Written by Prabhav Kamojjhala
Sustainability is no longer just a fad. In 2018 Nielsen reported that American consumers had spent about $128.5 billion on sustainable goods. The market is only expected to grow further, with an estimated value of nearly $150.1 billion by 2021 (Pre-COVID projections). To put that in context, the whole US automotive market was worth approximately $108.9 billion in 2018.
There’s been a clear growth in interest in the area – a 2019 article in the Harvard business review reported that over 65% of all consumers said they wanted to buy from purpose driven brands. The results are clearly a perfect case of “shared” value. Sustainable brands like Patagonia and Allbirds are clear examples of how sustainability is now in vogue and the future looks bright for such firms.
The issue is that most of these sustainable brands tend to sit more on the expensive side. While your average sweater costs anywhere between 30-50 dollars, a quick trip to the Patagonia website reveals over wear options that go well into the 100 dollars and above price range. In the same HBR survey on consumer spending, only 26% of consumers surveyed reported purchasing sustainable goods.
The question is – can sustainability scale up to meet the needs of lower income consumers? The implicit assumption here, however, is that sustainable firms want to meet the needs of lower income consumers. To understand this, we need to answer three main questions – Who buys sustainable goods? What do they buy and why do they buy them?
Let’s first answer identify the target market for sustainable goods. The short answer is wealthier consumers. Sustainable products on average cost more than their unsustainable counterparts. This is primarily driven by two main factors – strategy and costs. On the strategy end, firms see sustainability as a source of a pricing “premium” that allows them to boost revenues. The average consumer in the UK for example, paid 44% more for sustainable goods compared to their regular alternatives. Higher costs of production however appear to be a much harder constraint to tackle. A study by McKinsey found that about 2 in 3 firms surveyed expected an additional 1-5% increase in costs due to sustainable sourcing. The issue is that these higher prices implicitly segment the market by income – effectively ruling out the average low to medium income consumer as a target market.
So what products are driving this growth in sustainability? Research by Prof. Whelan – Director of the Center for Sustainable Business – reveals that by and large, sustainable consumer packaged goods have grown 5.6 times faster than conventionally marketed products. Categories such as hygiene products (Diapers, Sanitary Pads) appear to demonstrate the largest difference in growth patterns suggesting that there has been a strong penetration of sustainable goods into the consumer goods market.
Nielsen reports however, that mark-ups tend to play an important role in the growth strategy applied. In the case of eggs and milk for example, consumers are willing to pay 122% and 87% more respectively to buy organic alternatives. The issue however is that these trends indicate a skew towards wealthier consumers. The expenses that such products involve add up over time. For lower income consumers however, the feel-good factor of an organic carton of eggs doesn’t make up for the other carton of egg sacrificed.
The strategy of sustainability by and large skews towards the young and moneyed. Unfortunately, young and moneyed isn’t the best way to describe the average American. The question is thus one of incentives. To understand growth in purchases that we’re currently observing, we need to understand the incentives that are driving the same.
As per Nielsen, it’s not just communication, but action towards sustainability that matters. Paraben (a type of preservative) free makeup for example has made significant inroads in market growth when compared to conventional counterparts. Moreover, more rigorous standards such as a B-Corp status appear to be some of the largest growing sustainability claims in the US. The common thread is that action appears to matter now more than ever for consumers. The issue, however, is that educating oneself on such issues involves time and effort. To the average American, the costs of acquiring this information are notable, and the monetary incentive is limited. To take the analogy of “voting” with dollars, researching the practices of each brand you buy is like researching each issue on a ballot. While the outcomes may be important, the average person is more likely to spend time working and relaxing as opposed to researching the nuances of a firm’s supply chain.
The way out of this problem is arguably to pursue sustainability through cost reduction. At its core, an inefficient use of resources is a cost to both producers and society. The work of Tom Szaky and Terracycle is a perfect example of this argument. Focused on improving the cyclicality of packaging in the market – the firm makes containers for brands like Pantene. Such technologies create value for both the recycler and the purchaser of the packing. To be able to identify and exploit these opportunities for waste reduction and cost reduction in the process of sustainability are thus more likely to impact general industry trends in the long run.