Opinion - January 18, 2022

Circular Economy: the tricks businesses are missing in circularity

Written by Expert: Arthur Parry 5 min read

This article was originally posted on the Products of Change website. For the original version, please see here.

Arthur Parry is an independent Circular Consultant and Expert with the Solar Impulse Foundation. In this article, Arthur examines key lessons for how businesses can embrace the Circular Economy.

The Circular Economy has long been positioned as a key element in addressing climate change and securing a sustainable future. And with core the core principles – as set out by the Ellen MacArthur Foundation – being to eliminate waste and pollution, circulate products and materials (at their highest value), and to regenerate nature, then it is surely in everyone’s best interest that we construct a system to achieve this?

However, the most recent publication of the Circularity Gap Report tells us that the percentage of the global economy which is circular has declined from 9.1 per cent in 2020 to 8.6 per cent in 2021.

But with so many clear and evident benefits to people and planet that the circular economy provides, the big question is why?

Among the reasons, once concern often voiced by business leaders is that there is an understandable nervousness about changing a growing, profitable business for something which appears likely to increase costs. At least in the short term. 

Similarly, it might not be obvious at first sight how exactly revenue will be generated. 

One of the most effective ways to address these fears, however, is through sharing the stories of those that have found success within the circular model. So here goes.

Our first case study takes us to Switzerland and Smart Lease, a solution for high end beds and mattresses in the hospitality industry, launched by Elite. Elite was already a manufacturer of beds, mattresses, and bedding who developed a circular business model to better serve their customers. The Smart Lease concept enables hotels to be charged for the beds and mattresses based on occupancy, through remote monitoring. With this approach, Elite can anticipate the need for maintenance, sanitation, and ultimately, replacement. 

The second example is Borobabi, America’s first circular retailer, focussing on kids’ fashion, who has been circular since its inception. The Borobabi model allows customers a flexible approach to access the products through direct purchase, rental, or gifting and via both on- and off-line rental, in all cases with a Lifetime Return Policy. 

There are many aspects which can lead to success in the Circular Economy, and here are just a few which are best demonstrated by both Smart Lease and Borobabi. What are the keys to circularity success?

  1. Sell the intrinsic benefits rather than circularity

At first sight, this may appear counterintuitive if your goal is to drive circularity, however it shouldn’t be necessary to sell the concept of circularity if the solution offered to your customers is simply a good, appealing idea. Even for the customers most committed to sustainability, it will still be the strength of the idea and the emotional connection which will drive appeal and, ultimately, purchase intent.

For Borobabi, this is associated with providing their customers with high quality garments, with a focus on ensuring a joyful and simple interaction with the brand at all stages. Related to this, there is also the benefit for customers to have the assurance that they have a simple solution for the garments to be used productively once they have finished with them. 

Meanwhile, with Smart Lease, Elite clearly also focuses on the quality of the product they are providing. In addition to this, they communicate the value-added services which are enabled by the circular model. Key amongst these is the ability for client hotels to better manage their cash flow, given that during periods of low occupancy they will have little or nothing to pay. 

Both brands do share information regarding the benefits of the Circular Economy, but this is not the main selling point for their customers.

  1. Understand retained future value and include this in the business model

Based on the above, it would be fair to ask how this approach can generate sufficient revenue. Part of the answer is that successful circular businesses inherently understand the retained future value of their products and materials. This value is then accounted for within their business models and pricing structure. In short, if you are aware that your products, and the materials from which they are made, will continue to have value beyond their first use, then it ceases to be necessary to use only the first transaction to recover costs and generate profit. 

By taking a truly systematic design to the solution, and therefore keeping control over the subsequent transactions, it is possible to either offer a product with a higher perceived value at a lower initial outlay for your customer, or to have comparable pricing, but with the inclusion of services over and above what would be available in a more traditional approach.

For Smart Lease, although the total outlay for the customer hotel is likely to be similar to the existing alternatives, the fact that the service includes effective bedroom management (for example, the regular rotation of mattresses between higher and lower occupancy rooms to optimise utilisation) means that the customer is getting much more for their money. 

With the model that they have developed, Borobabi is able to take advantage of the maintenance of value by generating revenue in two different ways, put together in a series. This makes for a more profitable and efficient business.

Children’s clothing is not utilised to it fullest potential due simply to how quickly they grow. By selling, recollecting, and then leasing, Borobabi can make clothing affordable for customers while making more money than traditional retailers.

  1. Consider the full lifecycle – circles within circles

So, we’ve looked at retained future – now let’s run with it. Another common aspect of successful circular businesses is that they consciously and deliberately take a systematic view of the design of their solutions and consider the full lifecycle. 

This is essential in the Circular Economy, in large part to avoid an erosion of value. Not only is it true that waste and emissions typically generated by processes necessary to restore lost value, but also the people or organisations in the circular ecosystem which experience the lost value will come under pressure to revert to a linear approach simply to survive. Once this process begins, it rapidly becomes challenging to keep the integrity of the circular business model, due to margin dilution.

Despite being in different industries, and despite having different starting points, both Smart Lease and Borobabi have taken a similar approach in this area. This often starts with careful consideration of the materials chosen, to ensure their durability during the various purchase or usage cycles, and to ensure they can be appropriately managed once further usage is no longer possible.

In addition to this, both Smart Lease and Borobabi have put significant efforts into ensuring that their cleaning operations are not only low impact for the environment, but also ideally suited to supporting the maintenance of value and therefore enabling the products and materials to stay in use at their highest value state for as long as possible. 

In both cases, attention has been paid to what happens to the products and materials beyond this.

 Through careful material choices, Borobabi garments are both readily recyclable and compostable. Borobabi has not left this to chance, however, and has partnerships in place to ensure that this recycling and composting takes place and is done in a way consistent with their values.

 For Smart Lease, the consideration of the latter stages of the lifecycle begins wit the possibility for the products to be purchased at a nominal price, as even after they are no longer appropriate for the leasing programme, they still have the potential to be used elsewhere. 

Like Borobabi, Smart Lease also has partnerships in place with recyclers and with charities for whom the mattress can still be used to great advantage. What has this meant for the businesses involved? 

Francoise Pugliese, the owner of Elite SA, is a huge advocate of the benefits to his business by moving to the Circular Economy. In fact, he was recently quoted to say: “Thanks to the Smart Lease, we have doubled our sales… [and increased] our notoriety around the world as an innovative company in the hospitality sector.”

 Meanwhile, Carolyn Butler, CEO and co-founder of Borobabi was quoted to say that “we have been able to grow our revenue at 35 per cent month on month over the past year, exceeding the growth target for the year by 37 per cent.” Clearly then, Circular and successful is possible; so what’s stopping you?

Written by Expert: Arthur Parry on January 18, 2022

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