Sustainability in consumer goods: Why product type makes a difference to value

Around the world, there’s growing evidence that businesses are falling behind on environmental, social and governance (ESG) commitments. This is especially true of commitments towards net zero emissions. It’s not clear why this is happening, though one theory suggests that sustainability is seen as a cost that many businesses can’t afford.  

However, work from various analysts and consultancies shows that this may not be an accurate picture. Indeed, it’s possible that businesses have this upside-down, and sustainability could provide genuine financial benefits.

Consumers’ views on sustainability

A report last year from McKinsey and NielsenIQ entitled Consumers care about sustainability – and back it up with their wallets provided useful insights. The report focused on the consumer-packaged goods sector and explained a paradox within this area.  

Previous research by both consultancies has found that consumers say that sustainability is important to them and that they’re prepared to pay more for sustainable goods. However, consumer goods companies complain that when they launch products with sustainable claims such as ‘eco-friendly’ or ‘environmentally sustainable’, they fail to generate sufficient sales. 

How can these two facts both be true?  

Goods and products supported by ESG claims have out-performed other products. The sales of these goods have grown faster than competitor products; on average, 28% growth over five years compared to 20% for products that made no such claims. However, the growth differs by product category, and not just broad categories like food, drink or household, but at a far more granular level. Either companies’ perception of lack of growth simply isn’t supported by data or the data is quite nuanced, making it difficult for companies to make decisions.  

Unpicking sustainable consumption by category

This idea is fascinating and suggests that consumers place different values on sustainability in different purchasing categories. It’s worth unpacking a little more to understand it in more depth, and to highlight some of the key issues.
 

1. Products in the limelight

Products receiving more negative publicity or increased customer awareness tend to benefit from the ESG claims. A clear example of this is paper and plastic products, which show a growth differential of 20 percentage points, with around 75% of retail shares coming from goods backed by ESG claims. The dramatic difference – a growth differential of almost doubling in the next category – could be attributed to public awareness and various campaigns about the issues surrounding plastic sustainability and single-use plastic.  

This concept may explain the difference between salty and sweet snacks. In both categories, products making ESG-related claims have about 40% of the market. However, that’s where the similarity ends. The growth differential on sweet snacks is nearly 10 percentage points – the joint-highest in the food category. In the past few years, the issue of diabetes and sugar consumption has placed sweet snacks in the spotlight. Perhaps the ESG claims may help boost consumer confidence, or at least contribute to the “feel good” factor when people are purchasing these products. Other products which are often associated with relatively higher sugar content also benefit from the ESG “feel good” factor as demonstrated by the growth differential for candy, gum, mints, desserts, yogurt, fruit drinks, soft drinks, and fruit juice. Other drinks with relatively less sugar content such as water and tea experienced less growth.  

This feel-good factor may also explain the difference between the growth or lack thereof when reviewing packaged coffee and ready-to-drink coffee. The packaged coffee sector has been promoting sustainable farming and fair wages for farmers, whereas ready-to-drink doesn’t get the same attention, which may explain the growth experienced by these products. 

2. Essential and non-essential products

ESG claims appear to have less impact on products that customers deemed “essential”. However, “less essential” or “nice to have” goods seem to see more impact. In other words, customers are prepared to pay more for ESG claims in goods that they consider to be small luxuries, but it’s unlikely they will pay extra for essentials.  

Looking at the food and beverage market, products with less growth differential could reasonably be categorized as essential, such as baby food, baby formula, water, tea, ready-to-drink coffee, and diapers. These categories generally experienced less growth than sweet snacks and desserts sectors, which are less essential.  

Baby food, baby formula and diaper products experienced the lowest growth differential based on ESG claims. This doesn’t mean that parents and caretakers don’t care about ESG claims, since the data from the McKinsey and NielsenIQ report also shows that consumer across demographics, “urban and suburban residents and households with children”, and those with “higher income” are “more likely to buy products that made one or more ESG-related claims.”  

Instead, it suggests that if the consumers do care about ESG but their behaviors do not change, there must be other considerations that might override any ESG consideration. In the children’s formula and nutritional-beverage category, the essentiality concept is further deepened because ESG-related claims compete against a form of professional claims from a credible source. The McKinsey and NielsenIQ report posits that customers’ “decisions reflect advice from doctors and that consumers probably won’t let ESG-related claims outweigh clinical recommendations.” 

