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BECAUSE THERE IS NO PLANET B:

THE CASE OF ECOALF
Original written by professors Martina Pasquini and Berend van der Kolk at IE Business School.
Original version, September 10, 2019.
Published by IE Business Publishing, María de Molina 13, 28006 – Madrid, Spain.
©2019 IE. Total or partial publication of this document without the express, written consent of IE is prohibited.

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This document is authorized for use only in IE University.

INTRODUCTION

What is the responsibility of a business? Already back in the 15th century, the Italian mathematician
Luca Pacioli stated that merchants should be ethical in all business activities and make a profit. Some
five centuries later, Nobel laureate Milton Friedman would downplay the social and ethical
responsibilities of businesses by claiming that "the only responsibility of a business is to make profit”1.
Yet, it seems that - to thrive as a business in the 21st century - more is needed than a sole focus on
shareholder value. Books that criticize the shareholder-focused market society2 gain popularity and
alternative views such as Freeman's stakeholder theory are embraced by large audiences. It seems
that businesses cannot justify their existence anymore by only referring to the fact that they create
"shareholder value" - a renewed focus on the social, ethical and environmental is needed.

Studies of Corporate Social Responsibility (CSR) have, until now, often highlighted the benefits of
engaging in CSR activities. The mainstream approach sees corporate philanthropic giving as a form
of 'protective insurance'. Firms that donate to social causes are, according to this approach, rewarded
for doing so by key stakeholders who care about those causes. The stakeholder view assumes a
"passive" or "responding" attitude of the companies, who mainly act because of pressures from
stakeholders such as employees, customers and investors. The investment in CSR could be
particular critical in face of negative shocks and events, since it could really act as a sort of airbag
with the reputational capital to be spent in such situations. This approach, however, is slowly
becoming outdated.

The idea that businesses should not (only) use CSR as a responding mechanism to stakeholder
pressure, but rather intrinsically combine aspects of business with a social mission, is gaining
momentum. Customers seem to increasingly care about organic food, work conditions and the
environment, and become more and more demanding when it comes to the social impact,
transparency and sustainability of a business. This means that some organizations explicitly embrace
social values as a key component of their business model. Thus, the recent rise of businesses
labelled as social business hybrids is not coincidental: nowadays, companies have an increasing
tendency to blend profitable and social objectives. These social business hybrids create interactions
between social values and profitable goals, such that they might reinforce mutually. A form of these
social business hybrids is recognized in so-called Benefit (B) Corporations, a recent form of business
with high social impact, which started in the USA and spread to other countries in recent years. B-

1
Friedman, M. (1970) "The Social Responsibility of Business is to Increase its Profits", The New York Times Magazine,
September 13.
2
See for instance, the bestselling book "Doughnut Economics" by Kate Raworth. In this book, Kate Raworth builds a case
for a wider focus on stakeholders, the limits of the earth's resources and the dignity of people affected by a business. For
critics on the market society, see the book "What money can't buy" by Michael Sandel.

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Corporations contextually maximize shareholders’ value but must comply with socially responsible
standards, including adherence to and support for specific social issues. It follows that balancing the
different, and sometimes conflicting, goals of B-Corporations is a serious challenge (see also
appendix B).

One company that has taken up this challenge is ECOALF, a young Spanish fashion brand that uses
100% recycled fabrics to produce high quality clothing, sneakers and accessories made by more
than 60 fabrics that included different types of recycled material. ECOALF aims to merge the
economic objectives of a for-profit company with social impact, and has made substantial
investments in R&D and innovative alliances to reach its targets. Although ECOALF is gaining market
share and becoming one of the most innovative Spanish companies, tough challenges lie ahead,
especially regarding the balancing act of 'social and ethical' performance and 'financial' performance.

THE DEVELOPMENT OF ECOALF

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ECOALF was founded in 2009 by its current CEO, Javier Goyeneche. Javier studied Business
Administration at the European Business School, and International Marketing Strategies at
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Northwestern University in Chicago. Previously, he was the founder and CEO of the fashion handbag
and accessories brand Fun & Basics, which he sold in 2009. The brand name ECOALF is the
combination of “Ecology” and “Alfred”, the name of Javier's son. When Javier became a father, he
realized that he wanted to contribute to a more sustainable world for future generations. Given his
passion for the fashion industry and the problems with plastics in the oceans, he decided to bring his
ideals into practice and start a company to create clothing and accessories that are completely made
out of recycled materials.

