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Blockchain and supply chain: Growing revenue instead of just cutting costs

Posted: 15 November 2019 6:00 pm
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Blockchain can cut supply chain costs. But can brands also use it to grow revenue by extending it to consumers?

Most supply chain blockchain solutions to date have focused on using the technology to cut costs, improve efficiency and protect brands against counterfeiting.

These improvements are enormously valuable. Samsung predicts cost savings of 20% from using blockchain in its own supply chain, while IBM has found a 50% reduction in administrative costs when onboarding new suppliers with blockchain.

Meanwhile, the World Trade Organisation estimates that simplifying and streamlining global shipping supply chains could increase global GDP by 5% and total trade volume by 15%.

But immense as they are, all those benefits are on the cost-cutting side of the equation.

What about the other side? Blockchain can cut costs dramatically by bringing transparency to the supply chain, but are there opportunities to grow revenue even more by extending that transparency to consumers?

There absolutely are, says SUKU CEO Yonathan Lapchik.

"That's a $1 trillion market that is sitting right there for the brands to take it. They just didn't know how," he said.

SUKU is a blockchain supply chain project, spun out of Deloitte by several members of its blockchain team. While it initially focused on blockchain to cut costs, Lapchik now sees much more on the revenue side of things than on the cost-cutting side. One of its latest clients to this end is Cencosud, the third-largest retail company in Latin America.

The trillion dollar market

"The most important thing is that there's a group of people, a group of consumers, that want to buy sustainable products, or they want to buy transparent products. They want to know where it's coming from. They just don't do it, because they don't trust the brands," Lapchik said.

"We've seen a statistic that says 9 out of 10 millennials would switch brands if the brand is associated with a cause. So that's huge. The new generation of millennials is changing how they buy things, how they look for products, what they're looking for in a product," he added." Then we have 66% of consumers willing to spend 10% more on a product if it comes from a sustainable brand.

"Some of the conclusions we're getting is that this is a new trend that's pushed by millennials, who are changing their consumer habits.

"This new trend is making these businesses and brands shift a little bit, and it's demanding them to be more transparent, to source more ethically and sustainably... We thought it might be a small population – a small group of consumers. But the numbers are telling us that it's much, much bigger than we anticipated.

"I think many of the projects in the space are really focused on the cost side. So they're building tracing solutions so they can help you save some costs. We think, in the supply chain, the opportunities for revenues are 10x the opportunities of cost-savings, and this is proof of that."

How do I reach these kids?

All large brands are currently trying to navigate today's changing tastes, but it's unfamiliar territory for many.

"These are like, large retailers, right? I mean, they've been doing this for a hundred years," Lapchik said. "They know the process. They know that if they make a good product that has a good flavour, then they will be able to sell it.

"But this change is not only about the product and the flavour and how good it is…. It's about where's it coming from? How it was produced? What's the story behind it? Am I helping someone else when I buy it? So all those intangibles, that we thought were not going to affect how the consumers want to do their business – their decision-making processes – it's affecting them."

The result is a new advantage for smaller boutique retailers whose aesthetic flourishes imply organic ingredients, ethical sourcing and sustainability. It's also a problem for the large brands, which are inherently associated with the exact opposite.

"These large retailers and brands are being threatened by smaller boutique brands that know how to talk to this person," Lapchik said. "They know how to speak the same language."

How blockchain actually helps

Getting down to brass tacks, how does blockchain actually help brands build trust? How can blockchain reach a consumer who doesn't know the first thing about the technology and has no reason to trust blockchain-based labels any more than anything else?

The crux of the answer comes from SUKU's vision for a holistic blockchain supply chain ecosystem, Lapchik said.

If a company says its products were tested in a certain way, another company can confirm that it supplied the testing equipment. If a restaurant claims to have ethically-produced guacamole, its avocado wholesaler can try to demonstrate that it doesn't source conflict avocados via data from its farms and shipping partners.

By nature, almost any supply chain is a complex web of tightly interconnected providers. By having these providers start validating each other's data, you can build a system to start verifying the claims different brands make and communicating the validity of these claims to customers.

"Everyone is accountable," Lapchik said. "There's an entire network, enabled by blockchain, where they're saying 'yes that's true' or 'no it's not.' So I think the value for these large enterprises is significant."

This foundation of transparency then feeds into two effects: one on the brand's side and one on the consumer's side.

On the brand's side

For retailers and brands, it lets them more safely make claims that they couldn't before.

