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ESG Spotlight: Consumer Staples Sector Bucks the Trend on Supply Chain
- Samuel Leavitt
- Tech4Fin
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Global supply chain issues that began in 2021 continued to dominate the news in 2022. As reflected by management sentiment, supply chain shortages were a disruptive and costly problem for many companies.
But a closer analysis with our ESG platform’s Supply Chain data reveals some sectors are rebounding when compared to last year, particularly the Consumer Staples sector. We take a closer look at the supply chain theme to explore what companies in this sector and other sectors are experiencing.
Sector Outlook: ESG Supply Chain Sentiment, Aug. 2022 to Aug. 2023
The ESG Supply Chain Sentiment by Sector graph, depicting supply-chain data from August 2022 to August 2023, shows sentiment generally improving across the board. The Consumer Staples in particular has performed well, especially when compared to the Materials, Industrials, and Consumer Discretionary sectors. With this ESG data, we will explore these sectors to understand what companies have been experiencing in terms of the theme of “supply chain” in recent months.
In this analysis, we are looking at supply chain sentiment for the top mentioned companies in the news over the past three months.
Consumer Staples
As previously mentioned, the Consumer Staples space has seen the most improvement in the past year in terms of supply chain sentiment. This can be attributed to a variety of factors. One factor is that the consumable and perishable nature of consumer-staple products leads to higher inventory turnover than with other sectors. These companies have several additional inventory cycles to experiment and fine-tune their supply chains. Another factor is high visibility from consumers, which provides these companies with a greater incentive to implement new methods to cut costs and reduce carbon footprint.
Sector Outlook: Consumer Staples Supply Chain Sentiment, Past 3 Months
In recent months, Walmart (WMT:US) has been busy improving its supply chain. Walmart has been using AI to run simulations and predict consumer behavior during sales-boom events like Black Friday to anticipate supply chain needs. Walmart is also planning to open in 2025 its first-ever beef facility, which will create more than 600 new jobs in Olathe, Kansas. This is part of Walmart’s larger goal to establish an end-to-end beef supply chain. The company also announced an updated seafood policy in June that will provide greater transparency and monitoring of fishing activities in the supply chain to reduce risks such as illegal fishing.
Walmart is also partnering with Pepsi on a seven-year regenerative agriculture initiative. This plan is expected to reduce emissions of 4-million metric tons of carbon dioxide by 2030. Regenerative agriculture encompasses various land-management practices, such as improving the co-existence between agricultural land and wilderness vegetation, fostering carbon sinks, and encouraging wildlife habitation. Employing these methods can promote soil health, pollination capacity, and overall environmental health. Many companies have invested in regenerative agriculture practices in recent years, including major grain producers.
Nestlé (NESN: CH) and Burger King (BG: US) are each working to improve their own beef supply chains by breeding cows that expel less methane. This may seem like a novel concept. But for years, farmers have been trying to reduce their livestock’s methane output by experimenting with different feeding plans for their cows, including the use of seaweed and other greens. What makes this current venture stand out from previous attempts is its use of selective breeding to achieve lower methane emissions.
Methane production is just one aspect of the carbon footprint left by livestock farming. The other major component is the global deforestation from cattle ranching. Deforestation should also be a consideration for companies looking to enhance their beef practices.
Overall, these various activities among major companies illustrate how the Consumer Staples category has seen high sentiment improvement in the past year.
Materials and Industrials
When compared to Consumer Staples, both Materials and Industrials sectors have been slower to rebound in supply chain sentiment. This is most likely due to the capital-intensive nature of these sectors. The majority of materials and industrial companies build and aggregate machinery and vehicles from other specialized parts. The parts themselves can be expensive, hard to obtain, or in many cases, both. Furthermore, there is high demand for some materials and components with an emphasis on sustainable development.
Sector Outlook: Material and Industrial Supply Chain Sentiment, Past 3 Months
As we see in the Materials and Industrials Supply Chain Sentiment graph, supply chain issues are still affecting large manufacturers of aircraft and other vehicles. Boeing (BA:US) had been expected to deliver 51 new aircraft to Ryanair in April, but it was unable to complete the delivery until July due to supply chain issues. Boeing receives payment upon delivery of the aircraft, so as Airways Magazine points out, “supply chain problems create cash flow problems”. From a business perspective, supply-chain risk is still relevant for companies such as Boeing and other aircraft manufacturers.