ECOALF manufactures products without using new natural resources, while making sure its products
are itself 100% recyclable. In 2018 the product portfolio of ECOALF included high quality garments,
footwear and accessories for both men and women. The products, such as T-shirts, coats and shoes
are divided into three product segments, i.e. Timeless (basic products), Xtrem (sportive) and Uptown
(fashionable). ECOALF featured in various global media outlets such as The Economist and
Bloomberg, and has an increasing customer base spread over various countries. The brand is
becoming an icon of the sustainable fashion industry and has an ever increasing follower base on
social media like Facebook and Instagram.

Concerns regarding the environmental impact of the clothing industry and the work conditions of
those who work in the industry are having an increasing impact on how consumers view fashion
brands, which has fuelled the demand for 'sustainable' and 'ethical' fashion. In the Spanish market
alone, there are numerous brands that try to address this demand, such as Genuine, Irene Peukes,
Mireia Playà, Urban Fawn, Ephemeral, Lifegist, Skunkfunk, Ecology, and CUS. ECOALF is different
from these brands as it mainly uses organic and non-polluting fibers such as organic cotton or vegetal
chrome-free leather in its production processes. While other brands also offer apparels made by
recycled material, ECOALF's aims seem more ambitious as they commit to only using recycled
materials in their clothing while still offering high quality fabrics.

When ECOALF started offering products to consumers, they found out that it was not yet well-
accepted to use recycled products: "As new entrant, ECOALF faced several challenges, firstly, we
had to convince consumers that recycled products can be cool” - as the founder and CEO highlighted
in an interview – “because the general public views "recycled" as an indicator of poorer quality”. Thus,
the first challenge of ECOALF was to change the customer's appreciation of recycled material.
According to Javier, consumers used to associate recycled products with old, outdated and low-
quality clothes "worn by their grandparents", and that had to change.

ECOALF aimed to distinguish itself mainly by its authentic and distinctive manufacturing process: it
uses 100% recycled materials to produce its garments, such as PET plastic bottles, fishing nets,
used tires, post-consumed coffee, post-industrial cotton, and post-industrial wool. What makes
ECOALF a sustainable brand is not exclusively the reuse of these materials, but also the impact that

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its new production processes have in terms of raw natural resources savings. ECOALF's sneakers
are, for instance, produced from plastic bottles from the Mediterranean Sea. The bottles are
processed into a yarn, used to create a black knitted upper sole that fits the wearer like a sock.
Furthermore, the patented process which facilitates reusing the compound of coffee, called S.Café
®, is another example of process innovation. After the coffee compound is dried, it is taken to a
recycling plant, where any oil it contains is extracted. Then the coffee ground is grinded to a size of
nano-powder, which is prepared in master batches to be mixed with recycled polyester polymers in
order to create yarn. The resultant fabric is soft, light, flexible and breathable, and can also be used
to produce an outer shell that is water resistant.

ECOALF invested in research and development in at least 14 alliances with companies and research
centers worldwide (based in, for instance, Taiwan, Portugal, Mexico, Japan and Spain) and by
cooperating with a range of well-known brands and persons, such as Will.i.am, Coca Cola, Swatch
and Apple. According to the CEO and founder “ECOALF's partnering and branding decisions should
always relate to these key terms: innovation, sustainability, and design”. Alliances and partnerships
were key in the learning processes regarding the creation of recycled fabrics without sacrificing the

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quality of the products as well as for building a branding awareness.
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ECOALF IN THE SPANISH APPAREL MARKET

The apparel market (SIC code 56)3 includes baby clothing, toddler clothing and casual wear,
essentials, formalwear, formal wear occasion, and outerwear for men, women, boys and girls, and
excludes sports-specific clothing. The Spanish apparel retail industry had total revenues of € 26.6 bn
in 2017, representing a compound annual growth rate (CAGR) of 4.7 % between 2013 and 2017
(see Appendix C). In comparison, the French and German industries grew with CAGRs of 0.3% and
2.2% respectively, over the same period, to reach respective values of € 35.2 bn and € 59.8 bn in
2017. The growing popularity of shopping online is an important factor that has impacted the growth
in the apparel retail industry. The Spanish online retail sector grew by 14.5 % in 2017 and is expected
to increase a further 74.2 % by 2022. Despite the growing trend of shopping online, specialty retailers
remain the dominant channel in Spain, accounting for 55.8 % of the industry’s value.

The womenswear segment was the industry's most lucrative in 2017, with total revenues of € 14 bn,
equivalent to 52.6 % of the industry's overall value. The menswear segment contributed revenues of
€ 8.2 bn in 2017, equating to 30.8% of the industry's aggregate value. The performance of the
industry is forecasted to decelerate, with an anticipated CAGR of 4.3 % for the five-year period 2017
- 2022, which is expected to drive the industry to a value of € 32.8 bn by the end of 2022. To put this
in perspective, the French and German industries are expected to grow with CAGRs of respectively
1 % and 2.4 % over the same period, to reach values of € 37.2 bn and € 67.4 bn in 2022.

