Climate Woes Force New Biz Models

THE FESTIVAL OF COLOURS, Holi, celebrated towards the end of March, marks the onset of summer — that time of the year when air-conditioner, air-cooler and refrigerator manufacturers make a fortune out of the sweltering heat. For most firms, the growth target is well above 20% during summers.

But the summer of 2023 changed all that. Not only did the winter prior to that get extended well into mid-March, the summer months were intercepted by unseasonal rains, leading to a significant drop in temperatures. Thanks to consumers who didn’t feel the need to invest in a new air-conditioner or replace the existing one, most brands ended up with huge unsold inventory, dragging sales down 15-20%. Washing machine sales also played spoilsport, leading to an ever larger inventory pile-up.

This year, the story has been different, though. Consumer durable manufacturers have seen a 35-40% growth in sales owing to temperatures soaring up to 50 degrees in most parts of the country. But despite the surge in demand, there was an opportunity loss. Excessive heat led to a stock-out of air-conditioners and air-coolers. While most manufacturers ran out of components, many shipped products directly from the manufacturing line to stores (consumer durables are usually shipped to a warehouse and depending on orders from stockists and retailers sent to different stores).

“Over 40% of air-conditioner shipments have been direct this year,” points out Anil Verma, CEO, Godrej & Boyce. “Last year the summer was bad and this year it was too good (in terms of demand), but the fact is that the needle is shifting drastically. Last year we had a lot of unsold inventory, while this year we are pushing stuff from production lines to dealers,” he adds.

It’s not just the consumer durable sector that is facing the brunt of the vagaries of climate — from personal care to food and beverages and apparels, climate disruptions are pushing companies to reinvent business models. If there are flash floods in a particular geography, an HUL or Emami, or an Amul or Nestle have to find ways to ensure their products reach consumer homes. For Parle Agro whose flagship product, Frooti, clocks its highest sales during summer, can there be a weather-predictive model which could help manage inventory efficiently, or can the company launch products which can be sold throughout the year? Similarly, apparel brands such as AND have to look beyond the conventional spring/summer or fall/winter collections. Can they focus on collections that generate sales through the year?

These are some of the dilemmas most consumer-led businesses are grappling with. In a CEO survey by consulting firm PwC earlier this year, climate was identified as a core driver of the need for business reinvention along with macroeconomic volatility and technological disruption. Around one-third of those surveyed expect climate change to necessitate shifts in the ways in which they generate value in the next three years. Many foresee changes to their supply chains and are preparing to offer different products and/or services. According to U.N., climate-related productivity losses will exceed $2 trillion by 2030, and environmental risks in the supply chain could cost firms $120 billion by 2026.

Reinventing The Value Chain

The tradition of annual strategy plans no longer holds good. “All these years we operated on a predictable weather cycle. Even disruption was predictable. Once in every two-three years, one would see extended monsoons or summers. Now you can’t even say it is summer as a few days it is summer and suddenly there’s going to be rain somewhere. You are grappling with multiple seasons within a season,” explains Nadia Chauhan, joint MD, Parle Agro. Flexibility is the need of the hour, she adds.

The FMCG major, ITC, has developed a multi-decadal climate prediction model to address possible climate change disruptions for the next 30-40 years. “Weather is broken down into features such as temperature, precipitation, wind and hailstorm. The model also includes flooding and drought. We have data at a micro-region level as well, because it is not good enough to just know what is happening at the state or India level. We work with specialised agencies/firms and synthesise the information,” explains S. Sivakumar, group head, agri and IT, ITC.

The company has created scenario-planning tools which help in building resilience across its value chain. “If the forecast says a week from now it’s going to rain, firstly, there is no guarantee it will rain. And when it does, it could be 5 cm or 14 cm. Therefore, you need to look at multiple scenarios, and for each of them you need a tool kit. For instance, if summer extends by two weeks or there are floods in a particular geography, how can I plan better? The planning has to be from the upstream end of any chain (if I am in the business of beverages or food, I need to deal with farmers), all the way to the downstream (distribution or sales),” says Sivakumar.

Similarly, if the tools caution them of a condition which could lead to a pest attack, the company can get farmers to take precautionary measures. “The tool kit ensures flexibility within the supply chain network, manufacturing processes and inventories so that we are able to respond with agility. If there is a prediction of excessive rain or heatwave, it enables the sales person to advise the retailer on how much inventory to stock,” he adds.

Hindustan Unilever (HUL), in the past three years, has developed capabilities to service demand from multiple geographies, through factories that can build multiple products at one go. “While it is crucial to serve the demand of the region from local factories and distribution centres to ensure cost competitiveness and keep a check on transportation emissions, we have created the capability to ‘service from anywhere’ in case of any disruption at our distribution centres/factories,” says Yogesh Kumar Mishra, executive director, supply chain, HUL. “Most of our factories make more than one category of products — be it home care, personal care, beauty and wellbeing, nutrition, or ice cream. In case of a crisis in any region, we can reallocate production to other areas,” he adds.

