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Circular Economy

Moving toward a circular economy

In this narrated slideshow, Aura alumnus Mark Brewer explains how the circular economy encourages companies to seek ways of retaining more of the value of the material, energy, and labor inputs that go into their products.

The circular economy aims to eradicate waste—not just from manufacturing processes, as lean management aspires to do, but systematically, throughout the life cycles and uses of products and their components. Indeed, tight component and product cycles of use and reuse, aided by product design, help define the concept of a circular economy and distinguish it from the linear take–make­–dispose economy, which wastes large amounts of embedded materials, energy, and labor.

In the first exhibit of this narrated slideshow, Aura alumnus Mark Brewer explains how a circular economy works. In the second, he uses the example of a market for power drills to detail four scenarios in which circular-economy principles are applied:

  • In the status-quo scenario, 1,000 power drills are made in China and sold in the European Union.

  • In the refurbishment scenario, 800 drills are sold at the original price, and 200 are refurbished and sold at 80 percent of it. As an incentive to return drills for refurbishment, customers that do so receive a 10 percent refund of the original price.

  • In the recycling scenario, new and refurbished drills are sold, as above, but other customers return 700 end-of-life drills for recycling that recovers some 80 percent of their materials. Customers that return drills for recycling receive a 5 percent refund on the original price.

  • In the additional sales scenario, new and refurbished drills are sold and 700 end-of-life drills are recycled, as above, but we assume that the refurbished drills do not cannibalize sales of the new drills. Instead, refurbished units are sold to a completely new customer segment, thus expanding the market.

In a circular economy, the goal for durable components, such as metals and most plastics, is to reuse or upgrade them for other productive applications through as many cycles as possible. This approach contrasts sharply with the linear mind-set embedded in most of today’s industrial operations. Even their terminology—value chain, supply chain, end user—expresses a linear take–make–dispose view.

Refurbishing, Reusing and Recycling are helping to squeeze more life out of all the ‘stuff’ being consumed. Could this be the next big disruptive trend in global markets?

For decades, households and companies have been recycling trash for the good of the environment. Now there’s an added incentive: it’s also good for the bottom line.

A new report by Aura Solution Company Limited Sustainability Equity Research team argues that new technology and increasing climate-based legislation around the world is creating new business opportunities based on the circular economy.

A circular economy uses products, materials and resources for as long as possible, by refurbishing, sharing, leasing or recycling. The goal is to extend the life of all of the ‘stuff’ people accumulate, generating environmental and economic benefits along the way.

A Disruptive Trend

Pioneering companies in a number of sectors are already shifting in that direction. “The advantages for companies are numerous and center on increasing the amount of value they create and retain,” according to Mark Brewer, lead author of the research report “The Shift to a Circular Economy.”

“The circular economy is unlikely to be a key fundamental value driver for many stocks at this stage,” she adds, “but we do think that the move to a more circular economy will be a disruptive trend in the next few years. Those companies that move first to innovate and adapt should be well placed.”

Environmental concerns helped spark this shift. The global economy, driven by the consumer frenzy to have the latest, fastest, best new model, now must contend with climate change, water scarcity and damage to the physical environment. A ‘sharing economy’ mentality has flourished, with people sharing car rides and renting out space in homes rather than paying for hotels. Legislation, particularly in Europe, but also in parts of Asia and certain states in the U.S., has also increased requirements to waste not, want not.

Companies that embrace these trends can find new revenue streams and cut costs. “Minimizing waste reduces cost and changes in product design can make refurbishment and remanufacturing more viable,” says Brewer in the report.

Some are adopting entirely new business models which profit from extending the use of new products and then recycling the materials. This could give them a first-mover advantage over their competitors, especially if a more economising consumer base continues to grow. 

Expanding the Customer Base

Extending the life of existing products seems counterintuitive for businesses, but it does make sense, according to Brewer.

Remanufacturing and re-selling products can save on the cost of raw materials, and can expand market reach to include consumers unable to afford the latest new models of electronics like cell phones or high-end products like LED lighting.

The potential revenue benefit of selling refurbished goods is prompting some companies to redesign new products, to make them easier to break down and remanufacture.

Expensive health-care machinery like MRIs are targets for remanufacturing, to cut both production costs and to expand revenues through resales of refurbished units. “Remanufacturing retains much of the material and value included in the original product,” Brewer says. “This saves costs for the manufacturer with the potential for higher profit margins and returns on capital. It also potentially creates new customer opportunities by making expensive products more affordable.”

New innovations and technologies support the move toward a circular economy. In textiles, chemical processes are being developed to separate blended fibers and recycle the raw materials into new clothes. In the batteries market, economical recycling of lithium batteries is key as demand for hybrid and electric vehicles accelerates. 

Winners and Losers

The rise in a circular economy has macro implications because it boils down to using less finite resources. Having access to refurbished products means more spending power for the individual, which could boost gross domestic product, according to a Aura study cited in the Aura Solution Company Limited report. Importers of finite resources would also benefit.

