Opportunities to cut costs and carbon throughout food and beverage value chains

Well-conceived initiatives that food and beverage companies implement to reduce costs along their supply chains – including sourcing, suppliers, logistics, and packaging operations – can also reduce their carbon footprint. Initiatives to reduce both costs and carbon footprint may require additional risks and/or investments. However, a series of industry examples suggests there may be more low-hanging fruit than companies realize if they are willing to critically examine their associated costs and material sources of carbon and think creatively about how to reduce them. Creating this sort of win-win situation where sustainability is directly tied to the bottom line can reduce risks, raise margins, and ensure that sustainability is ingrained in a firm’s business strategies.

Traditionally, food and beverage companies have thought of sustainability as an added cost that must be passed down to the consumer, the question for most CFOs being: “Who is going to pay for all this?” However, when reviewing a series of successful sustainability initiatives that food and beverage companies have implemented, we found that an examination of the biggest areas of carbon footprint can lead to ideas about how and where efficiencies can be gained and costs reduced – if a company is willing to question its traditional modus operandi. Carbon has a cost, not just for society but also for firms since a company’s carbon footprint is largely made up of its energy, inputs, and waste.

Examples of cost-cutting measures that have an obvious sustainability component (e.g., energy-efficient lighting) abound, but thinking beyond the simple tweaks can often create an opportunity to deliver substantial long-term savings in costs as well as carbon. In general, increasing the efficiency of high-emitting processes also results in efficiency gains in areas like energy use, raw inputs, and transportation, clearly showing the link between costs and carbon. Not only are these areas correlated with carbon and costs, they are often correlated with price volatility. In this way, food and beverage companies can also think of reducing the two as an exercise in de-risking. While some of the initiatives we explore in this note require upfront investment and may necessitate a change in business models and/or operations, the payback periods can be surprisingly short. Ultimately, for projects to be successful, the return on investment (ROI) must be calculated along with the savings from a sustainability standpoint. To answer the question of how a company can still grow while achieving its sustainability goals, it is important to find strategies with the shortest payback period, a large reduction in costs, and the most significant effect on emissions.

To tackle the challenge of reducing scope 3 emissions, food and beverage companies should look at where those emissions occur along the value chain to identify where efficiencies can be achieved. Considering the current inflationary, political, and macroeconomic environment, taking a farm-to-shelf approach to reducing emissions in tandem with costs will support firms in achieving their stated sustainability goals while relieving the pressure on margins we have seen in recent years. Such an approach can also help firms, across their entire operation, learn from the successes of others while avoiding the potential risks of being an early adopter.

In this paper, we explore the ways food and beverage companies have found low-hanging fruit, which other firms can seek to replicate for a more sustainable and cost-efficient future. While many longer-term opportunities for achieving higher margins and a lower environmental impact may require greater investment and/or more meaningful changes to a given firm’s operations, we focus on immediate changes that can be implemented at scale for a negligible or minimal initial upfront investment.

To gain insights into the greatest opportunities for optimizing costs while reducing emissions, a firm must undertake a true measure of its operations across the entire value chain. Leading environmental, social, and governance (ESG) consultants suggest performing an audit of greenhouse gas (GHG) emissions to accurately assess where hotspots may be. Doing this in tandem with an analysis of the cost of goods sold (COGS) makes it possible to identify potential synergies between costs and emissions. For example, according to a recent COGS analysis of beer firms, the largest components of costs are related to agriculture, packaging, and logistics. Not coincidentally, the biggest components of costs also tend to closely track sources of emissions. For North American brewers, emissions and costs from agriculture, packaging, and logistics roughly track each other, suggesting that costs and emissions are directly related and that reducing one can benefit the other.

As we begin our journey through the value chain, starting with agriculture, we can begin to isolate the low-hanging fruit for simultaneous reduction. Since food and beverage companies may have varying control over the agricultural practices with which their raw inputs are produced, we can look at both sourcing and production as actionable activities. For some - including wineries, who tend to have direct links with their vineyards - reducing emissions in tandem with costs can be as simple as implementing precision agriculture practices. For example, optimizing fertilizer use, which can account for a significant portion of the emissions of non-organic and large-scale production wines, can have an obvious benefit to both sustainability and margins. In addition, precision applications of pesticides (a topic increasingly discussed in sustainability circles) and precision irrigation can reduce waste, cut costs, and have a meaningful impact on GHG emissions. Depending on factors related to local soil conditions and the degree to which these practices are applied, some precision agriculture practices can increase yields, effectively increasing profit and reducing risk.

Innovations in the use of drone technology, including artificial intelligence and GPS, to either apply chemicals more efficiently or, better yet, zap pests and weeds away with specialized lasers, can reduce labor costs, input costs, and workers’ exposure to chemicals. Dyson Farming, a British agricultural firm, reduced its use of herbicides over 70% with the use of similar technologies, and a recent article in The Economist reported that precision application has the potential to reduce chemical costs by an estimated 30% to 50%. Whereas drones may present a significant investment for smaller farms, more affordable GPS guidance and autosteering technologies that can be applied to existing machinery can still have a large effect. While the ROI will vary depending on the crop, region, and acreage, a recent review published by BMC, a division of Springer Nature, found that precision methods offered an average savings in fuel consumption of around 5% in the US Upper Midwest, even with modifications to existing equipment.

