A New Lens on Sustainability: The Triple Bottom Line in the Luxury Sector

By Renee delCastillo, MBA 2013 @ The College of William and Mary

The business world is not just about reaching potential, it is about redesigning it. In modern business environments, success is no longer measured in the bottom line of the income statement, but a triple bottom line: people, planet and profit.  While the luxury sector is more immune to small economic downturns, the prolonged effects of recent global financial crisis have made all consumers (including buyers of luxury goods and services) more cautious of the social and environmental impacts of their purchasing decisions.

The luxury sector already understands the impact that quality, attention to detail, and personalized service can have on the buying decisions of its target customers. Hence, the experience of buying a Hyundai Elantra is much different from purchasing a Range Rover. The luxury experience is about making the individual buyer feel important by tailoring the purchasing experience to their explicit and implicit needs. When you enter a Volkswagen or BMW dealership, you are not bombarded by overly eager salesmen asking if you will be trading in a vehicle. You are welcomed into the store, made to feel comfortable, and offered guidance on finding the best vehicle to fit your needs. The sales professionals are really ambassadors for a product, whose reputation and attention to detail sells itself.

With regards to environmental initiatives and sustainability, it is commonly thought that this is the focus of non-profit organizations. However, when we take a closer look at the impact that some of these environmental issues can have on the business world, the picture becomes much different. There are currently 1.1 billion people who lack access to clean water. By 2025, two-thirds of the world’s population will live under water scarcity. At first glance, this may appear to be a social problem of the developing world. However, this is a global problem that will have social and economic implications if conscious efforts are not taken against the trend.

The impacts of water shortage will affect two different business segments: those who will experience a direct effect from water scarcity; and those who will feel the indirect impact from their suppliers. Distilleries are an example of those who will experience a direct effect of the water scarcity issue. Distillation processes use a significant amount of water in their cooling systems. With time, it is likely that prices per unit of water will increase to encourage businesses to be more conservative in their use. However, for businesses, in which water plays a direct role in their production, this will have significant impact on their costs and decrease their margins.

The second segment affected by the crisis will be businesses, whose suppliers feel the impact. The water crisis will lead to a number of businesses having to make significant investments in technology to recycle the water they are currently using, or to improve water accessibility. Either way, these costs will need to be recovered and will most likely show up in the prices that end users pay. This will weaken the power of smaller companies who lack the large economies of scale necessary to absorb these higher costs.

Luxury consumers may be less price-sensitive, but it is important to remember that luxury items are specific and customized goods that offer less substitutability of inputs than their more standardized alternatives. With a standardized product, if the price of a raw material increases, the company can switch to a different supplier because there are lower expectations in quality and attention to detail. By tradition, luxury products are associated with superior reputation and higher levels of quality. Thus, consideration for the long-term effects on quality and reputation make it less likely for manufacturers of luxury products and services to easily switch between suppliers.

The important questions for today’s businesses should focus on redesigning the processes and strategies that not only drive profitability, but ensure sustainability. For example, production facilities can investigate innovative mechanisms that recycle water. Specifically, distillers should look into implementing cooling systems that reuse water instead of drawing from a new source each time. There are conscious steps you can take in your own business to minimize the impact of water scarcity on your profits. Here are six from the Beverage Industry Environmental Roundtable (BIER):

Six Principles of World Class Water Stewardship in the Beverage Industry

Leaders Act with the understanding that:

  • Water is a finite and shared resource
  • Continuous improvement of water efficiency is fundamental to operational excellence

Leaders Engage and Communicate with the understanding that:

  • Community engagement is essential for sustained solutions
  • Partnerships lead to more effective water management
  • Open and honest communications define transparency

Leaders Work to Influence with the understanding that:

  • Responsibility for water stewardship extends throughout the value chain

(BIER) is a coalition of beverage industry companies and supporting partners that work together on a variety of environmental and stewardship initiatives in three core areas: Water Stewardship, Energy and Climate Change, and Stakeholder Engagement. For more, visit: http://bieroundtable.com.

It is time to breathe new life into the old and more traditional ways of doing business. As business leaders of the future, it is imperative that we focus on the triple bottom line: people, planet and profit.

Note: Images culled from Water Use Benchmarking in the Beverage Industry: Trends and Observations, 2010 by BIER

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