Converting to the circular economy: companies between recyclability and the quest for profitability

Savoring your morning coffee can be for its taste, it can be for the energy it brings, it can also be because we know that the packaging and the ground beans will not become waste. The aluminum cap will be recycled, perhaps to accommodate a future coffee, and the marc will be transformed into biofuel. Agree to pay a little more for this coffee and do the same for other products if they fit into thecircular economy, a lot of consumers now seem ready for it.

Waste is the source of most environmental problems, global warming, pollution and loss of biodiversity and more and more people are aware of it. Many then try to do without products whose economic model is based on the “extract, manufacture, consume, discard” scheme.

Nevertheless according to Global Circularity Gap 2023 report, only 7,2% of materials are reinjected into the economy at the end of their life cycle. This means that more than 90% of the materials end up becoming waste and can no longer be reused. We are still far from circularity.

Within a research work recently, conducted with Stefan Buehler, from the University of St. Gallen, and Rachel Chen from the University of California at Davis, we therefore tried to understand the workings of circular economic models in order to develop strategies to reinforce circularity . This included identifying the conditions that make the transition from a linear economic model to a circular model both profitable and socially desirable.

To buckle the buckle

How can companies take advantage of the circular economy? Unlike the linear economic model, which stops at the point of sale, the circular model is based on 3 pillars: reduce, ie optimize products with a view to recycling them by limiting waste; reuse, i.e. recover end-of-life products through a reverse logistics process; recycle, i.e. transform recovered products into raw materials.

To move to the circular economy, a company must therefore review the way it designs its products and set up a reverse supply chain to recover end-of-life products. Closing the loop also requires consumers to agree to return products for recycling. The key to the circular economy lies in the interaction between the decisions of companies in terms of product design, and those of consumers in terms of their disposal for recycling.

The circular approach also offers companies a potential new source of revenue. Recovering and recycling the resources contained in end-of-life products reduces the unit cost, that of the aluminum in my coffee capsule, for example. In addition, this practice may justify the application of a higher tariff, the famous "green bonus", for products that are easier to recycle.

How then to find a balance between recyclability and higher price? We have integrated this aspect into consumers' purchasing decisions. Our model incorporates issues such as the end of a product's life, the ease and cost of recycling, and the guilt associated with not recycling. We also considered the impact of reusing the resources contained in the products on their design, on profits and on the company's overall environmental footprint.

Convince consumers

Surprisingly, the transition to the circular economy does not always reduce the company's overall ecological footprint. This is explained by a rebound effect : even if the footprint of each coffee is lower in the circular model, the reduction in waste is sometimes more than compensated by the increase in sales of the more ecological products, so that the overall footprint of the coffee producer is higher .

Our analysis also shows that it is difficult for a company to achieve full circularity. I prepare my coffee with a capsule that has been specially designed to be recycled, and I intend to ensure that it is. But for the product to be truly circular, all consumers must do the same.

For circularity to be attractive, consumers must be convinced of the importance of recycling and reusing the resources contained in end-of-life products, and reverse logistics must not be too expensive. We see that the easier it is to recycle, the more consumers are ready to play.

Stay profitable

The deposit system (the company returns part of the purchase price when the reader brings back the product to be recycled) thus seems to increase recyclability but not necessarily the profits: the number of additional consumers who recycle the product is not always sufficient to offset the cost of the deposit. The observation is the same with buy-back, that is to say when the company buys back end-of-life products from its customers to reuse and recycle them.

It seems, for the company, that it is better, in general, to remain the owner, by renting the product for the short or long term. Thus, all products are recovered, and profitability and recyclability are increased.

There is also a good chance that the circular business model will prove more profitable in the future. Government policies are moving in the direction of reducing waste, which makes companies less inclined to offer non-recyclable products. What's more, with the increase in the price of raw materials, the recovery and recycling of the resources contained in end-of-life products are becoming increasingly attractive. Finally, thanks to technological progress, the cost of setting up reverse logistics should fall, as should the cost of manufacturing recyclable products.

This study thus calls for the implementation of policies that financially penalize linear companies, for example by taxing waste. Other measures, such as raising consumer awareness or lowering the cost of reverse logistics, making it easier for consumers to access or setting up a collection service will help both businesses and consumers reduce their waste and resource consumption.

Daniel Halbheer, Associate Professor, HEC Paris Business School

This article is republished from The Conversation under Creative Commons license. Read theoriginal article.

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