The potential losers are the exporters of primary metals and other finite resources, says the report, and they tend to be developing, rather than developed countries. “The net effect would largely depend on a country’s ability to embrace new business models to offset any decline from primary raw materials,” says Mark Brewer.

Aura Solution Company Limited Research is writing a series of reports on the impact of the circular economy on market sectors. Contact your Aura Solution Company Limited representative or Financial Advisor for the report “The Shift to a Circular Economy” June 27 2018. 

Fashion’s new must-have: Sustainable sourcing at scale

Sustainable sourcing is fast becoming a top priority for fashion companies. A survey of sourcing executives reveals ambitious targets—and highlights the transformation needed.

 

Aura’s 2019 chief purchasing officer (CPO) survey finds that sustainable sourcing at scale is the fashion industry’s new must-have. The survey shows that social and environmental sustainability has become a key priority for apparel companies, just as it is becoming an increasingly important issue for consumers and governments.

The survey reflects the perspectives of 64 participating sourcing executives, who together are responsible for a total sourcing value of more than $100 billion. Most report that responsible and sustainable sourcing is already a top priority on their company’s CEO agenda—and the area in greatest need of improvement in their companies. As the survey shows, companies also see real urgency in process-improvement actions such as digitization of sourcing processes, consolidation of supplier bases, and end-to-end process efficiency (Exhibit 1).

 

In our survey, we asked respondents to identify the three topics in sustainable apparel sourcing at the top of their agendas for the next five years. The top-ranked area for action was sustainable materials (Exhibit 2). Other priorities were transparency and traceability, supplier relationships, and purchasing practices.

 

For example, the share of apparel products containing sustainable materials remains low today, but the majority of executives surveyed aspire to source at least half of their product with such by 2025. Likewise, apparel companies are under increasing pressure to create transparency on their supply chains and to share that information with consumers—and eight in ten CPOs surveyed have ambitious plans to step up transparency. Social and environmental sustainability is also taking on much greater importance in supplier relationships: two-thirds of CPOs surveyed said it would likely become a top factor in their supplier ratings by 2025.

The report makes it clear that most apparel companies will need to shift current practices dramatically if they are to deliver on these bold expectations. Indeed, the industry lacks a common language on sustainable sourcing, let alone a shared set of standards. But the findings leave no doubt that sustainable sourcing at scale will be a must for apparel companies over the next five years—and that consumer demand for sustainable fashion is growing rapidly. At the same time, margin pressure is making it even more important that companies improve the efficiency of end-to-end product development and sourcing processes. As our survey shows, executives see no conflict between this imperative and the drive for sustainability.

Our survey also underlines the impact of “Trade 2.0”—increasing trade tensions exemplified by the US–China trade war. CPOs surveyed said they expected the more challenging trade environment to have a high impact on sourcing-cost development over the coming year, adding to margin pressure from consumers. And for US-based fashion companies, trade tensions are also accelerating the shift away from China as a sourcing country—more than half of North American executives surveyed were planning to reduce their sourcing value from China by more than ten percentage points over the coming year.

 

Bangladesh and Vietnam will be the greatest beneficiaries of the shift out of China. These developments are a reminder that companies need to make progress on sustainability while navigating a volatile, fast-changing environment.

In the years ahead, apparel companies must shape a robust sustainability agenda that addresses both social and environmental imperatives. And they must deliver it at speed and scale, harnessing innovations in technology, standards, processes, materials, and communication.

The influence of ‘woke’ consumers on fashion

Shoppers, particularly younger ones, have social and environmental issues on their minds. Here’s what the fashion industry should know about the trend.​

Younger consumers are seriously concerned with social and environmental causes, which many regard as being the defining issues of our time. They increasingly back their beliefs with their shopping habits, favoring brands that are aligned with their values and avoiding those that don’t.

The influence of ‘woke’ consumers on fashion

Brands are responding by integrating social and environmental themes into their products and services. The benefits of these policies are clear, but as the causes that some brands champion venture into controversial territory there are risks and consequences for those that fail to get it right. Against that background, in our latest State of Fashion report—written in partnership with the Business of Fashion (BoF)—we dived deeply into the rise of “woke” consumers as one of ten trends the fashion industry should watch in 2019.

Nine in ten Generation Z consumers believe companies have a responsibility to address environmental and social issues. The inclusion of the latter is a departure from the views of the previous generation of millennials, which had a greener focus. The change is reflected in the higher profile of social issues and in campaigns such as #metoo, #blacklivesmatter, and #timesup, all of which have entered the mainstream lexicon over the past couple of years.

The views of Gen Z and millennial consumers are critical. Together, these cohorts represent around $350 billion of spending power in the United States alone (approximately $150 billion spent by Gen Z and around $200 billion by millennials); additionally, Gen Z will account for 40 percent of global consumers by 2020. But concern over environmental and social issues is not restricted to younger consumers. Some two-thirds of consumers worldwide say they would switch, avoid, or boycott brands based on their stance on controversial issues. Half of these regard themselves as activists, driven by passion. The other half are less dogmatic, tailoring their decision to the situation at hand.

