– FMCGs need to accelerate innovation to keep up with changing consumer preferences for plant-based products and less packaging
– M&A appetite for small, ethical brands has been on the rise, more than quadrupling over the last five years
– Industry faces potential disruption from physical risks caused by climate change, as well as upcoming packaging and labelling regulation
– Some companies stand out in tackling these challenges with Danone and Nestlé leading the Food and Beverage sub-sector and Unilever and L’Oréal leading Household and Personal Care. Laggards include Kraft Heinz and Estée Lauder
The world’s top FMCGs including Nestlé, Coca Cola and P&G are in a race to adapt to rapidly changing consumer trends, including a rise in veganism and increasing activism on plastic packaging. This is revealed in a new report ‘Fast Moving Consumers’ from environmental non-profit and investment research provider CDP today. The report ranks 16 of the largest and publicly listed Food and Beverage and Household and Personal Care companies on business readiness for a low carbon transition.
The life cycle environmental impact of products from the industry is significant and FMCGs have a key role to play in curbing over a third of global greenhouse gas emissions. 90% of the sector’s carbon emissions lie in the value chain, leaving companies exposed to raw material risks and product consumption risks. The proximity of the sector to consumers means companies are exposed to changes in consumer preferences, but also have the opportunity to drive behavior change in order to ensure the longevity of their brands.
Some of the most transformative low carbon innovations delivered by these companies include developing vegan and organic product ranges. Our analysis shows 5 out of the 7 food and drinks companies that originally offered dairy or meat-based products are innovating with new vegan alternatives.
Similarly, Household and Personal Care companies are creating more plant-based, natural options – 6 out of 7 companies including L’Oréal are actively innovating to replace petrochemicals with natural, biodegradable ingredients. Unilever is among the 4 companies to have developed vegan personal care product ranges.
A tide of consumer activism on plastic packaging has resulted in increased scrutiny and changing preferences for circular, zero-waste business models. This is forcing companies to rethink their approach, with around 60% of companies investing to advance biodegradable plastic and recycling infrastructure, and Danone leading the way.
Despite this innovation in the sector, almost 60% of the top 10 revenue generating brands for each company have failed to deliver low carbon innovations in the last 10 years. Given most companies (88%) generate over 50% of their revenues from these key brands, including Nescafé, Budweiser and Dove, they must up their game or risk falling foul of changing consumer demands.
Many FMCGs are responding by acquiring smaller, sustainable brands. 75% of companies have directed M&A efforts towards the acquisition of niche, environmental brands in the last 5 years and this type of activity has more than quadrupled over that time. For Food and Beverage companies, this trend is further driven by the alignment of health and environmental trends, demonstrated by Nestlé’s recent acquisition of Sweet Earth and Pepsico’s purchase of Bare Foods. However, this approach will not be sustainable if their fundamental business models – which are based on driving more consumption – remain unchanged.
Beyond reputational risks, impending regulation is also threatening these companies, as more robust rules on packaging and waste are introduced. The EU 94/62 directive’s 2018 amendment has set measures for reducing packaging waste at source as well as improving recycling and recovery, while product labelling and carbon footprinting is on the horizon.
The sector is also highly exposed to the physical risks associated with climate change. For example, heat stress and water scarcity have the potential to disrupt agricultural supply chains and cause price volatility. This poses a real threat to the sector, especially for diversified food companies like Nestlé and Kraft Heinz that rely on a variety of raw materials. When it comes to physical risks in the consumption phase, personal care and home care companies are most exposed, due to the amount of water it takes to use their products.
Notwithstanding the media scrutiny around palm oil, some companies are being slow to respond. Despite the palm oil exposure faced by all Household and Personal Care companies, less than 45% is supplied from physically certified sources. Of the palm oil users, only Danone and L’Oréal have already achieved a 100% physically certified supply.
Carole Ferguson, Head of Investor Research, CDP commented, “As consumer facing brands, at risk not just from climate change but water scarcity and deforestation too, these companies have a unique role to play in driving forward the sustainable economic transition. Ongoing activism around plastics and packaging is just the tip of the iceberg, and we expect to see more environmental issues come to the fore as consumers start to question what goes into the products they buy, use and dispose of.
Leading companies are taking action across their entire value chain and redefining the role of business in society – by engaging with suppliers, innovating their product lines and even working with consumers to drive behavior change. This level of action is impressive but necessary to address fundamental risks. And these efforts need to be replicated by others in the sector, if they are to justify their role in a society that can no longer be based on fast paced, rising consumption and linear business models.”
Kweichow Moutai, a Food and Beverage company listed on the Shanghai stock exchange, did not respond to CDP’s 2018 climate change questionnaire.