Going full circle: A guide to the circular economy in retail

As consumers look increasingly to brands with innovative sustainability
models and initiatives, circular commerce is a strategy that addresses many of the challenges at play for retail marketers.

Amanda Groth, 

24 October 2022

Despite the weight of the current challenges resting on the retail industry’s shoulders, sustainability remains high on the agenda. Retailers were already feeling the pressure to act on sustainability and the surge in news of forest fires, record-temperatures and flooding has made climate change impossible to ignore. With 45 percent of global emissions generated by consumer products alone, it’s not a surprise that nearly 6 in 10 consumers are willing to change their consumption habits in order to reduce their environmental impact. Retailers must break out of their sustainability rhetoric and take meaningful action to drive sustainable business growth.

As consumers look increasingly to brands with innovative sustainability models and initiatives, circular commerce is a strategy that addresses many of the challenges at play. In the last week alone, fashion heavy-hitters ZARA and SHEIN announced new circularity initiatives (the latter receiving some mixed reviews, to say the least).

What is circularity and how can it benefit retailers?

Put simply, the circular economy is a model that moves away from the traditional linear approach, which starts by exploiting finite resources and ends with a pile of waste buried or burnt. In a circular model, products are created to be reused, repaired, and recycled to go back into the supply chain and, yes, go full circle.

Second-hand is becoming mainstream

Not that long ago, very few brands such as Patagonia openly lead with their sustainability agenda. In between many initiatives, they started facilitating the return and resell of “pre-loved” clothing items. It was innovative, but also remained very exclusive from a price-point perspective. Yet, Patagonia proved that such model was viable and profitable. More mainstream brands such as Asos have had a place in the circular market for a while now, and they’ve been joined by brands such as The North Face, H&M and Levi’s just to name a few.

Aside from the retailers themselves, platforms such as Vestiaire Collective have been leading the way in upmarket second-hand fashion for many years, and recently, Vinted and Depop have managed to acquire an audience of nearly 100 million users. The second-hand fashion market is becoming mainstream and growing 11 times faster than traditional retail – that’s an opportunity retailers don’t want to miss out on. Yet another example of circular success is Back Market, which was recently valued at $5.7B after their latest round of funding to support them in reselling used electronics. If retailers do not seize the opportunity, others will.

Some have already committed to ambitious environmental promises. Global giant IKEA is aiming to be fully circular by 2030 in every aspect of the business. It’s already launched Circular Hub, allowing customers to resell and buy second-hand furniture.

Decathlon, the sports apparel retailer, recently trialled a subscription model where customer could borrow and exchange any item in the catalogue up to a specific amount. Their initial target was families as they realised the ever-changing need they faced between kids growing, trialling new sports, needing more performant gear as they improve, and participating in seasonal activities such as skiing. For Decathlon, it is an amazing way to ensure a client won’t buy anywhere else, but the returns also provide extremely valuable information into product quality (wear and tear), and potential for improvement. This could be as disruptive as Netflix was to Blockbuster.

Companies who reinvent themselves by creating innovative business models will be those that make their mark without leaving a footprint.

Rewiring the existing model

The issue with a circular economy is that it is a drastic departure from the traditional and linear business model. The circular model is designed to deliver continuous value instead of just optimising sales of products built as cheaply as possible. When a brand knows it might be reselling an item several times, the initial production cost is now only one part of the equation. But, on the other side of that coin, the product quality and repairability can multiply its potential revenue. Financially speaking, the initial margin now has a potential multiplier linked to how many times the product comes back to be resold, and how much value remains as it comes back to be recycled as raw materials for new items.

Ultimately, building a circular future requires a reconsideration of the overall business from design and supply chains to returns. Despite recognising their importance, the cost of circular initiatives can seem difficult for retailers to justify, especially under the pressures of today’s uncertain market. The approach suffers from a misperception that such an investment would drive little growth in return. In a recent survey by Deloitte, only 4% of respondents strongly agree that they expect to a see a financial return on their investments in sustainability initiatives, in stark contrast with those actually doing it right now.

All this can be tied back to something everyone agrees on, customer-centricity. Customer attitudes towards climate change are shifting, and buying behaviours are following the trend, which has a direct and growing impact on retailers’ revenue and growth.

Yes, the shift to a circular economy is bringing major challenges for retailers, but also a massive opportunity for those who can seize it. This transition, difficult though it may seem, can be made easier when supported by the right technology.

First-party data in a circular economy

First-party data was already becoming increasingly valuable thanks to the recent and numerous changes in privacy regulation. The circular economy is about to bring it to yet another level. Virtually every step of this virtuous circle needs to be data-driven to be effective, and as the consumer is at the centre of it, the circular economy is inherently first-party data-driven.

Access to up-to-date and unified data equips retailers with the tools to adapt to changing customer behaviour – and nothing is going to change consumer behaviour like climate-change and sustainability have started to. Consumers are looking closely at what products they are buying as well as who they are purchasing from, and they are ready to shop elsewhere if they don’t like what they find. Retailers need to understand their consumers’ concerns and priorities, and adapt their offering and their communications accordingly. Not being able to do so puts them at risk of always being several steps behind, missing out on the long-term gains.

Retailers should no longer be seeking opportunities to just sell more, not only because there is not planet B (even if Elon Musk and his billionaire friends make it to Mars), but also because there is a bigger untapped opportunity. Retailers can thrive by providing customers exactly what they need, when and how they need it, without added damage to the environment. These shifts are opportunities to provide a service that can generate untapped margin and strengthen the customer relationship. Even the final recycling step is an opportunity to interact with the customer (and another opportunity for sales). This move away from a simply transactional relationship is a fantastic loyalty opportunity. But, without access to readily available data enabled by the right tools, brands will struggle to keep up during this transition. Using predictive modelling and leveraging the insight from a unified, Single Customer View, brands can start predicting how each consumer’s attitudes and behaviours are changing towards sustainability. In a circular model, a satisfied customer is always circling back and can literally become a customer for life. Retention was important, but it is now becoming crucial.

Climate change is no longer tomorrow’s problem

Today’s volatile market has left many retailers’ well-laid plans and processes in disarray. Those who take this as an opportunity to align new growth strategies with climate action are better placed to achieve their long-term goals, whilst giving themselves a head-start against their competitors. No one can predict exactly how our climate-affected future will pan out, but if we know anything, we know the challenges will be different from today’s. To succeed during uncertainty, the best strategy is to ensure you have the tools in place to understand and adapt to the demands of the evolving consumer.

Climate change is bringing unprecedented changes to our market, driving innovation across many business aspects from production to logistic, and when retailers win by doing good, so does everybody else: customers, business, and planet.

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