Publications News & articles by our team of futurists What’s NXT: Regenerative Retail (Radical Retail part 1/5)

What’s NXT: Regenerative Retail (Radical Retail part 1/5)

Today, we are in the middle of the third retail revolution, characterized by automation, social involvement, and embeddedness. Shoppers and communities are increasingly becoming co-creators, and the physical world is merging with the digital, which is on its way to manifest in the metaverse. This shift is happening in parallel with a dire need to adapt practices to the limits of life and resources of our planet.

The history of retail is deeply intertwined with the history of civilization. Already 10.000 years ago, people started gathering in permanent or temporary markets to trade goods they were not able to produce themselves. Since then, the way we trade has undergone two major shifts: one that made retail’s institutions more permanent, in the form of permanent markets, bazaars and later shops, and a second which is characterized by shopping becoming a significant part of the the growing middle class’ lifestyle.

In the work with Radical Retail Report, a report on retail 2030, produced together with Nexer Group (downloaded here), we identified five shifts that are defining the third retail revolution:

1. Regenerative retail – From Cowboy Economy to Spaceship Economy 

2. Phygital experiences – From Transaction Enabler to Experience Provider

3. RADICAL retail – From Manpowered to AI-powered

4. Mytopian retail – From Me in the Marketplace to Me as the Marketplace

5. The Great Data Chaos – From War on Market shares to War on Data shares

This is part 1 of 5 in an article series that outlines the five shifts of the third retail revolution, and presents key take aways for retailers to use in their strategic work towards 2030. 

Shift 1: Regenerative Retail – From Cowboy Economy to Spaceship Economy
Things are getting real. The 2022 IPCC climate change report states with high confidence that human induced climate change has caused widespread deterioration of ecosystem structure and function. This is not only tragic in itself, but also creates insecurity and health risks for humans. The economic risks are also immense: A recent study at University College London posits that the global GDP at year 2100 can be 37% lower due to climate change than would it be without. And this impact is felt already: The rainfalls in Europe summer 2021, are estimated to have cost €300 billion in Germany only. 

From degeneration to regeneration
It is obvious that retailers need to transition from extractive, degenerative practices. The first step is to eliminate the harm that is done, but some actors are aiming higher – towards contributing to creating more life in ecological and social systems. For example, Walmart’s CEO Doug McMillon states: “We want to go beyond sustainability to become a regenerative company dedicated to placing nature and humanity at the center of our business practices”. (Regeneration means restoring, renewing, and replenishing, in addition to conserving and sustaining.)

Figure 1: Towards regenerative retail. Five main drivers push retailers towards a transition to regenerative business. The steps in the model should however not be interpreted as the journey is linear – many businesses must make a fundamental qualitative shift in how they operate to truly become a regenerative force.  

What will drive the change?
Five main factors will support the change.

• Climate change induced uncertainties push retailers to rethink how they source resources, how their value networks operate and what environmental trace they leave. 

• How venture capital is allocated will be a great driver of transition. Sustainable practices are increasingly becoming a booster of value, since investors deem it as long term important.

• Regulations pay an important role in enforcing and motivating new behavior. For example, the EU Taxonomy Delegated Act makes mandatory to classify certain economic activity according to environmental sustainability, creating more transparency and hence motivation to change. 

• Employees today are very values driven in their choice of employer, and to attract competence, companies will have to consider the ethics in their operations.  

• Consumers are increasingly demanding responsible businesses. But although they are fast to criticize, actions are not always consistent: studies show that there is a significant intention-behavior gap in consumers’ sustainability related actions. 

Enabler 1: End-to-end transparency 
To enable the transition towards regenerative retail, transparency will be important. Supply chain verification solutions are already becoming increasingly common to enable regulation, and to show both consumers and investors what they buy into. Blockchain is a promising technology in this development, as it helps creating reliable records. UK-based Provenance is an example of a solution builder in the area. They help companies map the impact of their supply chains and visualize it in a way that can be easily understood and assessed. Challenges remain though. There is the unresolved dilemma of the presently high energy consumption of blockchain technology, and the challenge of creating simple enough structures and parameters to measure, to avoid creating complexity that just confuses. 

Enabler 2: Incentives for resource efficiency
Transparency and information display will not be enough to change behavior, incentive systems that align with the goal to create regenerative systems must also be designed. Efforts will probably span from nudging consumers to resource efficient choices to redesigning the whole logic of business models, including what behaviors from both consumers and suppliers are rewarded. 

