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How retailers can compete using circular economy principles

Four steps to implementing the economic model that both meets consumer demand and drives higher revenue.

Consumers are asking far more of retailers than ever before, fueled by the demands of modern lifestyles and changing needs. Whether consumers even will want to buy as much as they have in the past is brought into question by the fact that the average American already has $7,000 of unused goods in his or her home, leading many to suggest that we may have already reached "peak stuff."

Consumers are also increasingly putting considerations of sustainability at the heart of their purchasing decisions, coupled with the ever-growing competitiveness of online shopping, which is putting pressure on retailers to become essential enablers for the betterment of their customers’ lives rather than merely suppliers of "stuff."

Circular economy principles provide an opportunity for retailers to increase both their attractiveness and deepen their connection with their customers.
Circular economy principles provide an opportunity for retailers to increase both their attractiveness and deepen their connection with their customers. In the circular economy, products are kept in use for as long as possible through multiple "service lives," maximum value is extracted from them while in use, and the materials in them are then recovered and regenerated at the end of each life.

Dell and Apple are two examples of companies that are helping put this idea into practice.

For example, Dell is diverting plastics that otherwise might go into the ocean to be used as part of a new packaging system for the XPS 13 2-In-1 laptop globally. Apple is investing heavily in robotics to disassemble and recover valuable materials inside. Its newest robot, Daisy, can disassemble up to 200 iPhones an hour. It separates parts and removes certain components as it goes.

Implementing circular economy initiatives effectively and consistently can be good for business, good for society and good for the environment. PA recently published a report, "Keeping Customer Connections," based on research conducted by Cranfield University and Arizona State University. We found that retailers that participate in the circular economy through instituting programs that make it easier for customers to sell, donate or recycle items can experience significant and sustainable increases in customer loyalty. Indeed, over two-thirds of consumers would resell a product (specifically apparel and electronic goods) if their retailer provided a service to do so.

This is an exciting opportunity for retailers. It means that consumers want to maintain a relationship for months or even years after they made their original purchase, thereby creating opportunities to generate additional income and sales. 

So, if retailers want — as we believe they should — to explore the opportunities offered by the circular economy, where should they start? Our view is that pilots are the key. The disruptive business models and technologies underpinning circular economy initiatives need to be tested in an agile, rapid way — allowing maximum opportunity for learning and minimizing risk. 

First, start with a customer problem and involve your customers in refining it. Danish company Vigga is a great example of listening to your customer needs and creating solutions to meet them. The problem it looked to solve is one felt by every new parent: Your child is not even 4 months old and already has outgrown two rounds of clothing sizes. Vigga provides baby clothes and maternity wear on a subscription model. Parents exchange clothes when they are outgrown, avoiding unnecessary cost and waste.

Second, embrace partnerships. Many circular economy initiatives effectively can be implemented only by engaging with a number of participants across the value chain. For example, H&M partners with a clothing collection company to assist with sorting and recycling garments their customers drop off. However, collaborating often can seem daunting in a highly competitive sector, so look to also test collaborations when piloting technologies and business models.  

Collaborating often can seem daunting in a highly competitive sector, so look to also test collaborations when piloting technologies and business models.
Third, find the right language to talk about the circular economy. Research shows that even small changes in language, such as moving from the term "leasing" to describing something as a "club," can create far more appeal and ultimately uptake with consumers.

Finally, scale fast. When you hit upon a winning idea, be prepared to scale it quickly. There is real potential for differentiation and building your brand and customer base when you are an early mover. Recognize that circular economy can be difficult to "bolt on" to business as usual, so be prepared to look at creating internal ventures, setting different incentives and breaking down silos.

Circular opportunities are often cross-cutting, requiring new ways of working across the retail enterprise, including merchandising, marketing, logistics and operations. But the buzz of excitement that goes with them is often infectious, garnering massive engagement from staff and customers.

What is clear is that this market is developing rapidly and there are clear competitive advantages to be gained by those able to effectively implement circular economy initiatives that deepen shopper engagement. The Real Real , for example, aims to become the first $1 billion circular economy company, through reselling luxury goods — and they are not far from achieving it.

The message is clear: Circular economy principles can deliver meaningful benefits valued by shoppers and greater revenues to business, and if existing retailers don’t realize these opportunities, emerging innovators will.

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