In this growing market, ECOALF achieved over time a steady increase of sales, and the balance
sheet total of ECOALF has also steadily increased over the past couple of years. To illustrate the
magnitude of the growth, ECOALF's CEO indicated that last year they ordered 2,000 T-shirts to be
sold in 2018, while they ordered 18,000 T-shirts for 2019. "We more than doubled our sales in the
past couple of years, and we aim for this year to multiply our total sales by a factor 2.5."
Notwithstanding the growing sales, the key financials still show some serious challenges (see Figure
1 and Appendix A).

Retail is becoming more and more important in the growth of ECOALF: in 2018, 40 % of the sales
was retail (and 60% wholesale) while the year before, retail only constituted about 10 % of the total
sales. Recently, new retailing points have been opened like the existing eight shop- in-a-shops in the
Spanish popular department store El Corte Inglés. In 2019 ECOALF is planning to open other
locations in addition to the current flagship stores in Milan, Berlin and Barcelona.

3
SIC Code classification: https://www.osha.gov/pls/imis/sicsearch.html

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€ 5,000,000

€ 4,000,000

€ 3,000,000
Sales (euro)

€ 2,000,000 Material costs (euro)

Personnel costs (euro)
€ 1,000,000 Balance sheet total
Operating income
€-
2013 2014 2015 2016 2017

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€ 1,000,000-
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€ 2,000,000-

FIGURE 1 - Financial highlights. Source: SABI database. Based on information from Appendix A.

With the increase of sales from retailing, the question of how to deal with unsold products also
becomes more urgent. Discounting products is not something ECOALF is happy to do, and simply
destroying clothes - as some other high-end brands do4 – is not a viable or sustainable option.
Regarding selling prices, ECOALF aspires to be "affordable, but not cheap", "We do not sell via
Amazon, we don't do Black Friday sales”, the CEO states, “we want to sell our products, but we do
not believe in the philosophy of buying-throwing-buying-throwing that is typically the case when doing
continuous promotions”.

B-CORPORATIONS

Since 2018, ECOALF is a Certified B-Corporation (CBC). A CBC is a new corporate form that is
spreading in the United States since 2007, aiming to synthesize social impact and profitability.
Around the world, there are about 2.600 B-corporations divided across 60 countries and 150
industries. The concept of B-corporations aims to fundamentally reshape doing business: compete
not to be the best in the world, but for the best of the world.

CBCs are companies that have voluntarily chosen to be audited on social and environmental
performance by B Lab, a non-profit organization founded in 2007. B Lab aims to help entrepreneurs
and companies to obtain a recognized certification of a company based on a social mission. The
certification process involves a deep analysis of the business model of the company, evaluated
according to its social impact on five dimensions: environment, community, workers, governance and
customers. CBCs are organized in such a way that they create benefit and a high social impact for
society. Each year, a CBC must publish an official report on the social activities of the company.
Furthermore, B Lab assigns scores on various dimensions to the organizations, and to stay
registered as a CBC, the total score should not be lower than 80 points - ECOALF currently has 81.8
points (see also Appendix B).

4
See for instance, the article "Why does Burberry destroy its products and how is it justified?" The Guardian, 20 July 2018.
https://www.theguardian.com/fashion/2018/jul/20/why-does-burberry-destroy-its-products-q-and-a

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WHAT'S NEXT?

ECOALF is in a crucial and turbulent phase of its development. Sales are booming, ECOALF is
expanding geographically and the portfolio of products offered is increasing - yet the company is still
not profitable and the long-term continuity of the company is threatened. Thus, in order for ECOALF
to achieve its social, environmental and financial goals, strategic decisions have to be made that
facilitate a sustainable balance between the various objectives of the company.