"I think the retailers and brands want to mitigate some of the risks of owning the data saying 'this happened, this is organic, this came from that country.' They're responsible for saying that," Lapchik said. "We present them a solution that will actually help them validate, certify and double check every single claim... they have different claims, and we help them verify these with technology."

On the savings side of the equation, this benefit saves on paperwork, regulatory expenses and risk mitigation.

But on the revenue side, it's a way for companies to safely make new claims regarding their products and to use blockchain to better communicate their brand's trustworthiness for an edge over the competition.

"They definitely see it as a risk mitigation tool, but also as a way to differentiate from the competitors," Lapchik said.

On the consumer's side

The effect on the consumer's side is a bit trickier. How can blockchain build that trust between brands and consumers when the shopper doesn't know the first thing about the technology?

It will have to be a gradual process, Lapchik says, but there's every reason to believe consumers will be responsive.

First, these shoppers actively want to know more about the products they're buying. The consumers targeted by this solution are active learners by definition. They are already actively seeking more information on the products they consume and have already changed their behaviour and spending habits in line with their findings.

If learning more about blockchain and supply chains is the path that naturally leads to more conscientious purchases, many people will eagerly go down that road.

Plus, these consumers are already rightfully fed up and deeply mistrustful, Lapchik noted.

Lies, damn lies and statistics

PwC now estimates that about half of all "Australian beef" sold in China is either not Australian or not beef. Australian beef attracts premium prices because it's regarded as highly trusted relative to the usual local selection.

Premium prices attract counterfeits, which enter the market with the deliberate intention of exploiting consumer preferences by slapping a false label on their product.

More internationally, when people actually fact check claims like "farm to table" or "local" on restaurant menus, it's found that many of those claims are simply lies, while greenwashing and corporate philanthropy with ulterior motives are increasingly regarded as normal by a cynical public.

There's an enormous legal difference between selling counterfeit goods, lying to customers on a restaurant menu and releasing a perky but unjustified green advertising campaign, but these are all basically identical behaviours, where the goal is to trick consumers by misleading or lying to them.

Today's consumers are eager to shop cleaner and greener, but they're also deeply suspicious of any claims of cleanliness or greenness.

Don't trust, verify

A loose mountain of evidence says a way to verify, rather than trust, is exactly what consumers want.

"On the consumer's side, they don't want to trust anymore," Lapchik said. "Even when they trust, there are mistakes... If someone's telling them anything on the label, they will know that with SUKU, they will be able to verify whether that's actually true, or if it's not true.

"The value, I think, is significant for both parties, [brands and consumers] and blockchain is enabling this. It's removing power from central authorities, distributing data among different participants, and making sure that everyone is accountable, and everything can be proved."

By this line of reasoning, one of the key questions here is how to bring consumers along on a blockchain journey on a massive scale, transitioning from trust to transparency en masse. Shoppers are willing and motivated, but there's still an enormous educational gulf to be crossed.

Learning experiences

Lapchik sees this journey as a gradual process, made smoother with a combination of incentives and SUKU brand exercises, to encourage consumers to enter the system and experience it and to then start associating SUKU with transparency.

"It's all about education. It's all about showing them [consumers] the value possible, and then giving them some tokens as incentives, giving them a way to actually spend the tokens, and use the tokens for real benefits.

"And I think that's the cycle that we need to have in order for them to start learning: Why does it work? What does it mean for everyone on the blockchain to be saying 'yes' or 'no.' We need to start somewhere, and we thought making a real application, giving [consumers] some tokens, giving them access to the technology, is the way to educate them. And when they see the value, I think that's going to be significant."

Brand-wise, the SUKU logo will make its first public appearances on beef sold in Wong (a Peruvian Cencosud subsidiary) stores. This logo will show that the product has been tracked on SUKU's blockchain.

"You go to a supermarket. You see the product, you see our logo. The SUKU logo, we want to be the symbol of truth... so when you understand the value, you're going to look for the same logo on every package," Lapchik said.

There's already some evidence saying blockchain can effectively denote trust. In its own tests, French supermarket chain Carrefour found that food products with blockchain data sold better than those without.

Eyes on the prize

On the one hand, SUKU is using blockchain to track beef from paddock to plate when it's sold through one Peruvian supermarket chain.

On the other hand, it's envisioning a world where you'll see a SUKU logo on almost every product, and the world has collectively wrapped its head around "don't trust, verify".

It's more about the latter, Lapchik said.

