Introduction

What’s the Story? The metaverse is expanding exponentially, with NFTs and blockchain technology making further inroads across global business sectors and consumer segments, including retail. While NFTs in art, fashion and media are evolving rapidly, application of the technology within retail supply chains is still nascent. We have previously written about blockchain within retail as a distributed and decentralized database that keeps digital records of historical transactions. In this report, we discuss the use of NFTs as digital assets that exist on a blockchain and are attached to physical assets, such as raw materials, certifications and finished products that can be tracked through blockchain platforms. In this report, we discuss how NFTs can improve supply chain traceability, enhance authentication and boost security. Why It Matters Manufacturing facility shutdowns and port closures held up the making and movement of raw materials and finished goods, curbing supply and driving up prices. With impacts reverberating across the global economy, the need for robust supply chain strategies has never been clearer. This global supply chain disturbance has left businesses from luxury retailers such as LVMH and consumer packaged goods (CPG) companies such as Procter and Gamble with low or hazy visibility of their goods, increased work for internal teams in tracking and follow-ups—and, ultimately, increased costs. This underscores the need for robust supply chain strategies supported by innovative technologies, such as blockchain and NFTs. Blockchain sits among the top trends set to impact supply chains within global businesses by 2025, according to business executives surveyed by process and performance improvement firm APQC in January 2022. The relatively lower position of blockchain among key global trends, as shown in Figure 1, indicates major opportunity for retail players, from retailers to technology providers, to capitalize on this nascent technology for supply chain applications.

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Figure 1. Global Trends That Are Expected To Impact Supply Chains by 2025 [caption id="attachment_147940" align="aligncenter" width="699"] Base: 261 executives from global businesses across different sectors, interviewed in January 2022
Source: APQC [/caption]   NFTs in Retail Supply Chains: Coresight Research Analysis The unique, blockchain-based encrypted data in an NFT ensures the information contained about its ascribed physical assets remains secure due to its tokenization. NFTs can be tracked and authenticated on blockchain—they are not interchangeable or editable, and cannot be duplicated. For companies to engage with NFTs and incorporate blockchain technology into their processes, they will need to use an enterprise blockchain platform, such as IBM Blockchain Platform, or use an application such as Aura SaaS.

• The IBM Blockchain Platform is a blockchain-as-a-service offering, which allows users to create, manage and expand their own blockchain networks. Users can develop their own functions that the blockchain network should serve and add the stakeholders that are part of their business, such as vendors, agents and others, to their network.
• Aura SaaS is a cloud-based software-as-a-service offering from Aura Blockchain Consortium, which was founded by LVMH, Prada Group and Richemont’s Cartier for the luxury sector. Users can access the Aura SaaS offering through APIs—software intermediaries that allow two applications to connect. Aura SaaS allows users to generate smart contracts, view products registered on the blockchain, trace product events and history and record ownership acquisition and transfer. It will also provide white-label consumer-facing interfaces that can easily take information from the Aura Blockchain and display it in a user-friendly format. Aura Blockchain is also working on a plethora of turnkey applications that can speed up the technology’s route to market and enable smaller brands to adopt the technology.

Use of NFTs in retail supply chains is fast evolving, driven by the three key functions we discuss below. 1. Traceability: As NFTs reside on a digital ledger, they can be traced back to the original owner or creator. Within a retail supply chain, this is useful for tracing the origin and quality of raw materials, as well as the labor conditions related to making their products. As sustainability continues to grow in importance and with many recent issues regarding unethical trade practices coming to light, it is critical that brands and retailers have full visibility. Sourcing raw materials is a complex process not least due to the number of materials involved—apparel and furniture products, for example, may require multiple types of materials per style and seasonal collections can have numerous styles. Aggregating the materials and ensuring that they are genuine can be challenging using traditional methods, i.e., on paper, or have people input data into a system or manually sending the data (physically or online), but NFTs can help maintain a trail more efficiently.

• For example, if an organic cotton supplier needs to use the term “organic” in reference to its products, it needs to fulfill specific criteria and receive the certification from a reputed agency such as the Global Organic Textile Standard (GOTS). If GOTS provided its certification as an NFT, the supplier can transfer the NFT to garment manufacturers who will in turn transfer it to the brand or retailer.

