Have you ever wondered where your piece of clothing came from or where the components that make up your iPhone were sourced? For the vast majority of us, this has never been an issue. Consumers purchase their products and use them without much thought beyond: Does this product serve a purpose or fulfil a need?
Gen Z consumers are different. They want assurances that their products are ethically sourced and arrive at retail stores through supply chains with minimal environmental impact.
Ethical retail will have a significant impact with companies paying a hefty price should they fall short of consumer expectations.
Consumer awareness and preference
“An increased consumer awareness, fueled by information accessibility through the web and social media, is prompting individuals to consider the ethical implications of their purchases,” says Jacqui Baker, Head of Retail at RSM UK. “Concerns over labour practices, such as sweatshops and child labour, drive demand for products that ensure fair treatment and wages for workers. Additionally, growing environmental consciousness leads consumers to prefer products with lower environmental footprints and sustainable sourcing practices.” Companies need to be more sustainable when it comes to their products and will naturally gravitate towards ESG which will attract consumers.
These concerns come with an increased desire for supply chain transparency, with consumers wanting to know the origins, manufacturing processes, and impacts of products, both socially and environmentally. As said by Beccaria, “This shift in consumer preference also highlights the desire for consumers to opt for products that reflect their ethical values. This is manifested through the prevalence of organic, fair trade, and cruelty-free labelled products, among others.”
The article adds that for retailers, adapting to this consumer shift has been crucial. Christopher Shaker, National Retail Sector Leader at RSM US adds, “The ability to market products with labels that cater to consumers that are ethically and socially conscious is fast becoming a critical component of every retailer’s marketing strategy. In an environment where brand loyalty is less common than it once was with consumers, many retailers now have entire segments of their website dedicated to highlighting their efforts around ethical sourcing of products to differentiate from competitors and improve customer loyalty.”
Local retailers have gravitated towards localised supply chains which has seen a recovery in consumer retail as customers are taking advantage of lower fuel prices and a stabilised inflationary environment. Retailers such as Pick n Pay and Checkers regularly advertise that they support local farmers and consumers have the ability to track where their goods are sourced from.
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Regulations and standards
To ensure fair work and ethical practices, many governments around the world have implemented stricter legislation on retail ethical standards. “These can range from labour and food safety standards to environmental policies. Laws and regulations around ethical labelling and sustainability are also on the rise, forcing companies to be more transparent about the origin and production methods of their products,” says Edgardo Rondó, Partner at RSM Argentina.
The article points out that, beyond governmental regulations and standards, third-party entities have also published guidelines on the best ethical practices across the supply chain. The OECD, for example, has published guidelines for multinational enterprises that emphasise the incorporation of social, human rights, and environmental considerations. On the consumer side, the UN has published its guidelines for consumer protection to ensure ethical practice at the other end of the supply chain. There are also other global organisations such as Fairtrade International who work to ensure that standards are met to support local farmers and producers in developing countries – this includes fair pay and good working conditions.
Risk mitigation
The article adds the third main driver for ethical retail closely relates to the previous two, ultimately encompassing the potential pitfalls of not aligning with consumer preferences or regulatory compliance. In the 2022 Environmental, Social and Governance (ESG) Special Report from the RSM Middle Market Business Index, 97% of respondents identified the desire to mitigate the impact of emerging regulations or new laws as a top factor in instituting a formal ESG plan.
“Companies are recognising that ethical and sustainable practices can help mitigate long-term risks, such as litigation, consumer boycotts, reputational damage, and supply chain issues,” adds Rondó,
The risks of ignoring ethical retail strategies
The article points out that there are broadly two main catagories of risk that can have a damning impact on retailers if they fall short of creating and implementing an ethical retail strategy – both of which can significantly affect an organisation’s bottom line. These are:
Reputational risks
“While compliance with regulation is usually at the top of the boardroom list of risks associated with maintaining an ethical retail strategy, it may not be the most significant risk,” says Shaker. “Customer and investor satisfaction are often very high on the list of business risks related to ethical retail – and those risks can carry severe penalties. It is critical that retailers consider how their strategy with respect to ethical retail impacts the customers that buy their products, and the investors that they report to. Instilling confidence in both is critical to success for any sector in today’s retail ecosystem.”
“Furthermore,” adds Robyn Duffy, Senior Analyst – Consumer Markets at RSM UK, “Failure to meet ethical expectations can result in a loss of competitive advantage, as consumers increasingly favour brands aligned with their values. Financial repercussions are also considerable, including decreased sales, increased costs, and damage to shareholder value.”
The article adds that reputational risks can also be severe internal ramifications in Companies. Duffy continues, “Employee dissatisfaction may arise from perceived ethical shortcomings, leading to morale issues and high turnover rates.” As well as this, “Unethical practices can negatively influence employee morale and satisfaction, which, in turn, can decrease productivity and quality of client service. The lack of an ethical strategy can also limit market opportunities in segments where corporate social responsibility is valued, blocking the company’s long-term growth,” Beccaria adds.
Compliance risks
Retailers can face significant penalties if regulations are not met. As previously mentioned, governments across the world have varying laws and regulations to ensure that retailers adhere to ethical standards. As put by Baker, “Legal and regulatory consequences loom large, with non-compliance exposing companies to penalties, fines, and legal action, particularly regarding labour laws, environmental regulations, and fair-trade practices.”
The article points out that there are plenty of retail giants that have faced significant public and financial backlash from committing severe breaches to ethical standards. Fines can reach into the hundreds of millions, and that is before the court of public opinion have had their say. In the worst cases of ethical breaches, criminal charges can be brought against individuals involved in the misconduct. Whilst criminal charges for regulatory negligence are not as common, the financial penalties can still be damning.
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The takeaway
The demands of ethically conscious consumers and regulatory bodies are propelling the retail sector towards a more ethical future. Businesses that embrace ethical retail practices can gain a competitive edge whilst meeting regulatory requirements by building trust with consumers and investors. The risks of ignoring ethical retail strategies are significant, encompassing reputational damage, financial losses, and legal consequences. Therefore, prioritising ethical considerations in retail operations is as much a moral imperative as a strategic necessity for long-term success.
The article adds that, as the retail landscape continues to evolve, navigating the complexities of ethical retail will remain a critical challenge for businesses. Moving forward, collaboration among stakeholders, governments, and consumers, will be essential in driving meaningful change towards a more sustainable and ethical retail industry. Through a collective effort and commitment to ethical principles, the retail sector can play a pivotal role in building a more responsible and resilient global economy.
Conclusion
Transparency will be a major driver of profitability in retail. US outdoor clothing giant Patagonia allows consumers to track the source of the product they are purchasing from when the garment was made until it is purchased. This has been a major draw for the company as consumers become increasingly sustainability-focused.
In Ireland packets of crisps can provide details of the exact farms and fields that grew the produce and the date of harvest to support claims of local ethical products.
Can South African companies modify their business models in a similar way? Are our supply chain systems capable of this or will they face significant challenges? Our major retailers have started this journey for some of their products and are making significant investments in their supply chain tracking and sourcing decisions. How is your business doing?
