Fast-moving consumer goods companies (FMCG) and retailers had mixed fortunes during the COVID-19 pandemic, depending on their product lines, sales and distribution model, and the extent of restrictions in countries in which they operate. At the same time as companies were seeking to predict and meet changing consumer demand and adapt their business models, they were also battling the impact of supply chain disruption.
But pressure on these industries extends further than the COVID-19 pandemic. FMCG and retail supply chains need to adapt to meet consumer, regulatory and stakeholder priorities around sustainability and convenience, whilst adjusting to the major demographic and geopolitical shifts that the next decade will bring. By 2030, the elderly will outnumber children, the middle classes in Asia and Sub-Saharan Africa will be larger than that of the United States and Europe combined, and the environmental effects of climate change will continue to affect supply chains globally, whilst consumers continue to expect to be able to shop virtually and with near-instant delivery.
Consumers were already prioritising environmental and ethical criteria in their purchasing decisions before the COVID-19 pandemic, but this has accelerated.
Standard Chartered’s recent research report, Critical indicators of sustainable supply chains, explores how companies globally, including those from the FMCG and retail sectors, are adapting to this new era. It explores what is required to build resilient and sustainable supply chains that have the flexibility and connectivity to meet changing demands whilst ensuring reliable supplies.
This research revealed how these industries are excelling in supply chain risk management, and leveraging data and digitisation to finance and boost supply chain resilience and sustainability but all in the responsible manner demanded by their customers. By doing so, FMCG and retail companies are at the forefront of responsible corporate citizenship whilst becoming more responsive to changing supply and demand patterns.
1 https://www2.deloitte.com/uk/en/pages/consumer-business/articles/sustainable-consumer.html
Our research emphasises that FMCG and retail companies have already invested in developing highly sophisticated, adaptable supply chains.
However, despite these mitigation measures, supply chain risks continue to increase. For some goods, such as textiles, supply chains have become two or three times more geographically concentrated since 20022. Furthermore, around 80 per cent of world trade now flows through countries with declining political stability scores, which are often the countries most vulnerable to climate change3. Climate events increase the risk of supply chain disruption, which impacts on revenues and damages customer relationships.
The pandemic both emphasised and exacerbated these vulnerabilities. Many companies recognised their over-reliance on individual markets, such as China, when supply chains were disrupted during the early stages of the crisis. More recently, imbalances in state responses to COVID-19, and varying capacity to vaccinate populations has created additional risks across different parts of supply chains. Environmental and social considerations also apply, such as issues around shipping distances and risk, which could lead to more near-shoring in some cases.
3 McKinsey, ibid
However, for both practical and ethical reasons, companies are not able or inclined simply to switch or diversify production locations quickly. The garment industry in Bangladesh provides a useful case study. Bangladesh’s garment industry accounts for 80 per cent of the economy4. In the early days of the crisis, when shops were shut, many clothing retailers no longer needed stock that was already on order.
Looking ahead, although some companies will look to diversify production over time, the expertise and depth of supply chains already established in Bangladesh means that it will remain a key manufacturing location. In addition, the ethical implications of switching to other locations are considerable given the high risk of economic collapse, which in turn creates reputational damage for companies. However, FMCG and retail sectors could adapt their supply and production models to manage their risks and costs more effectively, such as increasing production flexibility by sharing or renting factory space.
The reputational risk of poor sustainability scores
Companies are focused not only on managing the resilience and sustainability of their supply chains in business continuity terms, but also from an environmental and social perspective. Many companies start their sustainability strategy with zero or negative carbon emissions. Unilever, for example, has set a zero carbon goal for all products by 20395. Our Carbon dated: The Net Zero Supply Chain Revolution6 study reveals that almost a third of multinational corporations are already taking a zero-tolerance approach to their supply chain, removing suppliers that endanger their transition.
With consumers increasingly including environmental and ethical factors in their buying decisions, there are both commercial and reputational risks if the company and its suppliers have poor environmental, social and governance (ESG) credentials. In particular, today’s consumers are keen to see their providers reduce waste, reduce their carbon footprint, provide sustainable packaging, commit to ethical work practices, and respect human rights7.
7 Deloitte, ibid
Taking a lead in driving sustainable supply chains
Consumer demands for more sustainable and ethical products resonate strongly with FMCG and retailers and as such, these industries are taking a leadership role. Supply chains play a key role in achieving this. For example, P&G’s Ambition 2030 incorporates significant commitments both for its own business and its supply chain, including aiming to advance at least 10 major supply chain partnerships to drive circularity on climate, water and waste8.
Our research reveals that these industries have made significant progress in understanding and monitoring their suppliers’ ESG credentials.
There are areas where progress is still to be made. Our research shows that:
With forty weather disasters in 2019 alone that caused damage of more than USD1 billion each, and the growing frequency, scale and economic cost of weather events9, this will be an important area of focus.
9 McKinsey, ibid
To mitigate these risks, companies are looking for help to finance producers in their efforts to improve resilience and sustainability. This is particularly challenging for grass roots producers such as farmers, who may be unbanked.
Companies are also bringing together financing and technology to drive sustainability innovation across their own supply chains and beyond. For example, as issues such as sustainable packaging and recycling become a greater regulatory and consumer concern, some consumer goods companies are using sustainable finance to invest in research and development directly or using surplus cash to invest in sustainable producers and ancillary industries. Others are working in consortia to invest in new solutions, such as Pulpex, which brings together companies such as Unilever and Diageo to create paper-based packaging for liquid products10. Consortia are also helping to create standards for supplier credentials and connectivity.
Harnessing data and digitisation to deep dive into supply chains
Companies are not only seeking to build resilient and sustainable supply chains by working with their direct suppliers, but also their wider, indirect supply chains, through to grass roots producers. Two-thirds of FMCG and three-quarters of retail companies that participated in our research highlight the importance of measuring and monitoring the environmental and social credentials of their indirect supply chain; however, their priorities differ slightly.
While FMCG and retailers are successfully monitoring, and in some cases, helping to improve, their direct suppliers’ ESG credentials, this becomes more challenging when looking deeper into supply chains. Access to reliable data and analytical capabilities is essential to achieving this; however, maintaining this data for indirect or deep-tier suppliers, and using this data to prove the provenance to consumers, is more challenging.
Digital technologies have a significant role to play in increasing traceability across indirect supply chains.
For example, in some cases, the ambition is to enable consumers to use QR codes to check the provenance of their purchases, but this requires considerable supply chain connectivity and auditability.
By achieving greater visibility through supply chains, companies are better equipped to identify the major risks and vulnerabilities.
FMCG and retail industries have a unique social role as they determine what populations consume, and therefore contribute to citizens’ own health, and environmental and social footprint. As a result, they are increasingly being called on by governments to play a greater role in the health and wellbeing of citizens, as well as being simply producers.
To achieve this innovation and transformation, however, FMCG and retailers need to invest in key supply chain enablers: managing supply chain risks; leveraging data and analytics, and harnessing technologies to improve visibility, connectivity and financing across supply chains. By doing so, they can drive new business models and champion sustainability, adapt to changing consumer and regulatory demands, and succeed in an environment where risks – but also opportunities - have never been greater.
