Sustainability is Shifting from Promise to Progress, with Keith Anderson, Founder & Principal Analyst at Decarbonize.co

Transcript

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Peter Crosby (00:00):

Welcome to unpacking the digital shelf where we explore brand manufacturing in the digital age.

(00:16):

Hey everyone. Peter Crosby here from the Digital Shelf Institute. As we shift from stopping climate change to mitigation and adaptation, retailers and brands are increasingly making net zero commitments and digging into the practical ways they can have an impact. And it turns out that those who do are enjoying the side impacts of lower costs and higher search views and conversion, a win-win win. Keith Anderson, founder and principal analyst@decarbonize.co join Lauren Livak Gilbert and me to shine a solar powered light on the ways that brands are organized around turning their commitments into action and positive outcomes for all. Welcome to the podcast, Keith. We are so looking forward to diving into a topic that we haven't covered a lot on the podcast, but it's on the mind of a lot of brands and citizens of planet Earth these days, and that's sustainability. So thank you so much for coming on to speak about it.

Keith Anderson (01:11):

Thanks for having me, Peter. Great to be with you and have been a fan of the show for a long time and excited to join you.

Peter Crosby (01:18):

Oh my gosh, you are the one. Thank you. Just kidding. So specifically we wanted to talk about sustainability and what it means for brands. It has an impact on shipping and packaging strategies as well as new product innovation. It's been bubbling around for a while now, but it does seem like consumers, regulators, and retailers and suppliers are now really bringing it to the forefront. And I wanted to know, is that what you were seeing and sort of what's top of mind for you in the sustainability movement right now?

Keith Anderson (01:54):

Yeah, I've spent my entire career in retail and CPG about two thirds of it in industry analysis and consulting, about a third of it in-house in strategy product and partnership roles at an e-commerce analytics company. And when I exited that company 18 months ago or so, I was sort of plotting my next adventure and went back to my industry analysis roots and was looking at what are some of the forces of change in the industry that are high impact, increasingly high velocity, and of course things like AI and retail media bubbled to the surface. But the one that jumped out at me as having implications really across the business that I didn't see getting the level of focus that I think it's going to merit over the coming three to five years was sustainability broadly and maybe even more narrowly, not that I think you ought to have tunnel vision on this aspect of it, but a lot of companies are setting net zero targets that really are guiding them to make decisions to draw down their emissions over time.

(03:24):

And so what I started to see was number one, there was a sort of exponential trajectory of both retailers and brands making science-based target initiative commitments 20, 30, 20, 40, 20, 50 net zero commitments. And they almost always have interim milestones that are closer in. And of course a commitment doesn't mean you're doing anything differently necessarily, but I can point to companies like Mars whose senior climate manager I recently had on my podcast, they're deploying a billion dollars over the next three years to accelerate their plan. So you are really starting to see Walmart as just another example I think was six years ahead of their target as part of Project Gigaton, which is their initiative to work with suppliers to eliminate a gigaton of emissions from their value chain. So there is some really material change happening in the industry that I hadn't been looking for it and I didn't see it, but when I went looking for it, I started to see it.

Peter Crosby (04:41):

And when you see that happening, I want it to be for the let's save the planet together, but I also know that there must be business drivers behind it. What do you think are the things that are shifting that are causing, because I would also think right now where money's no longer free and people are sort of often drawing back on kind of the experiments. And I'm not saying climate is an experiment, but I think where I'm getting at, what are sort of the top three reasons that brands in this expensive times are still continuing to take the leap towards these kind of commitments?

Keith Anderson (05:27):

Totally. So when you're thinking of climate specifically, there's two vocabulary words that I think everybody is going to internalize over the next few years, one of which is mitigation, and the other is adaptation. Mitigation means things that we do to reduce emissions and make the problem smaller over time. Adaptation means things that we do to adapt to the changing conditions. And I think the first driver candidly is adaptation. When you listen to, for example, Walmart's head of sustainability, she spoke at Goldman Sachs Global Sustainability Conference last fall and talked about the impacts they're already seeing on their supply chain in terms of surety of supply and quality of yield, particularly in food. But with some of the issues at ports, it can impact any category. And so one of the drivers is simply if we want business continuity and predictability over what we're going to be able to produce and supply to retailers and customers, we need better intelligence.

