Increasingly severe global weather events and the urgent tone of the 2022 UN Climate Change Conference (COP27) have made it crystal clear: now is the time to truly prioritize sustainability. And 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. In South Korea, for example, GHG emissions from agricultural products accounted for 3 percent of the country’s total emissions in 2018; the Carbon Neutrality and Green Growth Commission has set the goal of cutting emissions by 38 percent by 2050.1
It’s not simple to reform a system that plays a critical role in people’s health and that more than 500 million farmers, workers, and employees around the world rely on. Yet pressure from stakeholders has never been stronger: consumers are demanding sustainable products and services, investors are shifting to sustainable investments, regulators are implementing new and tighter sustainability regulations, and pressure from nongovernmental organizations (NGOs) is increasing.
We believe grocers are in a unique position to be a driving force in this much-needed sustainability transformation. They’re ubiquitous—even the smallest town has a grocer. They’re integral to local and national economies and are often the largest private employer in an area.
Grocers also have the power to both influence consumer choices and collaborate with farmers, suppliers, and even other grocers. 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.
Making sustainability a strategic imperative
Many food retailers have already kick-started their sustainability efforts with portfolios of initiatives that typically span decarbonization, packaging, assortment, and social sustainability. South Korean grocers have quantified their starting point and defined concrete actions to address sustainability topics, yet many of them are not confident they will achieve their sustainability targets.
The problem? Grocers associate sustainability with significant costs and have not solved the challenge of creating value through commercializing green activities, which has slowed progress. They are simultaneously juggling other critical strategic transitions, such as digitalization. Grocers also find it difficult to set up much-needed upstream collaboration with farmers and suppliers.
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 specific circumstances. We have identified three areas of focus that will help grocers succeed:
- five key sustainability themes for holistic impact
- levers grocers can use to capture efficiency, growth, and margin-improvement opportunities while managing potential downsides
- an operating model enabling grocers to successfully manage the sustainability transformation
1. Focusing on the five sustainability topics that matter
While looking at the food system’s sustainability from an environmental, social, and governance (ESG) perspective is a good start, grocers can go further. We sought to create a framework for grocers to provide insights about the most important dimensions. Our research into stakeholder requirements and external costs of the food system suggests grocers focus on five explicit dimensions: health, the environment, the economy, animal welfare, and livelihoods (HE2AL). Within this framework, we further identified 15 topics that should matter most to grocers (Exhibit 1).
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.
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 their 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 2).
This means grocers need to focus on two elements. First and foremost, they should work on their own footprints and optimize their own operations. This can be a significant—and expensive—investment of time and resources, requiring anything from making thousands of stores energy efficient to sourcing green energy and reshaping cooling technologies and logistics.2 But it holds the potential for grocers to make a sizable contribution to sustainability and create value. South Korean retailers are taking several actions. For example, convenience-store operators such as 7-Eleven and BGF Retail have adopted electric vehicles (EVs) for their logistics. Similarly, SSG.com, the online mall run by Shinsegae Group, is operating EVs equipped with cold-chain technology.3
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. Grocers can reduce Scope 3 emissions while creating value by taking actions such as introducing transparency requirements for all products, changing product assortment (for example, introducing lower-emission alternatives), adjusting specifications (such as specifications on shape or size that can cause farmers to waste “nonfitting” produce), supporting farmers who want to develop emission-reducing agricultural production, or improving supply chain financing based on the GHG footprint of the supplier. Tackling Scope 3 emissions can be quite complex because grocers need to collaborate with their partners in the value chain. However, given the large share of total emissions and grocers’ central position in the value chain, this step is required to decarbonize the food system. Major retailers (such as Hyundai Department Store, Lotte, and Shinsegae) have announced plans to reduce the plastic content of packaging and recycle used plastics.4 Emart also published the Product Sustainability Initiative, a guidebook that articulates metrics for gauging the sustainability of products from suppliers.5
Along the five HE2AL dimensions, grocers should identify opportunities to fundamentally—and credibly—differentiate themselves and create competitive advantages, allowing them to maximize sustainability impact and value creation. This does not imply grocers need to be sustainability leaders across all 15 topics, but they should make conscious choices about where they want to lead, where they want to benefit from resource productivity gains, and where they just want to comply with regulations. The following five factors can help grocers prioritize their efforts:
- the company’s starting point (baseline)
- the position of competitors
- stakeholder expectations, especially those of (future) consumers and regulators
- the company’s “appetite to do good,” reflecting its purpose
- the overall resulting potential for value creation, including upsides and downsides
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 3).
