How to build a circular business model that works

Circularity – finding ways to put products, components, and materials back into the supply chain rather than ending up in landfills after their first use – has become a strategic business imperative. It is an increasingly important strategic differentiator for top executives and a critical demand from customers, consumers and regulators. Those who choose not to pursue circularity do so to their long-term strategic detriment, but making the circular transition and finding models that operate successfully at scale is proving difficult.

Based on a 2021 survey conducted by Bain & Company, approximately 33% of executives expect their industry to be disrupted by insurgent circularity start-ups and 50% of executives expect circularity to become the "new normal" for all companies in the next decade. A circular business model is not a trend but strategically essential. It will require new ways of thinking, the ability to build new partnerships across your value chain and with your competitors and the propensity to adapt and scale existing operations and build new supply chains to enable circular business models.

Companies are engaging with circularity in a broad range of ways. They are piloting different programmes focused on sourcing more recycled materials, manufacturing with less waste and implementing “second life” approaches for products they have already produced. Most are focused on making incremental improvements to their existing supply chains rather than building towards a new business model. They have high expectations for what they expect to achieve and are motivated by environmental sustainability, short-term financial returns and improvements to their operational performance. Though the journey has started, 46% of initiatives featured in the survey are still in early stages and success has proven difficult: half of the survey respondents report low financial value from the initiatives that they have launched.

Why has success been so elusive? Circular business model requires a fundamental shift in how a company operates, including changes to its economic model and switch to new profit pools; new operations and supply chains create new steps in the process (goods recapture is consistently listed as a new step to manage) and there is a high burden of proof for the sustainability and financial benefits related to this shift. The concept of circularity is met with almost universal approval, but the operational reality of implementing it is a hurdle that must be crossed and one consistently listed by executives as the single greatest barrier to its success.

To get operations right, companies must answer the critical questions of “what goods do I need back?”, “where are they?” and “how do I get them?”. This requires companies to understand what products they are going after with the corresponding profit available from these products. After that has been decided, they need to understand how to physically trace a product and the best way to recapture it. The companies in the survey who stated that they had overcome the barrier of traceability were 30% more likely to state that they had medium or high financial returns on an initiative than those who had not developed their traceability capability.

Circularity can open opportunities for new business models, such as extending a products’ life by authenticating and reselling it on secondary marketplaces. An example of this model is the pilot that Ralph Lauren, EVRYTHNG and Vestiaire Collective are launching through the World Economic Forum, which will test the value available when brands partner with the right technology and platform.

To build a traceability strategy that enables circularity, companies must consider five main factors: understand market dynamics; establish business goals; prioritize data and select technology; select and develop partnerships; and test, learn and scale.

One successful example is CaaStle, which enables retailers to offer “Clothing as a Service” (CaaS) as an alternative to purchasing clothing. They partner with companies such as Express to offer clothing rentals as an alternative to outright ownership. CaaStle’s traceability offerings include product tracking and reverse logistics for companies to recover their clothing post-rental. CaaStle began by using fabric stickers and markers, shifted to barcode and now uses washable RFID (radio frequency identification) stickers to track clothing. This RFID technology enables the most important pieces of traceability – permanence, readability, and speed – allowing CaaStle to track each item’s journey. CaaStle provides a strong value proposition to retailers, enabling them to acquire additional customers and achieve higher profitability.

Implementing circular business models brings many benefits: according to the survey, more than 80% of those who have piloted or scaled circularity initiatives say they would do it again. Though the operational hurdles should not be taken lightly, traceability can be a critical component of successfully enabling circularity initiatives.

The demand to increase circularity will continue to grow; companies can best position themselves by identifying the circular business model they wish to implement (taking a future-back approach) and taking small steps now (tied to near-term tangible results) to build their circularity and traceability capabilities. Companies must act to rapidly test, learn and scale to build momentum for future supply chains.

The work in the World Economic Forum’s initiative “Accelerating Sustainable Production through Digital Traceability” will explore how corporations can best select circular business models to accomplish their goals and begin implementing change in their organizations. Please join us in this journey.

Footnote: Figures are based on data from the Circularity Survey by Bain & Company in 2021. Total N of 191. Some questions are based on the responses of a relevant subset of respondents