There was also recent supply chain news involving General Electric (GE:US) relating to Materials and Industrials. GE plans to improve the wind turbine supply chain through a joint venture with Toshiba in Japan. Based on our online news data, it looks like wind turbines are still a major segment for GE, and this latest development with Toshiba further supports that idea. GE chairman and CEO Larry Culp has said that the company’s supply chain issues have improved but are “still challenging”. While GE is actively working to improve its supply chain with this latest venture, it does acknowledge that there is room for improvement.
British-Australian mining group Rio Tinto (RIO:GB) is looking to become part of the growing lithium supply chain in North America. As a result of the Inflation Reduction Act’s push to accelerate transportation electrification, there has been a greater incentive to mine rare earth minerals critical for EVs in North America, as well as to have those vehicles manufactured in North America. Rio Tinto is also expanding low-carbon aluminum production in Quebec. These two moves are helping Rio Tinto lower its carbon footprint, and they are potentially reducing costs in the company’s supply chain and helping to maximize opportunities in the emerging lithium market.
Consumer Discretionary
Supply chain sentiment in the Consumer Discretionary space has also been taking its time to bounce back. This is due primarily to the variable nature of the automotive industry, coupled with an increasing demand for electric vehicles. Electric vehicles—a relatively new consumer good compared to internal combustion engine (ICE) vehicles—require their own supply chain, and that supply chain is still growing and evolving. In this section we unpack how the major automotive producers have been dealing with their EV-related supply chains in recent months.
Sector Outlook: Consumer Discretionary Supply Chain Sentiment, Past 3 Months
On the one hand, Tesla (TSLA:US) has been working on reducing its need for water and cobalt. The company has also produced its first cyber truck, but it has had to delay mass production due to supply chain issues. Tesla is also exploring expansion into India, a bold move considering that Tata Motors already produces EVs in India at a fraction of the cost compared to Tesla. For example, a Tata Motors EV is about $10,000 compared to a Tesla that can range from $45,000 to $90,000. Tesla will not only need to compete with the Indian manufacturer on price, but also figure out how to set up its supply chain.
Time will tell how successful Tesla will be in shoring up that supply chain. But the fact that it is also focusing on water, and not just on the rare earth minerals needed for production, is a good sign, as water use is becoming a growing concern in the ESG space.
General Motors (GM:US) was forced to temporarily close a plant in Canada in July due to supply chain shortages. GM and South Korean steel-maker POSCO had just announced the previous month that they were making investments in North America’s battery supply chain. The Inflation Reduction Act has spurred many similar partnership moves for automakers in the Materials and Industrials space. The auto manufacturer had also recently announced a deal with Australian mining company Element 25 for the production of manganese sulfate, a material used in EV batteries.
Ford Motor Company (F:US) received a letter from U.S. lawmakers this summer that brought into question its commitment to responsible supply-chain management. The letter alleges that CATL, the Chinese technology partner for Ford’s new Michigan plant, has links to forced labor in Xinjiang. There is also an alleged handshake deal with CATL that would give the jobs in this new EV battery plant not to Americans but to Chinese citizens coming to the U.S. Meanwhile, Ford is lowering prices of its EV F-150 as supply chains have stabilized and costs have come down, allowing the company to pass the savings along to consumers.
More Sector Rebounds on the Way
From our supply-chain analysis, we see that Consumer Staples sentiment has had the greatest rebound in the past year among our selected sectors. Our data also shows a concerted effort between the Materials and Industrials sectors and the automotive industry within the Consumer Discretionary sector to promote sustainable development through clean technology and EV production. Sentiment has rebounded for those sectors as well, but at a more sluggish rate due to capital constraints and high demand.
However, legislation such as the Inflation Reduction Act has helped spur activity in these sectors, and EU rollouts around carbon taxation on imports may further increase innovation.
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