Today, most manufacturers engage with consumers through linear production models, which are best described "take - use - dispose." This involves extracting/sourcing raw materials and inputs, using them to create products and selling them to the consumer, who, after the expiration of the product lifetime, ultimately discards it as waste. A relatively small portion of production is recycled, including its dominant form, which in the linear production model is downcycling. As a result of downcycling, processed waste loses certain properties, so that raw materials from the initial product can only be used to produce products of lower quality.

 

The textile industry is an example of an almost entirely linear business. Large quantities of unsold clothing, or after a short period of use, are sent to landfills or incinerated. It is estimated that more than $500 billion in value is lost each year due to unused clothing and lack of recycling. Increasing waste has a negative impact on the environment (methane emissions), building a low-carbon economy (increasing energy consumption to extract more raw materials to produce new products) and encouraging consumptionism.

 

The pursuit of a linear pattern of development has very serious limitations:           

• environmental: total demand for raw materials/resources is expected to reach 130 billion tons by 2050, up from 50 billion in 2014; this means exceeding the Earth's assimilative capacity by more than 400% (Circular Policy, World Business Council for Sustainable Development, 2021);
• Regulatory - related to sustainability, for example, the EU has introduced regulations requiring companies to adopt circular and sustainability indicators (EUGreen Deal and Fit for 55;
• Demand-driven: globally, the number of middle-class consumers will increase, while the lifespan of products will decrease, contributing to lower product quality, faster replacement cycles and the generation of more waste.

 

On the other hand - in line with consumer and investor expectations - initiatives are emerging to support the development of the circular economy.

• Since 2019, assets in public equity funds dedicated to the circular economy have increased 28-fold from $300 million to $9.5 billion by the end of 2021; bond investments have increased 500% and the number of PE funds has increased more than 10-fold (Ellen MacArthur Foundation)
• By 2025, more than 40% of consumers will change their preferences and purchasing decisions in favor of sustainable goods and services, generating $860 billion in spending on sustainable products and services (Ellen MacArthur Foundation).

 

As a result of these contrasting trends, the global economy is only 7.2% circular (Circularity Gap Report 2023). It highlights that increasing consumption of raw materials and inputs is reducing the global circularity: from 9.1% in 2018 to 8.6% in 2020 and 7.2% in 2023.

 

Transformation towards a circular economy

An interesting example of the change from a linear to a circular model is ON - Swiss sportswear and footwear manufacturer.

 

According to estimates, 1.2 million tons of shoes are discarded annually in EU. These products, due to their complex structure - involving at least 40 materials glued together - are not often recycled. ON has concluded that maintaining a purely linear business model will waste significant amounts of raw materials and materials and will not achieve the benefits of moving to a circular production model.

 

The company launched a program to produce running shoes (Cloudneo) and sports shirts (Cyclon T) in a circular model. This required significant production modifications and changes to the business model.

 

By using bio-based materials and modern engineering methods, advanced fully recyclable running shoes are produced. They have been designed to eliminate waste and reduce necessary components. A single shoe consists of 10 components from a single family of materials, compared to more than 60 components from different materials when produced in a linear model. The shoe and T-shirt are made from the same knitted fabric, created from fully biodegradable castor bean material. They are undyed to minimize negative environmental impacts. The materials used can be recycled without losing any performance or structural properties, ensuring a complete circularity. 

 

Running shoes are available in 33 countries only on a subscription model. Similar to Netflix or Spotify, the subscriber pays a fixed monthly fee to use the product.  After 3 - 6 months of a subscription shoes can be exchanged for new ones. The condition for obtaining new shoes as part of the subscription is to return (for free) the old ones with their original packaging. Once they are returned, the manufacturer grinds and melts them down and reuses 100% of the material. The loop repeats itself. With each cycle, less primary material is used, allowing for an increase in the margin generated.

 

The key elements in implementing circular production model in ON consisted of:

• designing the running shoes with a circular process in mind;
• designing and implementing several product innovations related to the use of biodegradable material, reducing the amount of material used, and eliminating harmful chemicals from the production process;
• optimizing distribution - to simplify and decarbonize logistics;
• establishing cooperation with a third party company to acquire recycling know-how.

 

Benefits for companies after implementing circular models

Sustainability

The circular model used by the manufacturer brings tangible sustainability benefits. Compared to athletic footwear manufacturers operating in a linear model, the company produces 50% less CO2, uses 70% less energy and generates 90% less waste.

 

Supply chain resilience

High economic volatility makes it an important element of success for companies to build resilient supply chains for their products. Industry shortages increase raw material costs and impact margins. Circular business models help solve this problem by allowing manufacturers to recover raw materials and reintegrate them into supply chains.

For example, ON will be able to estimate the number of shoes they expect to return, and thus avoid new raw material orders.

 

A recurring revenue stream

Circular models allow companies to introduce SaaS models for products that are not typically seen as recurring. ON running shoes sold through a subscription model are a practical example of this. By charging for a monthly subscription, the company builds a recurring relationship with consumers, which translates into growing sales and margins over the long term and allows for increased accuracy in revenue and cost forecasting.