Nestlé Nespresso: Creating Shared Value through Real Farmer Income
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Nestlé Nespresso:
Creating Shared Value
through Real Farmer Income™
Background
I. Introduction II. Background on Nespresso
At the heart of Nespresso’s success as a brand lay its commitment The Nespresso concept was the brainchild of a Swiss coffee
to exceptional cup quality. However, in the pursuit of the best pioneer and inventor who was determined to create an espresso
coffee beans, there was also a recognition by its management that extraction system that would enable discerning espresso coffee
quality was inextricably linked with sustainability. A sustainable consumers to prepare excellent quality espresso coffee at home.
approach to coffee production – one that considered both the The patented system uses a unique extraction method encased
social and environmental impacts of the sourcing process – was in stylish machines to extract consistently high quality espressos
the key to preserving the ability to produce consistent quality from top exceptional coffee blends in portioned aluminum
for the future. Real brand leadership was not just about selling capsules. Created in 1985 Nespresso revolutionized in-home
a unique, high quality product, but also about ensuring that the coffee cup quality and gave rise to the entirely new home use
social and environmental performance of that product spoke with portioned coffee category in the coffee sector.
the same authority as its quality.
The patented technology has created a product advantage for
Nespresso’s CEO Richard Girardot had already committed the Nespresso during the course of the last quarter century, allowing
company to the concept of Creating Shared Value: “We are a it to significantly outscore other espresso brands according to the
part of Nestlé – Nestlé has committed to ‘Shared Value’ as an Nestlé 60/40 plus principle whereby all products must outperform
operating principle.” This principle, developed by Harvard category competitors in consumer taste tests by a 60 to 40
Professors Michael Porter and Mark Kramer in 2006, maintained advantage. The company has not stopped with the one invention
that companies had a responsibility to create and share value not but has continued to innovate with new machines, introducing
just for shareholders but also for the communities in which they milk solutions for certain markets and more affordable machines
operated - from farmers through to customers and ultimately as well as super premium machines; it has also developed
consumers. specific formats for use in out-of-home channels such as high
end hotels, restaurants, catering and travel as well as solutions
In the years since 2007, Nespresso’s Vice President for Marketing for offices.
and Sustainability Guillaume LeCunff, had led a team from
various Nespresso departments in several countries, along with The Nespresso business model is based on a threefold
some external advisors, to bring Nespresso’s environmental and commitment to the unique extraction system, an innovative and
social performance up to what he considered the same level of efficient direct-to-consumer club membership model (whereby
performance as their now-famous high quality coffee. those who buy a Nespresso machine automatically become
members of the Nespresso club) and 24/7 service that allows
In programs developed since 2009, the team could see that club members to order capsules, send machines for repair and
Nespresso’s initiatives on energy efficiency and environmental ask any questions related to their consumption of Nespresso.
impacts of their machines were advancing well. And results from
their new initiatives to increase recycling of their coffee capsules In addition to technological, and therefore product, superiority
were also looking positive. However, while the third leg of their Nespresso has created an iconic brand which stands for luxury,
sustainability strategy, coffee sourcing, was making some good exceptional quality and a lifestyle experience. The individual
progress, the issues the team encountered were proving more coffees in the range are described not as varieties or flavours,
complex and challenging. but as grand crus (a term used most often in the wine industry to
denote an excellent quality, and adapted by Nespresso to denote
the quality of their coffees). In addition to being able to order
This case was written by Lawrence Pratt of INCAE Business School, and Dean
capsules online, club members can also shop in Nespresso
Sanders of Goodbrand, and Bernard Kilian of INCAE Business School, to serve as a boutiques, which are always located in the high-end luxury retail
basis for class discussion and not as an illustration of correct or incorrect handling
areas of major global cities. Advertising and marketing campaigns
of an administrative situation.
RESTRICTED DISTRIBUTION © 2012 INCAE Business School. seek to convey a brand story that positions Nespresso as ultra
This case study has not been reviewed or approved by Nestle Nespresso S.A. or its premium, further justifying (in addition to product delivery)
parent company, Nestle S.A. It does not represent the views or position of either
company. The authors are solely responsible for the contents including any errors
consumer price premiums. In addition to machines and coffee
or omissions. DO NOT CITE OR QUOTE. capsules, Nespresso has had great success in selling espresso-
-3-
Nestlé Nespresso: Creating Shared Value / Backgroundrelated accessories created by top designers and has sponsored the correct quality level, flavor and aroma profile for the Nespresso
high-end events such as the Cannes Film Festival and the Swiss grands crus. Given this constraint in coffee sourcing options and
challenge for the Americas Cup sailing competition, as well as the significant growth rates of the business, securing a stable,
using celebrities like George Clooney as brand ambassadors. long-term supply of highest quality green coffee will continue to
The overall profile of Nespresso consumers is upmarket, slightly be a significant challenge for the Nespresso management.
