The Real Economics of Corporate Social Responsibility

For corporations it has many names, but one goal - to develop business while balancing the needs of present generations with those of the future. As it has grown in status throughout the world, corporate social responsibility (CSR) has evolved from a nice idea into a critical business function, especially for consumer goods manufacturers and retailers. Like other business functions, such as finance and marketing, CSR has developed its own objectives, reporting, and metrics.

Why are consumer goods manufacturers and retailers so readily embracing CSR? Today's brands and banners reflect more about the company than they did at their mass-marketing, mass-distribution beginnings. The brands of old needed simply to represent consistency in product quality or selection, and include an implicit promise of satisfaction. The power of a brand did not go much further than the point of purchase, or point of consumption.

But today's sophisticated, well-educated consumers are not only interested in your new product, they want to know more about the company that produced it, the labor conditions under which it was produced, and how its production impacted the environment. Your corporate brand is a halo over all your brands, and consumers prefer to trust your whole enterprise when they buy from you. They want the brand and its corporate owner to reflect their own social and environmental attitudes, as well as their personal tastes.

In recent years, "sustainability reports" have proliferated, appearing alongside annual reports to detail just how socially responsible a company is. Sustainability reporting seeks to produce the same level of transparency for a company's social and environmental numbers as is available for the traditional financials. The point is that companies have stakeholders beyond their investors, and these people also need a complete scorecard on the firm. "What gets measured gets done." Inspired by the design of annual reporting, these sustainability reports have moved beyond the bottom line (financial), to the double bottom line (financial and social/environmental), to the triple bottom line (financial, social, and environmental), which breaks out all three separately.

Charitable giving may be the most visible and measurable part of CSR. In 2004, Wal-Mart gave $188 million in donations to social causes; Johnson & Johnson, $121.8; and Target, $107.8. In its latest report, Starbucks noted $30.3 million in cash and in-kind global donations. Procter & Gamble donated over $100 million to various causes, including its worldwide Children's Safe Drinking Water program. Thoughtfully designed programs that reach around the world are being called "strategic philanthropy," since they combine the desire to give with the desire to open up new country-markets.

Charitable giving may reflect a company's willingness to give back to society, but it also naturally attracts consumers similarly sympathetic to the targeted causes, which means these social investments impact the original bottom line through more sales. But there is more to measure in CSR than summing up donations or rating their impact simply as a promotional event in a marketing mix study. If the thrust of CSR is to report the impact a company has on society, doesn't it make sense to measure that company's social impact in real economic terms?

In October 2006, in Amsterdam, the Global Reporting Initiative (GRI) will release the latest guidelines for sustainability reporting, G3. The GRI is the international organization that was established in 1997 to create "a generally accepted framework for reporting on an organization's economic, environmental, and social performance." This latest reporting framework should go a long way to clarifying the use of the term economic, which has for too long been thought of as synonymous with financial.

As a result of the new framework, indirect economic impacts will now be listed in sustainability reports to describe public investments and services, as well as their measurable impact. How will this be done? It will probably vary from company to company, with the most progressive wanting solid numbers. The science of economics will give it to them.

Consumer goods suppliers and retailers are already using advanced econometric modeling to answer how the greater economy impacts their business. Those that are catching up to CSR or leading the movement are turning that equation around to ask, "How do we impact the economy?"

by Robert Caldwell
Senior Consultant, Consumer Markets

 

The Index of Leading Indicators
and the Consumer Confidence Index
In March, the Conference Board's Consumer Confidence Index improved to 107.2, from 102.7 a month earlier. Consumers reportedly feel more optimistic about the present situation, as well as the six-month outlook, suggesting that the pickup in the economy in the early part of the year will continue to impact business conditions positively over the coming months. The Board's Index of Leading Indicators decreased to 139.0 in February, down from 139.3 in January, following four straight months of increases. The decline is largely attributable to vendor performance and consumer expectations. Despite the February downturn, the recent trend of the index indicates that economic growth is likely to improve over the coming months.

 

 

Housing Starts
Housing starts in February declined 7.9% to 2.12 million units, from an amended January figure of 2.30 million units. For the year, Global Insight expects starts to drop 8.2%. This downturn in starts is a long one, extending into 2010, but it will not be deep because interest rates will not increase much further. Weak new and existing home sales numbers are the strongest evidence yet that after five remarkable record-setting years, the housing market is in decline, and Global Insight expects a gradual decline through the end of 2008. Despite weaker demand, prices are still climbing at unsustainable rates, but in the forecast, price appreciation slows discernibly, starting in the second quarter of 2006.

 
 

Crude Oil Prices
The average prices of all grades of retail gasoline fell in February, primarily because of the lower costs of crude oil. Prices averaged $2.33/gallon, almost 19% above year-earlier levels. Prices rose in early March by nearly 8 cents, as seasonal demand for gasoline began to increase. Retail gasoline prices are projected to average $2.35/gallon in the first quarter of 2006, and were already forecasted to rise in the second quarter. However, recent and unresolved political developments in the Middle East continue to impact the oil markets, and are pushing gasoline prices higher, as well.

