THIS ARTICLE IS WRITTEN BY DAVID BOEKEL AND TRISTAN MIGHAWRY. DAVID ([email protected]) AND TRISTAN ([email protected]) ARE SENIOR CONSULTANTS FOCUSSING ON ESG AND SUPPLY CHAIN CONSULTING WITHIN THE BUSINESS CONSULTING SERVICES OF RSM NETHERLANDS.

Not only in Europe but all over the globe, e-commerce is experiencing an ongoing rise in sales volume. The outlook of this type of business is expected to continue to increase in the (near) future. There are geographical differences but the e-commerce sales in retail have come close to a 20% of the total retail sales. For example, in the Netherlands the number of physical stores was exceeded by the amount of web shops in 2022. These trends and developments make it evident that e-commerce is not only here to stay but is a crucial factor to make a business model future proof and to get the product to the client. The developments in technology have supported this trend with easy-to-use apps and a customer experience aligned with the needs of the current generation. As a result, entire supply chains have evolved to support next day delivery.

The expectations of customers have risen, and a lot of businesses are trying to capture a share of the growing online market. Each company is taking another step forward in attracting customers to their website. Discounts, free shipping and free returns are now common factors to convince the customer to buy from their website. Free returns are a must these days to meet customer demand, especially in the fashion industry. The ease of free returns convinces customers to buy additional products as the burden of the return is not on them. Sales volume has increased, but as a result customers now have come to expect free returns. This flow of return goods points out the downside of e-commerce whereas volumes of return goods have increased up to 30% of the sales.

The ESG impact of the increased customer expectations and demands

Since the consumer does not have to go to the store and that there is no building, e-commerce has more than half the carbon footprint compared to sales from a physical retail store. At a first glance, this makes e-commerce a far much better business model from a sustainability perspective than tradition business models.

However, sustainability reaches much further than only the environmental part of ESG (Environmental, Social and Governance). In addition, the return goods ruin the benefits that e-commerce provide in favor of traditional business models. Not only the transportation of return goods has a negative impact, but a significant part of the return goods is not available for immediate sale after the goods have returned to the logistical center. To re-sell the goods, businesses must check the returned goods on quality and replace possible damaged packaging. This ends up in a costly process compared to the value of the goods. This results in goods that are being destroyed as that is often the cheaper option.

Up until today this downside was part of the business model and the eventual financial loss of returns was accounted for in the margins. But that option comes to a hold due to global developments supported by (European) legislation. This demands a critical view on your own value chain and your place within the value chain.

The impact on your business model

ESG-performance is getting valued more and more. Due to global developments like the Paris Agreement, global warming and shortages on resources the expectations of society are changing. Customers demand sustainable products and transparent businesses with a low or even a positive impact on the world. This trend is supported by (European) legislation like the Corporate Sustainability Reporting Directive (CSRD) and the Extended Producers Responsibility (EPR). These two sets of legislation oblige companies to be transparent on their non-financial impact throughout the entire value chain and hold companies responsible for the end-of-life-effects that the product has on the environment.

This makes that the negative ESG impact of incineration or dumping goods to a landfill to get rid of non-saleable returned goods is now on the company. If not addressed, this will become a burden that is becoming so big that it is challenging the entire business model of e-commerce. Not only a financial burden as prices for virgin materials go up, but it also contains a reputational risk because companies are obliged to be transparent on these processes. This transparency obligation affects the reputation of businesses once they do not act in line with societal expectations.

Future proof businesses are stepping up their pace in the field of ESG by avoiding the destruction of goods. This can be achieved by giving new room to the ‘old’ business model where people visit the store. The impact of the ‘old’ business model lies on the consumer going to the store and the energy consumption of the building itself. If companies can minimize that impact, e-commerce takes precedent over the ‘old’ business as customers can get exactly what they want limiting the return goods flow and salespeople can provide a full customer experience positioning the brand of the company in an optimal way.

If customers are not willing to return to the ‘old’ business model, then a viable e-commerce line can only exist when the burden of the return goods can be contained. Future proof businesses understand that and are putting effort in reducing the hidden negative impact that e-commerce currently offers with limited compensation to society.