Prioritizing Sustainability in a Recession
Economic uncertainty, inflation, bank collapses - it can all feel scary.
It is easy for brands to focus solely on cost-cutting during these times, putting ethical and sustainability commitments on the backburner. But history has shown that this approach is not only wrong for the planet, it is actually bad for business.
In fact, brands that increased their commitment to sustainable goals and initiatives during previous recessions weathered downturns better than their counterparts and recovered more quickly and successfully.
In this piece we share:
- Historical trends related to sustainability and recessions, as a bit of a silver lining for the EcoAllies we work with and a reminder of why your eco commitment is more critical now than ever
- How we’re thinking about the current economic climate
- Ideas and strategies for your brand to consider as you think through and plan for a recession
No one can accurately predict if and how challenging 2023 will be for small businesses, but history has shown that ethical, eco-focused brands like yours will have a leg up.
The Current Economic Reality
The current news cycle continues to debate whether we’re in a recession right now, when a recession will hit, and how severe a recession will be.
And more and more, we’re reading the term, “rolling recessions” as a way to describe this extended slowdown - a term that refers to an economy that may not meet an official recession definition, but in which many sectors feel very much like they are in contraction.
As this debate continues to rage on in the news and on Twitter, we know that this academic anlaysis means very little to the business leaders who are in the trenches. Many of the brands we serve have been experiencing and dealing with a downturn in sales and financial turmoil for the past 18 months.
Like most, we at EcoEnclose are attempting to digest the events of the past three years, the financial hardships many in the ecommerce industry have been facing over the past 18 months, and our community’s current reality. In understanding the trends, we see a few different - though highly interrelated - issues at play affecting the ecommerce industry.
Deflating of The Pandemic-Induced Sales Bubble: In December 2021, we began hearing from many of the ecommerce brands we serve that their Q4 2021 holiday sales did not hit expectations.
This was largely due to the fact that brands and retailers set forecasts for their 2021 holiday season based on what they experienced in 2020, a year when ecommerce sales grew a whopping 43% because COVID shutdowns forced online shopping and many consumers gained access to extra discretionary funds for a period of time.
Additionally, most retailers and brands - traumatized by the supply chain issues and inventory shortages of 2020 - ordered early and ordered extra going into 2021’s holiday season, not knowing what to expect.
Ultimately, however, ecommerce grew only 14% in 2021 (compared to 2020), a big decrease from the previous year's growth rate. The 7% inflation rate in 2021 accounts for a large portion of this increase in sales (and likely means that retailers not only missed forecasts but also lost a significant gross margin that year).
This all left retailers and brands entering 2022 with little cash, extra inventory, and more overhead (fixed costs) than they could afford. In the spring of 2022, large companies like Walmart and Target began slashing prices to sell off their excess inventory at breakeven prices or at losses. Based on what we’ve heard from the brands and retailers we work with, many D2C companies did the same.
These trends continued during the remainder of 2022, with online sales flattening or declining for many segments. The following chart shows a high-level, day-in-time snapshot of Amazon sales by industry.
Inflation, Interest Rate Hikes, and Layoffs: In May of 2022, broader economic issues became apparent. Inflation was at a 40-year high and gas prices topped $5 / gallon nationally, for the first time ever. The Federal Reserve began increasing interest rates swiftly to curb inflation.
This led to declines in the market and consumer confidence. The S&P, which peaked in December of 2022, began falling swiftly and steadily through the summer of 2022. Consumer sentiment feel, reaching its lowest point in June of 2022, reflecting the fear and uncertainty that the entire country was experiencing.
In response, technology and retail companies began their first round of layoffs last summer. Amazon, GoPuff, Rent The Runway, Wayfair, Meta, Warby Parker, and ShipBob are just a small set of the many, many companies in these industries that underwent layoffs.
And these layoffs have continued, with many companies undergoing their second round of layoffs in the first quarter of 2023. Retailers cut 13,000 jobs in January alone, a 3,225% increase year over year, according to a report from Challenger, Gray and Christmas. During this same period, retailers planned to hire only 615 employees, down from 5,901 in January 2022. Additionally, all large retailers, including Macy’s, Target, Walmart, and Best Buy called for flat to declining sales in 2023 - a sharp contrast to the early years of the pandemic.
