Why decarbonization offers retailers a chance to lower costs and increase revenue

The retail industry is in the midst of a tectonic change. When the COVID-19 pandemic prompted lockdowns in early 2020, many brick-and-mortar retailers saw foot traffic and products plummet. The pandemic caused many retailers to invest heavily in digital technologies and e-commerce to serve customers who were unwilling to visit physical stores — investments that are continuing to reshape the industry to allow customers to engage and buy from retailers in any way they choose.

Deloitte’s consultancy mention to the many changes altering retail as a “retail reset.” But retailers searching for new ways to engage with and attract customers while also improving their financial performance would be wise to develop a holistic sustainability strategy and action plan.

Customers care about climate action

It may sound like an odd strategy, given that many companies view decarbonization as an expense not connected to their core business. This assumption needs to be reconsidered for a host of reasons, not the least of which is that meaningful pursuit of emissions reductions can help attracters and retain both new consumers and employees.

Research supports consumers’ interest in sustainability. A survey by McKinsey found that 75 percent of millennial consumers consider sustainability when they purchase clothing and in the past five years, there has been a 71 percent increase in online searches for sustainable goods. And what’s more, shoppers are even willing to drop brands that took an action that violated their values.

Research also shows that many consumers are willing to pay more for sustainability. A study released last year in the journal Environmental Management concluded that 79 percent of people surveyed were willing to pay a premium for sustainable food products. Given that decarbonization is an important aspect of sustainability, taking meaningful action to address climate change can be an important differentiator for retailers.

Lowering costs and increasing revenue

But decarbonization isn’t just a matter of burning a brand’s reputation. There’s a reason why big retailers like Target have pledged ambition climate action: it makes good financial sense. Many retailers, particularly those in food retail, have thin profit margins. Many decarbonization initiatives, including energy efficiency or participation in demand response programs, allow retailers to lower costs and increase revenue.

Companies with low-profit margins, reduced operational expenses and higher revenues can contribute to their bottom line. Other decarbonization steps, such as renewable power purchase agreements (PPAs), let retailers lock in long-term electricity prices, protecting them from price volatility.

A wealth of options

A wide range of options is available to retailers interested in lowering costs and raising revenue while also pursuing environmental, social and governance (ESG) objectives. It helps when retailers start thinking about how they can best manage their own assets. For instance, monthly electricity bills are not a fixed cost and can be impacted through a number of on-site solutions. A changed mindset empowers retailers to take steps such as participating in utility demand response programs. At its most basic level, demand response programs financially reward utility customers that reduce their energy use at times when demand for electricity is particularly high.

Because many retailers use a lot of electricity, their participation in demand response programs can be especially beneficial to both the grid and to retailers that can successfully reduce their energy usage. Many retailers are also making investments in on-site solar generation and energy storage. For retailers that operate in states with time of use (TOU) rates that charge more for electricity consumed when demand is high, on-site renewables and storage can insulate them from high-priced electricity.

On-site renewables and energy storage are also tools to reduce or eliminate the expensive demand charges some retailers face. These charges are typically based on the maximum amount of power a customer requires over a defined period (typically 15 minutes) of time in a month. On-site renewables and storage also allow retailers to earn revenue by participating in wholesale electricity markets. As the power system overall evolves to include more variable generation, like wind and solar, it’s possible for retailers to be compensated for capacity, energy and voltage and frequency support to the grid.

Electric transportation is another powerful tool retailers can utilize to decarbonize, lower costs and better serve customers. For example, many customers spend an hour or more shopping at a mall or individual store. Adding EV charging at a retailer’s location can enhance the customer’s experience and offers a way for retailers to differentiate themselves. Many retailers also rely on a fleet of delivery trucks to transport products to customer homes. Fleet electrification offers an opportunity to decarbonize and contain costs.

Other opportunities to reduce costs and drive decarbonization depend on the size of a retailer’s store. Retailers with a large format or big box stores generally have a lot of control over energy usage. This provides opportunities to aggressively pursue energy efficiency measures that slice electricity bills and lower emissions. In stores, retailers may have less control over building energy usage.

Lowering risks, working with experts

Whether retailers opt to develop those relationships, move forward alone or do nothing, it’s important to be clear on the risks of interaction. A recent report by the Retail Industry Leaders Association (RILA) outlined a range of business risks climate change poses. Among the risks identified in the report is damage to stores and supply chains due to extreme weather associated with climate change. Another risk the report highlighted is the possibility that regulation will put a price on carbon and mandate emissions reductions — an added cost that retailers could avoid through proactive action.

Even retailers motivated to leverage decarbonization to improve financial performance may lack the internal energy and technology expertise to develop and implement a roadmap and strategy.

This is understandable. Managing supply chains, responding to changing customer preferences, hiring and retaining staff are more than enough to keep retailers focused on their business. This is why it’s so important to forge strategic relationships with companies that have deep expertise and experience in the energy industry, like Shell Energy. Companies that understand the nuances of electricity markets and the performance and cost trajectories of low carbon technologies, allow retailers to benefit from decarbonization initiatives while remaining focused on their customers and growing their business.

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