The FMCG major has also made sure it manufactures closer to demand. “We have reduced the distance travelled for finished goods by 10%. This journey of optimising our network will continue. When distance travelled is reduced, you can quickly service demand if there is a sudden increase.”

Year 2023 saw some of the worst climate-related disruptions globally — ‘monster flooding’ in Thessaly, Greece, considered the nation’s bread basket; heat waves across North America and Europe in April-May, and heat waves in parts of Asia which affected rice cultivation. No wonder 47% of the CEOs in the PwC survey say they have been enacting initiatives to improve adaptation to physical climate risks.

“Globally, consumer companies are trying to take multi-year data of temperature. They are looking at data around precipitation and rainfall and figuring out the kind of climatic disruption. If they know 80% of their supply is going to come from climatically vulnerable zones, then they know it’s time for them to start looking at supply chain resilience,” explains Easwaran Subramanian, partner and supply chain leader, Deloitte India.

But weather predictions aren’t too accurate in India, says Chauhan of Parle Agro. “Earlier, we used to plan on the basis of seasons. Now we are not saying these are the months that you would have a hot season, it’s more about how you make the most of all the hot days of the year. You have to work on day-to-day, week-to-week planning. The cycles are shorter now.”

The greatest challenge for consumer durable companies to counter climate change disruptions is shortage of components. Be it the compressor of an air-conditioner or electronic components, bulk of them are imported. The window for placing an order for these components and the final manufacturing of the product is six-seven months, making it difficult for brands to improve agility. “Product life cycles are becoming shorter but lead times are longer,” explains Manish Sharma, chairman, Panasonic Life Solutions, India and South Asia.

“When a purchasing manager places an order for an air-conditioner component, by the time that factory begins manufacturing and despatches it to us and manufacturing happens at the Panasonic plant and the final product is despatched to distributors and retailers and finally to the consumer, the lead time exceeds seven months. This puts pressure on the supply chain to manage inventory in a manner that they don’t have redundancies,” adds Sharma. Panasonic India has been investing in local sourcing hubs for components, but the demand this year was so high that the sourcing initiatives could not solve its component woes.

The government’s Production-linked Incentive (PLI) scheme encourages local manufacturing of consumer durable components. “Our scenario planning needs to be revisited. We need to build in more volatility,” says Verma of Godrej & Boyce. “There needs to be more emphasis on climate change. What are the risks if demand is going to fluctuate 25-30%? If there is going to be a summer which is hotter? Am I able to meet demand? What do I require in terms of components, manufacturing capacities and shipping? We need to identify the risks and build a mitigation plan,” adds Verma.

In fact, most consumer durable components are imported from China or Taiwan, which, in the past few years, have faced the worst climate disruptions, putting supply chains in disarray. Frequent floods have created havoc, leading to forced closure of manufacturing companies. In fact, according to a recent report by Bain & Company, only 30% of supply chain sites in the U.S., China and Taiwan are capable of pivoting to an alternative site in less than 10 weeks. Around 11% are fully prepared for climate disruptions.

Fashion Fiasco

For the global fashion industry, 2023 was one of the toughest years. The industry, which has the dubious distinction of contributing 3-8% to global greenhouse emissions, witnessed supply chains coming to a standstill due to climate disruptions in its major sourcing and manufacturing hubs worldwide. For instance, around 67% of cotton that goes into apparels is sourced from India, Pakistan, Bangladesh, Cambodia and Vietnam, which, in the last few years, have been facing either extreme heat or excessive flooding. According to a BoF-McKinsey report, India, the world’s second-largest cotton exporter, reduced its supply last year due to extensive rain and pest invasions. Pakistan, too, has been hit by extreme monsoons, while cotton producers in drought-affected Texas have seen abandoned crops and steep production declines.

Similarly, 55% manufacturing sites in Vietnam’s Ho Chi Minh City — a hotbed for contract manufacturing for apparel brands — could be exposed to rising sea levels and flooding by 2030. Factory workers in Bangladesh, according to the study, reported headaches, exhaustion from dehydration and lack of sleep due to high temperatures, while 53% of surveyed Cambodian workers reported unwell due to heat stress. Meanwhile, productivity is estimated to decrease about 1.5% for every degree of temperature that rises above 25°C.

Climate is also impacting fashion’s logistics strategies. Across industries, 90% of exported goods rely on shipping to reach their final destinations, but an estimated $122 billion of economic activity at ports is at risk from disruptions caused by extreme climate events. The summer of 2023 saw Europe’s worst dry spell in 500 years, with ships navigating the Rhine River forced to reduce the weight of cargo to continue their journeys. A similar narrative played out on the Panama Canal. In China, drought slowed traffic on the Yangtze River, forcing companies to move goods through alternative, often more expensive routes.

The BoF-Mckinsey report says extreme weather events could jeopardise $65 billion worth of apparel exports by 2030. Companies are looking to de-risk supply chains by increasing sourcing from multiple geographies. For instance, firms dependent on cotton sourcing from South Asia are now looking at supplementing the shortfall by importing from Brazil, Australia and the U.S. “Brands across the globe are also moving away from the traditional spring/summer and autumn/winter launches. They are looking at more frequent drops (quarterly or even monthly) so that they don’t sit on excess inventory. The focus is on lesser production, quicker turnaround and lesser inventory so that raw material consumption is conserved,” explains Rahul Mehta, chief mentor, Clothing Manufacturers Association of India.

