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IADS Press Release: IADS White Paper- Reinventing department stores through sustainability

press January 2023 Press release

No longer a must-have but rather a bare necessity, sustainability is a chance for department stores to reinvent their business model, provided they find profitable ways to overcome the remaining unresolved challenges.

While the sustainability topic is not new in retail, customers have been facing the actual impacts of climate change and are increasingly asking market players to act and adjust, to the point of turning sustainability into a major factor in business decisions and investments. However, to the dismay of retail leaders, sustainability also reveals itself to be Pandora’s box, with a seemingly infinite list of complex questions. The difficulty lies in the nature itself of a challenge in perpetual motion, making sustainability “a framework rather than a destination”.

Department stores, due to their size which involves dealing with many suppliers, their central position in cities and customers’ lives, and their complex business model often including historical practices, are on the frontline of the needed changes. While they have already proven their ability to adapt to business disruption, they now face a much more holistic problem, of either radically reinventing themselves or becoming irrelevant.

In its new White Paper, “Reinventing department stores through sustainability”, the IADS extensively reviews the sustainability topic from department stores’ point of view, including where they stand, their initiatives and remaining challenges. Hard questions are raised, and potential directions are identified, keeping in mind that while sustainability is not a trend but a true structural change, the solutions built by department stores cannot be cosmetic but need to efficiently and financially address the topic if they want to survive.

The variety of stakeholders complexifies an already fuzzy question: what does sustainability mean in retail?

At first glance, the situation looks overwhelming as even just defining where to start is hard. Retailers started moving by defining a Corporate Social Responsibility (CSR) framework, soon completed by trackable metrics compiled in Environmental, Social and Governance (ESG) reports. However, they quickly realised that properly addressing sustainable issues required more than reports or guides of good conduct. Simply being able to track greenhouse gas emissions requires nothing less than re-engineering the entire supply chain systems. To make things more complicated, retailers also must deal in real-time with many stakeholders with different views: 

-    Customers, who require immediate and impactful actions, but do not always align intentions with their purchasing behaviour, especially in an inflationary context (not to mention that the very notion of sustainability has a different interpretation according to the age group or socio-economic cohort),
-    Pressurised governments, accelerating regulatory efforts without global coordination, leading to a variety of constraints that retailers must comply with, sometimes in a record time (the French AGEC law was enforced in 9 months) leading to the multiplication of non-scalable short-term compliance investments,
-    Suppliers, nudged by retailers to heavily invest to make their production output sustainable, in addition to auditing their carbon emissions to help fill in retailers’ Scope 3 tracking (a titanic task for department stores working with international brands contracting factories dotted across the planet).

Finally, shareholders and employees are worried that retailers will end up paying for the transformation bill, estimated from €315bn to €615 bn between now and 2030, in a shrinking profitability context (-6.5% in the past 6 years in France).

Travelling a long and winding road: an overview of department stores’ initiatives so far

Aware of their social role and seeing a transformative opportunity in this inescapable challenge, department stores have already initiated their journeys towards sustainability, despite not being all at the same stage of progress due to different local geographical and political situations. To document and draw a dynamic picture of these efforts, the IADS used its privileged ties with its members to conduct several studies, the first one just at the beginning of the pandemic, in March 2020, then another one in June 2021, followed by one in 2022.

When it came to defining objectives, retailers answered to mounting legal pressure by teaming up and exchanging ideas and experiences with an unprecedented degree of transparency. This took place through organised bodies, such as the 2030 Breakthrough Initiatives, various retail associations and federations, such as the IADS, helping department stores exchange with strict respect of antitrust guidelines, but also by talking with new third parties (NGOs, trade unions or consumer associations). Such a degree and scale of openness from notoriously secretive department store organisations is new and considered critical in order to help them set goals and update them in real-time.

This cooperation allowed department stores to take control of their Scope 1 and 2 emission rates rapidly, as shown by El Corte Inglés’ reduction of its Scope 2 emissions by 78% between 2017 and 2021, Breuninger’s offer of CO2-neutral shipping or Galeries Lafayette’s entire store electricity consumption being 100% renewable. Dealing with Scope 3 emissions (95% of the total emissions) proved trickier. Collaboration groups and think tanks helped review market initiatives, such as Macy’s reducing its use of virgin plastic by 50%, or Selfridges’ plan to achieve 45% of its sales through a circular economy by 2030. It is also widely understood that the next area of focus is the supply chain, seen as the second most beneficial area of investment after digitalisation in terms of ROI.

Department stores are also experimenting with their own private labels, which in turn raises the painful question of the lack of a relevant global standard applicable to all brands and marketable in a simple way to customers. For that reason, Green Pea in Italy, “the first 100% sustainable department store in the world”, can provide some ideas of what the answers could be. In addition to finding new ways to deal with the environmental impact of their real estate footprint, normally estimated to contribute up to 60% of a retailer’s total emissions, Green Pea educates their customers by openly sharing simplified, but brutally honest, information about their own consumption impact.

The head-scratching has just started

The unprecedented collaboration between companies does not overcome the fact that there is not a one-size-fits-all solution for all department stores, as their customers and markets are by nature extremely different. As a consequence, the sustainable journey is a collaborative and solitary trip at the same time. In addition, each department store must figure out how to deal with problems that come on top of environmental issues and that are linked to their own social contexts, such as diversity and inclusion. 

This raises questions on what to communicate and how, and above all, on what platform. The comparison of actions in 2020 and 2022 showed that department stores, always attentive not to be accused of greenwashing, also discovered that umbrella concept consistency across channels (stores, e-commerce) and partners (suppliers and brands) was necessary, but also that messages had to be adapted in each case to maximise reach and clarity.

The other question is the nature of the organisations guiding sustainability efforts. There is a wide variety of options, from a Chief Sustainability Officer to a dedicated ESG committee, also including partnerships with third parties or responsibilities dispatched between departments. Whatever the chosen option, leaders will have to be careful not to add an extra layer of complexity to their organisations, as has been the case in department stores in the past.

Finally, the most pressing topic is obviously the business itself and how to make sure that sustainable efforts are not an additional financial weight, but, on the contrary, contribute to new revenue flows thanks to the necessary reinvention of the model. While it is relatively easy for new companies such as Green Pea to propose innovative approaches, the situation is different for heritage companies, as they must be creative to into addressing the future in a sound financial manner.

Don’t judge a book by its cover: sustainability is not a constraint, but a chance to be seized fast

Even though addressing sustainability might be painful, costly, and even hazardous, retailers do not have the choice and must follow the trend if they want to survive. Just like for digital transformation, they need to start their journey as soon as possible, as passing time is definitively lost and could rapidly become a competitive disadvantage. In addition, they should not be troubled about not having a perfect plan: the most important thing is to get started, and then the learning process will take place bit by bit in a non-linear progression. We identify two phases in the approach, the short-term one being to fully focus on the sustainable transformation of the supply chain, as the needed technology is already here, and the longer one being to increase collaboration between retailers to accelerate the pace of innovation. This is proof, if needed, of the relevance of collaboration groups and think tanks such as the IADS, which has been actively helping its members since 1928 address the most pressing business issues.

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