older coffee consumers. The home market of Switzerland
and other European markets with a tradition of espresso III. Coffee Markets
consumption still constitute a significant proportion of total
sales, though the brand is also growing in so called ‘white cup’ Coffee has been traded internationally for hundreds of years.
markets such as the US, Asia and South America. A customer Its genetic origins are found in what is now Ethiopia. Coffee
segmentation study conducted in 2008 identified 6 main groups was widely traded by the 16th century, and Arab traders brought
of customers motivated by different aspects of the brand and the coffee to Europe and parts of Asia in the 17th Century. Coffee was
product, including a group of 16% of consumers defined as ‘eco- introduced as a cash crop in many countries, including Costa Rica,
committed’ and described as liking the good things in life but in Colombia and Guatemala in the late 18th century and has played
a responsible way. This group is significantly more interested in a critical role in the economies of these and other exporting
Nespresso’s sustainability program than other segments. countries ever since.
The unique features of the Nespresso system and business Coffee is grown in many countries. However, only a few countries
model have led to phenomenal growth rates, an average of are significant exporters of coffee. (Table 1 shows country
30% per annum in recent years, resulting in a turnover in 2010 export volumes by category.) Coffee comes in many varieties,
of more than CHF 3 billion, making Nespresso one of Nestlé’s but generally falls into two categories - Arabicas group and
fastest-growing businesses and a so-called ‘billionaire’ brand. Robustas group. (see Appendix 1 for additional information on
In 2010, the company demonstrated strong growth of over 20%, these groups). Robusta is produced in very large volumes and is
with double-digit sales increases in all markets around the globe. considered of lower quality than Arabicas. Arabicas are produced
The brand is now available in more than 50 countries. One of in smaller volumes (frequently on farms of less than 1 hectare, but
Nespresso’s main strategic challenges in recent years and in the sometimes on farms of over 1,000 hectares), and are generally
future will be to manage this growth, in all areas of the business, of high to extremely high quality. The are the nearly exclusive
including human resources, customer service and supply chain choice for consumers interested in cup quality. Nespresso and
management.
Table 1. Major Coffee Export Countries (June 2009 – May 2010).
Nespresso’s success has drawn the attention of a range of
competitors. While a number of companies compete with
Nespresso in the portioned coffee segment, Nespresso believes COUNTRY ROBUSTA ARABICA
that its quality proposition continues to set it apart. 000” MT
Brazil 36 1156
In 2010, two new competitors entered the portioned coffee sector
with capsules they claim are compatible with the Nespresso Vietnam 690 ---
machines. Interestingly, each of these new competitors has Colombia --- 330
chosen a specific sustainability attribute to challenge Nespresso’s
sustainability position. One has focused on biodegradable Indonesia* 251 28
capsules (as compared to Nespresso’s recyclable aluminum India 102 138
ones) and the other is ensuring that 100% of the coffee in their
Honduras --- 168
capsules is certified to the European-based agricultural standard
“Utz Certified.” Guatemala --- 162
Perú --- 108
According to studies conducted on specialty coffee and product
sensory profiling by the internal green coffee experts within * Estimation based on historical proportions of Arabica and Robusta.
Nespresso, only around 1% of the worldwide coffee harvest is of Source: ICO (A and B), 2010.
-4-
Nestlé Nespresso: Creating Shared Value / Backgroundits principal competitors are interested in Arabica coffee and Chart 1. Green coffee prices 2000 to 2010.
generally compete with each other for supply and suppliers.
(Table 2 provides an overview of coffee consuming countries.)
250
200
Table 2. Major coffee consuming countries (2009).
US cents/lb
150
YEARLY 100
CONSUMPTION
COUNTRY CONSUMPTION
kg/capita 50
(million 60 kg bags)
0
U.S 21.4 4.13
00
01
02
03
04
05
06
07
08
09
10
Germany 8.9 6.5
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
Italy 5.8 5.9 Colombian Milds Other Milds Brazilian Naturals Robustas
Source: ICO(a), 2010.
UK 3.2 3.1
France 5.6 5.4 IV. Recent Market Conditions
Source: ICO (c), 2010.
With this increased demand for high quality coffee, many analysts
An interesting aspect of international coffee markets is that predicted skyrocketing prices for Arabica coffees. However, new
although Arabicas and Robustas compete in very different entrants in the Robusta market, most notably Vietnam supported
segments, they are frequently substituted for each other in blends by a massive World Bank program, begun in the late 1990s,
produced for mass markets. The result is that the international flooded international markets with Robusta coffee driving down
market price for Arabicas is highly dependent on the supply and Robusta prices, and taking with them the Arabica prices.
demand in the much larger Robusta market. (Chart 1 shows
historic coffee prices for the principal coffee groups) The overall result of market conditions for the past 20 years has
been decreasing real prices (inflation adjusted) for Arabica coffee.
