Barclays: Retailers terminate £7 bn in contracts as part of supply chain clean-up

UK retailers have cancelled £7.1 billion in contracts across the last 12 months with suppliers that don’t meet stringent ethical and sustainable standards, new research has revealed.

The report from Barclays Corporate Banking – Reshaping retail: how ethics and sustainability are changing retail’s ecosystem – shows that the pandemic and an increasing focus on Environment, Sustainability and Governance (ESG) are shifting business priorities. In a study of more than 300 retail decision makers, just over half say sustainability is more important now than it was two years ago and just under half say the same about ethical standards.

Additionally, almost four in five retailers think that a long-term strategy to improve their ethical and sustainable credentials is more important than overcoming short-term supply chain disruption. On average, retail businesses with more than 10 staff are investing £504,000 per year to improve their own footprints.

However, the imperative to be more sustainable and ethical is now being felt financially across the supply chain. Over a fifth of retailers that Barclays surveyed have cut ties with suppliers in the last year because they’re not meeting required standards. Among this group, the average is six contracts cancelled per retailer, with an average value of £306,000 per contract. Cumulatively, £7.1 billion worth of contracts have been cancelled across the industry over the last 12 months.

The most common reasons for cancelling contracts with suppliers were:

1.       Use of unsustainable materials (39%)

2.       Unfair working hours (37%)

3.       Lack of membership to trade body that monitors ethical and sustainable standards (32%)

The importance of monitoring standards throughout the supply chain is reflected in the £179 million retailers invested last year in joining trade bodies that monitor supplier performance in ethics and sustainability. Over a quarter of retailers signed up to new bodies last year, spending an average of £34,500 each in doing so.

Karen Johnson, Head of Retail and Wholesale, Barclays Corporate Banking, said: “We are seeing a marked acceleration and shift among retailers towards prioritising sustainable and ethical standards in every part of their business operations. That is now starting to take its toll on retail suppliers with billions of pounds worth of contracts being cancelled every year.

“It’s being driven by increasing consumer demand and will rise even further as Gen Z enter the workplace and begin to earn their own money. Retailers must continue to monitor and improve their ethical and sustainability standards if they are to appeal strongly to younger demographics.”

Two thirds of 16-24-year-olds would stop shopping with their favourite retailer due to ethical concerns and 68% of 25-34-year-olds would cut ties and shop elsewhere if their favourite retailer was found not to meet sustainability standards.

There is, however, an upside for retailers, in that consumers are prepared to pay a premium for these higher standards. On average, shoppers will pay 4.55% more for an ethically-sound product and 4.36% more for sustainably-sourced goods.

Consumers do also feel there is room for further improvement with nearly two thirds (63%) wanting to see retailers make more ethical and sustainable upgrades in future.