Banking Crisis: Even while the federal reserve continued its trajectory of increasing interest rates every month and retailers put forth flat to declining sales projections, many economists began to feel optimistic at the start of 2023 about the diminishing likelihood and/or the milder severity of a potential for a full on recession.
Then, in the span of two weeks, we’ve all watched four banks - Silvergate, Silicon Valley Bank (SVB), Signature Bank, and Credit Suisse - collapse, with the future of First Republic and Deutsche Bank still in flux. Many regional banks relied as heavily as SVB did on low-interest rates, and an estimated one in ten banks are sitting on even greater losses than SVB, suggesting that more bank runs and collapses could be ahead.
How does the current banking crisis affect ecommerce brands?
With the federal government signaling that they will protect depositors (above and beyond FDIC insurance levels), companies’ cash and ability to operate is safe, even if they bank with regional banks most likely to have the most risk in their portfolio.
Given this, most analysts suggest that the main fallout of the banking crisis for small to large companies is that a recession is now significantly more likely to occur and could be more severe, due to even tighter credit, leading to increased layoffs and decreased hiring, and decreased consumer spending.
Bottom Line for Ecommerce: 2023 is unlikely to be a year of significant growth for the ecommerce and retail industries. Brands should plan their forecasts, hiring, and marketing budgets accordingly.
However, in many ways, D2C brands (based on conversations we’ve had with our own customers) seem to be well-positioned for the next twelve months. This is because many already responded last year to the slowdown in sales growth through tighter inventory management, scaling back forecasts, and cutting down on overhead.
Additionally, while the overall industry is likely to stay relatively flat, there continue to be opportunities for individual brands to grow (though likely more modestly than during the pandemic) - by expanding their relationships and sales with existing customers and acquiring new customers in more strategic and less costly ways than they may have in the past. As we’ll discuss in the next section, sustainability-focused brands are uniquely well-positioned for this type of success - even during a downturn.
Leveraging Sustainability as a Differentiator During and After Economic Downturns
Here’s the good news for our EcoAllies - businesses who keep the planet front and center in their mission and operation have historically been at a distinct advantage during and after downturns.
During the great recession of 2008, sustainable brand and product lines tended to be the most successful.
Brands that continued to make bold, aggressive investments in sustainability during those tough economic years weathered the recession significantly better than traditional brands. It seems counterintuitive. In fact, many so-called “experts” predicted that the 2008 recession would be a nail in the coffin of CSR and sustainability innovations. The thinking is that companies need to cut costs at all costs during a downturn and because environmental initiatives may be resource-intensive, they would inevitably be the first thing companies do away with.
Thankfully, this thinking proved uninspired and uninformed, as the opposite actually happened.
- A 2014 study, The Impact of Corporate Sustainability on Organizational Processes and Performance showed that a $1 investment in 1992, in a portfolio consisting of 90 “High Sustainability” companies would have grown to $22.60 by 2010. A $1 investment in a portfolio of “Low Sustainability” companies would have grown to only $15.40 during the same time period. What’s more, the High Sustainability portfolio would have hit a low of just $14.39 while the Low Sustainability portfolio would have bottomed out at $8.14.
- Studies have shown that companies with strong corporate responsibility reputations “experience no meaningful declines in share price compared to their industry peers during crises.” Firms with lower CSR reputations experienced market capitalization losses of $378M per firm, during those same time periods.
- A survey of 1,300 small businesses conducted by Green America, EcoVentures and the Association for Enterprise Opportunity found that sales of green products increased and outpaced traditional alternatives during the 2008 recession. In fact, they found that the greener the product was, the more likely its sales increased. Almost 60% of the survey respondents expanded their green offerings, and most indicated that these resulted in higher revenues and increased competitiveness during the downturn.
- B Corporations, businesses certified by nonprofit B Lab for meeting high standards of transparency and social and environmental performance - are self-reported to have been 64% more likely to fare well during the 2008 recession than traditional businesses of comparable size (see Forbes interview).
What 2008 taught us is that sustainability is not something that should get tossed to the side in times of economic uncertainty. In fact, it is actually a strategic imperative to invest in eco-friendly strategies during downturns.
While nothing can recession-proof a business (i.e. almost all businesses will feel the impact of tough economic times), sustainability-oriented companies generally fare better during the recession and recovered more rapidly in its aftermath.
