Climate Change in the UK Market – Part II: Consumer Tipping Point

November 18, 2006

Carbon Trust (CT) predicts that by 2010, the UK consumer market will have reached a tipping point: Purchase decisions will take into account climate change impact and how companies are actively addressing it.  Like all tipping points, the shift will be marked by abrupt and rapid change in consumer behavior with potentially significant consequences for corporate profitability and brand value (see Climate Change in the UK Market - Part I: “Brand Value at Risk”). 

According to CT, three factors must align for consumers to reach a tipping point on climate change.  Specifically, consumers must:

 

·         “Be concerned about climate change

·         Make the link between environmental issues and their daily actions, and

·         Modify their purchasing behavior to reflect their concerns about how companies are addressing the issue.”

 

CT offers analogies where similar tipping points have been reached on social and environmental issues: unleaded gasoline, dolphin-friendly tuna, and more recently, mass market organic foods.  Tipping points such as these occur when consumers “both want to, and can, take action”.  As such, there are two critical questions for today’s marketers to consider: Are similar dynamics in motion for climate change and, if so, when will they reach a tipping point?

 

If you were to make a prediction solely by examining the mindset of the average British consumer today, you would be hard pressed to conclude that a tipping point may be fast approaching.  While 67% of British consumers claim that they know “a great deal” or “a fair amount” about climate change, there is little evidence to suggest that a substantial number of consumers have made a clear link between their own actions and the environmental consequences. 

 

Nonetheless, CT identifies five factors in play that may accelerate these dynamics:

 

·         Personal experiences (e.g. draught, perceived temperature shifts) make the issue more relevant and “provoke the strongest reaction” from consumers

·         Exposure to media which enables consumers to better comprehend and “internalize” the message

·         Leadership by other countries provides a road map for others to follow

·         Supporting regulation which reinforces desired consumer behavior

·         Realistic and available substitutes enable consumers to make other choices without changing consumption patterns

 

While CT projects such factors will accelerate the onset of a tipping point by 2010 in the UK market, do similar dynamics exist in the US?  It could be argued that such dynamics may be emerging:

  • Though a more-mild-than-anticipated hurricane season defied forecasts this year, heat waves, droughts and continuing recovery from Katrina will keep the potential consequences of climate change fresh in consumers minds
  • Exposure to climate change issues is increasing, and is becoming more ingrained in our mass culture (keep an eye on An Inconvenient Truth at Oscar time).  This will only be reinforced next year as a massive awareness campaign spearheaded by Al Gore is set to launch in early spring.
  • Given the political climate in Washington, at least until this month, leadership on climate issues has emerged from states such as California or New York (both, incidentally, led by Republicans). These states have passed bills that cap carbon emissions or mandate use of renewable energy.
  • Substitutes are emerging: Green energy is becoming more cost competitive and hybrid vehicles are being rolled out in conventional styles.

While the US consumer market may still lag behind the markets in Europe and Japan, seeds continue to be planted that will inevitably move US consumers closer to the tipping point. Marketers should take note.


Climate Change in the UK Market – Part I: “Brand Value at Risk”

November 18, 2006

 

The Carbon Trust, a UK government-funded think tank, makes the case that many companies’ brand value – a key component of the market value measuring intangible assets – is at risk from climate change.  The logic is straightforward: UK consumers may be four years away from a tipping point (2010) whereby purchase decisions will be increasingly based on how a company addresses global warming issues (see Part II of this series).  At this point, brand value – the % of market value that is based on intangible assets including image/reputation, trust and perceived consumer experience – may erode. 

 

Carbon Trust (CT) forecasts suggest that diverse industries face the prospect of brand value erosion.

CT data suggests that companies with both high operational exposure (measured as the amount of CO2 emitted per $ of EBIDTA) and high % of total market value based on intangible assets are especially at risk of losing significant value.  This risk is compounded by the long lead times required to reduce operational exposure (e.g., airlines, oil & gas), as it will be difficult to change course quickly to mitigate lost market value by reducing carbon footprints and reshaping its brand image with consumers.

 

Somewhat surprisingly, industries such as food & beverages and banking have more market value at risk from climate change than the carbon-intensive airline and oil & gas industries.  While airlines may face the prospect of losing 50% of their market value due to climate change issues, it is projected that for banks, the absolute amount of the decline will be significantly higher.

 

For banks (and other low carbon emitting industries including telecommunications), the critical issue is not whether their own carbon levels will influence consumer purchase behavior – as “the absolute levels are not sufficient to influence mainstream customer choices”.  Instead, the issue is whether there are “material indirect effects that are within companies’ control or area of influence”.  Brand value, therefore, may rest on whether a company is viewed by consumers (and shareholders) as taking a ‘leadership’ role on climate change issues or as lagging behind its competitors.

 

For banks, material indirect effects may include its “investment and lending exposure” – especially if consumers view such investments as “irresponsible” given the potential ramifications from climate change.  Moreover, shareholders may view bank portfolios as increasingly risky if, for example, they include a high concentration of mortgages for properties located in flood-prone areas. 