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ANNEX A
ECOALF KEY DATA

ECOALF key figures

Year 2013 2014 2015 2016 2017
Number of employees 7 9 11 15 18

Key data from income statement

Sales € 286.165 € 1.402.671 € 2.683.032 € 3.604.862 € 4.135.155
Material costs € 288.350 € 1.125.735 € 2.014.438 € 2.874.782 € 2.816.513
Personnel costs € 153.121 € 354.234 € 420.710 € 544.451 € 559.810
Other operating costs € 524.981 € 1.102.610 € 1.093.056 € 1.405.281 € 1.707.164
Operating Income € -680.288 € -1.179.908 € -845.173 € -1.219.653 € -948.332

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Balance sheet*
Total assets € 2.245.995 € 2.451.803 € 3.526.820 € 4.133.522 € 4.230.301
Total Fixed assets € 489.422 € 846.427 € 1.071.017 € 1.005.912 € 991.198
Intangible fixed assets € 63.002 € 75.129 € 72.792 € 56.980 € 58.165
Tangible fixed assets € 205.737 € 240.162 € 224.231 € 165.393 € 163.927
Other fixed assets € 220.683 € 531.136 € 773.995 € 783.538 € 769.106
Total Current assets € 1.756.573 € 1.605.376 € 2.455.803 € 3.127.610 € 3.239.102
Stocks € 650.365 € 873.276 € 1.337.031 € 1.772.427 € 1.825.730
Debtors € 281.221 € 452.205 € 775.783 € 1.140.386 € 1.141.548
Cash & cash equivalent € 824.988 € 90.896 € 270.307 € 135.798 € 246.824
Other current assets €- € 189.000 € 72.682 € 79.000 € 25.000

Total equity & liabilities € 2.245.995 € 2.451.803 € 3.526.820 € 4.133.522 € 4.230.301

Shareholder funds € 1.488.408 € 557.050 € -171.526 € -1.662.618 € 1.304.182
Long-term debt € 500.000 € 1.500.000 € 3.040.000 € 4.500.000 € 1.303.321
Current liabilities € 257.586 € 394.753 € 658.346 € 1.296.141 € 1.622.797
Loans € 13.837 € 8.358 € 528.281 € 765.676 € 825.107
Creditors € 224.185 € 358.547 € 103.981 € 238.352 € 414.413
Other current liabilities € 19.564 € 27.849 € 26.084 € 292.113 € 383.277

* Balance sheet data from 31 January of the reported year.

Income statement data from 12-month period before 31 January of the reported year.
Source: Data obtained from Sabi database, Bureau Van Dijk.

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ANNEX B
BENEFIT CORPORATIONS AND DEVELOPMENTS

CBCs differ from ‘Benefit Corporations’ (BC) and ‘Public Benefit Corporations’ (PBC) solely by
prescription of government sponsored legal status: BCs and PBCs are distinct U.S. state legislated
corporate entities. In Europe, the legal status of the B- Corporation is only recognized by the Italian
law5, and a benefit of this is that it helps to secure and protect the social mission of the company.
The US law is mostly directed to protect the rights of the shareholders to maximize the value of the
company, but in the case of Benefit Corporations, to maximize the economic value of the
shareholder, the management of a company is obliged to put in action strategies that are to be taken
for social purposes and to ban actions that, though economically profitable, they can collide with the
mission company. A failure to do so implies directly a breach of management's fiduciary duties.

Regarding the certification, a recent survey found that the large majority of CBCs (72 %) are founded
as CBCs, while only 18 % have chosen to be certified and transformed to a CBC after their
foundation. Furthermore, 30 % of the CBCs also have another ‘green’ or ‘sustainable’ certification,

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such as cradle-to-cradle. Founders and owners of CBCs mainly point to two important advantages
of having the certification: it helps to attract new talent - as it signals that the organization is part of a
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social movement - and second, the certification helps to secure the organization's values6.

In Spain, there are currently about 37 CBCs. ECOALF was the first Spanish CBC in the fashion
industry and received its B-Corp certification scoring 81,8 points7. Although the B Lab has not
published the exact methodology used to calculate the scores for companies, it does split the B
Impact score in five different categories. ECOALF's scores are: Governance (14.8), Workers (17.2),
Community (17.7), Environment (32.1), Customers (0.0), which makes the total 81.8 points, just
above the minimum level of 80 points.

ECOALF had the highest evaluation for the environmental impact (32.1 points) that is intrinsic to its
mission of recycling its inputs and both conserve existing resources and being the first mover to
revolutionize the apparel manufacturing process by reducing the consumption of water and energy.
ECOALF also shows good impact scores for governance (14.8) and community aspects (17.7
points). The company has been renowned for its social mission and its strong civic engagement, for
instance by leading the “Upcycling the Oceans” projects in Thailand and Spain, in an effort to clean
the Ocean seas from waste. The project initiated in September 2015, and since then about 280 tons
of waste have been recovered from the oceans. In the project, ECOALF collaborated with about
2.500 fishermen and 500 fishing trawlers located in 37 fishing ports all over Spain.