While these trends seem counterintuitive at first glance, they actually make sense with further analysis and reflection.
- Green customers are more loyal and less price-sensitive, even during a downturn: Ethical brands are able to establish deeper emotional ties with their customers, allowing them to fare better during recessions. A 2014 paper published by the Canadian Agricultural Economics Society reported, “Purchasers of Fairtrade products are much less price-responsive than those of non-Fairtrade products” a trend that is true during strong and weak economic periods.
- Consumer demand for transparency and ethics continues (and often increases) during a recession: The 2008 recession, a result of corporate greed and “casino capitalism”, triggered widespread public anger which led citizens and consumers to demand a higher level of ethics from the brands they purchase from. The many emotionally charged events of the past two years have accelerated this further. In fact today, most successful D2C brands must actively and authentically engage with and support issues ranging from sustainability to racial justice to gun control. Everything brands do - from the products and packaging they create, to how they pay and support their employees, to what supply chain partners they work with - is under scrutiny.
- Sustainability done right means innovation, a key business differentiator, especially in recessions: In 2008, American Express CEO Ken Chenault said, “A difficult economic environment argues for the need to innovate more, not to pull back.” Studies have corroborated this claim. Data pooled from the economic downturn years in the 1980s, 1990s, and 2001 shows that brands that invested in innovation during recessions recover faster and come out on top compared to competitors, particularly in industries where disruption is most possible. By committing to sustainability and circularity, brands look for ways to constantly do better - to source more ethical and sustainable materials, to create goods that use less material or are more durable or more recyclable, and to utilize new green technologies in their products or processes. These improvements can cut costs, can create PR and customer buzz, and build customer loyalty - all benefits that will pay off either during the downturn and/or the recovery period.
- Circularity and sustainability strategy often lead to new, more resource and cost-efficient ways of doing business (that are good for the bottom line and the planet): Many eco investments save resources (such as electricity, water, fuel) which directly translate into immediate savings for a company. When hotels began asking their guests to hang up and reuse their towels and skip the daily sheet changes, they saved 25% off their annual energy and water costs while also garnering goodwill from guests. When Walmart instituted technology to reduce fuel consumption while its trucks were idling, they were able to reduce their diesel costs significantly. When United Airlines switched its inflight magazine to a lighter paper stock, they saved $300,000 annually on their fuel costs alone (this doesn't even factor in the lower cost of producing their magazines!). Strategies like these are a win for the environment and budgets.
- Improved employee morale: Tough economic times can be hard for employees, whether they are fearful of their job security or simply anxious about the future in general. Studies have shown that morale among employees is significantly better in companies with strong sustainability programs, compared to those with poor ones, and employee loyalty is almost 40% better. This means absenteeism, increased engagement and enthusiasm, and improved productivity and output.
- A commitment to environmental sustainability, almost by definition, means a brand is thinking long-term: Brands that take a long-term view about their impact, their resources, their supply chain partners, their customer satisfaction, and engagement are the ones that come out ahead in both the good and bad economic times. A commitment to sustainability will help brands avoid the knee-jerk, shortsighted cost cutting actions that can hamstring them during the recovery period and beyond. This doesn’t mean hard decisions shouldn’t be made! Often, layoffs are unavoidable, cost cutting measures must be pursued, and prices have to be increased. But hard decisions can be executed humanely and ethically and should be considered alongside their long-term environmental, social, and business impact before they are finalized.
- Recession or no recession, the impact of climate change is front of mind for consumers: Fires, hurricanes, extreme heat events, droughts, flooding - unprecedented weather patterns are becoming the norm worldwide. According to the IPCC Co-Chair Panmao Zhai, “Climate change is already affecting every region on Earth, in multiple ways.” Even as Americans (and consumers worldwide) grapple with economic uncertainty, they are also already living with some of the harsh realities of climate change. A 2021 Pew survey of almost 20,000 people found that 72% of respondents are very or somewhat concerned that global climate change will harm them personally, and 80% are willing to make immediate changes to how they work and live to reduce the effects of global climate change.
There is a Lot Being Written Right Now About ESG Funds Faltering. Should We Be Worried About What This Means for Sustainability and Long-Term Success? There is some highly politicized debate that recent bank failures were driven by SVB’s supposed focus on ESG investments and diversity, equity and inclusion policies.