(06:44):

We may need to adapt our production approaches and those kinds of things. I think the second big force that you increasingly hear is the consumer. And I think that's one that's actually evolving at the moment. And it reminds me of the conversation we used to have, I don't know, 15 years ago when e-commerce and online grocery we're in their nascent stage in the industry because we would talk about these millennials who were going to begin forming households and entering their high consumption life stage, and they were digital natives. And so as they rotated into the segment of the population that had a growing concentration of discretionary income, they were going to drive an industry shift to e-commerce and omnichannel as we've seen. And I think you're seeing something similar, as you said upfront for decades there's been a niche of consumers that are sort of conscious and are maybe more willing to pay a premium or might be willing to compromise.

(08:03):

But I think what's happening now is the mainstream is increasingly aware of some of the issues, whether it's ingredients, whether it's emissions, you name it, plastic waste, but they're not necessarily willing to compromise. And so I do think there's a interest among mainstream consumers, but I think what you're seeing increasingly from the brands is a focus on product superiority and to your point, economic viability. So we're not necessarily presenting products to the consumer that are at a premium or I spoke to somebody yesterday whose product upfront is actually priced at a premium versus some of its alternatives. It's an electric toothbrush, but the lifetime cost of using it is actually lower because it's repairable and the replacement heads are lower cost than some of the alternatives. So I do think the value proposition to the consumer is evolving in some important ways. And you're seeing some of the brands that have historically centered their climate or sustainability initiatives in the branding are not necessarily backpedaling on the decisions they're making when it comes to the categories they play in their product formulation and design, packaging, logistics, you name it, those are continuing to evolve, but they're deemphasizing it in the positioning because the consumer ultimately is still making decisions based on factors like effectiveness and value and so on.

(10:00):

The last two things that I'll highlight would be there are significant cost savings in some of these areas. I think the conventional wisdom often leads us to assume the more sustainable choice is going to be more expensive or is going to require some compromise. But I think increasingly in areas like packaging and logistics in particular, there's a pretty high correlation between things that eliminate waste or emissions and things that lower costs. So if you can remove excess packaging material, if you can reduce the distance that a product has to move from a distribution or fulfillment center to somebody's doorstep, ultimately you are reducing emissions and you're probably going to pay less in shipping, handling fulfillment and break costs.

Lauren Livak Gilbert (11:00):

I mean, if you can add increased profitability and reduced costs to that, that's important to brands and to retailers, right? Because that's ultimately to Peter's point with money is no longer free and there's a focus on profitability, that's where both sides of the fence are focused. So from the retailer side, I know you mentioned Walmart was a really great example, they have a chief sustainability officer. What are some of other examples on the retailer side where they're committing to sustainability and some of the programs that they're focused on?

Keith Anderson (11:30):

Sure. I think it's hard to find a major retailer in mass or grocery that isn't doing something. I think some of the standouts that I would point people to and listen, none of these retailers are perfect and all of I think would acknowledge that and are continuing to evolve their thinking. But Amazon, Walmart, ahold, target, even in categories that are maybe a little adjacent to where you and I usually focus, Ikea is doing an immense amount. And just to hone in on a few of those, somebody like Amazon has fairly broad reaching climate initiatives. They've got a climate pledge fund that invests in both technologies that have the potential to reduce emissions for not just them but for industry broadly as well as consumer brands. But they've also introduced programs like Compact by Design, which is oriented to brand manufacturers as an incentive and a guide to help them reduce product and packaging weight and volume, which to the point we made a minute ago, reduces cost and increases efficiency, but also gets them closer to their emissions goal.

