Editor’s note: This article is part of a series on sustainability.
Sustainability has been a focus for several DTC brands from day one, and that has helped attract younger consumers.
From the materials brands use to curb waste to the way in which they produce goods, brands like Allbirds, Reformation, Everlane and others have baked sustainability into their DNA.
But as these brands look to scale, are their sustainability goals in jeopardy?
Despite sustainability targets, certain areas of business are still harmful
Several retailers, including DTC brands, have outlined goals aimed at operating in a more sustainable manner.
Reformation, for example, reports its progress around sustainability quarterly. In the first quarter of 2022, the apparel brand reported that it launched a denim capsule collection made from recycled fabric scraps from factory floors, joined Land to Market — a sourcing solution for regenerative agriculture — and Fashion for Good, and set goals to achieve 100% traceability through its supply chain by 2025, among other things. This comes in addition to Reformation’s other initiatives, including a recycling program.
Allbirds similarly has outlined goals for itself to cut its carbon footprint in half by 2025 and reducing it by “near zero” by 2030, including shifting to regenerative agriculture, using renewable materials and utilizing responsible energy.
“If you’re making things in China or Vietnam or India, you’ve got to ship them all across the world. Your choices are boat or air … and either one leaves a very big carbon footprint.”
Partner in the consumer practice of Kearney
But despite some of the commitments companies are making, there are a number of things brands are currently doing that have negative environmental impacts, like how and where a brand manufactures, transports and packages products; what its back-of-house operations look like; and how it handles reverse logistics.
The consequences of manufacturing overseas is greater, pushing many companies to consider nearshoring, according to Brian Ehrig, a partner in the consumer practice of Kearney.
“If you’re making things in China or Vietnam or India, you’ve got to ship them all across the world. Your choices are boat or air … and either one leaves a very big carbon footprint,” Ehrig said.
And packaging can have a major impact on whether a brand is operating sustainably. DTC brands are still one of the biggest users of plastic and corrugated packaging, according to Tyler Higgins, retail practice lead and managing director at global consulting firm AArete.
That comes on top of the fact that consumers may receive packages frequently depending on the brand and type of product they sell.
“From a transportation standpoint, they’re a high use of miles,” Higgins said. “A lot of consumers might get packages for seven straight days from the same direct-to-consumer brand.”
The targets that some brands set for themselves to address these problems, however, really only focus on the factors within their own control, Higgins said.
“A lot of those things that fall on the world of scope 3 emissions, [brands] don’t put as much onus on or focus on because it’s less in their control and they’re really focused on building their brand around the specific products they’re manufacturing,” Higgins said, adding that sustainability is “sort of in the eye of the beholder, for lack of a better phrase.”
While many DTC brands may claim to be transparent when it comes to their sourcing materials, they may also have ships and trucks burning fuel within their supply chains.
“They may tout their manufacturing process, but then they may go put it in a plastic bag or corrugated box before it ships to your front door,” Higgins said. “What I think brands are doing is picking what they have the most control on and what they’re good at and touting that component, even if the other pieces” are not necessarily sustainable.
But as more digitally native brands turn to physical retail, questions are emerging around how that impacts their sustainability targets.
Stores versus e-commerce
DTC brands have come to realize the benefits of having a brick-and-mortar presence, including allowing customers to touch and feel a product before purchasing, reducing customer acquisition costs by serving as an additional marketing vehicle and, for some, serving as a fulfillment channel for goods. But does operating a store have environmental benefits as well? It’s a question that doesn’t have a straightforward answer.
When looking at products on a per-unit basis that were manufactured from the same locations, AArete’s Higgins believes a store is more sustainable because “you’re delineating the emissions over a much broader polling of items.”
But something to factor in, which impacts how sustainable a physical location is overall, is how consumers are getting to the store — something that falls in the realm of scope 3. To think about sustainability holistically, retailers need to consider things like how much fuel is used to get to the store or whether public transportation or biking options are available, Chris Ventry, retail and consumer lead at SSA & Company, said in an email.
In the U.S. 95% of shopping trips are made by car, according to research led by Sadegh Shahmohammadi. Comparatively, in the Netherlands that number was 44%.
“When you have a lot of store locations, it means that you could have the wrong inventory in too many of the wrong places.”
Partner in the consumer practice of Kearney
Operating fewer stores or no stores at all will have less of a negative impact, Ehrig said. That’s because the fewer distribution points a brand has, the fewer places it needs to house inventory. When a brand operates hundreds of stores, it needs to carry inventory in all of those locations, and for a brand — particularly in the apparel sector — the risk of miscalculating demand is higher.
“The likelihood that I forecast the demand for that is relatively low, which means I’m going to have more obsolescence of inventory and then I have to dispose of that in some way,” Ehrig said. “When you have a lot of store locations, it means that you could have the wrong inventory in too many of the wrong places. That’s really the big risk.”
