By Mike Montemarano, Associate Editor03.29.23
Consumers value products and brands that positively impact people and the planet. Less clear is the best strategy for communicating these values, and which impact areas resonate the most with people.
NIQ (formerly NielsenIQ) and McKinsey & Company recently conducted a joint study examining sales growth for products that claim to be environmentally and socially responsible. The companies published their report, titled “Consumers care about sustainability—and back it up with their wallets,” in February of this year.
Experts from the companies shared findings at an education session during Natural Products Expo West in March.
According to the NIQ/McKinsey study, 61% of consumers said the poor health of the environment was having a negative impact on their own health. Meanwhile, 64% of consumers said they would be willing to pay more for products supporting communities and vulnerable groups.
“Factors such as responsible material sourcing, eco-friendly packaging, reduced or zero waste, biodegradability, recyclability, and similar factors are the table stakes everyone should be thinking about,” said Sherry Frey, vice president of total wellness at NIQ. Sustainability credentials are no longer a differentiator.
Products that feature certain sustainability claims may not yet have high sales in total, but are experiencing extremely high growth rates such as regenerative agriculture, low-carbon emissions, water conservation, biodynamic, and more.
“This rise in new claims is great, but the variety is also creating confusion among consumers. Compared to 2016, almost twice as many consumers report that they don’t know how to find sustainable products in the grocery store,” said Frey.
Nearly half of consumers (44%) said they would choose a retailer if buying sustainable products was incentivized through things like sustainable shopping aisles, loyalty points or discounts, replacing all options with sustainable alternatives, climate-friendly labeling, refill stations for reusable containers, and investments in the circular economy.
“We know that there is a pronounced difference between what consumers say they’re going to do in surveys versus what they actually do. Sustainable products get introduced, and while many find success, many don’t,” said Steve Noble, senior partner at McKinsey & Company.
NIQ was able to identify 93 different claims related to environmental, social and governance (ESG), which were divided into six classifications: animal welfare, environmental sustainability, organic-farming methods, plant-based ingredients, social responsibility, and sustainable packaging.
Products making ESG-related claims averaged 28% cumulative growth over the 5-year period, versus 20% for products that made no such claims, representing an 8% “growth differential.”
Sustainability drove growth in most CPG categories, but there were some differences across brand sizes and price tiers.
In 59% of all categories studied, the smallest brands that made ESG-related claims achieved disproportionate growth. But in 50% of categories, so did the largest brands that made these claims.
Mid-size brands didn’t perform as well, with only 38% seeing outsize growth. While the data can’t explain the underperformance of medium-size brands, according to the report, it’s possible that they lack the marketing and distribution scale of large brands and the aura of credibility that may benefit smaller brands.
ESG claims performed better among established products, rather than newer products, suggesting that consumers may have greater expectations for new products, but are pleasantly surprised when legacy CPG products make claims for the first time.
The report also looked at how the prevalence of a claim affects sales performance. While no ESG-related product claim outperformed all others across all product categories, less-common claims tended to be associated with larger growth, said Noble.
For instance, “vegan” and “carbon zero,” both of which are low-prevalence claims, led to 8.5% growth differential in products, compared to medium-prevalence claims like “sustainable packaging” and “plant-based,” which had 4.7% growth differential.
“The headroom is still there, however. Highly prevalent claims on products are still providing growth benefits to brands which are late to adopt them,” Noble said.
A product making a less prevalent claim is more likely to succeed with premium pricing, said Frey, and the opportunity for premiumization wanes for commonplace types of ESG claims.
A brand that has a large portion of products which are sustainable is more likely to generate repeat purchases, according to sales data. A brand that generates 80% of its sales from products with ESG-related claims is likely to see a 34% repeat rate (portion of buyers who wind up purchasing a product three or more times annually).
However, if less than 20% of a brand’s sales are generated from sustainable products, repeat rates drop to 27%.
