Accounting for Product Impact in the Consumer …

Accounting for Product Impact in the Consumer-Packaged Foods Industry

Amanda Rischbieth George Serafeim Katie Trinh

Working Paper 21-051

Accounting for Product Impact in the Consumer-Packaged Foods Industry

Amanda Rischbieth

Harvard T.H. Chan School of Public Health, University of Adelaide

George Serafeim

Harvard Business School

Katie Trinh

Harvard Business School

Working Paper 21-051

Copyright ? 2020 by Amanda Rischbieth, George Serafeim, and Katie Trinh. Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Funding for this research was provided in part by Harvard Business School. George Serafeim is a co-founder of both KKS Advisors and Richmond Global Services providing advisory and software solutions, which are using the authors' methodology. He has equity stakes in both firms.

Accounting for Product Impact in the Consumer-Packaged Foods Industry

Amanda Rischbieth, George Serafeim, Katie Trinh

Impact-Weighted Accounts Project Research Report

Abstract We apply the product impact measurement framework of the Impact-Weighted Accounts Initiative (IWAI) in two competitor companies within the consumer-packaged goods industry. We design a methodology that allows us to calculate monetary impact estimates on customer health, access and affordability of products and recyclability, among other factors. Our results indicate substantial differences in the impact that competitors have through their products. These differences demonstrate how impact measures reflect business strategy choices and informs decision-making on industry-specific areas, including food reformulation and product placement.

Amanda Rischbieth a visiting scientist at the Harvard T.H. Chan School of Public Health, Associate Professor at the University of Adelaide and is a member of the Advisory Practitioner Council for the Impact-Weighted Accounts Project. George Serafeim is the Charles M. Williams Professor of Business Administration at Harvard Business School and the faculty lead of the Impact Weighted Accounts Project. Katie Trinh is a research associate at the Impact-Weighted Accounts Project at Harvard Business School. The Impact-Weighted Accounts Initiative is a joint initiative between the Global Steering Group for Impact Investment and the Impact Management Project incubated as a project at Harvard Business School. We are grateful to the Division of Faculty Research and Development of the Harvard Business School for financial support. We thank Winnie Lu for her invaluable contributions to the framework application and data construction. We thank Dariush Mozaffarian, the Impact Management Project, Leah Moehlig, and Matthew Watkins for many useful comments. George Serafeim is a co-founder and has an equity stake in Richmond Global Sciences, a technology firm providing software solutions on product impact. Contact email: ktrinh@hbs.edu.

1

1. Introduction Although significant progress has been made in the environmental and social metrics

disclosed by companies and prescribed by reporting standards, these mostly pertain to a company's operations and are still not embedded in financial statements. In contrast to employment or environmental impacts from operations, product impacts, which refer to the impacts that occur from usage of a product once a company has transferred control of the good or service, tend to be highly idiosyncratic limiting the ability to generalize and scale such measurements. As such, for companies that do measure product impact, impact evaluation is highly specific, limiting comparability and scalability. Moreover, the number of companies that have managed to measure product impact in monetary terms is even more limited.

In prior work, we designed a framework in which product impacts can be measured and monetized in a systematic and repeatable methodology across industries and have provided a sample application to the automobile manufacturing industry to address these issues.i Within any industry, the framework can be applied using a set of standard principles, industry assumptions and public data to estimate product impacts across the following seven dimensions.

Reach

Quantity

The magnitude of individuals

reached

Duration

Length of time the product can be used, particularly for durables

FIGURE 1 Product Impact Framework Dimensions

Dimensions of Customer Usage

Access

Quality

Optionality

Accessibility of product through pricing and efforts to provide for the underserved

Quality of product

through health, safety,

effectiveness, and inherent

need or goodness

Ability to choose an alternative product with

full information and free will

Env Use

End of Life

Pollutants & efficiency

All pollutants and

efficiencies enabled through customer usage

Recyclability

Projected product volume recycled at end of product life

In this paper we apply the framework to two competitor companies in the consumerpackaged foods space. We then discuss potential data points and data sources for monetization and detail the decisions behind assumptions made. Finally, we provide examples of insights specific to the consumer-packaged foods space that can be derived from impact-weighted financial

2

accounts and their analysis. In our prior work, we discuss the broader need and implications of impact-weighted financial accounts.ii The application of the product impact framework to the consumer-packaged foods space demonstrates feasibility and actionability, while also providing guidance on the nuances and decision-making of applying the framework to other similar industries. The impacts derived demonstrate the potential for product impact measurement to inform strategic decision-making. We see our results as a first step, rather than a definitive answer, towards more systematic measurement of product impact in monetary terms that can then be reflected in financial statements with the purpose of creating impact-weighed financial accounts.

2. Application of the product impact framework We apply the product impact framework of the Impact-Weighted Accounts Initiative

within the consumer-packaged foods industry to ensure the framework is feasible, scalable, and comparable in the space. Through a detailed analysis of two competitor companies, we provide a cohesive example that examines the impacts of packaged foods across the seven product impact dimensions of the framework to uncover nuances of the framework application in estimating monetary values. The companies will be referred to as Companies A and B given the purpose of this exercise is to examine feasibility and is not to assess the performance of individual companies. We do note that the data is from two of the largest global packaged food manufacturers.

2.1 Data collection process This application is based on publicly available data from company disclosures and

industry-wide assumptions informed by regulatory bodies and established research firms. These examples use existing data and metrics with the goal of incorporating publicly available data rather than making a judgement of materiality.