Anyone reading these headlines may worry that ESG is a problem (and may begin questioning their own brand’s sustainability strategies).
There is no evidence that an ESG had any impact on these bank failures.
Almost everyone agrees that these bank collapses are driven by poor risk management (and in the case of SVB, the absence of a Chief Risk Officer), reliance on low-interest rates, and excessive concentration in a single and very risky industry. It is - as always - so disappointing to see the situation being politicized in this way.
However, it is important that broader trends be discussed here as well, as it is true that 2022 was a tough year for ESG investments.
An ESG fund is simply a fund that incorporates environmental, social, and governance issues into the investment process. There are a variety of ESG fund types, and fund managers employ a number of different ESG-centric investment strategies. Some ESG funds are simply incorporating “negative screening” (such as opting out of all tobacco or oil and gas companies, or eliminating all companies with ESG scores below a set threshold). Others employ “positive screening”, seeking to include companies whose ESG scores are above a specific level. Finally, “thematic investing” is where an ESG fund manager identifies longer-term macroeconomic trends that they feel have tailwinds and that should collectively contribute to better E, S, or G outcomes. Blackrock is widely credited with making the concept of thematic ESG investing more mainstream. And, in another politicized move, this led Florida to pull $2bn from BlackRock in December 2022 as part of its anti-ESG stance.
Last year was a rough one for ESG funds. For the first time since 2011, investors pulled more money out of ESG funds than were put into them. Additionally, ESG funds underperformed compared to similar non-ESG funds for the first time in five years.
These trends may cause some eco-minded brands to pause and wonder: Are their own commitments to sustainability putting them at risk, especially during a recession?
Our read? A Definite No. Recent, short-term trends around ESG investing should not be used to assess the long-term impact of sustainability commitments on an individual business’s success.
Most analysts suggest that ESG’s poor performance last year was due to macro trends, the fairly loose definition of what constitutes an “ESG fund” and the fact that stocks in industries ESG funds tend to avoid had particularly high returns. Specifically, the analysis points to four factors:
- Soaring stock prices of fossil fuel companies (which are typically avoided by most ESG funds)
- Falling stock prices of technology companies (which are typically included in ESG funds, though this is not necessarily an ESG investing strategy we agree with)
- Fallout from the Ukraine War
- Political backlash that cast doubt on ESG investing and led to some outflows of funds
Even with the poor performance of ESG funds in 2022, the long-term outlook for ESG investing remind strong. We all need to remember that sustainability investments are a long-game. Neither ESG investing nor the commitment to sustainability within an individual brand should be considered slam dunk, short-term profit drivers. Instead, they should be approached as a mindset and approach that influences all strategies and supports the long-term success and viability of an individual company, an individual fund, etc.
Strategies to Invest in Sustainability During an Economic Slowdown
It is clear that D2C ecommerce brands are in the middle of a relatively extended time of economic uncertainty.
With this in mind, here are some suggestions on:
(1) how to plan for and navigate this time period as strategically as possible, and
(2) how to continue and even increase your investment in sustainability to support your brand’s short and long-term success.
The Basics: Bring Efficiency Thinking and Planning to Your Business
There are hundreds of resources out there to help you plan for and manage your financials through a recession. We know, we’ve read many of them!
Here are our favorite tips that cut across some of the best recession-planning guides out there.
Established Tiered Forecasts With Proactive, Thoughtful Cuts If Needed: We believe ecommerce has likely seen the worst of the downturn already. But, in reality, no one knows how the next twelve months will play out. Will sales decline? If so, how deeply? For how long? Because of this uncertainty, creating tiered forecasts with corresponding cost cuts (tying to scenarios of 10%, 20%, 30%+ reductions in sales) is a great approach. It helps you and your team plan for - in advance - what changes you’ll pursue based on your actual revenue.
It is important to note that cost-cutting - if you need to pursue it - must be done strategically. An HBR report, “Roaring Out of Recession”, looked at data from 4,700 public companies during the three years before and after the 2008 recession and found that 17% of those companies went bankrupt, were acquired, or became private. The majority had not yet regained their prerecession growth rates and about 9% prospered after the slowdown. They found that companies that made the deepest cuts had the lowest probability of long-term success while those that fared best were the ones that maintained healthy spending in the areas of their business that were core to their differentiated brand and their company’s culture.
