Quantifying the Loop: Three Scenarios and Four Circular Economy Business Models

Abstract

Background: To mitigate the growing environmental concerns caused by overconsumption and ineffective production, an innovative business model has emerged called “circular economy” (CE). It moves away from the traditional take-make-dispose linear model and instead designs closed-loop products to be reused at the end of the lifetime. CE, however, remains a highly contested field. In academia, there are 114 definitions to-date. This thesis adds to this debate on CE. Research aims: The thesis aims to accelerate the transition to circularity by exploring a major barrier: the financial viability of circular business models. This was achieved by developing three scenarios based on four circular economy business models. The three scenarios are: 1) linear standalone business model; 2) additional circular business streams from a) rental and b) leasing; and 3) lower cost from circularity from c) lower material cost and d) lower operational costs. To provide insight on the financial viability of CE business models, we posed the research question: What are the challenges and opportunities of quantifying the financial value of mature circular economy business models at Tarkett? Subquestion: What might be the implications and recommendations for other businesses? Methods: The analysis blends both quantitative and qualitative data. Each of the circular business models was developed from interviews with professionals at Tarkett, a leading circular flooring company with offices in North America, Europe and global. The scenarios were modeled at the mature stage post-implementation to allow for a fair comparison. Results: The model found that both circular scenarios are financially viable compared to the standalone linear model. The lower cost scenario provides a 7.3% value premium over the linear scenario. The additional revenue scenario provides a 3.8% value premium. We also assessed sensitivities to stress-test the robustness of our results. We explore upper and lower ranges of key assumptions that affect the valuation of Tarkett in each of the three scenarios. The sensitivity analysis shows that the results do not change in the upside / base / downside cases. The lower cost CE model is more financially viable than the additional revenue CE model in all cases. Despite the clear findings, there were many challenges in quantifying the financial value of circularity. Even at Tarkett, a forerunner in circularity, the nascent nature of the CE model makes it difficult to analyse and measure circularity. Conclusion: The results help identify which circular models provide the greatest financial benefit in the mature stage. Both CE scenarios are financially viable in the long run but focusing on lowering cost is the better option from our findings. There are, however, challenges for companies wanting to transition to circularity that are outside of the scope of this thesis. A few limitations include the challenges of measuring and defining standards for circularity. The thesis does not examine which model is easier to implement, or evaluate transitional costs, such as high research and development costs, as it focuses on the post-transition mature stage, and such an analysis falls outside of the scope. Thus, while this thesis shows the lower cost circularity scenario is financially viable, the decision to transition cannot be taken in isolation without considering the full spectrum of implications. Transitioning to a fully circular economy will take time and careful consideration. This thesis contributes to an ever-changing landscape.