"That's why we left Deloitte when we did a couple years ago," he said. "We really wanted to make blockchain real, with a real partnership with a real client that's using something on a massive scale... that's all we had in our heads; how do we make this real? How do we educate all these people that this is the future?"

By its nature, blockchain is at its best when deployed on a massive scale, but one of the problems with reaching that scale is the challenge of getting enough partners onto the same network.

For example, trucking companies are key to the supply chain but don't directly benefit from shipping provably organic goods instead of plastic crab meat. At the same time, brands with skeletons in the supply chain closet may prefer just using blockchain to cut costs without giving consumers any additional transparency.

In that light, it's worth doubling back to where we started: the new revenue opportunities, rather than the cost-cutting opportunities, of using blockchain in supply chains.

Is there enough money there to kickstart a chain reaction of blockchain adoption?

The trillion dollar market

A lot of spending can be boiled down to a reflection of consumer trust. Advertising, including greenwashing, is often an attempt to build trust, while the price premiums of luxury goods reflect trust in the quality or other credentials of a brand.

A loss of trust is also expensive.

An expired meat scandal in 2014 saw McDonald's Japan net revenue plummet 60% that year compared to the previous, and when Walmart China's "Five Spice" donkey meat was found to be contaminated with fox meat, it was mostly problematic because the incident risked Walmart's hard-earned reputation in China, rather than because too much fox makes your donkey taste funny.

And when consumer trust is shaken, the effects are often indiscriminate. When horse meat was discovered in "beef" sold by British supermarket chains Tesco and Asda, sales also initially dropped at Sainsbury's, but then saw a profound rise once Sainsbury's beef was shown to be free of horse meat.

Blockchain can help protect supply chains, but by taking it to the next level and extending that transparency to consumers, brands have a new way of protecting themselves from a loss of consumer trust and capitalising on competitor slip-ups.

Extending supply chain information to consumers is also a new way to narrate brand storytelling.

Consider the infamous case of Crystal Pepsi. It seemed to have all the makings of success but flopped when consumers rejected it. When the product was revisited years later, blind taste tests found that people didn't like the taste of the drink by itself, but they did like the taste when given a (false) explanation of why it was clear.

People experience products very differently depending on what information they have about it, and it's reasonable to expect people to be more willing to pay premium prices when they know exactly why something is worth more than other products, with more certainty that the information they are given is true.

This also gives brands news ways of manipulating connecting with consumers.

For example, one curious side effect of the organic-food explosion was that companies suddenly needed to reconsider their usual consumer profile and start strategically touching a lot more different nerves. Someone going organic for health reasons may be turned off by a company that advertises how green it is, while someone who wants to support local farmers may perceive a product as less tasty if it advertises its health benefits.

The ability to just tell consumers "look for this logo in-store, then use an app to see everything you want to know about the product" is a relatively new way of appealing to a wide range of different consumer desires all at once, and letting shoppers home in on the factors that matter most to them.

Chain reactions

All of these extend far beyond food. People have a keen interest in knowing precisely what goes into their cosmetics, how much slave labour went into their clothing and what the working conditions are like in the factory where their phone was made.

If some brands start enjoying a competitive advantage by using supply chain blockchain technology to reach out to consumers, instead of just on the back end, it's likely that other companies will follow suit.

And with the transparency it can bring, this may help give consumers a more powerful voice, which could see large businesses reflect consumer preferences in a more genuine way. Instead of pretending to go green, a company might actually go green because its customers can now tell the difference.

Conversely, it could go wrong.

There are no guarantees that hucksters won't undermine public trust in blockchain as a whole, reducing the effectiveness of these kinds of systems. If consumers never make that mental leap from simply trusting a label to actually critically assessing the credentials of a product based on blockchain data, then it's too easy for anyone to slap a fake "blockchain verified" sticker onto anything they want.

And even if it all goes as intended, you can't discuss plans of this magnitude without taking an (admittedly hysterical) look at some extreme scenarios.

Paying premium prices for green, sustainable, ethical and organic goods is a luxury that not everyone can afford, and maybe people don't want to see how the sausage is made – both literally and proverbially.

Where one person gets peace of mind, another might find that they have no choice but to knowingly wear slave-made shoes and feed their children carcinogenic horseburgers. Will brand-shaming take on a new life of its own as society starts discriminating against people who are seen using unethical and eco-unfriendly products?

And if we get too comfortable with knowing everything about what we consume, how can we trust an untracked product? Will we start assuming the worst of anything unknown and gradually retreat into bubbles of xenophobic brand loyalty?

Tune into the next episode of Black Mirror to find out.



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