5
7 Italian Benefit Corporation, Law n. 208, 28 December 2015.
6
These data on B-Corporations are collected by an original survey sponsored by the Marie-Curie Grant Agreement #655676.
Source: https://cordis.europa.eu/project/rcn/197276/brief/en
7
Source: https://bcorporation.eu/directory/ecoalf-recycled-fabrics-sl retreived 6 June 2019.

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ANNEX C
MARKET DATA

Spain apparel retail industry value, 2013 - 2017

Year Million € % Growth
2013 € 22.156
2014 € 23.013 3,9 %
2015 € 24.065 4,6 %
2016 € 25.454 5,8 %
2017 € 26.648 4,7 %

Spain apparel retail industry category segmentation, 2017

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Category Million € %
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Womenswear € 14.017 52,6 %

Menswear € 8.208 30,8 %
Childrenswear € 4.424 16,6 %
Total € 26.648 100 %

Spain apparel retail industry selling point segmentation, 2017

Selling point %
Clothing, footwear and accessories specialists 55,8 %
Department stores 23,1 %
Hypermarkets, supermarkets and hard discounters 5,5 %
Online pureplay 3,0 %
Other 12,7 %

Total 100%

Spain apparel retail industry value forecast, 2018 - 2022

Year Million € % Growth
2018* € 27.821 4,4 %
2019 € 29.035 4,4 %
2020 € 30.280 4,3 %
2021 € 31.574 4,3 %
2022 € 32.895 4,2 %

*The value for 2018 is a forecasted value - the real value was not available when this case was
finished.

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SELECTED SOURCES AND REFERENCES

WEBSITES AND VIDEOS:

Article The Guardian, Why does Burberry destroy its products and how is it justified?, 20 July 2018.
https://www.theguardian.com/fashion/2018/jul/20/why-does- burberry-destroy-its-products-q-and-a.

B-Corporation website, retrieved 14 February 2019, https://bcorporation.net/.

B-Corporation impact assessment ECOALF, retrieved 14 February 2019,

https://bcorporation.eu/directory/ecoalf-recycled-fabrics-sl.

B-Corporation Anthem, retrieved 14 February 2019, https://www.youtube.com/watch?v=V-

VFZUFJwt4.

Bloomberg article about ECOALF and Spanish economy, retrieved 14 February 2019,

Este documento es autorizado para uso exclusivo de IE University.

https://www.bloomberg.com/news/articles/2018-06-19/how-spain-got-its-swagger-back.
This document is authorized for use only in IE University.

Dezeen article about ECOALF sneakers, retrieved 14 February 2019,

https://www.dezeen.com/2018/07/15/ecoalf-shao-sneakers-algae-ocean-plastic-waste/.

ECOALF video about Ocean Waste Sneaker, retrieved 14 February 2019,

https://www.youtube.com/watch?v=boV_TkmBtho.

ECOALF website, retrieved 14 February 2019, https://ecoalf.com/.

FashionSustain Berlin video ECOALF, retrieved 14 February 2019,

https://www.youtube.com/watch?v=52BGgnCBOdg.

Between Social Values and Profitable Performance: The Case of B-Corporations, retrieved 14
February 2019, https://cordis.europa.eu/project/rcn/197276/brief/en.

OTHER REFERENCES:

Battilana, J., & Lee, M. 2014. Advancing Research on Hybrid Organizing—Insights from the Study
of Social Enterprises. Academy of Management Annals, 8:397–441.

Branzei, O., Gamble, E., Peter W Moroz, P.W., & Parker, S.C. 2018. Enterprise Before and Beyond
Benefit, Part 1: Entrepreneurship and For Benefit Corporations, Journal of Business Venturing, 33(2):
117-240.

Freeman, R. E., & Moutchnik, A. 2013. Stakeholder management and CSR: questions
Friedman, A. L., & Miles, S. 2002. Developing Stakeholder Theory. Journal of
Management Studies. 39 (1): 1–21.

Friedman, M. 1970. The Social Responsibility of Business is to Increase its Profits.

The New York Times Magazine, 13 September.

Raworth, K. 2017. Doughnut Economics: Seven Ways to Think Like a 21st-century Economist.
London: Random House Business Books.

Sandel, M. J. 2013. What Money Can't Buy: The Moral Limits of Markets. London: Penguin.

Santos, F., Pache, A., & Birkholz, C. 2015. Making Hybrids Work: Aligning Business Models and
Organizational Design for Social Enterprises, California Management Review 57/3: 36-58.

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Sedláček, T. 2011. Economics of good and evil: The quest for economic meaning from Gilgamesh
to Wall Street. Oxford: Oxford University Press.
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