Consumer Market Bites

Transcript

Anthony Goldsworthy:

Hi, I’m Anthony Goldsworthy a partner in our Assurance practice and your host of PwC’s Consumer Market Bites series. Welcome to our fourth episode. Consumer Market Bites was created to share bite-sized content on the latest insights from PwC and also hear from some of our clients across the consumer markets industry. I’d encourage you to interact via the comments section or links below where you can watch all our episodes on demand. If you have feedback or ideas on future topics, we’d also love to hear from you. 

In this episode, we’ll be diving into a topic which has been increasing in focus for consumer markets executives for a number of years now, sustainability. We’ll be hearing from Caroline Cosgrove, a partner in our ESG Assurance team, who will provide an overview of the ESG reporting landscape as well as provide industry insights from our Building Public Trust report. Next, Stuart Holywell and Patrick Reiss from our Digital Innovations team will then share an overview of sustainable innovation principles they are adopting with their clients at the moment. Over to you, Carolyn.

Caroline Cosgrove:

The ESG reporting landscape is fast evolving. Companies have been using a number of voluntary frameworks to help structure how they describe their environmental, social and governance performance to broader stakeholder groups. With increased market demand from investors but also from other stakeholders, the volume and breadth of reporting has continued to increase year on year. At COP 26, we saw the formation of the International Sustainability Standards Board under the IFRS Foundation, which was the amalgamation of a number of previous frameworks, standards and organisations. And the goal of the ISSB is to provide consistent and comparable information for primarily investors to assess the potential impact to enterprise value of the environmental, social, risks and opportunities that a business will face. 

When we look at the current ESG reporting across the consumer market in Australia, we see some really strong points, as well as some areas for improvement. 

The consumer market, as well as more broadly, has really started to understand their environmental footprint with a lot more disclosure of carbon emissions, specifically on Scope 1 and Scope 2, as well as a good understanding of the impacts of up and down the value chain of the products they produce and sell. A number of the consumer product companies have gone a long way in understanding the climate-related risks and opportunities that face their business, and included in their disclosure, how they’ve integrated the risk management of these into their existing risk management framework. 

We’ve also seen a number of companies look at scenario analysis and assess what the future may look like for their business under various climate scenarios. One area that we understand consumer markets are still working through is the measurement and disclosure of Scope 3 emissions. That is, the creation of emissions up and down the value chain to get a product all the way to market and then all the way through its end of life when the consumer uses it. And this is a consistent theme across a number of industries. Scope 3 is hard, and there is in some instances, a lack of available information.

Stuart Holywell:

When we think about product innovation and sustainability in consumer markets or any industry for that matter, the key is to understand the implication and the impact on your business model, but it’s important to have a clear and consistent framing to identify where the disruption and unique opportunities exist for you. When we think about the business model, there are three main dimensions and we view those dimensions with two lenses. The first lens is what’s the story or the narrative and the second lens is how does that flow through or impact your financial statements, or more specifically your intrinsic valuation. This includes understanding the impact to your free cash flow to the firm and any potential impact on your cost of capital. The dimensions that we think about for your business model, are:

1. Customer model: What is the interface and social contract with your customer?

2. Operating model: How do you organise to deliver on your customer model?

3. Durability model: How can you protect the other two dimensions, taking into account global and local market dynamics and regulation?

Let’s jump into the customer model. We typically define your customer model on the following characteristics: your segmentation, your channel mix, your products and services and your revenue model, which includes optimising products and services through the bundling or even unbundling. 

For example, many of our clients have got a shift in mindset with regards to their bricks and mortar channel if this is part of your channel mix. Previously, a multi-channel approach was prevalent where there are many different channels available to your customers. However, they’re often separate and disjointed. We now see a strong mindset shift towards an omnichannel experience where your bricks and mortar footprint is strongly connected to your digital and your service-oriented channels, and generally aligns to your customer browsing, purchasing and experience expectations. 