This practice of sourcing less and manufacturing for shorter cycles is followed by luxury brands as well. “Earlier, we used to work spring/summer and fall/winter. Today, we have a new collection entering stores every three months,” says Carlo Beretta, CEO of Italian luxury brand, Tod’s. “In the past there were two big production cycles, leading to higher carbon emissions. We now plan the collection thinking the product should last in the store for two-three months or more. There is a higher rotation of the product, and our inventory is more calibrated. We have certain iconic products such as the Gommino Bags manufactured all through the year,” he adds.

Japanese retailer Uniqlo launched its stores in Delhi and Mumbai last year with its autumn/winter collection in September/October. But it was not winter either in Delhi or Mumbai. The retailer corrected its inventory after realising that winter in India is a short spell of two-three months and that too mostly in the north. Bulk of Uniqlo’s merchandise now comprises cottons and linens. In fact, most apparel retailers in the country have shortened the window of their winter drops.

“India is not a summer-winter market, except in the north. Brands used to earlier buy winter merchandise for 60 days, but with winter months having reduced considerably, they are now buying stock for 45 days,” explains Kavi Mishra, MD, Shoppers Stop.

Technology Enables

Not only has Tod’s done away with the practice of launching two major collections a year, it has also started using predictive artificial intelligence (AI) tools to make its supply chain more efficient. “Technology tells us how many products we should ship to a particular store. The system predicts the evolution of sales according to the climate. This has helped increase sales dramatically. AI also tells us which shoe size sells more in a particular store, so we ship accordingly and don’t lose sales,” explains Beretta.

HUL’s supply chain and inventory management are fully tech-enabled, aiding demand prediction. “We have developed a system that allows us to adjust production plans based on previous day’s sales. For example, our entire shampoo sachet production is now driven by daily sales data,” says Mishra. This predictive model has led to a 50% reduction in inventory. HUL is also extending this capability to coffee, tea, and other categories, allowing for production adjustments based on daily sales fluctuations.

“To make our supply chain more resilient, we are developing a Supply Chain Nerve Center under Project Samarth. This will act as an enterprise brain to drive faster decision-making, providing end-to-end visibility, and achieving global optima over local optima,” adds Mishra.

Parle Agro has partnered with Boston Consulting Group to build a hyper-sensitive tech model that would bind the company’s entire supply chain network. “The technology will enable us to respond in real time,” says Chauhan. “Today, the moment it rains during summer, the retailer doesn’t want to hold stock, nor does the distributor. The psyche is that it’s raining and nobody will buy. But there are days when it will be hot and sales will spike. It’s like accelerating and pausing, the longer you take to accelerate when the opening is there, the more you lose. Technology will enable us to handle acceleration and pause promptly without any loss of time,” she adds.

The likes of Panasonic, Godrej and Samsung, meanwhile, have connected products which generate real-time data. “We have not only tried to bring in real-time data from the point of sales, our connected products also give us consumer insights in real time. The error in our judgments 10 years ago was 25-30%, now it is 3-4%. We are able to simulate demand in a more scientific manner,” claims Sharma of Panasonic India.

Creating New Demand

Would reconfiguring business models give brands the opportunity to innovate better? Not necessarily. The opportunity lies in creating pockets of new demand. “Climate planning has to be integrated with business planning,” says Anirban Mukherjee, partner & MD, BCG.

“The biggest opportunity is being able to transition to a year-round business. In our case it is about building the psychological system which says you sell through the year, educate the trade about it and show everybody the upside. You can’t depend just on summer to extract your revenue,” points out Chauhan of Parle Agro. With summers being interspersed with intermittent showers and winters getting delayed, Chauhan’s strategy is to sell her seasonal products such as Frooti throughout the year.

Building value through the year leads to operational efficiencies. “The more you are able to extract out of your infrastructure, overall costs will come down substantially,” says Chauhan.

Jayen Mehta, MD, Amul, looks at opportunities to reduce the seasonality of ice-creams (which typically gets consumed more during summer) and convert it into a round-the-year snacking product. “To counter seasonality, we have been working on developing products which increase frequency of consumption. Ice cream has become a part of snacking habits due to on-the-go products such as ice cream sticks, milk bars, cups and cones. Customisation in the form of sundae, toppings etc makes ice creams a must-have in parties, which increases consumption,” says Mehta.

In the apparel business, demand creation is happening largely in the area of eco-friendly, sustainable fabrics which can be used round the year, says Mishra of Shoppers Stop. “Brands are sourcing more organic products, and the use of polyester has gone down substantially. Linen, which used to be used in summer, is now being used across summer and winter. The nature of fabric consumption has changed.”

Climate change disruptions are here to stay and firms have little option but to find ways to realign their business models in order to stay afloat.