Carrefour Exits South Korea
The French retailer Carrefour is selling its 32 South Korean stores, valued at almost $2 billion. The world's second-largest retailer exited Japan last year, and has seen their sales in South Korea drop dramatically in comparison to domestic firms. Carrefour has short-listed four companies for the sale - Tesco, Lotte, Shinsegae, and E-Land. The successful bidder should win greater negotiating power with vendors to cut prices and improve overhead efficiencies as South Korea's leading retailers battle eroding margins in the country's $120 billion industry.

Reuters

 

  

South Korea Kicks In: Despite Carrefour's performance, retailer interest in entering or expanding their presence in the South Korean market makes good sense, given South Korea's economic recovery. Consumption has returned to normal growth, following a protracted slump arising from a credit bubble in 2002. Consumer confidence, although low, is improving, coinciding with the uptrend in real spending. The growth in household spending has been reinforced by rising incomes and a stable job market. This upturn in household spending will primarily affect the labor-intensive consumer goods and services sector. This should increase employment and wages, leading to further increases in spending.

Global Insight

Female Baby Boomers
to Lead Apparel Demand
Clothing retailers are recognizing the growing demand from female baby boomers looking for better fitting and trendier fashions. It is estimated that by 2010, women over the age of 45 will be spending more on accessories, clothing, and shoes than their teenage counterparts. This is in part due to the size of the demographic, their spending power, incentives from Hollywood, and even pressure from their children. Retailers such as the Gap and Talbot's are looking to capitalize on this demographic, as they plan to launch new chains and fashions aimed at the 45-plus consumer.

Boston Globe

 

  

Fashions Forward: Global Insight is forecasting that in the 2006-15 period, the population of females aged 45-74 is expected to grow at a rate of 1.8% annually, compared to 0.6% for the 15-24-year-old group. We are also forecasting consumption in clothing and shoes to expand nearly 3.4% annually over the same period. Retailers who have a strong business selling exclusively to younger women right now aren't necessarily at a disadvantage. In fact, they may be best positioned to financially leverage this trend. They can focus on understanding the upper-ages of their shoppers now, to build loyalty among them, and retain their sales as they age with this larger group.

Global Insight

Texas Town Home
of High-Sales Mall
The La Plaza Mall in McAllen, Texas, is one of the nation's highest-grossing malls, with sales over $450 a square foot, compared with a national average of $392. Mexican shoppers are behind the numbers, making 40 million visits per year. Of the nation's top 100 retailers, 40 are doing business in the area. After NAFTA, many estimated that retailing on the U.S. border would decline dramatically, but a strong peso and steep tariffs on products imported into Mexico from China make some items more affordable in the United States. These retailers also have more lenient exchange policies than stores in Mexico.

Wall Street Journal

 

  
Calling from Hidalgo: Local business leaders are now hoping to make McAllen attractive to companies other than retail, which might relocate higher-wage jobs for call centers or factories. From a county perspective, part of that wish may come true. McAllen is located in Hidalgo County, and manufacturing jobs there dropped 8.0% annually for the past five years. Based on current projections, that decline will not reverse, but the sector will remain flat over the next five years. The better news is that professional and business services jobs are expected to increase 4.7% annually through 2010.

Global Insight

 

Trade: West and East Coast Total Import Volume (TEUs)
In the middle of the slow season for container imports, all the major U.S. ports were in good condition, operating without congestion. Looking ahead toward the coming 2006 peak season, operators may expect new high-capacity vessels added to trans-Pacific services to affect water routes through Panama and Suez services. Also, some Asian imports will not revert to being handled through West Coast ports, due to changes in supply chain practices. This includes the use of new regional distribution centers, which explains the growth at the ports of New York/New Jersey, Hampton Roads, Charleston, and Savannah.

 

 

Credit: Card Risk Outlook
Delinquencies as a share of total outstanding credit card debt are expected to rise to 4.2% by 2007, compared with current estimates of 3.9%. Net charge-offs as a share of outstanding debt will decline to 4.9% by 2007, compared with 5.8% last year. Key inflation risk factors suggest that the Federal Reserve has not yet finished raising interest rates. Global Insight expects one more hike in the federal funds rate, to 4.75%, at the end of March.

 
 

Construction: Retail Building Construction
According to Global Insight’s latest forecast, construction spending for retail buildings will increase 0.7% through 2006. Much of this relative weakness may be traced to a slowing residential housing market. Retail construction typically moves with residential construction, and may lag or lead, depending on the area and the planning process of particular developers. Separately, and in contrast, office building construction will grow 4.2% by the end of the year.

 


For more information on all available category and channel forecasts, please contact: robert.caldwell@globalinsight.com



Quarterly data are seasonally adjusted and annualized