(13:13):

Similarly, the climate pledge friendly credential gives products that are eligible badge not unlike the Amazon's choice or bestseller badges that is displayed contextually on search result pages, detailed pages, it's displayed a little differently on desktop and mobile and it's evolving, but Amazon has shared that in 2023 on average products that became eligible for that badge saw a 10% increase in product page traffic. They also said more than 60 million shoppers have switched from a product that didn't have the badge to one that did. And then just over the last week or two, momentum Commerce published their analysis, independent analysis, that products that received that badge saw on average in 8.4% sales lift. So I had been saying until I saw that we don't know exactly what the impact is, but we at least now have a more quantitative way to consider the potential upside. And I think anything that helps a product stand out on a search result page to attract glance views and helps at least those motivated shoppers C essentially at a glance, this is a better choice.

(14:44):

I think that goes a long way. And so you are seeing more retailers introducing these way finding and seal programs to help shoppers find and consider and buy products that meet some of the conditions that both the retailer is driving towards, but more frequently that the shopper is looking for. Sephora is another one that we're recording this on April 3rd. Just a few days ago, Sephora introduced two new global sustainability seals that they're rolling out regionally first, but their ambition is to have some consistency across the markets they play in so that they can use their leverage as retailers to guide the brand and help their shoppers find the products that they're telling them they're looking for.

Peter Crosby (15:42):

And isn't part of that in order to pull all this off, there's a huge amount of data that must have to exist behind the scenes. When you think of the supply chain that goes into creating these products now and the variety of places that it all comes together and everything, and I know that part of the emission scope, for example, there's three levels of scope if I understand it correctly, in that scope three is where it's really what are your suppliers giving you or what are they creating? And then if you're a supplier, where are you getting your ingredients? And so there's a complex, which I guess is part of why you've set up decarbonized, that there's a lot that needs to be done to be able to attach these seals with credibility in a way that a regulator or anyone else taking a deep look at it would accept. Right,

Keith Anderson (16:37):

Absolutely. And there's a couple important ideas in there. One, and I dunno that we're all going to have to memorize all these new vocabulary words, but I do think one of the things that is really important about what's different about sustainability and specifically climate now versus maybe five years ago is to your point, there are these three scopes of emissions and scope one is basically what comes out of your own smokestack. It's the stuff that your own facilities produce. Scope two is what you source indirectly energy, for example. But scope three is really your value chain emissions both upstream from your suppliers and downstream from your customers or consumers. And for both retailers and brands, 85 or 90% of their emissions are represented by those value chain emissions. And so that's why Walmart with Project Gigaton is so focused on engaging suppliers. And when you look across the industry, both the brands and the retailers, they're increasingly directing their effort upstream to their suppliers.

(17:58):

And so retailers are supplied by the big brands. And that's why I think increasingly this is a topic that when I thought about it, and I think when many of us thought about it five or 10 years ago, it was sort of backstage, I was aware that the retailers are making shifts in how they're sourcing their energy or maybe they're changing the technology they use to heat or keep things cool in the cold chain. But that was all stuff that happened behind the scenes in a distribution center in the back room. It wasn't anything that impacted assortment decisions, that impacted merchandising, marketing, things that show up at the digital shelf. What is happening increasingly is as the industry acknowledges, the majority of the emissions actually come from the value chain. There's a growing level of coordination, growing level of desire for standard standardization so that we can get to the desired outcome in a way that we can agree on, and that's faster.

(19:14):

You highlighted data and it's an immense challenge. Candidly, it's a little bit of the wild west in some ways. We haven't talked about regulation yet, and I'm not going to dwell on it, but there's just an immense amount of regulatory activity happening in Europe in particular, but there's some domestically too. And a lot of it relates directly to what companies are going to be obligated to report, particularly publicly listed companies. And when you get into the scope three discussion, you start to shift from a corporate emissions number down to a product level. And so as I've been approaching this industry shift as an analyst, one of the things that led me to start decarbonized.co was I looked at where the venture capital in our industry was flowing the same way I did way back when, and I saw more than 20 billion of capital invested over the last five years into technology and solution providers oriented to retailers and CPGs whose value proposition includes isn't necessarily focused on, but includes some way to help them get closer to their net zero target compatible with their business.