In 2001, coffee markets were made more open when a long- (Chart 2 and Chart 3 present annual average prices, nominal and
standing producer-country cartel was abandoned. In the following real for New York “C” coffee3).
years, producers and producer countries (particularly of Arabica
coffees) shifted their emphasis toward more differentiated Unfortunately for the world’s Arabica producers, production costs
markets, as aspects of quality and flavor profile became more have also increased. Compared with 1995 levels, fertilizers have
important for a variety of international markets and trading increased in cost by a factor of 4 or more (largely correlated with
companies.
Chart 2. Nominal prices for Arabica coffee from sources
reputed for quality.
This market liberalization opened up new possibilities for traders
and roasters. Many companies entered this new market space. 250
In the U.S. companies like Starbucks, Pete’s, Green Mountain
200
Roasters, and many other smaller roasters redefined the retail
US cents/lb
coffee industry. 150
100
50
0
19 0
19 2
19 4
19 6
19 8
19 0
19 2
19 4
19 6
20 8
20 0
20 2
20 4
20 6
20 8
10
8
8
8
8
8
9
9
9
9
9
0
0
0
0
0
3. The Coffee “C” contract is the world benchmark for trading of Arabica coffee. The contract
19
prices physical delivery of exchange-grade green beans, from one of 19 countries of origin in
a licensed warehouse to one of several ports in the U. S. and Europe, with stated premiums/ Brazil Costa Rica Colombia Guatemala Mexico
discounts for ports, origin, and coffee quality. The Exchange uses certain coffees to establish the
“basis”. Coffees judged better are at a “premium”; those judged inferior are at a “discount.”
Source: ICO (d), 2010.
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Nestlé Nespresso: Creating Shared Value / BackgroundChart 3. Real prices for Arabica coffee from sources V. Creating Shared Value,
reputed for quality.
Nespresso AAA Sustainable
260
240 Quality Coffee Program and
220
200
Real Farmer Income
180
US cents/lb
160
140
In recent years many corporations have been working through
120 their own responses to the challenges of the Corporate Social
100
80 Responsibility (CSR) and sustainability agendas. Companies
60 have been developing strategies to address issues that have
40
20 been raised by NGOs, key opinion leaders, media, activists and
0 other stakeholder groups demanding more transparency around
the way companies create value especially with regard to the
19 0
19 2
19 4
19 6
88
19 0
19 6
92
19 4
98
20 0
20 2
20 4
20 6
20 8
10
8
8
8
8
9
9
9
0
0
0
0
0
19
19
19
20
exploitation of natural or human resources.
Brazil Costa Rica Colombia Guatemala Mexico
Source: ICO (d), and OECD, 2010. Many companies have been forced to develop rapid reactive
responses to some of these pressures, which while potentially
oil and natural gas prices). Labor costs have also increased,
mitigating short-term reputational risk are more often than not
particularly in Central America and Brazil where pay levels have
unsustainable in the long term. In their work, published in the
increased due to economic growth. Since chemical inputs typically
Harvard Business Review in December 2006, Michael Porter and
represent around 1/3 of production costs, and labor costs over
Mark Kramer analyze some of the reasons why corporations
half – profits have been squeezed, and in many cases eliminated.
engage in CSR and sustainability programs and suggest that
these are misguided in that they see creation of value for
In other agricultural sectors, prices have also decreased (mostly
business as inconsistent with the creation of value for society and
due to increased supply and flat demand), but producers have
communities.4
managed to maintain profit levels through increased productivity
(defined as total output per hectare). However, in the case of
In the Creating Shared Value approach they advocate, companies
Arabica coffee, there have been no major technological changes
identifying a ‘sweet spot’ or point of connection between the
to increase productivity in the past 20 years or more. In fact,
activities and needs of a company and the activities and needs of
productivity has actually been decreasing in most Arabica-
society, and call this a process of mapping social opportunities.
producing regions as declining profit margins have slowed re-
In this way, business organizations can be much more targeted
investment in new coffee plants, genetic upgrades, machinery
and efficient in assessing the way their business activities create
and even chemical inputs. (Table 3 presents historic information
value that is shared with other stakeholder groups. The Creating
on coffee yields for selected countries).
Shared Value (CSV) approach to CSR and sustainability has been
Table 3. Average coffee yields of five representative countries, adopted by Nestlé which uses the framework to report on the
measured in “quintals” (46 kilo sacks of green coffee) ways its business creates shareholder value for investors, whilst
per hectare (2.47 acres). simultaneously creating value for a wide range of stakeholder
groups from farmers through to customers and ultimately
COUNTRY 1990 1995 2000 2006 2007 2008 consumers. Given the nature of its business Nestlé has identified
qq/ha water, rural development and nutrition as its main strategic CSV
Brazil 10.9 10.8 18.2 24.2 21.6 27.4 focus and social opportunity areas.
Colombia 18.4 21.0 20.5 20.1 20.6 20.4
Informed and inspired by the CSV approach, Nespresso identified
Guatemala 18.0 17.2 24.8 19.6 22.4 22.6 its own social opportunities and areas of interdependence with
Kenya 14.8 12.9 12.9 6.2 7.1 5.9 wider society within its value chain. On this basis, Nespresso has
Peru 10.8 12.9 15.8 18.5 15.2 15.2
Rest of the World 11.6 12.3 15.2 16.9 16.3 18.4 4. Porter, M.E. & Kramer, M.R. (2006) “Strategy and Society: The Link Between Competitive Advantage
and Corporate Social Responsibility”, Harvard Business Review, December 2006, pp. 78-92.