Double down on your best products (and cut spending on the other 80%): Shift resources to your best-selling highest-rated products, and pause your investments and efforts on the 80% of your SKUs that may be driving only 20% of our revenue. In healthy, high growth periods, these “long-tail” products help you maximize your overall sales potential, customer loyalty, and drive your company’s growth trajectory. But in cash-tight times, you may find that these products are a distraction and financial burden.
Invest more in customer retention and referral (over acquisition): For most ecommerce brands, acquiring new customers is the hard and expensive part. Engaging and bringing back existing customers, through newsletters, snail mail, targeted social media outreach, SMS, and oter channels can help you maximize your overall sales in 2023, without investing too heavily in acquisition during a time when low ROAS is expected.
More strategic inventory (and therefore cash) management: Consider maintaining high inventory levels on hand for products that drive revenue, and keeping a lot less (or none!) for products that aren’t driving your profit.
Diversify and grow sales in new channels and markets: Where are you currently selling your goods? Are there sales channels you can tap into quickly to help you access new customers relatively quickly and simply? For example, if you currently sell exclusively on your own website site, you might consider getting on Etsy, Amazon, Ebay or another marketplace. If you currently sell exclusively online, consider stocking your goods at local brick and mortar retailers.
Explore mutually beneficial marketing partnerships: Reach out to fellow eco-conscious brands that sell complimentary products (i.e. if you sell tea, partner with a chocolate company) and establish marketing partnerships that can be low or no cost to either brand but successfully expose you to each other’s customer bases.
Sustainability: Double Down on Eco-Friendly Tactics (Even While Being Budget-Conscious)
Here are a few ways to maintain, and even increase, your investments in sustainability and ethics.
Find cost and eco-conscious efficiencies: Making your products and operations more sustainable often cuts costs. Are there ways you can cut energy or water usage? Can you reduce the materials used in some of your products or packaging? Can you consolidate your shipping to reduce fuel costs? Strategies like these have an immediate position impact on the planet and your spending.
Audit your products for reduction opportunities: Are there any components or materials you use to produce your products that can be lightweighted, minimized, or eliminated altogether? A fun example of this is United Airlines’ recent steps of cutting 1 oz from each of its inflight magazines and printing its seatback guides on lighter paper. These steps have a minimal impact on the customer experience, but saved a total of 11 lbs of material per flight, saving 170,000 gallons of fuel (and $290,000 in fuel costs) annually.
Transition from a shipping box to a mailer, or from a paper mailer to a poly mailer: If your business can successfully ship in mailers, but you are currently using shipping boxes, this switch can help you save a lot of money and will improve your carbon footprint (because mailers are more material-efficient than the boxes you are replacing them with). Just make sure your mailers are 100% recycled and recyclable. If you currently ship in paper mailers but are looking for ways to cut costs, switching to 100% Recycled Poly Mailers could be worth considering. On one hand, poly mailers are made with recycled plastic and many conscious brands are going plastic-free. That said, 100% recycled poly mailers are significantly less expensive than paper mailer alternatives. Additionally, from an ecological lens, 100% recycled poly mailers have a lower carbon footprint than similarly sized 100% recycled paper mailers.
Consider if there are any excess elements of your packaging to eliminate: Most eco-conscious brands are already thoughtful about doing away with packaging elements that aren’t core to the functionality or customer experience. But it never hurts to take another look! Audit your void fill, your tape usage, and your decorative packaging additions. If something isn’t critical to delivering your product safely or is not really helping tell your sustainability and brand story, consider removing it. Remember that sometimes, the “excess” packaging itself is not really costly, but the labor required to execute it is. For example, many brands tie twine around their products before packaging them. This is a great customer experience, but the labor required for this tying may or may not be worth the cost.
Balance volume discounts with total purchase sizes: Some companies are focused on preserving cash in a downturn while others prioritize managing their unit costs and profitability. Buying more raw materials and supplies at a time will result in higher volume discounts, improving your profitability. Buying less at a time may result in a higher unit cost, but will help save cash and minimize the funds that are tied up in inventory.
