Why circular services are one of the hottest retail trends right now
- 16 March, 2022 07:10
In its recent ecommerce trends report, design consultancy, Designit, highlighted a shift across consumer brands and retailers towards circular services.
“In a move toward customers’ urge to consume and live sustainably, brands will accelerate the adoption of circular service models and rethink ownership and the approach to consumption,” the report stated. “As a result, leading brands and startups are exploring new offerings and business models that re-frame products into services, like repair and take-back programs that aim to design out waste.”
As the Ellen Macarthur Foundation describes it, the circular economy is a systemic approach to economic development designed to benefit businesses, society, and the environment. It takes the old ‘take, make and waste’ cycle with one and replaces it with a more holistic structured around re-use, recycle and re-design.
According to KPMG, challenges like resource availability, volatile commodity prices and changing consumer preferences are forcing many organisations to rethink wasteful and inefficient models of production and consumption. As a consequence, more companies are now designing products or services from the start for longer-term use, reuse and recycling. At the same time, markets are increasingly disrupted as leasing and sharing business models challenge traditional ‘linear’ models of product manufacture, ownership and disposal, KPMG notes.
And there are hard economic benefits to what can be seen as a huge step forward in sustainability and more environmentally responsible business practices. Benefits KPMG points to include greater efficiency and profitability, less waste and cost, better innovation and stronger relationships with customers. And in Europe alone, adopting circular principles could generate net economic benefit of EU€1.8 trillion (US$2 trillion), says Working Group Finance.
To find out more, CMO reached out to Designit managing director, Joff Outlaw, to explore what circular services entail, the impact in a retail context, which brands are already leading the way, and why it’s important to take a more circular approach.
CMO: Can you explain what circular services as described by Designit entails?
Joff Outlaw: When a product reaches the end of its life, its components and materials are usually not sent back to where they were made to be reused or reconditioned. Most global supply chains use virgin raw materials and new components only (linear model). Yet, supply chains would be made more resilient and efficient if they were able to close the materials and components loop. In simple terms, closing the loop is what it means to adopt a circular economy model.
Resource scarcity and increasing prices, changes in regulation and now the alarming lack of resiliency of our supply chains, has put circular models in the spotlight. It’s also demonstrated that circular services offer a significant improvement in operational efficiency for manufacturing businesses.
Credit: DesignIT The adoption of circular models of production often implies a significant investment, which holds back many companies from initiating the transition. But many examples in the market have demonstrated that the return over the investment is real.
Looking at the consumer end, trends driven by digital services such as Spotify, Airbnb and Uber have seen increasing numbers of people living in small spaces within cities and a generational change in how people manage their wealth and finances. This is changing consumer behaviour towards putting more value in access than in ownership of goods.
In addition, an increasingly conscious consumer group – driven by a motivation to adopt more sustainable ways of living – are putting organisations and governments under pressure to adopt practices and operational models that make a sustainable use of energy and resources.
Explainer: What is the circular economy?
How does this apply to retailers specifically?
JO: Circular services for retail organisations is all about creating an operating and service model that is able to create higher levels of efficiency for the organisation to deliver a service for consumers that is based on ‘access and performance’. Many retail businesses have already started to embed their products in a service ecosystem that considers their product’s lifecycle as a loop, and includes the consumer is a key actor of the process.
Can you share a few brand examples locally and internationally of circular services in action and why they reflect a solid approach?
JO: MsParis came online as one of the first Chinese fashion rental platforms in 2014. Today, it has 7 million registered users and the largest wardrobe in China. Similar to Rent the Runway, it initially focused on rental of prom dresses and similar special-occasion garments. Today, however, it includes a larger portfolio of more everyday clothes available through a subscription service.
The company offers a few different options, but the standard subscription service costs $US 50/month. As there is no limit to how many garments you can order per month — only per shipment — and you can keep rotating the clothes after each use. In December 2018, MsParis launched a new offering for customers enabling the rental of new clothes. After their first use, these garments become part of the standard subscription offering. This could be a gateway for those wary of sharing, overcoming initial doubts around the condition and hygiene of rented clothes.
Location Decathlon is another global example. Consider the use of camping equipment: Most people own a tent, which is used only very occasionally. So for most of its life, it takes up storage space in your home and gathers dust.
To address this example of product underutilisation and material waste, Decathlon, the French outdoor sports specialist created a service called Location Decathlon. This allows outdoor enthusiasts who don’t want to own a tent, or young people who want to try camping for the first time, to rent Decathlon’s outdoor equipment for as little as EUR 8 /day for the duration of their holiday. The delivery rate includes delivery, pickup and insurance. Through this rental business model, tents can have a higher use rate and the overall volume of materials required to provide camping experiences to citizens will be reduced.
In Australia, you may have seen Emma Lewisham's distinctive purple bottles popping up on your social media feed alongside impressive sustainability credentials. Unlike countless other products vying for your attention with similar environmental claims, Emma Lewisham is the real deal. The Aotearoa-based beauty company has developed refillable product packaging and a global take-back system to keep its products in use. Each product is also certified Climate Positive, meaning the company removes more emissions from the atmosphere than it emits during the production process.