Source: Faostat, 2009.
-6-
Nestlé Nespresso: Creating Shared Value / Backgroundlaunched an integrated CSV framework, “Ecolaboration™” to In 2008, Nespresso committed to RFI as one of its strategic
group together its value chain sustainability efforts in the area of pillars. Nespresso President Richard Girardot ““We are a part of
carbon footprint reduction, sustainable coffee farming and spent Nestlé – Nestlé has committed to “Shared Value” as an operating
capsule recycling. principle. We have taken the decision to increase Real Farmer
Income´ as the expression of our commitment to share value with
By applying the CSV thinking especially in the area of sustainable our critical farmer partners. RFI is critical to us, because of our
coffee farming, Nespresso soon realized that its requirement corporate culture, because it maintains the health and vitality of
for long-term sustainable sources of green coffee overlapped our supply chain, and because it is the right thing to do for the
completely with the farmers’ own need to improve their long- farmers who are such an important part of Nespresso’s success.”
term economic prospects and a wider societal need to improve the
effectiveness of coffee farming in conserving natural resources. While most Nespresso executives saw RFI as a critical strategic
This led to the Nespresso AAA Sustainable Quality™ Coffee approach, farmer well-being has not been an explicit part of the
program, a unique coffee sourcing program co-developed by traditional coffee buying and trading culture. Historically, the
Nespresso and Rainforest Alliance, originally rolled out in 2003, relationships between roasters/brands, their trader suppliers
but which now focuses on helping coffee farmers continuously and farms has been of a “transactional” nature, and nearly always
improve their performance in producing highest quality coffee, based on negotiations for the current years’ harvest, although it is
on-farm sustainability and farm productivity. The unique not unusual for farmers to sell to the same buyer for many years.
dimension of this program is the way in which it combines these
three issues simultaneously and, importantly, acknowledges the Beyond this cultural paradigm difference, RFI’s most strident
absolute requirement for AAA farmers to improve their incomes – supporters pointed out that there are significant institutional and
an insight that resulted in the conceptualization of a farm income practical challenges to improving RFI. For example, Nespresso’s
focus called Real Farmer Income™ (RFI) by Nespresso. head of Green Coffee, Karsten Ranitsch, noted some of the
important challenges. “We have always had a very small technical
From its original inception in 2003 and through its subsequent and buying team. Our strategy, from the beginning, has been to set
redefinition and expansion to include Real Farmer Income™ very high quality, environmental and labor standards, and work
as a metric, the AAA Program has now grown to be a sourcing with the most experienced and effective coffee trading companies
program that reaches 40,000 farmers in seven countries and present in the region. They help us identify producers capable
twenty growing regions (referred to internally by Nespresso as of meeting these standards. We pay a price premium to these
“clusters”), and is set to grow further to up to 80,000 farmers in traders who use these funds to provide a variety of advisory and
the next three years. The key characteristics of the Program are technical services and pass through part of the price premium to
to pay premiums to AAA farmers for quality, incentivize them to the producers.”
comply with the Rainforest Alliance standard (environmental,
social and various management variables) and initiate projects to “In practical terms, Nespresso has over 40,000 farmer suppliers,
boost yields and income. Nespresso also supports agronomists and no two are exactly alike in their strengths or weaknesses.
in the field who offer training and technical assistance through Virtually all will need some assistance to increase their income,
farm visits and workshops to help farmers improve performance. most will need a great deal of help – and not just in production,
As a consequence Nespresso is gradually building ever-closer but in quality management, and reducing their environmental
relationships with its global community of AAA farmers. impact.”
VI. Real Farmer Income™ VII. Farmer Study
Approach Nespresso had the initial idea of focusing on shared benefits for
farmers based on direct experience working on a quality and
As a consequence of these ever-closer relationships Nespresso productivity project conducted in the Caldas region of Colombia
is learning more about the needs of AAA farmers, frequently with the U.S. non-governmental organization Technoserve.
smallholders with very low incomes and limited opportunity to Then, in 2008, Nespresso commissioned a detailed study to better
invest in improving their farms. understand the economic situation of the producers that supply
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Nestlé Nespresso: Creating Shared Value / BackgroundTable 4. Summary of Key Economic Findings from Real Farmer Income™ studies in Nespresso
purchasing regions in seven production areas in five countries (2009 and 2010 harvest years).