Self-disclosed company datapoints reflect information found in the company's disclosures from 2018 such as the Form 10-K or annual sustainability reports which often disclose Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) metrics. Because these disclosed metrics are often input metrics rather than impact metrics, this dataset is supplemented with metrics from industry research firms and regulatory bodies, including Nielsen and the United States Department of Agriculture. This allows us to translate these inputs into estimated impacts.

3

Product categories and pricing data comes from the Nielsen Homescan Panel which tracks purchases of over 40,000 US households by UPC code with associated pricing, method of payment, and volume sold. Nutritional information comes from the United States Department of Agriculture Food Data Central database which provides nutrient content by product UPC code for over 250,000 branded products. Industry-wide assumptions on product pricing, nutrition associated health outcomes, and associated costs for various health outcomes come from the Nielsen Consumer Panel, health outcome specific non-profit organizations such as the American Heart Association, and meta-analyses of nutrition and health-focused studies. Given the methodology determines monetary impacts, the industry wide assumptions inevitably rely on some market-determined price and valuations.

3. Consumer packaged foods manufacturing application of the product impact framework

3.1 Overall impacts estimated

TABLE 1 Product Impacts of Company A and B

Reach

Dimensions of Customer Usage

Access

Quality

Optionality Env Use End of Life

Company Revenue Positive Product Impact Negative Product Impact Quantity Affordability Underserved Health & Safety Positive Effectiveness Impact Negative Effectiveness Impact

Need Information, Addiction, or Monopoly Emissions Recyclability

Revenue (%) by category:

Cereal

36.4%

Breakfast

18.3%

A $13.5bn $2.0bn -$3.2bn Crackers

14.9% $1,323m $3m -$341m $655m -$2,215m -

-

Snacks

11.2%

Breakfast (frozen)

10.9%

Ready to serve

4.1%

Yogurt

37.9%

Ice cream

15.8%

Snacks

12.2%

B $15.7bn $3.2bn -$1.1bn Cereal

8.8% $3,079m $73m -$61m $464m -$792m -

-

Produce

7.2%

Vegetables (frozen)

6.6%

Breakfast

2.4%

-$470m

-$153m

-$150m

-$49m

4

For the consumer packaged foods industry, the affordability dimension captures pricing below industry average of different product categories, estimates of food stamp sales proxy for underserved impact, recalls are monetized in the health and safety dimension, the nutritional profile of products are captured in the effectiveness dimension, sales of staple foods are reflected in the basic need dimension, emissions from cooking and storage are captured in environmental usage, and the emissions from waste are captured in the end of life recyclability dimension. The following sections dive into the details, assumptions, and decisions behind these estimated impacts.

3.2 Reach

TABLE 2 Implied Product Category Sales of Company A and B

Data

A

B

10K Revenue

$13.5bn

$15.7bn

Cereal

36.4% Yogurt

37.9%

Breakfast 18.3% Ice cream 15.8%

Sales by Nielsen product

category

Crackers Snacks Brkfst (frzn)

14.9% Snacks 11.2% Cereal 10.9% Produce

12.2% 8.8% 7.2%

Rdy to serve 4.1% Veg (frozen) 6.6%

Breakfast 2.4%

Estimation Revenue % category

A

B

$13.5bn

$15.7bn

x

2.4% to 37.9% =

Category revenue

Cereal

$4.9bn Yogurt

$6.0bn

Breakfast $2.5bn Ice cream $2.5bn

Crackers $2.0bn Snacks

$1.9bn

Snacks

$1.5bn Cereal

$1.4bn

Brkfst (frzn) $1.5bn Produce

$1.1bn

Rdy to serve $0.6bn Veg (frozen) $1.0bn

Breakfast $0.4bn

*Note: Product categories and percentages are based on Nielsen rather than company defined categories. Also, only product categories that represent over 2% of sales are displayed

3.2.A The customer The goal of the reach category is to identify the number of individuals reached by the

company. For consumer-packaged foods, we identify the customer as the end consumer rather than the retailer because the consumer is the one using the product. Furthermore, this decision is supported by the fact that manufacturers market their products to the end consumer rather than the retailer.

5

3.2.B Categorization of products Given the vast number of products that consumer packaged food manufacturers sell, it would

be unwieldy to report on and quantify the impact at the Universal Product Code (UPC) level. Instead, there needs to be a taxonomy of products according to a generally accepted set of categories. Looking at company disclosures for guidance, we found that although companies do categorize their revenue into certain product lines, the level of granularity and product categories differs across companies. Rather than using company-provided product categories, we use the groupings provided by a reputable and established consumer packaged foods data provider to ensure comprehensive comparability. In this example, we use the Nielsen Product Groups, but other data providers that track consumer and retailer behavior, such as IRI, could also have product groupings of relevance.

3.2.C Unit of measurement To determine the appropriate unit for reporting consumer packaged foods sales in reach,

we considered unit volume, revenue, calories, and servings. We use monetary revenue as the unit of measurement given it can be translated to implied calories, implied servings, or implied nutrients sold as required for monetization in the other dimensions.

3.2.D The impact estimate Since companies do not report revenue by Nielsen Product Group, we extrapolate the

percentage of sales by product group and manufacturer from the Nielsen HomeScan panel to company A and B's reported revenue for demonstrative purposes. Companies that perform this analysis could report actual revenue by Nielsen Product Group or another widely accepted taxonomy.

6

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download