How grocers could use sustainability to transform Asian food systems

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Increasingly severe global weather events and the urgent tone of the 2021 United Nations Climate Change Conference (COP26) have made it crystal clear: now is the time to truly prioritize sustainability. Asia is particularly exposed in this regard because Asian consumers are becoming more environmentally conscious (Exhibit 1).1Asia’s net-zero transition: Opportunity and risk amid climate action,” McKinsey, April 29, 2022. While climate may be top of mind, it can no longer be separated from other concerns about how we live and make supporting economies more sustainable. To address these problems, it is crucial to consider the food system, which accounts for 34 percent of global greenhouse-gas (GHG) emissions.

Asian consumers are increasingly eco-conscious.

It’s not simple to reform a system that more than 500 million farmers, workers, and employees around the world depend on, and that plays a critical role in people’s health. Yet the pressure on retailers is increasing (particularly in Asia) as consumers demand sustainable products and services, investors shift to sustainable investments, and regulators implement new and tighter sustainability regulations.

Grocers are in a unique position to be a driving force in this much-needed sustainability transformation. They’re ubiquitous, they’re integral to local and national economies, and they have the power to both influence consumer choices and collaborate with farmers, suppliers, and even other grocers. And, finally, they can benefit from the transition because sustainability can go hand in hand with value creation. In fact, our analyses show that while sustainability presents potential risks, it also offers opportunities for grocers’ top lines, margins, and costs—adding up to around 50 percent of EBITDA.

Making sustainability a strategic imperative

Some food retailers have already kick-started their sustainability efforts with portfolios of initiatives that typically span decarbonization, packaging, assortment, and social sustainability. For example, Thailand’s Tops Supermarket optimizes its fuel usage and supports local producers by making its backhaul trucks available to transport goods purchased from farmers. Singapore’s UglyFood sells excess or ugly produce and sustainably sourced goods. Australia’s Scoop Wholefoods sells products carefully selected for their environmental and health benefits, as well as for their minimal packaging; it also uses 100 percent green energy in its operations. Yet Asian grocers are often simultaneously juggling other critical strategic transitions, such as digitalization or expansion into countries whose competitive landscape is still predominantly fragmented. In addition, grocers associate sustainability with significant costs and have not solved the challenge of creating value through “commercialization” of green activities, which has slowed progress.

We believe grocers need to make sustainability an integral part of their businesses with a strategic perspective based on value creation and tailored to their circumstances. We have identified three things retailers need to start doing differently:

  1. reframe their purpose, typically around five themes that matter
  2. explore a set of business actions that drive sustainability while creating tangible value (higher margin, accelerated growth, and reduced risks)
  3. adjust their operating model in a way that will make sustainability actions core to the business rather than an afterthought

1. Properly framing the sustainability ambition around the five themes that matter

Viewing the food system’s sustainability from an environmental, social, and governance (ESG) perspective is a good start, but grocers can go further. A broader strategy would include five explicit dimensions: health, the environment, the economy, animal welfare, and livelihoods (HE2AL). Within this framework, 15 topics should matter most to grocers (Exhibit 2).

Grocers can help mitigate the external costs to society from food through 15 sustainability levers.

Viewing the food system’s sustainability from an environmental, social, and governance (ESG) perspective is a good start, but grocers can go further.

Retailers should focus on all HE2AL dimensions and look at the full value chain to maximize value creation and sustainability impact. Looking at the full value chain is important because many value creation opportunities and much of the sustainability impact come from interactions with suppliers and customers.

Let’s take decarbonization as an example. While the food system accounts for more than a third of global GHG emissions, only about 4 percent of grocers’ direct contribution is from grocers’ own operations (Scope 1 emissions) and from purchased electricity and heat (Scope 2 emissions). Most emissions are generated along the value chain (Scope 3 emissions), with about 80 percent stemming from land use, agricultural production, food processing, and packaging (Exhibit 3).

Food systems account for more than a third of global greenhouse- gas emissions.