 

CT estimates that for a bank, 17% of its market value is derived from its brand.  Of the 17%, CT estimates that 6-12% (or 1-2% of overall market value) is potentially at risk due to climate change.  Given bank valuations today, even a 1-2% erosion in value would result in a significant decline in market value for its shareholders.

 

The telecommunications industry faces similar risk based on indirect carbon use.  Examples include “computers left permanently on standby to support ‘always-on’ broadband, or mobile phone chargers left plugged in when not in use”.  While the industry may not face significant losses in market value from such issues (perhaps a 1% overall decline in market value), the situation may, conversely, provide a leadership opportunity that will help protect, or perhaps enhance, existing market value.

 

So, marketers and strategists should take note: a tipping point may be approaching which could put brand value at risk.  While dynamics in the US market may delay the arrival of this watershed event, its onset may be sudden and rapid and, thus, take companies by surprise.  It is interesting to note that many US companies are already preparing for this shift.  For example, Goldman Sachs has already committed itself to being carbon neutral while GE, which competes in more carbon-intensive industries, has purposefully repositioned itself as a more eco-friendly brand.  It may be prudent for more US companies to consider following suit.


Energy Efficient Home Listings

September 10, 2006

In today’s soft real estate market, home buyers increasingly are willing to wait to get what they want, at a price they are willing to pay. Moreover, as the cost of heating and cooling a home has increased significantly over the past few years, consumers are also paying increased attention to monthly energy bills associated with properties they are considering. Buyer hesitation is leaving sellers in the lurch and realtors without commissions. The current environment is ripe for a new marketing message, especially one that can turn issues that are detremental to home sales – like higher fuel prices – into an advantage.

Realtors should:

Market a home based in its energy efficiency. Energy efficiency has become a true differentiator in this market. Whenever possible, realtors should market homes based on comparable energy efficiency – focusing on monthly cost savings and reduced impact on climate change.

Encourage buyers and sellers to take advantage of FHA Energy Efficient Mortgages (EEM). These mortgages allow home owners to tack on 100% of the cost for energy efficiency improvements to an already approved mortgage (up to $4k or 5% of the value of the home, up to a maximum of $8k, whichever is greater). US Department of Energy is a good source for information on EEMs.

Buyers should consider investments that yield even modest improvements in energy efficiency, as they can result in significant reductions in monthly energy bills. Sellers should consider how these investments will reduce anticipated energy bills and improve a home’s salability.

Engage customers by providing educational content and hands-on tools. Consumers have not traditionally focused on opportunities to improve energy efficiency. Realtors should provide appropriate materials to educate both buyers and sellers.

Moreover, realtors should provide energy cost savings calculators that enable consumers to understand the impact of investments in energy efficiency. Wisconsin Public Service provides a comprehensive one.


Bottled Water Backlash

September 10, 2006

The $10B* bottled US water industry has enjoyed aggressive growth over the past decade. With over a 9% CAGR since 2000, the industry does not show many signs of slowing down (International Bottled Water Association). Today, one in two Americans drink bottled water while one in six drink it exclusively (Corporate Accountability International).

Marketers have fueled this growth by creating the perception in consumers minds that bottled water is better than tap water in three ways: it is healthier (i.e., based on purity, perceived health benefits), better tasting and more convenient.

While it may be convenient to pick up a cold bottle of water at the local convenience store (and perhaps a healthier alternative to soda), it is a misperception – fueled by marketers – that bottled water is healthier or necessarily tastes better than tap.

Bottled water is not necessarily healthier that tap: While different agencies govern tap water (Environmental Protection Agency) and bottled water (Food and Drug Administration), for the most part, similar standards have been adopted by both.

Consumers can not distinguish bottled and tap water by taste: Corporate Accountability International staged a “Tap Water Challenge”, a blind taste test in 8 US cities where consumers were asked to differentiate by taste between bottled (spring – Nestle’s Poland Spring and “purified” tap water – PepsiCo’s Aquifina or Coca-Cola’s Desani) and regular tap water. Overwhelmingly, participants could not distinguish one from another.

As such, the current brand positioning for bottle water is at odds with greens who view bottled water as detrimental to the environment (e.g., higher use of fuels to bottle and transport water) and, potentially, municipal supplies (e.g., may divert consumer interest and investment away from public water systems, unsustainable pumping of local aquifers). Brands may face negative impact if recent anti-bottled water campaigns such CAI’s “Think Outside the Bottle” resonate with even a small segment of consumers.

Marketers might want a preemptive strike:

Make product more eco-friendly and clearly label it so: Shift to eco-friendly packaging, tap local supplies to reduce transportation costs, ensure that the water comes from a sustainable source.

Donate % of profits to charity. Starbucks has it right. If you are selling a commodity to consumers at a premium price, why not ask them to help ensure that others have access to safe (public) drinking water as well? Through its Ethos brand, Starbucks plans to donate $10 million over the next five years for clean-water sources in poor countries (or about $0.05 per bottle).