FARMERS FARM SIZE FARM YIELD PORTION OF PRICE PREMIUM PRODUCTION PRODUCTION FARMS WITH
COFFEE COST COST
(2009) Mean/median/ Mean/median/ HARVEST RECEIVED RECEIVED NEGATIVE
REGION
StdDev StdDev SOLD AS AAA US$/qq US$/qq Mean/median/ Mean/median/ COSTS
StdDev StdDev
number hectares quintals/ha % US$/qq US$/qq US$/qq US$/qq %
CR - SM 780 4.8/1.0/9.6 27.3/25.7/14.7 57 105 5.7 2096/2003/1357 86.7/73.8/48.5 26
CR - LG 2210 2.8/2.0/2.1 44.4/24.3/71.5 88 106 5.7 2201/1913/1032 92.0/93.6/40.4 43
Guatemala 430 10/2.2/23.3 27.5/25.4/12.5 62 103 11 1970/2006/788.5 99.3/75.6/173 11
Colombia - Caldas 4320 2.4/1.6/2.2 13.6/12.2/8.1 84 124 6 925/773/648 88.9/64.5/104 17
Colombia - Nariño 20000 1.3/1/0.95 18.6/19.3/8.4 76 130 10 1540/1430/838 93.2/79/62.6 15
Brazil 750 37.5/25/36.5 39.7/37.2/19.6 45 80 10 3396/3288/1550 99.4784.8/56 45
Mexico 2250 1.8/1.4/1.7 9.9/8.3/6.2 73 90 5 890/800/502 110/112/13 42
Source: CIMS (a), (b), 2010.
them with coffee. A research team from the Sustainable Markets c) Nespresso needs to respond to the likelihood of decreased
Intelligence Center (CIMS) based in Costa Rica studied hundreds coffee production in zones it was planning to EXPAND sourcing to
of farmers in all main Nespresso producer regions to understand meet its strategic goals.
their revenue, cost structure, production strategies and ‘on farm’
conditions. The researchers effectively created new, comparable d) While there was evidence of positive farmer benefits from their
income statements for over 500 randomly-selected Nespresso relationship with Nespresso (through technical assistance and the
suppliers in seven of their preferred coffee growing regions in pass through of the price premiums) the “bottom line” impacts on
Latin America (in Mexico, Guatemala, Costa Rica, Colombia and farmer’s income were not strong enough to be transformative.
Brazil) and nearly 250 control farms (similar farms from the
same regions that do not supply Nespresso, randomly selected). VIII. Value Chain Strategy
The methodology was based on internationally accepted criteria
developed by the Committee on Sustainability Assessment Nespresso chooses very select coffee-producing regions
(COSA), a consortium of independent research organizations that around the world that provide the unique flavor and aroma
study the economic, environmental and social aspects of coffee characteristics that define its blends, grand crus and by extension
production (see http://www.iisd.org/standards/cosa.asp). their brand. Nespresso then identifies and enters into long-term
relationships with experienced coffee buying companies working
The study revealed some significant challenges in the value in those regions who are contracted to provide coffee according
chain that apply generally to all Arabica-growing regions across to Nespresso´s demanding quality requirements. In addition,
Latin America. Among the most important findings on the farm the buyers assist Nespresso and supplier farmers in advancing
economics (Table 4 summarizes the key findings): toward compliance with the AAA program.
a) Farmers are generally unprofitable. The Nespresso AAA Sustainable Quality™ Program pays
premiums for both quality and sustainability. The premium is
b) Nespresso and other purchasers of Arabica coffee could around 30 % to 40 % above the standard market price for coffee
reasonably expect large-scale exit of coffee producers from and 10 % to 15 % above the general local market price for coffees
coffee-producing zones they depend on for their highest quality of similar quality. Karsten Ranitzsch pointed out, however, that
coffees. “the program is about more than paying a premium, it is about
building a long-term relationship with coffee farmers. The buyers
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Nestlé Nespresso: Creating Shared Value / Backgrounduse this premium, as they determine, to secure the supplies of coffee’s path from farm to trading company. The disadvantage of
the high quality coffee and advance AAA compliance. Buyers also this approach was revealed in previous CIMS research – it is very
take on significant risk – notably the risk of acceptance/rejection inefficient for the trading company. Nespresso could realistically
by Nespresso due to lack of required quality, the costs and risk of expect to pay US$.07 to US$.10 per pound of coffee for each
maritime transport from origin to Nespresso´s Swiss warehouse, penny per pound that the farmer would receive. Furthermore,
among others.” the Nespresso team does not believe that this approach would
address the underlying issues of reduced farm yield and quality
An important aspect of Nespresso’s supply chain is that usually management. Nonetheless, the Nespresso strategy is predicated
only a relatively small percentage of each producers´ coffee on quality, productivity and a commitment to selling coffee
is eligible to receive Nespresso´s AAA premium (only this certified to international standards for sustainability performance.
percentage passes the quality test due to size of beans, harvesting However, in the international coffee trade these sustainability
approach, and post-harvest handling). Buyers and farmers have a attributes had always been recognized through price premia,
strong incentive to work to increase this percentage, but progress usually based on certifications.
has been slow.