(20:48):

And the data part of that equation is a huge one. And I think I've identified maybe 10 companies that are oriented to CPGs and retailers. Some are even more narrowly focused purely on food to help them calculate in a really efficient way at that product level. Here's this product's emissions through what's called a lifecycle analysis. And I mean it's fascinating. I hope this is fascinating to the audience as it is to me that almost 15 years ago, Tesco made this big announcement they were going to introduce carbon labels for almost all of their assortment. And ultimately it didn't happen because at that time, the cost in terms of both time and money, they got the cost down to something like 3000 pounds per item, but it was still a six month really labor intensive endeavor to get there. Now with technology and software, you can calculate with reasonable accuracy your entire portfolio or your entire assortment in a matter of weeks if not days, so that you can then make all kinds of decisions about maybe next year's new product development or if you're a retailer assortment and selection decisions.

(22:28):

And again, part of the reason that this is such a fascinating topic to me is the brands are increasingly talking about how this is a factor, not the deciding factor, but it's a factor in their m and a decisions. So if you're starting a new CPG brand in 2024 and your exit strategy isn't an IPO, you want to sell out to one of the multinational majors, one of the things your investors are telling you is you want to get them closer to their target, not further from it. So you have to be making decisions today that prevent unnecessary emissions. And if you have necessary emissions, you got to get on a pathway to pha 'em out on a timeline that's compatible with your exit strategy. So the data to your point, is a prerequisite for enabling these kind of decisions. And part of the reason that I think people like me who I'm not a sustainability practitioner, I spent my whole career as a generalist, but part of the reason that I'm focusing here is as the focus in the industry shifts from scope one and scope two, where do we source our power and how do we move our goods to much more customer facing decisions?

(23:57):

The implications are really starting to get more significant for cross-functional teams, consumer and marketplace insights, product design and innovation, packaging, logistics, supply chain procurement, marketing, merchandising. It's getting harder and harder to find a part of the organization that isn't going to have to upskill in some way a baseline understanding of some of what is happening and on the horizon.

Peter Crosby (24:34):

So I think you were asking earlier, and I hope this is interesting too, us as it is to you, and I think the thing certainly for me and the people I know in my life, the shift in vocabulary from sort of prevention to mitigation and adaptation kind of tells us where we are in this battle. I think that there's some stuff that's already happened that there'll be no walking back from. We're going to have to adapt our societies and cultures and the way in which we get products and how we thrive and grow food. I mean, all of it's going to have to adapt or and then do what we can to mitigate. And with that change in reality, I think it becomes a lot more interesting both as consumers, but I would hope increasingly for companies to figure out what that is for them. And so with that sort of call to action that you just gave us, there's stuff you can do now to be ready and to maybe even be ahead of your competitors in this to take advantage of the plus side that it looks like might be coming with it. So if you had to lay out two or three things that brand leaders can be thinking about now in sort of the near to midterm to make an impact, what are some things that you talk about to your clients?

Keith Anderson (25:59):

I'll focus my suggestions for what I think of as focusing commercial roles. You're leading, leading sales or marketing because depending on the size and maturity of the company, you probably have sustainability teams and entire teams of specialists that are focusing on different aspects of what we've been talking about. But I think if you're in a commercial capacity, one of the things that is really worth doing is take your top two or three accounts or follow the 80 20 rule, whatever the accounts are that represent 80% of your total volume, just go understand in a deeper way what their initiatives along these lines are. Particularly those that affect suppliers, that is things that either have implications for assortment and selection decisions, merchandising. That is where are we going to locate you in the building or on the shelf physical or digital? How are we going to credential you or present you to the shopper?