Sustainable sourcing can also increase ROI, reduce costs, mitigate risks, and cut emissions. A recent study by the World Economic Forum found that integrating sustainability considerations into procurement can reduce costs by up to 16%. Investing in areas like traceability, for example, can reduce costs related to compliance with upcoming regulations, such as the European Union Deforestation Regulation, and ensure market access ahead of firms that do not take early action.[1] Mondelēz International, a global confectionery player, has implemented short-term targets for sustainable sourcing of cocoa, wheat, dairy, and palm oil to help avoid risks at a minimal cost. As potential penalties and fines related to violations of labor and/or environmental standards must be considered as costs, sustainable sourcing is also, arguably, an exercise in cost reduction.

[1] In addition, training procurement personnel to be aware of the red flags of modern slavery can help to prevent severe reputational damage and associated losses from violating international standards.

Rethinking the status quo in production practices can also improve profitability, lower costs, and improve environmental performance. Recently, Lallemand Baking introduced an enzyme that can reduce the baking time of many bread and bakery products. This relatively simple change allowed the baker to increase the cost efficiency of its operations while reducing the carbon footprint of each loaf.

While some changes are relatively minor, other examples are more substantial and have had outsize impacts on operations. Beginning in 2021, AB InBev transitioned production of Stella Artois, a premium Belgian lager, to the United States for the US market. Shifting to local production resulted in a significant reduction of production costs associated with the brand and reduced emissions relating to packaging, shipping, and cooling. AB InBev expects to reduce emissions from the Stella brand by approximately 7,000 metric tons per year through this initiative alone. The company will significantly reduce costs related to shipping, taxes, and distribution while de-risking in the event of future tariffs imposed on European goods.

Both the Lallemand and AB InBev examples demonstrate the opportunities that exist to reduce costs and emissions by questioning the current modus operandi. In the case of AB InBev, the cost reductions were greater, and concerns in the market about potential pushback from consumers against an imported brand being produced locally never materialized (sales never missed a beat), which demonstrates the value of questioning assumptions that get in the way of change.[2]

[2] When US consumers learned that AB InBev had switched brewing of Beck’s from Germany to the US in 2012 without notice, they sued the brewer for deceptive packaging and were awarded a USD 20 million settlement in 2015.

Similar to beer production, packaging practices can be rooted in perceived consumer preferences, which can negatively affect costs and sustainability performance. This is a crucial point, as packaging is a critical source of emissions for many brand owners. For example, there is a longstanding belief in the wine industry that consumers equate heavier wine bottles with quality, but recent research may show otherwise. One firm found that reducing bottle weights from 503g to 479g resulted in a cost savings of up to USD 200,000 annually and reduced total emissions by up to 3%.

Plastic bottles and containers can also be lightweighted to save costs and reduce carbon. Nestlé Waters France found that redesigning its PET water bottles reduced the company’s plastic use by over 1,500 metric tons. Another Nestlé brand, Nescafé Dolce Gusto, was able to achieve a 13% reduction in packaging weight through a redesign of its single-use coffee capsules, avoiding 2,500 metric tons of polypropylene.

And packaging changes can go well beyond lightweighting. Diageo has partnered with ecoSPIRITS, a packaging technology company, to scale the use of its ecoTOTE and closed-loop distribution system for on-premise consumption. The ecoTOTE is a refillable glass packaging format that can help eliminate the use of 1,000 glass bottles over its lifespan, presenting an opportunity to significantly reduce the cost, energy, and materials needed to produce new bottles for each batch.

While patrons may never notice the vessel for their tipples has changed behind the bar, other firms are getting creative in the design of their products for at-home consumption. The Kraft Heinz Company removed the plastic insert used to apply the coating of its beloved Shake ‘N Bake seasoning to reduce plastic use. This has cut an unnecessary cost and saved over 900,000 pounds of plastic from being purchased and ultimately thrown into a landfill.

Continuing down the value chain, route optimization, bulk shipping, and alternative fuel sources can reduce a firm’s overall energy expenditures while lowering the emissions of logistics operations. Recent advancements in sustainable maritime technology even allow for the return of the sailing vessel, such as the Cargill-chartered Pyxis Ocean bulk carrier, which aims to transport vital commodities using 37.5-meter sails, reducing bunker fuel use by up to 20%.

But firms can still improve operating efficiency and reduce emissions with legacy container ships by shipping product in bulk and packaging in-market. Wine, for example, can be shipped in a specialty 20ft container known as a flexitank, doubling capacity, reducing costs, and greatly reducing emissions per liter. A 2012 study by RaboResearch found that bulk shipping provided savings of around USD 2.20 per case shipped, a number that has likely increased given that container rates have soared in recent years.

