweden-based Renewcell partnered with Beyond Retro to launch a new plant that will recycle 30,000 metric tons of cellulosic textile waste a year.6

The transition to a net-zero economy creates the need for an unprecedented reallocation of capital from high-emission to low-emission assets. A core element of that transition will be a move to circular business models and behaviors. Amid rising demand, there will be an opportunity for businesses to step up and play offense. For many, relatively simple changes could create significant pockets of value. For others, a more fundamental rethink, factoring in materials, the supply chain, and the customer journey, will be required. The task for decision makers now is to adopt a strategic approach, identify areas of potential, and seize the opportunity to align with the demands of the coming decade.

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