(27:14):

Because those kinds of programs are proliferating and they're not all worth participating in, but it's increasingly part of the engagement model of working with these big retailers at a minimum to be aware of what they're trying to achieve. And you do have to understand that a few of these big retailers, I would say Amazon, Walmart, and Target, I can point to examples at all three, are using their own labels to accelerate their progress where they're not seeing the pace from their large national suppliers that they're hoping for. So it's just becoming part of the engagement model, I would say. Secondly, when I think back to the early days of doing business with Amazon as a CPG company, we looked at the unity economics of selling an item that was going to be shipped directly to somebody's doorstep and all of the complexity of different minimum order quantities.

(28:26):

And it was a fascinating time, but where it led us was to think about different price pack architecture and pack configurations. And that led us to think about pack size and product form and packaging decisions. And I would say we're at another inflection point, really driven both by the growth of e-commerce as a distribution channel and the growing focus on eliminating waste in an economically viable way. And so focusing on product form decisions and packaging decisions to right size and lightweight is where the industry is absolutely headed. And you look at categories like laundry, where Armand Hammer, when they were presenting at the Cagney conference six weeks ago, was talking about their new power sheets first mainstream brand to launch laundry detergent sheets. And they were highlighting that they're the number two detergent sheet on Amazon, and Amazon is a great launchpad for that kind of innovation, but they're going to launch it nationally this year. Tide, just since we last spoke ahead of this conversation, launched their EVO fiber based product form. Both of these are concentrated dilu bowls that reduce the weight and the volume per unit that is per serving or unit, and that reduces all kinds of cost, helps you fill a truck with much more product, reduce the weight, which reduces the fuel cost, all kinds of things.

Peter Crosby (30:25):

I got to tell you, we use detergent sheets in our house and it delights me every time that I'm not dealing anymore with the huge plastic containers that you just go through and throw away. That kind of way is sort of all over the place that still is out there. And to see something as meaningful as this category take that on in a really innovative way, it really does feel like a meaningful shift.

Keith Anderson (30:59):

And when I speak to brands, I think in some cases the technology, whether it's the product formulation or something in the value chain has caught up to the intent or the ambition to eliminate waste. In many cases, the waste truly is waste, it's just excessive and we don't need it. And so if there's not already an exercise that's embedded in your new product development or your annual line review process, just to revisit waste, I think this actually dovetails with the first point because the retailers are increasingly asking for this, and they're rewarding the brands that are able to demonstrate progress in a meaningful way. And in some cases it's things that are even more system change level changes like refillable packaging that today is a very small single digit percentage of the packaging landscape. But in some categories, especially cleaning and personal care and others, it's building momentum. And so exploring whether it makes sense and whether there's a partnership play with retailers may be worth considering also.

Lauren Livak Gilbert (32:29):

And now, Keith, when you're working with brands, who are you working with that are trying to create these new innovative products or focus on sustainability? What function do they usually sit in or is it just kind of different in every organization?

Keith Anderson (32:45):

Well, most companies on both the retailer and brand side, at least in the top tier of the industry at this point have sustainability teams. And those teams are increasingly specialized in many ways. They'll focus on individual topics like climate or nature or biodiversity. But as you might imagine, none of those topics carry much meaning or weight to all of the conventional functions that we've been talking about. Product development, packaging, marketing, merchandising, supply, you name it. And so what really brought me back again to those early innings of e-commerce is it went from being a fraction of somebody's job that had many other responsibilities to a specialized team to actually a way of working across the organization. And that's what I see happening more and more today at some of the larger companies that is, it's championed by the sustainability head of the sustainability team, and you see more and more brands elevating it to one of their strategic pillars.

(34:09):

We had Francesca Han of Mondelez on our podcast a few months ago, and Mondelez is one of the brands that recently introduced sustainability as its fourth strategic pillar as she was describing. What that is doing in a practical way across the organization is making it part of the definition of success. And with that, it's becoming a KPI that cascades down across functions, across levels, into much more tangible things that are achievable. Mars, I think talks about it as progress over promise, and that is the ambition and the long-term commitments are a useful thought exercise, but the real definition of success is about showing material improvement in a way that's economically sustainable faster and faster. And so that means embedding it deeper and deeper into the organization and making it part of everybody's job. And so I'm starting to see it become a conversation in a lot of these commercial functions, people that lead an Amazon team saying, okay, I have seen those climate pledge friendly badges.