Another approach would be to short-circuit the supply chain and
IX. Alternatives simply pay farmers a premium for being a Nespresso supplier.
The payment could be adjusted according to the volume of coffee
Nespresso has aggressive growth targets – seeking to increase supplied to Nespresso. The advantage of this option is that it
coffee sales volume at least 20% per year for the next 4 years. Yet transfers a much greater percentage of Nespresso´s willingness
their own research showed that a large percentage of the farmers to pay to the farmer, eliminating most of the inefficiency of
in their target coffee regions are at risk of leaving the business the price premium system. However, the record-keeping and
due to lack of profitability. transaction costs could be very high, and would likely require
Nespresso to hire agents (or their buyers) to do this.
There has been only one new large-scale Arabica-producing area
entering the market in the past 15 years. That is the Brazilian A third approach is for Nespresso and other investors (such
Cerrado region. This means however, that there are no other new as development banks like the World Bank or Interamerican
areas of production, and Nespresso has decided that the current Development Bank) to help coffee farmers by financing
regions are the ones they prefer for their coffee flavor and aroma improvements on their farms that would make them more
profiles. productive and profitable. These loans could be repaid, in theory
at least, with the profits from the increased coffee production
Nespresso management is concerned that if they do not increase resulting from the investments.
farmer incomes in their producing regions, there is a significant
risk that they may not even be able to maintain current purchase Farmers could make needed upgrades to their plant stock,
levels, as yields decrease and farmers continue to leave the improve pruning and chemicals management, and ensure proper
business. They identified at least three ways they could increase fertilization programs. Guillaume and his advisory team were
RFI. very excited about this approach –because it seemed to offer
a broader range of possibilities, and addressed the root of the
Traditionally, this is the way most coffee traders reward coffee farmer’s problem – their long-term productivity and profitability.
producers for particular attributes. Nearly every sustainability Philosophically, it also seemed more consistent with Shared
certification program (organic, Fair Trade, Rainforest Alliance, Value and RFI, as Nespresso was investing in farmers’ long-term
Utz, etc.) use this mechanism. Coffee companies pay a price well-being, not merely passing through a bit of extra cash.
premium to their buyers who, in principle, pass some of this
premium to producers. The coffee trading companies, in turn, Of course, the critical question was whether or not it made
pass this higher price to retailers who add their mark-up. The financial sense (or was even logistically possible) for Nespresso
advantage of this approach is clear – the trader pays its buyers for or the farmers to engage in a massive program of this type.
the attributes and the entire value chain works exactly the same Nespresso discussed this option internally and with its coffee
as before, except for some additional paperwork to document the buyers. It hosted meetings with experts in the field, and tasked a
manager to explore all possibilities.
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Nestlé Nespresso: Creating Shared Value / BackgroundWhile there were no clear answers after the first round of analysis Chart 4. Farmer income in Nespresso purchasing regions
and discussion, the parameters were quite clear. in five countries, in US$/ha (ordered from least to most
profitable farm).
X. Drivers of Real Farmer
Income™ 5000
4000
Net income (US$/ha)
No two farms are exactly alike. Farmers have very widely ranging 3000
yields and production costs, even within the same production 2000
zone, and sometimes the same village. (See Chart 4 for summary
1000
data). This means that most farms will need customized (or rather
specific group-oriented) plans for increasing income. 0
-1000
Farmers tend to focus on price as their key determinant
-2000
of profitability. However, CIMS’ research for Nespresso
demonstrated quite convincingly that farmer profitability is very 0% 20% 40% 60% 80% 100%
closely correlated to yield (lbs of coffee per hectare), and hardly
Brazil Costa Rica Colombia Guatemala Mexico
at all to price. The reason for this is straightforward – increases in
yield increase sales significantly on roughly the same fixed AND Source: CIMS (c), 2010
variable cost base. Production increases went nearly completely
to increased profits (adjusting only for harvesting costs). At the
Table 5. Statistical Relationships between Price
same time, price premiums were relatively modest and increased and Income and Yield and Income,
income only marginally. (Table 5 shows the statistical relationship by Nespresso Coffee Producing Region.
between yields and income and price and income).
COSTA GUATEMALA COLOMBIA BRAZIL MEXICO
a) Very modest quality expenditures of no more than $100/ha/ RICA (Nariño)
year could increase the quantity of coffee sold as AAA by 50%. Correlation between Net Income and Price
Correlation -0.09031
b) Farms could reasonably be expected to return to their coefficient 0.05854 0.06883 0,358 0,403
historical peak yields through a comprehensive program of plant p-value 0.3691 0.5772 0.552Chart 5. Productivity based on Age of Arabica Plant.
XI. Pilot Projects
1,2
Nespresso engaged in a number of pilot projects to test different
1 approaches to addressing its RFI-Shared Value challenges.
0,8 Multi-Country Public Private Partnership
Percentage
0,6
The most challenging program undertaken by Nespresso is
0,4 a multi-country, muti-partner effort to try to rapidly increase
the scale and scope of AAA program participation. Nespresso
0,2
partnered with the International Finance Corporation (IFC,
0 the private sector arm of the World Bank Group) and one of its
key coffee suppliers, ECOM. The challenge was to help coffee
0 10 20 30 40
growers in Mexico, Guatemala, Costa Rica and Nicaragua
Plant yield potential increase the production of AAA standard coffee in harmony with
the environment, while also maintaining the highest quality.