3. ESG claims as a marketing edge

Data from the report shows that “in 59% of all categories studied, the smallest brands that made such claims achieved disproportionate growth” while “88% of categories of private labels products…with ESG claims seized more than their expected share of growth.” The disproportionate growth means those who need a marketing edge could establish a presence in the market through creating what McKinsey and NielsenIQ authors call “an aura of credibility”. The authors suggest that while some consumers “may be interested in searching for the cheapest items available… they might also be eager to support affordable ESG-related products.”   

This marketing edge may explain why some established brands or sectors experienced some growth but not as high as those “newer” products or brands. The kombucha category demonstrates this edge the best. Notwithstanding its health benefits against other beverage categories and familiarity in other parts of the world, kombucha as a product category is relatively “new” compared to its counterparts and thus requires more attention to attract consumers. Its constant push to garner consumer attention and loyalty pairs well with the industry’s initiatives to include ESG claims. 

4. Authenticity of the ESG claims

When looking at the claims, the report suggests that ESG claims do create growth, but the data is inconclusive on whether one type of claim is superior to another. On the other hand, the data also shows that less-common claims were associated with higher growth than more prevalent claims, suggesting that claims can be a means of differentiation. The report authors suggest that specificity might be the differentiator. I posit that authenticity of the claims is the real differentiator, and specificity is the route to achieve authenticity.  

In a Forbes article entitled Authenticity In Marketing: Why Brands Must Lead With ‘Why‘, Aimee Meester reveals that authenticity “can make or break” a brand’s success. She cited that “not only do 90% of customers report that authenticity is an important factor in deciding which brands they like, but Millennials and Gen Z (almost 140 million people) now prefer brands that are “real and organic” as opposed to “perfect and well-packaged.”   

The authenticity concept might help to resolve the seemingly “conflicting” data. The McKinsey & NielsenIQ report finds that products making medium-prevalence claims (such as “sustainable packaging” or “plant-based”) had a 4.7% growth differential over their peers. The most prevalent claims (such as “environmentally sustainable”) corresponded with the smallest growth differential.  

However, if “sustainable packaging” is too generic to create a big impact, then the reason for the paper and plastic sector experiencing such high growth when the sector also makes similar claims on “sustainable packaging” is because the “sustainable packaging” claims directly target the underlying issues the sector/industry is trying to solve. In this case, there’s credibility when the industry itself uses the claims to acknowledge a social/environmental issue that it’s tackling. Such a claim might appear less authentic for other sectors to make and thus garner less impact.  

The authenticity factor is even more important when there’s a saturation of claims from a particular industry. For example, the growth differential is less for the laundry care sector than others despite having a larger share of retail sales from products with ESG-related claims. Reviewing individual brands and their sustainability, however, may reveal a different story.  

Seventh Generation – the largest and arguably the most successful of green household brands – went from a scrappy mail order catalog product to being the largest eco-friendly cleaning supplies seller in the United States before being sold to Unilever. The purchase occurred in part because Unilever recognized Seventh Generation as “a disruptor in the US marketplace, leading the industry in sustainable innovation while attracting new generations of conscious consumers.” ESG and sustainable claims made by Seventh Generation garnered success in the marketplace, partly because ESG and sustainability have always been at the heart of the company’s ethos, product approach, and messaging.  

For older existing brands, similar claims might seem out of place and less credible. Thus, existing and successful brands should be – or at least appear to be – authentic when picking and choosing the claims. For existing brands, an ESG claim can backfire if it raises issues that consumers don’t associate with the sector or organization, or if they sense that claims are made to generate sales and not to solve a problem. Specificity and consumer education may be the route to higher growth and prevent downward risks that some brands have experienced. 

The longer view: our customers’ reality

There’s no doubt that more sustainable products can sell better. However, the growth differential seems to be better in three cases.  

First, where consumers have more reason to believe that sustainability is more important, and there may be more urgency in the buying decision. Second, where there’s more awareness of the issues, which means that more consumers are likely to value sustainability. Finally, there must be less reason for consumers to take other factors into account.  

In other words, companies need to invest carefully in the right sustainable products, and plan strategically to hit the right markets. The good news is that many of the markets with large differentials are vast. 

In general, sustainable products have a small to medium-sized market share, suggesting there’s plenty of ‘pie’ for everyone – and room to expand the market share of sustainable products if done so wisely. Sustainability makes sound commercial sense. The evidence shows that investment in the right sustainable products can be passed onto consumers who are willing to pay higher prices. It certainly shouldn’t be seen as a mere cost.