“Combining claims is another way brands are justifying a premium price point,” noted Frey. “Packaging is a no-brainer for virtually any CPG brand, but all brands should also think about where they might be able to benefit animal welfare, social impacts, and other aspects of the environment as well.”
According to the data, nearly 80% of all product categories saw compounding growth in sales based on the number of ESG-related claims a product made. Multi-claim products grew about twice as fast as products which made a single ESG claim. However, companies need to ensure they have data to support each claim in order to avoid accusations of greenwashing.
'ESG should be thought of as compliance, or as risk mitigation. No one will have a choice soon. It will be as enmeshed in business as balance sheets. Changing the food system requires accounting for everything in your supply chain.'
“Sustainability has become so much more about people than ever before, and it’s also become a matter of brands consistently focusing on what more they can do over time. It’s ridiculous to not base a brand on at least some of these social values with so many tools and forms of support.”
Representation in company leadership has also become substantially more relevant to consumers. “The past few years served as a major jumping off point for consumers to become interested in products that support diversity, such as those from woman-, minority-, or LGBT-owned brands,” Stockdale noted.
Finding a place among the brands driving systemic change is a challenge despite the widespread support, noted Errol Schweizer, sustainability, ESG, and retail strategy consultant and former vice president of grocery at Whole Foods Market, during the panel discussion at ExpoWest.
“Even as the bottom fell out of the economy in 2008, these attributes grew every year; and over the course of 30 years, we saw compound interest in organic, non-GMO, and other categories which have now become mainstream,” he said.
“ESG should be thought of as compliance, or as risk mitigation,” Schweizer added. “No one will have a choice soon. It will be as enmeshed in business as balance sheets. Changing the food system requires accounting for everything in your supply chain. Factory farms are externalities, and they’re catastrophic, but they’re also part of the food system you’re in. The biggest companies in the world are using those externalities and you’re going to end up reaching a premium price point if you want to be truly sustainable and transparent.”
At the same time, he continued, “ESG-compliant companies are more profitable, and draw higher investments because of the risk mitigation they undertake. But customers don’t want premiumization, they want both value and sustainability.”
With certifications and laws to prevent greenwashing now more common, with more being proposed, ESG-related claims will only be given more credence in the future.
“When I started STEAZ Organic Tea there was no organic certified logo to put on packaging,” noted Eric Schnell, founder of BeyondBrands. “We knew that eventually the government would put something in place in order to prevent greenwashing, but organic claims weren’t always a guarantee that something was organic.”
“When we became fair-trade certified,” Schnell continued, “it cost us about $10,000 more in labor costs per year, which was not a major expense for us, but that value was equivalent to about $1 million dollars in Sri Lanka, so it made a significant impact there. We went carbon-neutral across our whole supply chain, which was an expense of maybe $15,000 to $20,000. But this led to our B Corp certification, which is one of the biggest badges of honor to wear as a socially responsible brand.”
Choices in packaging are still limited based on factors outside of a CPG brands’ control, noted Schweizer.
“Lots of brands are being launched today based on the concept of offering the first of a given product in a sustainable packaging form,” he said. “But lots of smaller companies are forced to take whatever packaging is available until they reach a certain level of output. This needs to be figured out at a policy level, and we won’t see substantive changes until we break up the plastic lobby and create sufficient recycling infrastructure. Lots of compostable films haven’t been adopted widely by the marketplace, and recycling rates are abysmal; Tetra Paks, for instance, can only be recycled in 60% of municipalities.”
Given the hurdles involved in creating a sustainable business platform, “It’s good to help up-and-coming brands, and bigger brands alike, figure out the best path forward,” Stockdale suggested. “We should be concerned about the best possible outcome for the collective of the industry, which will be determined by who can cooperate and develop mutually beneficial relationships.”
NIQ (formerly NielsenIQ) and McKinsey & Company recently conducted a joint study examining sales growth for products that claim to be environmentally and socially responsible. The companies published their report, titled “Consumers care about sustainability—and back it up with their wallets,” in February of this year.
Experts from the companies shared findings at an education session during Natural Products Expo West in March.