Source: CIMS (a)
To achieve sustainable growth in the cultivation of the highest
quality coffee required support and training from Nespresso and
the partners, to implement quality, sustainability and productivity
g) Nespresso could provide capital as cheaply as 6% p.a. before best practices. Since 2007 around 6,000 farmers across four
intermediation, transaction and monitoring costs. clusters in Mexico, Guatemala, Costa Rica and Nicaragua have
been trained in sustainability and productivity best practices. The
Nespresso also needs its producers to implement and attain its first phase of the project ran until 2010.
AAA criteria to meet their quality, productivity and environmental
standards. For most farmers, this will require additional This first phase of the project has helped farmers to continuously
investment. (Table 7 describes the investment needed for each improve in all three areas of the AAA Program: quality,
production cluster and the estimated cost range). Most of these sustainability and productivity. Farmers are supported in two
investments relate to environmental performance aspects ways. First, they receive extra technical support and training
and worker protection. Without them, farms will not meet AAA to complete the self-assessment part of the Nespresso AAA
standards and risk losing their relationship with Nespresso. Sustainable Quality Program farm management tool, called the
Tool for the Assessment of Sustainable Quality, TASQ. Second,
farmers get better access to finance to make investments that
Table 7. Investment required to attain AAA. help them meet the standards of the program. The results of
this pilot effort were interesting in that Nespresso was convinced
INVESTMENTS COSTS OF that partnerships between major financial institutions, critical
REGION REQUIRED INVESTMENTS trading partners and their environmental NGO partners could be
US$ / cluster (US$ /ha terms) scaled up significantly. The concern that emerged, however, was
that farmer’s needs are very different across countries (and even
Costa Rica 595 000 113
across villages) and this type of program would necessarily be
Colombia – Caldas 4 500 000 297 focused on the “typical farmer” and risks being too much of a
“one-size-fits-all.”
Brazil 13 700 000 505
Mexico 255 000 58 Central Mill in Jardin, Antioquia, Colombia
Guatemala 545 000 95
In 2010, Nespresso co-funded a new community coffee-
Source: CIMS (a)
processing center in Jardín, Colombia to permit farmers to
process their coffee jointly, achieving economies of scale and a
number of benefits. In its first year of operation, the mill enabled
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Nestlé Nespresso: Creating Shared Value / Backgroundcoffee farmers to double the volume of coffee meeting the AAA quality ranges of coffee, and the increased financial speculation
standard, securing a higher price premium. In the near term, that accompanies volatile prices in commodity markets. A similar
farmer’s net income is expected to increase to 30% above their phenomenon was observed in cocoa a few years before.
pre-center income. In addition more water-efficient facilities
and better waste management systems at the mill are helping to Nespresso saw this situation as a mixed blessing. On one hand,
protect the local ecosystems. their input prices increased dramatically, along with all their
competitors. But on the other hand, Nespresso believed that
The mill currently benefits 110 farmers in Jardín and will be the price increase might be high enough to keep many farmers
extended to benefit more than 800 farmers over the next two to in their supply regions in the coffee business a while longer,
three years. This approach could be replicable across Nespresso allowing enough time for the AAA program and their other efforts
and other buying areas, since currently, less than 5% of Colombian with farmers to achieve their desired results.
coffee is processed in this type of central mill.
Nespresso quickly commissioned a study in mid 2011 to figure out
Improving farmer business skills in how farmers were responding to the price increase. The results
Huehuetenango, Guatemala were encouraging. With the peak prices, in theory, no Nespresso
farmer supplier should be losing money. Nearly 100% of farmers
Every smallholder coffee farmer tends to have a natural instinct across all of their Latin American “clusters” intended to stay in
for business, even if they do not have a formal education. Often, the coffee business, rather than use their profits to change crops
gaps in their knowledge mean they can struggle to profitably or leave the countryside. More than half stated that they intended
manage their farms. Recognising the importance for famers to reinvest a large portion of their profits in improving their farm
to develop good business skills, in 2010, Nespresso funded a operations. However, the study also found that farmers expected
12-month project with Root Capital to provide business training the high prices to last no more than 2 to 3 harvests (years).
to over 300 farmers in Huehuetenango, Guatemala. The training This meant their investments would be in short and medium
seeks to improve accounting practices and ensure effective term improvements (such as better fertilizer and chemical
financial decision-making to improve the profitability of their management, better pruning, harvest quality practices).
farms. The project has been extended for another 12 months and
in 2011 will seek to benefit over 650 farmers. It was clear for Nespresso that for smallholders, and particularly
in certain “clusters”, these investments alone would not
Interestingly, Nespresso’s principal supplier in Brazil COOXUPE transform their long term situation, not even for those part of
(one of the largest coffee producer organizations in that country) the AAA program. The challenge of creating an integrated set of
assured Nespresso that they would engage in their own set of partnerships, initiatives, tools, programs and practices to help
pilot projects, and did not need specific outside support. No AAA farmers evolve towards more sustainable farming, continues
results have been shared yet, but COOXUPE has a long, successful to be a key target for the management of the company.
track record of implementing programs to support coffee trading
partners expectations. The Nespresso team is confident that
COOXUPE will produce good results.
