Authors: ABIDI, Q; BITTLER, K; BRUCE, M; SEGHOSIME, R; SOLIMAN, E.
We believe so – if businesses can expand the innovative model of Algramo, a Chilean-based company that transforms traditional supply chains – ones that add unnecessary packaging of smaller quantities, extra steps of distribution, and the “poverty-tax” – into a new, sustainable supply chain.
Alignment with the UN Sustainable Development Goals
Reducing Poverty and Hunger
While private companies and governments have recently achieved major improvements in the agriculture productivity to satisfy the food demand, today 815 million people are still hungry and every third person is malnourished(1). These agricultural improvements have come at the expense of the environment exacerbating water scarcity, soil degradation, and greenhouse gas emissions. We can also see that distress migration is at unprecedented levels since 70 years due to many factors including limited access to resources and the increase in crises, many as a result of the climate change(1).
Responsible Consumption
Despite this crisis, every year the world wastes about a third of the food it produces, costing producers USD750B. The impact is far greater when we consider consumers, who suffer from the rise in price and the scarcity of food. Waste is a threat to food security and a danger to the environment, especially with the prevalence of single use packaging(1) that inflates costs and generates waste that further damages nature.
Progress in the industry?
Focusing on the food and beverage industry, we find companies at different levels of the spectrum, with some taking quite firm steps towards SDGs while others being more reactive(2). However sustainability is inevitable for a few reasons: first companies realized it makes sense from a business point of view (less waste hence less cost and more revenue due to appeal to customers) and the second reason is anticipated regulation and government interference, especially in areas like the Eurozone. Companies that are proactive to adapt to these changing market and regulatory environments will stand at an advantage in comparison to companies that are slow to respond.
Aligned objectives?
In June 2014, an expert food industry panel research found that 98 industry executives rated general performance parameters such as “increase market share,” “improve customer satisfaction,” and “grow profit levels,” as the most important objectives to be achieved over the next three years. Yet it is obvious that 69% of the executives at the highest positions in the companies believe that in order to achieve a long-term survival, they need to protect the environment in which they operate(3). These short term goals of management focused on economic profit stand at odds with the longer term sustainability needs that the majority recognize are crucial for the continued future of their industry, showing significant room for improvement.
Algramo’s Business Model Innovation
Within the fast-moving consumer goods industry, a company in Chile called “Algramo” developed a business model innovation that addresses the SDG goals of “No poverty “, “No hunger” and “responsible consumption”.
In South America, like much of the developing world, consumers living in poor communities face a “ghetto tax” for consumer goods. As poor consumers have low disposable incomes, they usually cannot buy items in bulk and therefore end up paying nearly 40% more for goods than high-income communities as companies tend to charge a higher margin for smaller formats. Moreover, smaller formats items such as detergent or shampoo sachets tend to have a higher proportion of the product being packaging material and therefore their disposal tends to have a disproportionately higher negative impact on the environment. Algramo’s business model aims to address this market failure.(4)
Algramo established a wholesale relationship with companies that manufacture and sell commodity consumer products such as detergents, rice and oil, enabling it to buy unpackaged products in bulk, thereby saving on packaging and logistic costs without lowering the quality of the product. Algramo then established relationships with small retail stores in poor communities where it has installed its large dispenser machines. Suppliers deliver the products in bulk to these local stores which are distributed through Algramo’s dispenser machines. The containers used ensure quality and hygiene, deliver an appropriate amount for daily consumption, and are returnable.
The dispensing machines are installed in local stores free of cost. The company drives its revenues, from the reusable containers which are sold to consumers on their first visit at the stores; the profit for selling these reusable containers is split equally between Algramo and the shop-owner. Families buy the required quantity needed through these dispenser machines and carry it in the reusable containers.
By eliminating the cost of packaging and enabling people to buy custom small quantities at bulk prices, Algramo’s vending machines reduced the cost of basic commodities by up to 40%. The savings can then be spent on products that were previously unaffordable, as well as on better education, or medical care. As such, this model allows for poor consumers to realize the benefits of bulk-purchasing thereby alleviating the “poverty tax” usually paid by low income families. Also, Algramo helped local storekeepers compete with the retail giants in an intelligent and efficient manner. Last, by buying unpackaged products in bulk from suppliers and using reusable containers for end consumers, this business model also dramatically reduces environmental pollution from packaging waste.
This business model is game changing by resequencing traditional supply chains to eliminate several steps, and pools demand for these goods at the local level in the vending machine, creating financial value for both customers, Algramo, and the environment. This shifting of business models away from single-use plastic to a sustainable outcome has the potential to radically re-align the consumer goods industry if widely adopted.