Co-founder and CEO, Emma Lewisham, is not just interested in having an impact at a brand level either, she wants to change the entire beauty industry. That's why she took the unprecedented move of sharing the company's intellectual property including circular packaging designs, sterilising processes, recycling and returns processes, packaging supplier connections, take-back procedures and carbon calculation guides. This is the kind of bold action required to fast-track the circular transition.
Then there’s HP, a multinational information technology company working towards reducing its carbon footprint and incorporating principles of circularity across its product and service portfolio of personal systems, printers, and 3D printing solutions. One of the company’s circular economy initiatives is HP Instant Ink, a printer cartridge subscription service that launched in Australia in April 2020. The first of its kind in Australia, the service is changing the way households and small-to-medium businesses use their printers, making it easier for them to reduce their environmental impact and recycle cartridges.
Are there new technologies or capabilities making circular services easier, more effective or more viable?
JO: Digital technologies enable retail brands and organisations to have a closer interaction with customers and shape experiences that are in tune with the customer’s contextual needs. Car-sharing has probably been one of clearest examples of the transition from product to service and the reprioritisation of ownership over access and convenience. Digital technologies also contribute to enable services based on peer-to-peer sharing, reuse and recycle – services that are part of the sharing economy and that have become the norm.
In the background, the use of data and IoT and blockchain technologies in different supply chains is enabling organisations to trace their products across their lifecycle and establish relationships both with partners and customers key to creating a circular service model for products.
Lizee has created a data-driven Rental Management System (RMS) to manage the whole rental cycle using just one platform – from in-store and online rental handling all the way to shipping, returns, refurbishing and eventually reselling. The system’s flexibility allows clients to choose the circular business model that suits their product and customer base, such as subscription, one-off, or on-demand rental. Lizee’s software has already supported companies like VF Corp, Adidas, Maje, Kiabi and Decathlon to make progress in their circular transformation.
What other macro trends are informing the circular economy?
JO: The idea of ‘access over ownership’ through business model innovation is a central concept in the circular economy. Lizee’s SaaS offering has the potential to scale-up the digital rental experience, so that more companies can respond to the growing trend in responsible and eco-conscious consumption, and to be part of a circular economy by promoting product reuse.
Why are circular services particularly critical to consumers in 2022?
JO: The pandemic has accelerated ongoing transformations such as the digitalisation of organisations and the workspace. It’s also evidenced the urgent need of changing our global ways of operating – the lack of resilience of our supply chains has become evident, heavily impacting both consumers, retailers and manufacturers. This global scenario has had an impact on governments, organisations and consumer behaviour, accelerating as well aiding the transition and adoption of sustainable and resilient production practices and social behaviours.
CMO readiness 2022: The supply chain
By implementing circular economy strategies, businesses could build more resilient supply chains, reduce materials costs and create new customer value propositions while reducing their environmental impacts. Supply chains would be more resilient because they would secure their supply, and more efficient because they would save money.
According to the European Commission, circular economy could save EUR 600 billion for EU businesses, equivalent to 8 per cent of their annual turnover. Since manufacturing firms in the EU spend, on average, about 40 per cent of revenue on materials, circular economy models could increase profitability while providing shelter from resource price fluctuations.
What’s in it specifically for retailers?
JO: Retailers are the owners of the front-end experience of services and products, which puts them in a key position to harness the momentum of the current trends, from both an operational and consumer behaviour perspective, creating experiences that involve consumers as part of the system and empowers them to take action through responsible and sustainable consumption.
In addition, with digital interaction opening more opportunities for companies to directly engage with its customers, the experience of the product life cycle can now be shared across all phases and stakeholders. This can lead to reducing the customer cost of repairing, returning and reusing of the product rather than replacing.
There has never been a better time to act than now. People are taking to the streets demanding climate justice, arguing that “beautiful fashion should not cost the Earth” and urging the industry to become a force of cultural change. We are in the middle of an era where more and more customers want to make purchasing decisions that reflect their values.
World leaders and policymakers are feeling this pressure and starting to respond. The recently launched global alliance from the United Nations, aiming to combat fashion’s biggest environmental and social challenges, is just one of many high-profile examples.
Changing customer demands may be the most powerful influence in shifting fashion brands and retailers, and those that do not respond quickly enough risk being left behind. Customers concerned with social and environmental issues are now demanding sustainable and ethical fashion. Young customers are demanding unlimited access to fresh styles, while others are looking for tradable platforms where luxury and vintage garments can be found. Those less influenced by such trends seek one thing — better quality clothes that can stand the test of time.
These growing customer segments require the industry to change. As McKinsey and Company stated in a 2019 report, members of the fashion value chain must “self-disrupt their own identity and the sources of their old success to realise changes that win new generations of customers”.
Where’s the catch?
JO: For a truly successful system all the stakeholder must realise they are caught in a web of interconnections. This means including the customer will close the loop of the Circular Economy and lead to a sustainable model of use and reuse.
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