written by
Victoria Annich
Victoria Annich
Market Insights
2020-07-29

Why new start-ups are backing the Circular Economy

Why new start-ups are backing the Circular Economy

The modern consumer values brands that value sustainability. New business models are now emerging which go even further than traditional sustainability practices and aim to design out waste and keep products in use. Known as the Circular Economy, this not only benefits the environment and the consumer but offers considerable advantages to companies also.

What is the Circular Economy exactly?

All products have a lifecycle and up until now these lifecycles were mainly linear. A company would procure raw materials, transform them into products and once the consumer was finished with them, they would be discarded. The circular approach, by contrast, extends the product lifecycle with methods that aim to re-use, re-manufacture and recycle.

Start-ups with Circular Economy business models are emerging at the moment, largely – but not exclusively – in the sectors of textiles (for example Fitle which provides virtual fitting technology for online shopping to prevent returns), food (such as Matsmart, a platform which sells discounted food and drink which would be thrown away, for example, if it were past its best before date. This company has won €40 million investment to date), electronics (notably Grover which provides flexible rental plans on the latest electronics. Grover closed an asset-backed financing deal in January 2020 to the tune of €250 million) and transportation (mainly ride and vehicle sharing platforms like Ridebee and Clevershuttle). Germany is a leader in this sector with the third highest number of CE start-ups in the world and, together with the UK and Sweden, accounts for almost a third of the circular economy ventures in the world.

What are the drivers behind the Circular Economy?

The Circular Economy is not a new concept and has been widespread in academia for decades. So why is it only emerging in the public’s consciousness now?

Drive towards sustainability

Not only are surveys increasingly pointing to the importance of a company’s degree of sustainability when consumers make their purchase choices, the cost-cutting nature of the Circular Economy also appears have a positive impact on consumers. Based on research by Euromonitor International, consumers are increasingly choosing sharing economy solutions or the purchase of recycled, pre-owned or long-lasting products not only because they are environmentally friendly but because they allow them to save money.

A recognition that the world’s resources are finite

As a consequence of the linear economic model, the majority of the world’s resources are used only once. However they are in short supply. For example it is estimated that crude oil reserves will be capable of serving the needs of the economy for another 50 years approximately.

Technological development

Digitalisation, the Internet of Things and artificial intelligence are solutions that promote and facilitate the Circular Economy. Take car sharing platforms for example – a digital platform and app makes it possible to locate available cars in your local area, check their mileage and open them up for use. This system would not be possible without a system of smart devices which can communicate with each other.

Benefits for Businesses

The Circular Economy opens up huge opportunities for both young start-ups and mature companies. New by-products from recovered waste are cheap to obtain and can open up new markets and sales. Repairs, remanufacturing, reselling and sharing ensures that a product such as electronics or vehicles can carry on generating revenue above its original purchase price. A rental model is attractive to those customers who might aspire to buy the high-quality, high functionality product but just can’t justify the cost of a new version. For example, BMW started its DriveNow service to make it easy for existing BMW owners to rent a BMW when away from home – then realised there were lots of other non-BMW owners who were interested in renting a BMW for a limited time too.

From a marketing perspective, 'circular' relationships present huge opportunities for brand owners as the potential for greater intimacy, personalisation and loyalty is huge. Circular economy approaches build stronger brand reputations simply by offering a first-class product and service – even if the customer was not the product’s first owner, or ultimately shares the product with others.

Challenges as a result

It cannot be denied: ecommerce continues to fuel a want-it-now culture of fast ordering, delivery and return. Society has some way to go before it will accept the reuse and refurbish approach in full. And although sustainability is a key driver for young consumers in particular, much of the success of these new business models will be related to their ability to provide the right product at the right price point. And building business models around sharing, recycling, upcycling, and waste reduction is no easy feat. Companies which have a sharing or rental model, for example, either need to bear the cost of repairs themselves or pass them onto the consumer, and both have potential serious implications for customer satisfaction and profitability.

Marketers will now need to think in in terms of ‘communities’ rather than ‘consumers’ due to the nature of both the circular business model but also the character of the consumers it attracts. Also, while people will have more intimate and involved relationships with brands, it’s very likely that they will have fewer of them. This will make the fight for consumers much more competitive than under the linear model.

In Summary

The Circular Economy is a huge opportunity for young companies. It has given rise to a range of new and innovative business models with a compelling offer for consumers – the chance to rent or purchase a quality product at a cheaper price – even if in most instances these products are refurbished, reused or based around recovered waste. Great for the environment, great for the consumer and great for business.

* Photo by Morning Brew on Unsplash

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