A Sea of Sustainability Claims
The wellbeing of the planet is deeply ingrained in natural shoppers’ conceptions of personal wellness.According to the NIQ/McKinsey study, 61% of consumers said the poor health of the environment was having a negative impact on their own health. Meanwhile, 64% of consumers said they would be willing to pay more for products supporting communities and vulnerable groups.
“Factors such as responsible material sourcing, eco-friendly packaging, reduced or zero waste, biodegradability, recyclability, and similar factors are the table stakes everyone should be thinking about,” said Sherry Frey, vice president of total wellness at NIQ. Sustainability credentials are no longer a differentiator.
Products that feature certain sustainability claims may not yet have high sales in total, but are experiencing extremely high growth rates such as regenerative agriculture, low-carbon emissions, water conservation, biodynamic, and more.
“This rise in new claims is great, but the variety is also creating confusion among consumers. Compared to 2016, almost twice as many consumers report that they don’t know how to find sustainable products in the grocery store,” said Frey.
Nearly half of consumers (44%) said they would choose a retailer if buying sustainable products was incentivized through things like sustainable shopping aisles, loyalty points or discounts, replacing all options with sustainable alternatives, climate-friendly labeling, refill stations for reusable containers, and investments in the circular economy.
“We know that there is a pronounced difference between what consumers say they’re going to do in surveys versus what they actually do. Sustainable products get introduced, and while many find success, many don’t,” said Steve Noble, senior partner at McKinsey & Company.
Tracking Claims Over Time
The NIQ/McKinsey study analyzed 5 years of U.S. sales data, from 2017 to June 2022, covering 600,000 individual product SKUs representing $400 billion in annual retail revenue. These products came from 44,000 brands across 32 food, beverage, personal care, and household categories.NIQ was able to identify 93 different claims related to environmental, social and governance (ESG), which were divided into six classifications: animal welfare, environmental sustainability, organic-farming methods, plant-based ingredients, social responsibility, and sustainable packaging.
Products making ESG-related claims averaged 28% cumulative growth over the 5-year period, versus 20% for products that made no such claims, representing an 8% “growth differential.”
Sustainability drove growth in most CPG categories, but there were some differences across brand sizes and price tiers.
In 59% of all categories studied, the smallest brands that made ESG-related claims achieved disproportionate growth. But in 50% of categories, so did the largest brands that made these claims.
Mid-size brands didn’t perform as well, with only 38% seeing outsize growth. While the data can’t explain the underperformance of medium-size brands, according to the report, it’s possible that they lack the marketing and distribution scale of large brands and the aura of credibility that may benefit smaller brands.
ESG claims performed better among established products, rather than newer products, suggesting that consumers may have greater expectations for new products, but are pleasantly surprised when legacy CPG products make claims for the first time.
The report also looked at how the prevalence of a claim affects sales performance. While no ESG-related product claim outperformed all others across all product categories, less-common claims tended to be associated with larger growth, said Noble.
For instance, “vegan” and “carbon zero,” both of which are low-prevalence claims, led to 8.5% growth differential in products, compared to medium-prevalence claims like “sustainable packaging” and “plant-based,” which had 4.7% growth differential.
“The headroom is still there, however. Highly prevalent claims on products are still providing growth benefits to brands which are late to adopt them,” Noble said.
Willing to Pay a Premium
While consumers express willingness to pay more for sustainable products, succeeding with a price premium actually depends on a range of factors.A product making a less prevalent claim is more likely to succeed with premium pricing, said Frey, and the opportunity for premiumization wanes for commonplace types of ESG claims.
A brand that has a large portion of products which are sustainable is more likely to generate repeat purchases, according to sales data. A brand that generates 80% of its sales from products with ESG-related claims is likely to see a 34% repeat rate (portion of buyers who wind up purchasing a product three or more times annually).
However, if less than 20% of a brand’s sales are generated from sustainable products, repeat rates drop to 27%.