*2005 forecast for producer revenue only, Beverage Marketing Corporation


Eco-friendly Packaging Premium

August 4, 2006

CPGs design packaging to serve many functions; one critical role is to enhance consumer perception of product value. Typically, CPGs do this by using a bigger box or more expensive or flashier material than necessary. Yet, CPGs and retailers alike are under pressure to reduce this waste.

A new generation of biodegradable packaging by companies such as EarthShell and NatureWorks (a Cargill company) is emerging as a cost efficient alternative. While this is great news for the environment, it may be somewhat surprising to marketers that the benefits from biodegradable packaging may not stop there. Studies suggest that consumers may be willing to pay a premium for products that use these materials. Research conducted by Grapentine on behalf of NatureWorks found that “50% of those surveyed would pay 20 cents more for products” in NatureWorks’ biodegradable polylactide packages [made from corn starch] versus more traditional petroleum-based plastic containers. (“Marketers See ‘Green’ in Nature-Friendly Packages”, BrandWeek, April 3, 2006)

Moreover, eco-friendly labeling may serve as an essential point of differentiation for products, especially for those where biodegradable packaging becomes a tangible expression of a product’s brand promise. Biota Spring Water - sold in biodegradable containers – is one example (see video of bottle decomposition).

Lower cost, higher prices, differentiated brands…retailers ranging from Whole Foods to Wal-Mart are taking note…so should marketers.


Wal-Mart Turns Over a Green Leaf and Generates Buzz

August 3, 2006

Eco blogs are buzzing this week over Fortune Magazine’s lead article (“The Green Machine,” August 14, 2006) The world’s largest retailer has learned that green is good for business. Much of the chatter questions Wal-Mart’s true intentions; after all, this is a company that has been a magnet for bad PR for paying low hourly wages, offering poor employee healthcare benefits, discriminating employees based on gender, and for putting mom and pop retailers out of business when it comes to town.

But, business is business and Wal-Mart is learning that consumer needs and attitudes are evolving. Latent markets exist for eco-friendly products – if the price is right. One example: Sam’s Club sold nearly 200,000 organic cotton tops ($14) and bottoms ($10) within ten weeks. To create these new markets, Wal-Mart is leveraging its overwhelming purchasing power to keep costs low and to motivate suppliers to bring innovative, eco-friendly products to them. The result: Wal-Mart has the potential to reshape the landscape when it comes to eco-certified products and eco-friendly packaging.

Wal-Mart has a long way to go to demonstrate to the skeptics that this positive PR is genuinely deserved. Nonetheless, with curious bed fellows such as Greenpeace, Wal-Mart has come a long way.


Social Labeling Works

May 27, 2006

Many green products require a premium to offset higher costs associated with mitigating environmental impact. In certain categories, consumers have already demonstrated their willingness to pay higher prices for environmentally-friendly products. For example, consumers pay a premium for hybrid cars (albeit the price is somewhat offset by lower operating costs). But, can this willingness be translated across broader product categories?

While market research suggests that consumers are willing to pay higher prices for socially responsible products, the only way to quantify this is through in-market testing. Harvard professor, Michael Hiscox, and his student, Nicholas Smyth, have done just that, testing demand for and price elasticity of products with socially-responsible labeling. (“Is There Consumer Demand for Improved Labor Standards?“, 2005) While this paper compares consumer purchasing behavior for manufactured products that specify fair labor practices (vs. no labeling), there are potential learnings that may be extended to green marketing.

Hiscox and Smyth tested demand for two products – towels (staple product) and candles (luxury) – using socially-responsible labels in ABC Carpet and Home, a home décor store catering to relatively affluent consumers on New York City’s Upper East Side. (A third product, handmade dolls, was also tested but used a less rigorous control – last year’s sales).

Results were impressive:

The ratio of socially labeled products sold increased significantly relative to unlabeled (baseline) products (12% increase for labeled towels and 26% for candles). Moreover, this trend accelerated when prices for the labeled products increased 10% (perhaps giving more credibility to the socially responsible product). In fact, the ratio of labeled products sold increased 37% for towels and 67% for candles vs. unlabeled (baseline), resulting in a significant increase in revenue for labeled products (due to increase in units sold + increase in revenue per product).

With a 20% increase in the price, the increase in the ratio of labeled towels sold (vs. unlabeled) was similar to a 10% price increase, demonstrating inelasticity of demand with higher prices for towels. With a 20% increase in the price of candles, demand did not increase (as with a 10% price increase), however, but rather remained the same as baseline (unlabeled control). Nonetheless, given the 20% price increase, total revenue was 20% greater than baseline.

Overall, this test suggests that companies that switch to socially labeled products could increase price by 10-20% and expect that overall demand to rise (at least for relatively affluent customers). While the test needs to be replicated using green product labeling and expanded to include less affluent consumers, it strongly suggests that consumers may be willing to pay a premium for green products. Green marketers should take note.


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