College Questions: Sustainability vs profitability

Posted by | October 26, 2019 | Random Thoughts | No Comments

This weeks college questions took a bit of a turn from the normal route. The question at hand is this: Can companies be eco-friendly/sustainable while also having high growth with profitability?

I’m going to focus on three examples today: New Belgium Brewery, Sun Basket, and Patagonia. So, all focused on consumer but I think it will help convey my sentiment.

In short, the answer is yes. And I would also qualify that as a big yes. If you were to ask me 40 years ago however, I think my answer would be very different. Historically, I would argue that vast majority of the population didn’t care about being environmentally sustainable. In 2019 however, I feel that the number is much higher – if not a vast majority.

There’s a lot of questions and conversations (although polarizing) around climate change and what corporations are going to do about it. I think this pressure comes from a few, over the top perspectives around how “the world is going to end in 12 years” and believing that fate is entirely because of humans. I’ll go on record and say that is the most self-centered, egotistical position we can take on a subject that is highly complex. Do humans contribute? Absolutely. Do I think we’re the primary driver of something like climate change? Possibly. Will we be ok? Probably not. Will the Earth be ok? 100%

The call to arms on doing something about climate change has certainly helped accelerate the desire for consumer goods that are on a more sustainable route. However, I would also say that general innovations in areas, such as automation, as well as higher overall consumer net wealth are the biggest factors pushing it.

There has been quite a historic shift from the middle to upper class in terms of families having upward mobility. This typically means more discretionary spending on goods. If we look at our first example, we can point to a company called New Belgium Brewing

In 1988 , two founders created a company called New Belgium Brewery with their flagship beer Fat Tire. They started to grow the company and continued to expand their beer line. Now, in 2003, they created an in-house sustainability department and also became a member of the “1% for the Planet”. This was entirely led by the individuals within the organization and they continued down that path as the company grew. in 2009, they purchased the largest solar array system at the time in the state of Colorado. Their growth continues today and are, as of 2018, the 4th largest craft brewing company in the world.

The secret to their growth was exceptional branding and a corporate mission focused on sustainability which created a cult-like sensation. One of the biggest cult-like facilitators was an event called Tour de Fat created in 2000 by branding savant Greg Owsley. The idea was to effectively create a mock Tour de France that was allowing individuals to becomes something they’ve always wanted to be – to elevate the individuals in the group. People came dressed up as astronauts, wacky clowns, and the like. Oh, and there was also lots of great beer and music. To this day, that event attracts literally tens of thousands of bikers all around the USA and was one of the primary drivers to accelerated growth. At each of these events, sustainability was a huge focus. One of the big sub-events was a drawing where individuals would submit their name and, if chosen, they would trade in their car for a bike to help reduce carbon emissions. New Belgium Brewery would build a custom bike to spec for the individual and then held a giant ceremony for them during Tour de Fat – elevating individuals who took the brave step toward dramatically changing their life towards sustainability. The overall sentiment around leveraging a bike with like-minded people to create a movement worked spectacularly with continued revenue growth, higher margins, and more members part of the eco-friendly cult.

Ironically enough, New Belgium Brewery had a deep partnership with another awesome company: Patagonia. Patagonia is an extremely eco-focused company with large efforts going towards staving off climate change and releasing their internal annual Sustainability Report each year. They have multiple corporate strategies to help reduce their foot prints that they transparently publish each year. Like New Belgium, they have also create a cult of followers by carving out a niche of “outdoor high fashion clothing” akin to a Gucci or Prada.

With high fashion comes high margins. Pair that with a growing cult following and you net high margins and revenue growth. As of 2013, the company had tripled it’s profits and grown their revenue to over $600M. The common theme keeps coming back to brand appeal and creating a cult that has a common cause. This attracts others because, as humans, we want to socially be part of something.

In more recent times, there is a company called Sun Basket that has come onto my radar. They’re a food delivery service which has historically been very difficult to scale and make profitable. Sun Basket started in 2014 and has taken $143M in funding with an ARR of $275M. From a sustainability perspective, nearly everything they ship is produced from recycled materials and can be recycled. Their food is sustainable by locally sourcing the food relative to their plants (east and west coast).

How are they achieving revenue growth and profitability while also being sustainable in an extremely tough industry? Automation. This company is heavily focused on creating warehouse automation to trim fat, stay lean, and focus on sustainable revenue growth instead of trying to hit the hyper-scale that most startups want to hit. Instead of creating a cult, they’ve created a model that makes the price point attractive enough to consumers while still staying in a somewhat niche market (organic foods).

If I were to throw my own observations at the whole situation, I think what allows companies like these to grow is, ultimately, a thirst from the market paired with highly effective branding. I think it would be awesome to have every company be sustainable, especially larger companies who tend to have a higher footprint. However, transitions away from one energy source to another typically takes ~50 years because of the eco-system they command. I think that in the long run capitalism will push companies to be sustainable because the vast majority of consumer will want it, it will be more cost effective, or it will create a competitive advantage to the company to do so. As the economics of being sustainable continue to drop, it will become a large driver of business decisions instead of largely being perceived as “charity”.

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