The future is business model diverse
The linear, profit maximizing business model will be challenged, complemented and in many instances replaced by new ways to deliver value to people. Changing the logic of how we create and enjoy value is key to incentivize both consumers and businesses to transform towards more regenerative practices. Rental, repair, circular, peer to peer exchange and secondhand marketplaces are all examples of logics that will be important to drive the transformation. 

Some examples are Popswap, a peer-to-peer clothes swapping app, Chainable, a kitchen-as-a-service provider, and The RealReal a platform for fashion resale. H&M-backed Singular Society presents a particularly interesting business model. Users pay a membership fee to get access to products to the cost of producing them. This increases transparency and is also a way for Singular Society to predict demand, since they know the size of their membership base. Switching to models like this which are closer to a pull logic, can support the strive towards less over production.

“When it comes to sustainability, retailers have to stop believing that the customer will get wiser and better, that is a naive wish. I think retailers need to drive change together with regulators and policy makers to encourage new behavior. And also understand and consider more profound human drives like belonging and status seeking, because there lies a key to create change.”
– Hanna Lumikero, Head of delivery, H&M Group design studio

For retailers, it will be inevitable to partner with the right actors to come up with new solutions to supply chain challenges and develop new business models. Some potential partners that are specializing in powering all the logistics of brands’ rental or resale operation are Lizee, Loopt and Reflaunt.

Smart product design – do it right from the start
Designing products that actually lasts, can be repaired and the material recycled is the foundation to create more resource efficient retail. Extended Product Responsibility (EPR) is a policy approach that is increasingly adopted and assigns the responsibility for the product’s entire life cycle to the manufacturer – especially the take back, recycling and final disposal of the product. “In 2030, retailers will to a greater extent own the products that consumers then use. They will take a greater responsibility for the whole product lifecycle.” 
– Ludvig Liljeqvist, Global Strategy, Development & Innovation Insight and Foresight leader, IKEA

Some current examples are Salomon Index.01 running shoe, which is designed in a way that the material in all parts of the shoe can be reused in new products, and Fairphone’s smartphones which are designed for easy repair and exchange of components, to make it possible for people to repair instead of buying completely new.

Data powered resource efficiency
With the help of data-based insights, supply chains can be optimized, demand can be predicted, and products and buyers can be more accurately matched. The retail experts in the Advisory Board that was gathered to give input to the Radical Retail Report agree that there is great potential in using data more than today to save resources. In extension, even more value can be obtained by sharing data between actors: “We have to start sharing data to improve value flows from a resource efficiency perspective” says Linda Pimmeshofer, Industry advisor for Retail, Microsoft western Europe. Daniel Mülbach, CEO at Footway Group agrees – part of Footway’s mission is to reduce waste in retail by openly sharing the insights from their platform to their suppliers, so that the brands can develop products that matches consumers’ desires better. Karolin Forsling, CEO, Forsling United agrees: “Retailers need to stop being so protective. They have to start opening up and inviting collaborations in business development, and also daring to be transparent and share data, because when we share data, we can more effectively share competence.” 

The promise of virtual living
The more we live in virtual worlds, the more we shift the weight of our spend towards virtual possessions. At first sight this might seem like the solution to the overconsumption problem – a new pair of virtual pants require no material. “In Korea, generation Z allocate 50% of their income to digital inventory. The gaming industry seem to be a strong driver towards dematerialization.” (Moon-Suck Song, CEO, Panagora) 

However, the energy consumption of virtual reality technology is large. If today’s hype becomes reality, the metaverse will require far more electricity than we produce today, and a massive outbuild of power networks. The question is, (how) can this development continue within the earth’s boundaries?

Defining transitions for Regenerative retail

Key takeaways for retailers towards 2030

• Regulation and consumer voice will drive capital towards prioritizing investments in “sustainability-labeled” businesses, how will your company ensure that you are one of them? 
• Companies will start aiming beyond zero harm, to make positive impact with their actions. How will you make your brand a regenerative force?
• There will be more diversity in business models. What is your plan for business model innovation to promote more resource efficiency?
• Retailers will need to track and report their ESG footprint across the value chain. How are you preparing for measuring and reporting scope 1, 2 and 3 CO2 and other ESG footprints?
• Strategic collaborations will be key to create successful circular business models in a landscape characterized by high expectations on resource efficiency. Do you have enough collaboration capital to attract the right partners?
• Putting data to work, with the help of AI, will be central to creating resource efficient operations and predicting demand. Do you have the right data and analytics competence to make your business zero waste?

The next article, 2 of 5 in this series, describes the shift towards Phygital experiences – a future of retail where the physical and digital have merged. Would you like to know more about how this affects your business, please contact Åsa Jonsson.