XII. Coffee Price Rise 2010-2011
In mid to late 2010, international coffee prices began to increase
rapidly. New York “C” prices that had been in the range of 50-
140 USCents/lb for a number of years (2000 to 2009), reached
highs of 274 USCents/lb in March 2011. The price increases also
included the lower quality Robusta coffees, which moved from
30-74 USCents/lb to 118 USCents/lb in the same time frame.
Even the most experienced buyers, traders and analysts were
taken by surprise. Analysts attribute the rapid increase to a range
of factors, including increased demand in China and India for all
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Nestlé Nespresso: Creating Shared Value / BackgroundAppendix 1
Coffee Categories
A. Coffea Arabica – Arabica Coffee
Coffea Arabica was first described by Linnaeus in 1753. The best known varieties are ‘Typica’ and ‘Bourbon’ but from these many
different strains and cultivars have been developed, such as Caturra (Brazil, Colombia), Mundo Novo (Brazil), Tico (Central America),
the dwarf San Ramon and the Jamaican Blue Mountain. The average Arabica plant is a large bush with dark-green oval leaves. It is
genetically different from other coffee species, having four sets of chromosomes rather than two. The fruits are oval and mature in 7
to 9 months; they usually contain two flat seeds (the coffee beans) - when only one bean develops it is called a peaberry. Since Arabica
coffee is often susceptible to attack by pests and diseases, resistance is a major goal of plant breeding programmes. Arabica coffee is
grown throughout Latin America, in Central and East Africa, in India and to some extent in Indonesia.
B. Coffea canephora - Robusta coffee
The term ‘Robusta’ is actually the name of a widely grown variety of this species. It is a robust shrub or small tree growing up to 10
metres in height, but with a shallow root system. The fruits are rounded and take up to 11 months to mature; the seeds are oval in shape
and smaller than those of C. Arabica. Robusta coffee is grown in West and Central Africa, throughout South-East Asia and to some
extent in Brazil, where it is known as Conillon.
C. Coffea liberica - Liberica coffee
Liberica coffee grows as a large strong tree, up to 18 metres in height, with large leathery leaves. The fruits and seeds (beans) are also
large. Liberica coffee is grown in Malaysia and in West Africa, but since demand for its flavour characteristics is low, only very small
quantities are traded.
XIII. References
Clifford M.N. and Willson K.C. (Editors), 1988. Coffee; botany, biochemistry and production of beans and beverage. London, Croom Helm,
1985; and, Wrigley G. - Coffee. London, Longman.
CIMS (a). 2010. Nespresso Real Farmer Income Study. Complete Report. Internal document.
CIMS (b). 2011. Field research for AAA coffee. Internal document.
CIMS (c), 2010. Specific research for AAA coffee. Internal document.
CIMS (d), 2010. Based on inputs from coffee institutes of each country and regional coffee buyers.
Clifford M.N. and Willson K.C. (Editors), 1988. Coffee; botany, biochemistry and production of beans and beverage. London, Croom Helm,
1985; and, Wrigley G. - Coffee. London, Longman.
Faostat, 2009. Production per crop data. Available at: http://faostat.fao.org/site/567/default.aspx. Consulted on: July, 2010.
International Coffee Organization (a), 2010. Exports by exporting countries to all destinations, May 2010. Available at: http://www.ico.org/
prices/m1.htm. Consulted on, July, 2010.
International Coffee Organization (b), 2010. Breakdown of exports of green Arabica and green Bobusta, May 2010. Available at: http://dev.ico.
org/prices/m1a.htm. Consulted on: July, 2010.
International Coffee Organization (c), 2010. Letter of the Executive Director. Coffee Market Report, May 2010. Available at: http://www.ico.org/
documents/cmr-0510-e.pdf. Consulted on: July, 2010.
International Coffee Organization (d), 2010. Historical data. Prices to growers. Available at: http://www.ico.org/new_historical.asp. Consulted
on: July, 2010.
Organization for Economic Co-operation and Development, 2010. Domestic producers prices. Available at: http://stats.oecd.org/Index.
aspx?DataSetCode=MEI_PRICES. Consulted on: July, 2010.
Tea and Coffee, 2010. Measures to develop the coffee industry discussed in Vietnam. Tea and Coffee Trade Journal. Volume 182 (6): 10.
Lockwood Trade Journal Co., Inc., 26 Broadway, Floor 9M, New York, NY 10004 U.S.A.
Source and for additional information, see: Clifford M.N. and Willson K.C. (1988)
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