Engagement: Focus on Your Customers and Build Your Brand
One of the few benefits of a slowdown is that you and your team may have more capacity than you would during crazy growth periods. These can be great opportunities to implement initiatives that can help you build your brand, further your sustainabiltiy goals, and strengthen your customer connections.
Start a Take Back or Repair Program: More and more, we’re seeing eco-focused companies institute a take back program of some sort. Three models we’ve seen:
- Repair programs and long-term warrantees: Brands that stand behind the quality and durability of their products often come out ahead. One way to show how committed you are to selling long-lasting goods is by committing to taking them back and repairing them if and when they break. Zippers, soles, jewelry backings - these are all examples of common product failures that are easy to fix.
- Take back for donations or recycling: We’ve seen apparel brands that take back clothing (from any brand!) to be properly reused or recycled. Companies like PopSockets allow customers to use packaging to send back old phone accessories (again, from any brand!) for recycling. One of the things we love about these programs is that they allow customers to immediately put the shipping packaging they received to reuse!
- End of life product take backs: Finally, some brands - particularly those that sell hard to recycle goods - are starting to ask their customers to send back their goods at the end of their useful life in exchange for a coupon for future purchases. This is a great way to keep customers connected to your business and keep waste out of the landfill.
Educational Videos: With ad spend and ROAS down right now, creative content is the best way to reach current and new customers. Videos are one of the best way to do this! 37% of consumers prefer brand videos over static content, and 35% have purchased a product after watching a brand’s livestream. This is a great time to create videos that showcase your products, help your customers learn how to choose between or how to use your goods, and that answer common questions.
Quantify Your Environmental Impact: You've already invested in eco-friendlier inputs and packaging. This is a great time to calculate the carbon and resource savings of these decisions and share this impact as part of your branded packaging design or digital marketing efforts. When it comes to your packaging, our savings calculator can quickly give you a snapshot of the resources you’ve protected by switching from virgin to 100% recycled packaging. Tools like Higg, Sphera and Trayak can help you calculate the impact of your product level decisions.
Custom Brand Your Packaging to Showcase Your Commitment: Sustainable packaging is the right call for the planet. But if you’re not boldly highlighting your efforts to your customers, you’re probably missing out on the short and long-term benefits to your bottom line (the very benefits that help sustainable brands be more successful during and after a recession). And we always say that your packaging has a 100% open rate, so if you’re not using it to tell your story, you’re missing out. Develop an eye-catching design that highlights your eco-efforts and the impact these efforts are having on the planet.
Market your Eco Impact Across Your Website and Social Media Channels: Push a series of social media posts showcasing your investments in eco-friendly materials and circular packaging. Add a page to your website highlighting the choices you’ve made and how they support the planet. Call out your packaging on product or checkout pages, helping to reinforce your brand’s ethos and ethic, and potentially increasing conversion rates.
Advocate or Volunteer for Issues Core to Your Business: Take stock in the environmental, social or political issues that are particularly important to you, your business, your team members and/or your customers. Then take steps to more formally engage in the solution. For example, you can start regular cleanups. You might decision to organize and advocate for critical policies. Develop a product line and donate a portion of proceeds to the right NGO. Efforts like these often become formally ingrained in your company’s culture long term and go a long way in expanding your eco impact, building your network, and engaging your customers and employees.
Innovation: Invest in the Long-Term
Experiment with New Product Materials or Techniques: As mentioned above, brands that innovate during recessions have an advantage and companies have historically found that green product lines are most successful during downturns. Can you rethink the formulation of a product, using innovative new inputs that are better for the environment and/or your customers? Can you put out a new product line, one that is on the cutting edge of sustainability? Major innovation takes time, resources, and patience but these investments generally pay off. Where it is feasible, look for ways to release incremental innovations that can come to market more quickly.
Invest in a sustainable packaging innovation: If it makes sense for your business, consider investing in reusable mailers, a groundbreaking circular shipping solution. Switch to carbon sequestering, black algae ink for your custom packaging. Been battling the single-use clear poly bag and are not sure what to do about it? Switch to the Kraft Bag or Glassine Bag for a plastic-free inner packaging solution, just in time for Plastic-Free July. Brands that maintain a focus on innovation and progress during tough economic periods set themselves up for short and long-term success. These packaging innovations are relatively easy wins.