“Combining claims is another way brands are justifying a premium price point,” noted Frey. “Packaging is a no-brainer for virtually any CPG brand, but all brands should also think about where they might be able to benefit animal welfare, social impacts, and other aspects of the environment as well.”
According to the data, nearly 80% of all product categories saw compounding growth in sales based on the number of ESG-related claims a product made. Multi-claim products grew about twice as fast as products which made a single ESG claim. However, companies need to ensure they have data to support each claim in order to avoid accusations of greenwashing.
'ESG should be thought of as compliance, or as risk mitigation. No one will have a choice soon. It will be as enmeshed in business as balance sheets. Changing the food system requires accounting for everything in your supply chain.'
—Errol Schweizer
Sustainable Growth & Risk Mitigation
It is a huge missed opportunity for any brand not to engage in serious projects to improve its social impact, said Kelly Stockdale, senior category manager, KeHE Distributors.“Sustainability has become so much more about people than ever before, and it’s also become a matter of brands consistently focusing on what more they can do over time. It’s ridiculous to not base a brand on at least some of these social values with so many tools and forms of support.”
Representation in company leadership has also become substantially more relevant to consumers. “The past few years served as a major jumping off point for consumers to become interested in products that support diversity, such as those from woman-, minority-, or LGBT-owned brands,” Stockdale noted.
Finding a place among the brands driving systemic change is a challenge despite the widespread support, noted Errol Schweizer, sustainability, ESG, and retail strategy consultant and former vice president of grocery at Whole Foods Market, during the panel discussion at ExpoWest.
“Even as the bottom fell out of the economy in 2008, these attributes grew every year; and over the course of 30 years, we saw compound interest in organic, non-GMO, and other categories which have now become mainstream,” he said.
“ESG should be thought of as compliance, or as risk mitigation,” Schweizer added. “No one will have a choice soon. It will be as enmeshed in business as balance sheets. Changing the food system requires accounting for everything in your supply chain. Factory farms are externalities, and they’re catastrophic, but they’re also part of the food system you’re in. The biggest companies in the world are using those externalities and you’re going to end up reaching a premium price point if you want to be truly sustainable and transparent.”
At the same time, he continued, “ESG-compliant companies are more profitable, and draw higher investments because of the risk mitigation they undertake. But customers don’t want premiumization, they want both value and sustainability.”
With certifications and laws to prevent greenwashing now more common, with more being proposed, ESG-related claims will only be given more credence in the future.
“When I started STEAZ Organic Tea there was no organic certified logo to put on packaging,” noted Eric Schnell, founder of BeyondBrands. “We knew that eventually the government would put something in place in order to prevent greenwashing, but organic claims weren’t always a guarantee that something was organic.”
“When we became fair-trade certified,” Schnell continued, “it cost us about $10,000 more in labor costs per year, which was not a major expense for us, but that value was equivalent to about $1 million dollars in Sri Lanka, so it made a significant impact there. We went carbon-neutral across our whole supply chain, which was an expense of maybe $15,000 to $20,000. But this led to our B Corp certification, which is one of the biggest badges of honor to wear as a socially responsible brand.”
Choices in packaging are still limited based on factors outside of a CPG brands’ control, noted Schweizer.
“Lots of brands are being launched today based on the concept of offering the first of a given product in a sustainable packaging form,” he said. “But lots of smaller companies are forced to take whatever packaging is available until they reach a certain level of output. This needs to be figured out at a policy level, and we won’t see substantive changes until we break up the plastic lobby and create sufficient recycling infrastructure. Lots of compostable films haven’t been adopted widely by the marketplace, and recycling rates are abysmal; Tetra Paks, for instance, can only be recycled in 60% of municipalities.”
Given the hurdles involved in creating a sustainable business platform, “It’s good to help up-and-coming brands, and bigger brands alike, figure out the best path forward,” Stockdale suggested. “We should be concerned about the best possible outcome for the collective of the industry, which will be determined by who can cooperate and develop mutually beneficial relationships.”