The end user, such as the brand or retailer, can look at the transaction trail on the blockchain to ensure that the organic cotton certification has been passed down from the original source and is not a duplicate or tampered with. Many certification organizations tend to list organizations they have certified on their websites, but NFTs on blockchain platforms are more secure, and cannot be tampered with.

2. Authentication: NFT authentication is done through smart contracts—programs stored on a blockchain and executed only if certain predetermined conditions are met. NFTs can carry authenticity certificates, similar to physical certificates that brands provide. For example, a jewelry brand can transfer to a consumer an NFT that provides proof of ownership as well as the authenticity certificate for a new product that the consumer has bought. If the customer wishes to resell the product, the new buyer will receive the NFT certificate showing the journey of the product from the retailer to the customer and then to the new (secondhand) customer. 3. Security: NFTs provide an enhanced level of security as they cannot be duplicated. Each NFT has unique attributes, such as the creator’s blockchain address, identifier and code, which are immutable. While an NFT creator can make multiple “editions” of a single NFT, all will show the same blockchain address for the creator. However, if someone else uses that NFT to create another NFT, the newly created one will have the second creator’s blockchain address and it will also carry a different identifier. In certain sectors, such as food and drug manufacturing, it is imperative that goods reach the consumer in their pure, uncontaminated state. For instance, a drug manufacturer can attach NFTs to specific drugs, which eventually get passed on to distributors, pharmacists or drugstore retailers. When consumers or patients receive the drugs, they can see the journey they have taken and due to the highly secure nature of NFTs, be sure that this information has not been tampered. Due to enhanced traceability, drugmakers can also trace the journey of the drug and make contact with the consumers easily in instances of recalls to guarantee product security. Impacts on the Retail Supply Chain We expect NFTs to have wide-ranging impacts on the retail supply chain.

• Driving Wider Adoption of Blockchain Technology in Retail

As businesses look to mitigate risks and prepare for unprecedented disruptions at the scale of those caused by the pandemic and lockdowns, many will be more open and willing to adopt technologies across their processes. We see blockchain technology as playing a leading role in shoring up businesses’ defenses against future eventualities. As brands or retailers alone cannot achieve cohesion in the supply chain, other stakeholders, such as suppliers, distributors and agents will also need to adopt similar technology to send and receive information on blockchain platforms. For example, if one party wants to send an NFT, the receiving party must also have access to the technology and platform to receive it.

• Alleviating Supply Chain Bottlenecks

Blockchain transactions can take place in near real time and speed up transactions, such as receipt of goods and processing payments. For instance, IBM instituted blockchain technology for The Home Depot in 2018 to track shipment data and packages in the retailer’s supply chain. The technology enabled the retailer to achieve almost instant payment processing, reducing wait times from several days after the arrival of goods. Having greater visibility and control of raw materials and goods in the supply chain can also enhance decision making. For example, if a manufacturer is aware that raw materials are delayed, the manufacturer can look at alternate sources to ensure deliveries do not get backed up.

• Reducing Losses from Returns and Supporting Resale and Rental Markets

As e-commerce continues to grow, so will the rate of returns—requiring strong tracking capability, especially for high-value items. Moreover, with the resale and rental markets growing, it is becoming ever more important for brands and retailers to demonstrate provenance and validate the authenticity of products. NFTs can help brands and retailers track products more efficiently and reduce instances of loss and theft.

What We Think

As more industries explore and experiment with blockchain technology for various applications, we expect the use of NFTs to proliferate across the supply chain. Implications for Brands/Retailers

• NFTs can help improve visibility and authenticate the provenance of raw materials and goods. Business must be bold and nimble enough to adopt new technology to overhaul their supply chain and get ahead of future risks.
• Businesses will also need to ensure that other stakeholders in their supply chain have also adopted blockchain technology to enable the exchange of NFTs. While this may sound feasible in theory, some parties may be reluctant to adopt new technology due to cost or expertise barriers, thus slowing the adoption of NFTs across the value chain.

Implications for Technology Vendors

• Technology vendors should take a leaf out Aura Blockchain Consortium’s book to develop platforms specific to sectors. Within sectors, businesses tend to have common suppliers, vendors, agents and other stakeholders, meaning they will have similar needs and use cases from the platform. Technology vendors should also develop white-label applications that can be onboarded easily onto businesses’ existing infrastructure to enable faster adoption of blockchain and thus NFTs in the supply chain.