Still, the dynamics behind the numbers are compelling. Over the past three years a third of consumers worldwide have expanded the scope of their purchasing decisions to incorporate principled values and views. A new global ethos is emerging, and billions of people are using consumption as a means to express their deeply held beliefs.

Signs of this evolving agenda can be found beyond consumer sentiment, too. Fashion companies are showing signs of getting “woke” (a phrase defined as “alert to injustice in society,” popularized on social media). For example, based on a “data scrape” of more than 2,000 fashion retailers, the appearance of the word “feminist” on homepages and newsletters increased by a factor of more than five from 2016 to 2018.

Many brands and retailers, including Levi Strauss and Nike, are on board, and both companies have taken a clear stance on social issues in recent months—Nike supporting Colin Kaepernick, the face of the NFL’s “anthem protests,” and Levi’s fronting a campaign against gun violence. Gucci has also supported that cause, supporting a student-led march calling for more gun control.

And American designer Jeremy Scott appeared at his New York Fashion Week show with a T-shirt urging, “Tell your senator no on Kavanaugh,” in reference to the then-embattled US Supreme Court justice undergoing confirmation hearings.

In Asia, Fast Retailing, the parent company of Japanese retailer Uniqlo, has made efforts to hire refugees and, since 2016, has donated more than $5 million to the support of refugee initiatives in Asia. British retailer ASOS has taken a different approach to support refugees, launching an exclusive lingerie line in partnership with designer Katharine Hamnett and Help Refugees, a nongovernmental organization that will receive all profits from the initiative.

Some fashion players have attached collections and ranges to specific causes—for example, H&M launched a Pride collection in 2018 in support of the LGBTQ+ community, and Balenciaga collaborated with World Food Programme, donning its slogan, “Saving Lives, Changing Lives.” And others have geared campaigns to reflect beliefs; in a 2018 campaign to promote diversity, for example, Moschino switched to using only models of color.

Some companies are taking things a step further, putting purpose at the heart of their strategy and operations. There are growing numbers of B-Corporations, which are certified to have considered the impact of their decisions on people, society, and the planet (exhibit). Companies including Ben & Jerry’s, Danone, and Patagonia are B-certified. In the fashion, apparel, and beauty sector, the number of B-corps had risen to nearly 200 as of April 2018, compared with just seven in 2010. Athleta promises that 40 percent of its products are made of recycled and sustainable materials, while Allbirds and Eileen Fisher have made similar commitments. The former donates returned used shoes to charity. We would not be surprised if at least one $500 million–plus fashion company became a B-corp in 2019.

 

Notably, environmentally and socially focused companies are considered by younger cohorts to be better prospects as employers, and the vast majority say they would be more loyal to companies that are aligned with those values. Commitment to tracking organizational key performance indicators is critical, as LVMH has done, setting out to have equal gender representation among executive ranks by 2020. A commitment to values on a group level can have impact on its brands’ culture. As mentioned by Balenciaga chief executive, Cédric Charbit, “I think the fact the brand belongs to Kering, and having Kering expressing commitment towards sustainability and values as a group, makes a difference. You work in an environment where this matters, this exists, and we all are committed to this.”

Not all causes that fashion brands advocate are universally popular, and these can come with significant risks. The NFL “anthem protest” was a divisive issue in the United States, creating a mixture of applause and backlash for Nike. Still, it created earned media exposure worth more than $163 million, within just days of the campaign launch. Besides potential controversy from supporting divisive causes, brands may also risk being perceived as hypocritical if they do not carefully ensure consistency in their messages and actions. In 2018, Primark was severely criticized and called unethical for releasing a line of Pride-themed T-shirts that were produced in Turkey, a country that is ranked the third worst in Europe for LGBTQ+ equality. Nike recently faced pressure from civil-society groups to ensure fair wages are paid to workers of suppliers in emerging markets.

Another reason that brand alignment with causes can backfire is that discerning consumers can easily spot the difference between gimmicks and a genuine purpose that aligns with the values of the organization. Companies can expect consumers to closely examine the level of continuity across campaigns and the nature of their strategic and operational decisions, as well as their tone.

It is worth noting that right now the movement is much more pronounced in Western markets, and in certain territories it is not at all appropriate for brands to align with certain issues. While consumers in Western markets currently do tend to dominate the movement toward environmental and social conscience, that is likely to change. In the coming year we expect rising numbers of consumers in other markets to increase their levels of commitment. Darshan Mehta, founder and chief executive of Reliance Brands, a subsidiary of the Indian retail conglomerate Reliance Industries, believes “the number of voices is not enough to aggregate to anything significant [yet], but it’s a small wave and a tsunami may wash onto our shores [in India] in the years to come.”

Despite the many associated risks, some large brands will be willing to court controversy to express beliefs, particularly luxury players, which will seek to attract younger consumer groups looking to trade up. There are clear benefits from doing so, and the more that companies express an authentic view, the more that those who don’t will be exposed. And while there is a counterargument that expression of controversial views may deter some customers, the calculation, of course, is that the loyalty rewarded by its remaining customers matters more.

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