This means grocers need to focus on two elements. First and foremost, they should work on their carbon footprints and optimize their own operations. This can include making stores energy efficient, sourcing green energy, and reshaping cooling technologies and logistics.

Second, grocers should take a holistic view of GHG emissions created along the entire value chain, reviewing how their assortment and sourcing choices and policies contribute to them. Reducing Scope 3 emissions while creating value can include actions such as introducing transparency requirements for all products, changing product assortment (for example, introducing lower-emissions alternatives), adjusting specifications (such as specifications on shape or size that can cause farmers to waste “nonfitting” produce), supporting farmers who want to develop emissions-reducing agricultural production processes, or improving supply chain financing based on the GHG footprint of the supplier. For example, dairy giant Arla has developed a program to incentivize farmers to use greener agricultural practices, allocating up to 4 eurocents per kilogram of milk to it (equal to about €500 million annually at their current volumes or 7 percent of the value of the milk at current prices). The company’s point-based system builds on the “climate check” already in place for approximately 8,000 farmers in Europe, who report their practices by answering a 200-question survey regularly. Arla compensates farmers for their practices, such as feed that cuts methane emissions and precision farming techniques, with the goal of becoming CO2-neutral by 2050.2 Tackling Scope 3 emissions can be quite complex because grocers need to collaborate with their partners along the value chain, but such examples show that incentive schemes are becoming a reality.

Along the five HE2AL dimensions, grocers should make conscious choices about where they want to lead, where they want to benefit from resource productivity gains, and where they simply want to comply with regulations. This prioritization typically considers the company’s starting point as well as those of competitors, expectations from stakeholders, and, importantly, the potential for value creation in the form of EBITDA upside or risk mitigation.

Grocers should make conscious choices about where they want to lead, where they want to benefit from resource productivity gains, and where they simply want to comply with regulations.

These opportunities then need to be translated into concrete targets that can be communicated internally and externally.

2. Creating value from the sustainability transformation

Grocers can generate significant value from a well-positioned sustainability transformation. The value generated can come from six types of value creation levers, which can be further grouped into reducing downside risks and seizing the opportunities sustainability offers (Exhibit 4).

Sustainability value-creation levers can drive economic profit.

Reducing risks

A strong sustainability strategy reduces several downside risks companies might otherwise face (such as increased cost of capital and enhanced reputation of competitors) and can thereby provide an important source of value. By proactively working across the supply chain to reduce GHG emissions, grocers can avoid these additional costs. In addition, as consumers increasingly patronize more sustainable companies, there is a risk of losing market share to sustainability leaders. By offering a wider range of healthy and sustainable options and by decarbonizing their operations and the value chain, for example, grocers can gain market share.

Capturing opportunities

Sustainability strategies can do more than mitigate risk and reduce downsides; such approaches can also give grocers a competitive edge and allow them to take advantage of new opportunities. We outline some potential strategies for grocers below.

Portfolio strategy: Grocers can begin reorienting portfolios toward sustainability at the level of their broader ecosystems. They can rigorously allocate capital—for example, by investing in sustainable parts of the business, managing unsustainable parts through cash flow, or scaling down and divesting—and think about organic and inorganic moves. There are many attractive sustainability value pools beyond grocery, often with significantly higher growth and margin potential. Grocers can evaluate the potential to extend beyond their core business, whether by focusing on adjacent segments that strengthen the core business (such as Australia’s Woolworths, which acquired health food retailer Macro Wholefoods Market in 2009 and has since introduced more than 350 products to its stores, including its Macro Whole Living range for cleaning products, which has been certified by Good Environmental Choice Australia [GECA]) or by using consumer data as an ecosystem backbone to provide highly valuable services.