According to research released last year from MIT’s Real Estate Innovation Lab, e-commerce was found more sustainable than traditional retail in more than 75% of the scenarios the researchers developed.
But when it comes to opening stores, brands may be prioritizing scaling their businesses, even if it comes at an environmental cost.
“While [stores] have some kind of impact on their carbon footprint, it could be a very good thing for their business,” Ehrig said. “So that’s sort of a trade off.”
Because shoppers don’t shop in a single channel, stores have become a necessity for DTC retailers. Brands can adopt ways to leverage stores to lower their environmental impacts.
Buildings and construction accounted for some 36% of global energy demand and 37% of energy-related CO2 emissions in 2020, according to a report from the United Nations Environment Programme. Nonetheless, “brick-and-mortar sustainability is a real issue that some direct-to-consumer brands are taking seriously — and using as a way to send a message to their customers,” Ventry said, pointing to examples like Patagonia’s use of sustainable building principles, Google’s LEED platinum store in New York and Allbirds’ pledge to use renewable energy across its entire retail portfolio.
Brands can also use their stores as a place to collect returns, a problem that online brands — particularly those selling apparel where size and fit play a big role — have to grapple with.
E-commerce was found more sustainable than traditional retail in more than 75% of the scenarios researchers developed.
MIT’s Real Estate Innovation Lab
“The average person is going to buy one product — they’ll probably buy three of them and return two of them,” Higgins said. “You ultimately are probably doubling the miles on the road, doubling the packaging that’s being sent around [and] doubling the amount of time it trades hands.”
Creating a point where consumers can return items in person may help mitigate some of those factors.
Brands can also leverage wholesale partnerships with traditional retailers as way to get their products in front of consumers in person, while also mitigating some of the negative impacts associated with running a store.
“Naturally, wholesale is going to be, on a per-unit basis, more carbon-friendly or more environmentally friendly than direct to consumer,” Higgins said.
However, when those consumers travel to a mass merchant to pick up products being sold by those DTC brands, those retailers are then passing on the environmental cost of fulfilling the purchase to the consumer, which starts to enter scope 3 emissions.
“It is a little bit of, you know, passing the buck,” Ehrig said.
There are benefits to wholesale, though: The way a product is packaged for wholesale is different. It generally contains less packaging so more product can fit on a container to be shipped.
Last year, several direct-to-consumer brands entered the public markets, from Warby Parker and Allbirds to Brilliant Earth and On. But those newly public companies may face greater scrutiny around their sustainability targets as the Securities and Exchange Commission lays out rules around reporting on climate risk.
“Actually being able to track and measure all of this is one of the most difficult challenges that they have. And, boy, getting it wrong would be a serious, serious mistake.”
Partner in the consumer practice of Kearney
The SEC wants to require companies to describe their climate risk and plans to achieve targets set for curbing those risks in their 10-Ks. Companies would be responsible for disclosing scope 1 emissions, like their greenhouse gas emissions from their facilities, and scope 2 emissions, like their energy purchases. While there could be more limits on requiring companies to disclose their scope 3 emissions, those companies that have already made commitments about curbing their scope 3 emissions will need to report progress.
But even for companies that are still privately held, issues around whether their sustainability targets are adding up are starting to arise.
“Most companies are not sure if all the efforts that they’re making are really adding up to the commitments that they’ve made,” Ehrig said. “We’re really doing a lot of reverse engineering of these 2025, 2030 goals to understand how they are measuring all these things. Are they making the right kind of impact? I would say that the vast majority of the companies that I’ve seen, the spirit is there and the funding is there, as well. Actually being able to track and measure all of this is one of the most difficult challenges that they have. And, boy, getting it wrong would be a serious, serious mistake.”
Where can brands go from here?
While many brands have already undertaken initiatives to help mitigate environmental harm, they’re just scratching the surface.
Focusing on the manufacturing side as well as the type of packaging used for products should continue to be a priority for brands moving forward, experts said.
“Even when not mandated by laws in certain jurisdictions, DTCs could increase their use of recycled corrugated cardboard,” Ventry said, adding that “there are opportunities for DTCs to further encourage consumers to reuse or recycle packaging.”
And finding ways to use the customer data brands already have to help streamline supply chains and reduce the number of miles on the road can help further reduce their carbon footprints.
“It’s become clear that factoring in sustainability and eco-friendliness has become not only a differentiator for direct-to-consumer brands, but a necessary part of their operations and planning. Brands that are most successful in this game will use data to make informed decisions about reducing waste. They’ll incorporate green practices into developing new products, including sustainable packaging and raw materials; they’ll design environmental strategy into their stores and operations,” Ventry said. “DTC brands need to be thinking 360 degrees about their impact on the planet, their customers’ perception of their responsibleness, and the effect on their bottom line of making these changes.”