Retailers need to address inflation woes amidst sustainability push

There is pressure from investors, regulators, and consumers that compels companies to pursue sustainability.

Pressure from consumers who are now more informed about environmental concerns is driving retailers to deliver sustainable products and services. With inflation dampening consumers’ purchasing power, there is now a need for them to balance this factor with the prices of their offerings.

Nobuko Kobayashi, EY Asia-Pacific Strategy Execution Leader, said 42% of CEOs in the Asia Pacific expressed that building sustainability as a core aspect of their products and service is the most important strategic priority over the next six months, higher than the 35% in the Americas and 39% in Europe, citing data from EY’s CEO Survey in October.

There are three factors that push companies to address climate change, one of the risks identified that will affect business growth, and address sustainability which are pressures from investors, regulators and consumers. Customers are the main driver for retailers, Kobayashi said.

Around 43% of global consumers want to purchase more from organisations that benefit society even if their offerings cost more, whilst 64% are prepared to behave differently if it will contribute to society, citing EY’s Future Consumer Index. However, 67% of the consumers noted that the high price deters them from buying sustainable products.

“The balance between serving affordability for lower-income households that are particularly hit by the recession, and inflation, versus addressing sustainability is very important,” she told Retail Asia.

Kobayashi said she recently spoke with a CEO of an Asian retail company that was struggling to transition from selling caged eggs to non-caged, free eggs which keep hens that produce eggs in a more humane environment. 

The trade-off, however, was that caged eggs are cheaper, and consumers who are mostly from low-income households are finding it difficult to adopt the more environmental option.

“When the recession hits, even though he's still walking in the same direction, he may have to adopt a longer-term horizon for this transition. The shift of such speed of transition depends on your target consumer segments because not all consumers are equal, some are less or more hit by the recession, which affects their appetite for buying sustainable products,” she said.

Sustainability path

Compared to other regions, Kobayashi said the environment, society, and government (ESG)- related transactions and investments by financial investors in APAC are “relatively nascent” but the market is “rapidly evolving.”

“Investors are increasingly seeking companies with long-term business resilience and companies are increasingly aware that an ESG business model could yield higher returns,” she said.

“From the financial investors’ point of view, I think there is a stronger focus on ESG acquisition strategy or investment strategy,” Kobayashi added.

The implementation of major APAC economies of a carbon net-zero pathway such as Japan, China, Singapore and India are also driving companies to adopt sustainability practices, she said.

Only around 13% of the CEOs in the region identify ESG as a primary driver for their merger and acquisition activity, according to the October survey, which shows that companies will be relying on their in-house teams to build and reinforce their ESG efforts.

According to the report, APAC companies can boost their ESG progress by acquiring skillsets to fill the gaps in their current capabilities, and consider acquisitions that will contribute to achieving more green capabilities in manufacturing to cut their carbon footprint. In this way, they earn carbon credits instead of having to buy carbon offsets.

For retailers, Kobayashi there is more than one way to frame ESG strategies as they have to think about who they are targeting which may be an environment or employee-related goals, or more about serving lower-income families.

Pursuing sustainability in their operations will capture the growing number of consumers, such as the Gen Zs and the Millennials, that prefer products or brands with clear sustainability goals. Kobayashi also said that having the financial metrics which are considered a license to operate and ESG commitments or the purpose to operate are more likely to attract investor support for long-term investments.

“Having strong ESG propositions helps you to stand out amongst competitors and achieve faster top-line growth over the long run,” she said.

Pressure is also coming in from APAC regulators, Kobayashi said, noting that ESG policies in the region have doubled in the last five years, including the requirement for ESG disclosures.  She cited Singapore which required all listed firms to provide climate reporting and India which mandated its top 1,000 listed firms to do the same starting in 2023. 

Failing to address the push for ESG strategies from investors, regulators, and consumers will be crucial for retailers and other companies.

The most immediate consequences will be coming from the regulators’ side as failing to meet requirements will result in financial penalties and reputational damage, whilst for the inverter side, the effects may be slightly longer-term as investors that prioritise sustainability may not invest in them, which could have a negative impact on their stock price 

Consumers that are concerned about the environment may also turn their back on them, especially as it is highlighted in the generational shift in favour of sustainability.

“Therefore, it could also mean that you're stuck with the ageing consumers and not capturing enough share of the younger consumers, which threatens your financial sustainability,” Kobayashi said.

The perfect storm

Kobayashi said that compared to the optimistic mood in the February CEO survey as they see the potential to reach the end of the pandemic, there are new worries CEOs are trying to address.

Aside from this and the climate crisis, the pandemic and the increasing geopolitical tensions remain a concern for the business environment.

“We find ourselves this time in a perfect storm,” she said.

Around 68% of APAC CEOs recognise that inflation will negatively impact their performance and growth. About 95% said that they have changed their strategic investment plans in response to geopolitical challenges, up from 69% at the beginning of the year.

Despite this, 66% are intending to ramp up their capital investment, compared to 13% of those who plan to reduce investment. Around half of the APAC CEOs are also planning to pursue acquisitions next year, slightly down from 54% in the February survey.