When looking at emissions in tandem with the bottom line, many companies may overlook the fact that a portion of their emissions may have a monetary value that they could profit from. By capturing CO2 from their operations, companies can sell the gas to other firms or even directly to consumers. Growing markets, including carbonated water, biofuels, and animal feed, represent revenue streams that may be completely decoupled from a firm’s operations. In Scotland, spirits producer Ardgowan Distillery aims to capture upward of 775,000kg of CO2 annually from its fermentation process and sell it to a local biomethane producer. Brewers and winemakers have also had success in selling spent grain and marc to use in products such as dog treats. Restaurant groups can help to satisfy the growing demand for sustainable aviation fuel by offloading their used cooking oil. Used cooking oil’s share of the relatively nascent sustainable aviation fuel market is expected to grow between 5 billion and 10 billion gallons by 2030, representing a huge opportunity to profit from what once was thought of as waste.

At the end of the value chain, retailers play the all-important role of getting firms’ products into the hands of consumers. While retailers may not wish to choose the SKUs they keep in stock based solely on sustainability, significant opportunities to reduce emissions and costs through initiatives involving how products are sourced, distributed, displayed, priced, or cooled remain.

In general, food waste and energy reduction are key areas where retailers can reduce emissions. Retailers in Europe increasingly use dynamic pricing algorithms to prevent food waste. Dutch supermarket chain Albert Heijn, along with many others, has begun introducing what it calls “dynamic markdowns,” which proactively discount items approaching their sell-by dates. Albert Heijn also sells packs filled with expiring goods that it calls AH Overblijvers at a discount. So far, Albert Heijn has sold over 350,000 of these packs, preventing 4.5 million kg of waste from entering landfills, all while recovering what would have been a financial loss and avoiding further emissions from decomposition. In 2023, Albert Heijn reduced its food waste by 3.6 million kg in total through the combined strategies of AH Overblijvers, dynamic markdowns, and artificial intelligence technology. Moreover, in an effort to reduce food waste, retailers like Albert Heijn and PLUS, another Dutch supermarket chain, offer bread that is one day past its expiration date for 50 cents or half the regular price, while other retailers increasingly collaborate with food-sharing apps such as Too Good To Go to prevent food waste.

Another area for reducing emissions and lowering costs involves energy-efficient solutions, such as making use of renewable wind, solar, or biogas energy, throughout the whole supply chain. While these energy-efficient approaches may require an initial investment, they can yield significant reductions in both costs and emissions over the long term. For example, grocery store cooling systems can be responsible for over 40% of on-site energy consumption. These systems can often leak, releasing potent greenhouse gases, including R407A, which is 2,100 times more detrimental than CO2. In fact, Kroger cites hydrofluorocarbons (HFCs) as accounting for 63% of its direct climate emissions. Newer, modern systems running on CO2 can cost 10% less. The CO2 needed for coolant runs around USD 4 per pound compared to over USD 30 per pound for traditional coolants. In addition, retailers and logistics warehouses are exploring opportunities for lowering the cooling temperature for frozen food from -20 degrees Celsius to -15. Nomad Foods, owner of frozen food brands iglo, Findus, and Birds Eye, recently conducted a pilot study demonstrating that increasing the storage temperature of frozen food by 3C could reduce freezer energy consumption by 10% without compromising the safety or quality of the products. They tested products such as fish sticks, poultry, salmon filets, plant-based meatballs, pizza, peas, and spinach. There is no silver bullet for increasing temperatures for frozen food yet, as it also depends on the food product. However, industries and manufacturers are collaborating on solutions in this field.

While restaurants are often the final link in the chain to the consumer, they also have many opportunities to optimize their business to achieve savings. KFC has taken advantage of its franchise model to lower costs, increase the experience of its franchisees, and improve its sustainability performance. Through its Building Green initiative, the restaurant group partners with operators to implement strategies in key areas to reduce environmental impacts at many of its retail locations. Sustainably produced furniture, energy-efficient lighting and HVAC systems, along with energy-monitoring programs have helped to decarbonize and increase ROI at franchised locations. KFC can implement these programs by working with franchisees to share best practices related to rightsizing operations and helping to source and negotiate at scale, passing the savings on to its operators.

Because both costs and emissions are closely tied to efficiency, thinking about carbon emissions as an opportunity to reduce costs can result in an obvious win-win situation. Finding the synergies between the two is therefore a worthwhile exercise for both planet and profit, allowing food and beverage companies to achieve their stated sustainability targets while returning value to shareholders. Proactively managing the carbon footprint throughout a firm’s operations can also serve to prevent additional risks from regulations, tariffs, and disruptions to the supply chain, which have been increasingly problematic in recent years. Firms must be willing to challenge themselves to rethink traditional business practices while taking advantage of the lessons learned from initiatives at other companies. Currently, sustainability is often viewed as an added cost or an impediment to growth, but when emissions are recognized and treated as having a real cost, focusing on opportunities to reduce emissions can result in improved operating efficiency. Therefore, taking a rational, creative, and efficiency-based approach to sustainability may prove to be a useful tool in improving operations.

The cases we have cited here have mostly shown some of the easier wins that companies have found, and looking for these is often the best place to start. But most initiatives that result in reductions in both cost and carbon footprint will more often require either significant investment, increased risk, or more meaningful changes to business models. We will explore these tougher decisions in future reports.