Sustainable-business building: Disruptive sustainable innovators are emerging in the food system, from vertical farming (such as Thailand’s FlexiFarm, Malaysia’s Farmy, and Singapore’s ComCrop and Sky Greens) to protein alternatives (for example, Next Gen Foods’ Tindle, a plant-based chicken) and packaging circularity (TerraCycle’s Loop partnership with AEON in Japan). Yet established grocers typically struggle to build new sustainable businesses successfully. While they face real challenges, such as brand credibility and incubating agile new ventures within larger corporate structures, established grocers are also held back by a lack of ambition and an unwillingness to disrupt themselves before someone else does. These are missed opportunities. Established grocers have significant advantages that should make them the natural owners of sustainable-business building. Migros in Switzerland is leading on this front, with its Cultured Food Innovation Hub developing cultured meat, seafood, and more.3 Meanwhile, Asian players are taking small steps. Examples include Vingroup with its sustainable agriculture unit VinEco in Vietnam, Super Indo with its launch of certified sustainable cooking oil in Indonesia, and Totoya with its first zero-waste supermarket in Japan.

Market share and margin gain: Consumer companies are increasingly gaining market share and margins by differentiating through sustainability. The three principal levers are branding and marketing, sustainable value propositions and differentiation, and green pricing—especially as sustainability premiums begin to materialize. For example, sustainability leaders disproportionately allocate shelf space and resources to sustainable products, which are outgrowing conventional products by a factor of seven.4 On green pricing, grocers must ask how much consumers are willing to pay for green products. Michal Klar, general partner from Better Bite Ventures, said, “For an alternative-protein product to be successful with consumers at scale, it needs to meet their needs at three core levels: taste, price, and convenience.”5Make room for alternative proteins: What it takes to build a new sector,” McKinsey, March 25, 2022. Consumers perceive price to be an important factor in purchasing decisions, so grocers need to get it right.

Sustainable operations and supply: More sustainable operations can be value accretive and significant drivers of better performance. Often, we find up to 50 percent of operational levers can be net present value–positive (NPV-positive) or NPV-neutral and can improve financial performance through cost reductions. Grocers should therefore approach sustainability investments as they approach other investments: by prioritizing the most economically efficient options. Grocers can use marginal-abatement cost curves to prioritize NPV-positive or NPV-neutral levers (Exhibit 5). Such cost curves show the cost of each investment and rank them by their return on capital.

Carbon-abatement cost curves can support decisions about the sequence of implementation.

3. Setting up the sustainability transformation for success

Maximizing sustainability impact and value creation requires a holistic transformation approach with the right operating model. Like any business transformation, sustainability is hard to do because it requires a substantial number of changes to the business as well as cross-functional collaboration. Sustainability efforts should therefore be anchored by the CEO and board, who should model a green culture. They should be supported by a central team led by a chief sustainability officer who reports to the CEO and acts as the main orchestrator and know-how provider across the organization. Building a successful green business depends on four imperatives:6Building a green business: Lessons from sustainability start-ups,” McKinsey, April 27, 2022. set a bold sustainability vision; double down on talent and culture; flex the operating model, with leaders modeling a bold, experimental mindset; and take an agile approach to risk capital, knowing commercialization of products and services won’t happen overnight.

The food system requires fast, systemic change to become sustainable. Grocers can be a driving force and create significant additional value, but this is a multiyear challenge. We recommend three steps that leaders should take now:

  • Assess your sustainability baseline and define your sustainability ambition with concrete impact targets (such as financial, carbon abatement, waste diversion, and supplier engagement). These should be based on your starting point, your purpose and internal “appetite to do good,” the behavior of competitors, your stakeholders’ expectations, and the resulting potential for value creation.
  • Implement a well-defined and prioritized set of sustainability initiatives that maximize your sustainability impact across the HE2AL dimensions and generate value for your business across all six types of value creation levers. Think strategically about how to involve suppliers, differentiate through sustainable own brands, and invest in transparency.
  • Adapt your operating model to anchor sustainability in the day-to-day business decisions most relevant to your articulated ambition across the value chain. This enables consumers to make sustainable choices, optimizes your operations, and allows you to collaborate with farmers, suppliers, and peers.

By taking these actions, grocers in Asia can lay the groundwork for a successful, sustainable future.

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