(35:43):

I was skeptical, but I'm seeing enough signals that I want to learn more and I want to go become eligible. Somebody in a chief customer officer role who's trying to develop a coherent playbook that they can bring to each of their customer teams to not say yes to everything every retailer is asking for, but to get credit for all the good work that they're already doing independently as a brand manufacturer and to connect that work to the retailers, various initiatives and programs that might yield commercial benefit. So I think just like e-commerce and omnichannel, it's becoming, it is a discipline unto itself and it's becoming part of the way we work across functions. I

Lauren Livak Gilbert (36:33):

Think this is an interesting call to action to brands. When you think about how it's starting to come up, there are targets in different countries around sustainability. There's some things you can do now that are going to impact sustainability and drive profit. If you think about how e-commerce evolved where it was one single team and then they broke out and then they became a COE, and now they went back into the org, let's use that as an example to say, wow, sustainability is following the same pattern as maybe e-commerce has in the past. So how can a brand get ahead of it and start working through these initiatives, understanding who in the organization can tackle it so that they're ahead of the game and they're not kind of playing catch up as a lot we're doing with e-commerce. I just think it's an interesting pattern to look at and a great call to action for brands altogether.

Keith Anderson (37:21):

I think it's a great point, and on an even more micro level, I think it's a great opportunity for individuals who are developing their careers is I saw the evolution of digital and e-commerce from an ancillary sort of afterthought. That was not where the high-performing brand managers wanted to spend their time on their ascent to the c-suite to, as we now see, most executives getting promoted over the last five years have considerable experience in omni or digital commerce, if not started there. And I think Mars, it was just a brief mention in their net zero roadmap, but they mentioned generally speaking, on average and your mileage may vary. There's all kinds of variables, but digital commerce on average is lower emission than conventional brick and mortar commerce. And understanding why that is and how I think there's a really interesting career opportunity at the intersection of these two industry shifts. And when you look at some of the emerging brands, particularly the ones that are soaking up capital in an environment where the capital's not free, many of them, it's not the only aspect of their value proposition, but it is a key part of it the same way that we saw brands starting with a digital first distribution strategy and marketing strategy 10 years ago. Yeah,

Peter Crosby (39:13):

Keith, it's a fascinating topic. It's great to see as you passed along, the phrase that you've been hearing sort of from promise to progress I think is, it'll probably make it into my title to be honest with you, because that to me is kind of the moment where you lean in and particularly the impact that it can have not only on people's careers, which is awesome, but also on the lives of the children that we all love in a world where it really matters is I think just exciting. And so thank you. As you've dug into this and really begun to build practices around it, it's exciting to hear it communicated in such a cogent and clear way that's connected to the business. So thank you so much for joining us and bringing that to the podcast.

Keith Anderson (40:05):

Thanks so much for having me. The more folks that I've spoken to that are really doing the work in this space, I think they are increasingly pragmatic and understand that for this to happen at the scale and speed that I think is necessary, it really is going to require different approaches that are going to have implications for most parts of our industry. And so it's going to present opportunity and it's going to present challenges, and I think anybody would benefit from understanding it and applying it sooner than later where they can. So I appreciate the opportunity.

Peter Crosby (40:50):

I know your business is moving fast with potentially upcoming events, and I know you guys have a great newsletter, so I would advise anyone out there to go to decarbonize.co and sign up and make sure that you're keeping on top of this. It's fascinating and obviously important, and thanks again for being here.

Keith Anderson (41:10):

Thanks again for having me, Peter and Lauren,

Peter Crosby (41:13):

Thanks again to Keith for sharing new sustainability wisdom with us. To keep up with all things digital shelf swing on over to digitalshelfinstitute.org and become a member. Thanks for being part of our community.