We also see a shift in the role of sustainability in your customer model. The operating model is generally well understood. However, we need to think broader than just people, systems and processes, but also understand aspects such as asset ownership and thinking about supply chains, value chains, but also knowledge chains as we drive a coherent and connected ecosystem. 

Ultimately, not losing focus that your operating model exists purely to deliver your customer model. This may sound obvious, but we see that customer models and operating models coexist as opposed to co-evolve together. Customer expectations today are, for most companies that we work with, the highest that they have ever been. However, customer expectations are also the lowest that they will ever be again. This manifests itself through the products and services that your organisations offer. However, also the speed in terms of listening to your customers and feedback and adjusting or releasing new products and services and propositions. As a result, many of our clients are investing in operating models that deliver streamlined and agile change and bringing a mindset that originally spawned in technology more broadly across the enterprise. Furthermore, the speed of technology innovation changes driving customer expectations. Whilst the metaverse may not be here yet, there’s still an opportunity to leverage augmented reality and virtual reality, both in terms of customer value propositions and for your employee experience. Although this is still for early adopters. 

We do also see that analytics-driven use cases are growing. For example, the capability for almost real-time optimisation of your store layout and leveraging the fire hose of data from IoT, or Internet of Things, to better understand the health, location and the movement of your inventory. We are also seeing use cases where data, IoT, blockchain and AI are all coming together, for example, to automate trust, which we’ll deep dive on next. 

Finally, the durability model is looking at the external factors to your organisation, including macroeconomic trends, your market dynamics, barriers to entry, your brand risk, regulation. We cover this separately too. So now have a framing for understanding the impact and opportunities of innovation and sustainability trends on your business model. The question is: how do you respond?

Patrick Reiss:

When it comes to sustainable innovation these are the design principles to highlight.

Focus on diversity and inclusion. It’s about incorporating diverse viewpoints into innovations. It’s about going beyond simply gathering data from diverse population. 

Build for circularity. Transition to circular business models to reduce waste and enable reuse, repurpose or recycle. 

COVID-19 further highlighted and accelerated the need for transparent integrated data-driven knowledge chains. A client came to us with the need to facilitate open conversations with consumers on sustainable products and consumptions. The question asked was how might we unlock new opportunities, drive growth and minimise risk by improving transparency through technology. Our answer was an open, secure and trusted data sharing platform with end-to-end visibility and transparency. It’s about trustworthy information that’s made accessible about product origin, journey, and impact. We want to enable provenance and drive insights through dynamic products. These are the three key steps that got us there:

First of all, we identified real problems. From product counterfeit to creating smart packaging by including emerging technology like QR and NFC. We wanted to collate and connect the data and incentivise data sharing through trusted permissioned access. 

Last but not least, we wanted to surface the relevant data by giving value-added information to participants to create an enhanced user experience. These are the learnings that we got from that engagement. Focus on circular products and packaging, attract growing customer base and reduce environmental impact. It’s about maintaining a trustworthy brand for integrated and dynamic products that support provenance. Last but not least, it’s about improving the transparency. It’s about going deep when it comes to visibility and go broad when it comes to relevance to maximise the knowledge chain. 

Anthony Goldsworthy: 

I hope you found those insights valuable and thank you to our guests. I regularly hear ESG reporting and sustainability-related topics being close to the top of the priority and risk list for our clients in the industry. While businesses across consumer markets have long focused on sustainability, they’re not as forthright in reporting the good things they’re doing as some other industries. I think the industry needs to be ready to adapt to changes in consumer preferences for more sustainable products, something that I believe will accelerate in the year ahead given the adoption of change across other markets such as the UK and Europe. 

Consumer Market Bites was created to help share digestible content on the topics that matter to you and your business. To learn more about this series, please follow the links below. And if you’d like to chat further about anything you’ve heard in this episode or previous episodes, please get in touch with the PwC team. I look forward to seeing you again for our next episode.