A strong sustainability strategy reduces several downside risks companies might otherwise face, making such a strategy an important source of potential value. Companies with low ESG ratings will face increasingly higher costs of capital as capital is moved to sustainable companies. By improving their ESG ratings, grocers can get access to capital at better rates. For example, major commercial banks in South Korea have released ESG loan products that offer better rates for companies that meet ESG criteria. The National Pension Service of Korea and most asset managers in South Korea have launched ESG funds to invest in companies with higher ESG scores.6 The Social Responsibility Investment (SRI) ratio of the three largest South Korean public pension funds has risen 13-fold, from just 1 percent five years ago to 13 percent today.7 Several NGOs are also lobbying regulators to extend the carbon tax to food, increasing the cost of these products. 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, grocers risk losing market share to sustainability leaders. By offering a wider range of healthy and sustainable options and decarbonizing their own operations and the value chain, grocers can gain market share. Although there is still considerable uncertainty around how sustainability will play out, there’s a clear business case for acting to mitigate downsides.
Grocers should approach sustainability investments the same way they approach other investments: by prioritizing the most economically efficient options.
Sustainability strategies can do more than mitigate risk and reduce downsides; they 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 their 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 that often have significantly higher growth and margin potential. Grocers can evaluate their potential to extend beyond their core business, whether by focusing on adjacent segments that strengthen the core business or by leveraging consumer data as an ecosystem backbone to provide highly valuable services. South Korea’s three largest retailers (Lotte, Hyundai, and Shinsegae) used their existing assets to enter the EV-recharging-station business, for example.
Sustainable business building. Some ambitious sustainability innovators are emerging in South Korea’s food system—for example, Farm8 and N.Thing (in vertical farming), Unlimeat and WeMeet (protein alternatives), and Botash and CaretBio (packaging circularity). 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.
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. Leaders in sustainability increasingly allocate shelf space and resources to sustainable products; they outpace conventional products by a factor of seven. For instance, Orga Whole Foods, a subsidiary of Pulmuone that focuses on distributing eco-friendly food directly to customers, turned a profit in 2021 after years of building its brand.8
Sustainable operations and supply. More-sustainable operations can add value and contribute significantly to better performance. Often, we find that 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 in the same way that they approach other investments: by prioritizing the most economically efficient options. Grocers can use marginal abatement cost curves to prioritize NPVpositive or NPV-neutral levers (Exhibit 4). Such cost curves show the cost of each investment and rank investments by their return on capital.
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 achieve because it requires a substantial number of changes to the business and to 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. Business units should take the lead in developing and executing specific sustainability initiatives, with sustainability embedded in performance management as a measure of progress that can ensure accountability both internally and externally. Moreover, grocers should invest in data collection and reporting across the value chain to be able to manage upstream and downstream impact. Many South Korean retailers, such as BGF Retail and GS Retail, have organized task forces specializing in sustainability to lead diverse ESG initiatives.9
The food system requires fast, systemic change to become sustainable. Grocers can be a driving force and create significant additional value, but sustainability is a multiyear challenge requiring leadership and focus throughout the organization as well as investments. We recommend three steps leaders should take now:
- Assess the sustainability baseline and define an ambition with concrete impact targets (such as financial, carbon abatement, waste diversion, and supplier engagement). These should be based on the organization’s starting point, purpose and internal “appetite to do good,” the behavior of competitors, stakeholders’ expectations, and the resulting potential for value creation.
- Implement a well-defined and prioritized set of sustainability initiatives that maximize sustainability impact across the HE2AL dimensions and generate value for the business across all five types of value creation levers. Think strategically about how to involve suppliers, differentiate through sustainable own brands, and invest in transparency.
- Adapt the operating model to anchor sustainability in the day-to-day business decisions most relevant to the articulated ambition across the value chain. This enables consumers to make sustainable choices, optimizes operations, and allows the organization to collaborate with farmers, suppliers, and peers.