Costs, risks, and barriers to scaling
The business model of Algramo is capital intensive. In order to adequately serve poorer neighborhood across Chile and beyond Chile, Algramo will require a lot of money, to manufacture and deploy its dispensing machines. The source of this funding, and the time to generate returns on this funding will be a major financial risk as Algramo scales.
In addition, to the high costs of manufacturing and deployment, Algramo also consider the costs of maintenance for its fleet of machines. There needs to be adequate personnel available to service machines across the country on a regular basis. The cost of maintenance also includes making expensive provision for possible risks of contamination of food items in the machines. Other risks include the risk of vandalism and other intentional damage to their machines, a prevalent problem for locating and maintaining equipment in the vending machine industry(5).
These costs and risks will slow Algramo’s plans to expand operation across and beyond Chile. However, the solution may lie in striking partnerships with large organizations that share Algramo’s values of alleviating the burden of poverty tax on the world’s poorer population. The influx of investment will help Algramo achieve its goals faster, as the capital required for the manufacturing and deployment of the food dispensers will be raised through these partnerships.
Potential negative environmental and social impacts?
With any innovation, negative foreseen and unforeseen consequences are possible. For example, some analyses have suggested that the plastic bag bans – intended to reduce resource consumption – may have the opposite effect. For example, a cotton tote bag would need to be used over 170 times to have less environmental footprint than a plastic bag, but their average lifetime is only 52 uses(6). Similar adverse impacts could potentially arise under Algramo’s business model – a recent study comparing the environmental impact of reusable tupperware to single use styrofoam found that tupperware would need to be used 18 times to have less of an impact than styrofoam(7). The outcome of this innovation ultimately depends on how many times the target customers will reuse the containers, and whether this level of reuse justifies the additional resources used to create a sturdier plastic.
Another potential social risk is of contamination. For example, some have suggested that reusable grocery bags can carry harmful pathogens (in particular, from uncooked meat) that can cross-contaminate other products in subsequent uses (e.g. fresh produce)(8). Contamination of the containers, dispensing machines, and the supply chain are potential risks that could have a impact on the customers. Given that many of the target customers are already below the poverty line, the impact of foodborne illness on a sensitive segment of the population is even more profound. The contamination risk also leads to a litigation risk for the company as well. Given that there are many users along the supply chain (from distributor, to vending, to the end customer), tracking the source of any contamination, and assigning liability becomes a more difficult business risk. Many businesses do not allow for consumers to take away food in their own containers because of this perceived litigation risk(9).
Algramo: How to change our consumption and end hunger
Algramo’s resequencing of the traditional supply chains and pooling of demand from communities experiencing poverty has the potential to help many people across the globe rise above poverty and hunger, while limiting the environmental footprint of consumption by eliminating unnecessary food waste, plastic waste, and the poverty tax. What if Algramo’s model can expand outside of Chile? And what if more affluent economies adopt Algramo’s model? Together, we can make a huge difference in re-balancing the food distribution on our planet.
References:
- Food and Agriculture Organization of the UN: http://www.fao.org/3/I9900EN/i9900en.pdf [2018]
- Leatherhead food research, ‘Sustainability Strategy in the food and drink industry’: https://www.strutturafine.it/risorse/strategie-sostenibili-per-food-and-beverage-white-paper [2014]
- Cision: Food industry sustainability and practices report: https://www.prnewswire.com/news-releases/food-industry-sustainability-strategies-and-practices-report-293536091.html [Feb22,2015]
- Algramo case, P2 of Managing Customer Value 2018: INSEAD 10/2015-6167 by Joao Caro De Sousa, INSEAD MBA 15D, under the supervision of Philip M. Parker, Professor of Marketing, INSEAD.
- http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.511.8645&rep=rep1&type=pdf
- https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/291023/scho0711buan-e-e.pdf
- https://www.sciencedaily.com/releases/2018/12/181218100410.htm, https://www.researchgate.net/publication/329166723_Environmental_impacts_of_takeaway_food_containers
- https://www.foodnavigator.com/Article/2019/01/17/Does-banning-single-use-packaging-carry-contamination-risk
- https://gippslandunwrapped.com/2016/08/18/the-law-using-reusable-containers/
Note: all images from Algramo or created by authors
This looks like a fantastic initiative, mainly because it doesn’t only make it a more sustainable business model, but also offers the best prices for the consumers. When the solution makes also economic sense, it’s much easier to attract potential consumers, especially among a population with less education available.
It’s really interesting that Algramo is promoting plastic reduction through an economically viable method. Certain grocery stores are moving in this trend – advocating for consumers to bring their own containers. Additionally, services in developed economies such as Loop deliver food items to homes in reusable containers. However, the centralization of Algramo also reduces inefficiencies in the supply chain and consequently reduces carbon output.