By Giovanna Dughera
An Italian TV ad said “Che mondo sarebbe senza Nutella?”, and in all truth, it’s hard to imagine a world without the ubiquitous hazelnut-cocoa spread that made the fortune of entrepreneur Michele Ferrero. However, as climate change and environment regulations increasingly threaten the supply of three key ingredients – cocoa, hazelnuts and palm oil – confectionery giant Ferrero is under enormous pressure to maintain its production volumes, cost structure and quality standards intact.
Hazelnut spread – without the hazelnut?
2014 was a critical year for hazelnut crops. Turkey, the world’s leading producer, suffered unexpected frost and hail in March which led to a decline in yield of ~30%[1]. As prices skyrocketed, Ferrero – which consumes an estimated one-fourth of the world’s hazelnut supply – reacted by quickly acquiring Oltan Group[2], the worldwide leader in hazelnut production.
This acquisition shows just how much climate change can affect business models. Independence is one of Ferrero’s leading values: the company is not listed on the stock exchange and had never been involved in major acquisitions before. The volatility of the market led Ferrero to a choice that was markedly out of character, but that effectively hedged it from supplier risk and ensured continued viability of its business model.
Towards cruelty free cocoa
Cocoa made the headlines last year thanks to catchy titles like “Why the world is running out of chocolate”. Indeed, with 70% of world production concentrated in Ivory Coast and Ghana, prolonged unfavourable weather conditions and increasing incidence of pest attacks point to zero growth in production in the coming years[3], which does not match the ever-increasing global demand for chocolate. Moreover, with a fragmented and unregulated market, the implications of large scale cocoa sourcing are severe: we can identify primarily deforestation, massive use of fertilizers and forced labour (including child labour).
Following the 2010 International Cocoa Agreement[4], confectionery manufacturers are under increasing pressure to move towards third-party verified sustainable cocoa. It was estimated that in 2009/2010 between 0% and 10% of Ferrero’s cocoa was certified; the company has since pledged to reach 100% certified cocoa sourcing by 2020[5]. Whilst certification may not be enough to ensure that profits from raw cocoa reach direct producers, they point in the right direction and give more visibility to the most crucial, yet disregarded and underrepresented, actors in the supply chain. Confectioners are also rolling out comprehensive CSR programs[6] to improve farmers’ living standards – providing food supplements, education, training… – and prevent them from abandoning their lands and further worsening the supply risk. The hope is that the continuous improvement of this win-win approach will reduce inequality whilst allowing the next generations to continue enjoying delectable, cruelty free chocolate.
Palm oil – friend or foe?
The buzz around palm oil in recent years has been relentless. Indeed, it’s impossible to ignore that the rise in its use across multiple industries – food and detergents primarily – is leading to massive environmental and social issues: deforestation, spread of monoculture with consequent loss in biodiversity, displacement of local communities. It is estimated that deforestation alone accounts for 10% of GHG emissions[7].
Ferrero has long used palm oil because of its lightness, lack of flavour and low cost. However, over the past few years the media built a strong campaign against palm oil – for reasons ranging from health concerns to irresponsible sourcing, with varying degree of substantiation of their claims – and turned the public opinion against its use, especially in Europe. In June 2015 French Environment Minister Ségolène Royal even suggested to boycott Nutella over worries for the deforestation from uncontrolled palm oil production. Mme Royal later apologized for this remark, because Ferrero leads the industry in best practices for sustainable palm oil sourcing: one of the 3 world-leading food producers to source 100% certified palm oil, Ferrero is a top scorer in the WWF 2016 Palm Oil Scorecard[8].
Whilst doubts about external certifications still exist, as discussed for cocoa, it is nonetheless a step towards increased regulation of the industry. With the public opinion’s full attention on the topic, manufacturers will increasingly follow Ferrero’s footsteps to maintain their reputation.
All that glitters is not gold
Notwithstanding what the flashy golden packaging of its Rocher pralines suggests, Ferrero still has a long way to go to ensure sustainability and responsible sourcing. Nonetheless, its efforts towards these goals are going in the right direction – reducing the bittersweet aftertaste for even the most conscious chocolate lovers.
For further information on Ferrero sustainability initiatives you can visit the following link: http://www.rspo.org/file/acop2014/ferrero-trading-lux-sa/M-Policies-to-PNC-waterland.pdf
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[1] https://www.theguardian.com/sustainable-business/2015/may/07/nutella-shortage-rumours-need-spread-no-longer
[2] https://www.ferrero.com/group-news/The-Ferrero-Group-continues-investing-in-Turkey-and-in-the-hazelnut-sector
[3] http://www.investopedia.com/articles/investing/090915/why-world-running-out-chocolate.asp
[4] https://www.icco.org/about-us/international-cocoa-agreements/doc_download/6-english-2010-international-cocoa-agreement.html
[5] Mars has set the same goal and the public’s pressure also persuaded Hershey’s to adopt the same objective: http://www.confectionerynews.com/Commodities/Ferrero-promises-transparency-as-it-sets-2020-target-for-sustainable-cocoa
[6] See examples of Ferrero’s CSR initiatives at https://www.ferrerocsr.com/index.php?lang=EN
[7] http://www.ucsusa.org/global_warming/solutions/stop-deforestation/deforestation-global-warming-carbon-emissions.html#.WR6lc4iGNPY
[8] http://palmoilscorecard.panda.org/check-the-scores/manufacturers/ferrero
It is interesting how market leaders in the industry are constantly receiving pressure from the market to push for more sustainable practices (i.e. in the case of stranded assets in oil&gas such as Shell, and Ferrero in the case of confectionary food). It is true that industry leader would greatly affect the way the companies do business, however the same pressure should also be put towards their suppliers, buyers as well as smaller peers. Because it might be easier to implement the sustainable practice that the industry leaders have found earlier on rather than incurring switching cost when the other companies grew scale.
The government should apply the same pressure across the industry, and invite emerging markets government to do the same too, since most sourcing happens in the emerging markets
An interesting read !!
Its fascinating to see how companies mend their values and switch models in the time of crisis.
While factually it is interesting to know the steps Ferrero took to mitigate the risk of supply, I am just wondering what impact this would have on the dynamics of the industry as a whole. Also, given that the problem of reducing yields of hazelnut still remains, and this merger can at best be a medium term solution and it would be interesting to know what Ferrero’s take is on this.
Finally, it would have been interesting to read more details about 2 things: 1) what problem does certification solve; and what actions has Ferrero been taking for it to be labelled as an industry leader in best practices for sustainable palm oil sourcing (apart from sourcing them 100% from certified producers)
Woa, never realised this about Nutella. Thanks for sharing, Giovanna!
It is interesting to read how quick they were to acquire Oltan. I guess it makes sense considering they are one of the largest hazelnut consumers, but we shouldn’t underestimate the impact of this on their business.
I wonder whether they are also doing R&D to decrease the # hazelnuts in Nutella to decrease their dependence on this nut.
In my opinion there is only so much they can do in terms of hazelnut quantity reduction in the recipe –
they are already strongly criticized for Nutella being primarily made up of vegetable oil and sugar.
However, the increase in price is pushing more countries to grow hazelnuts and in coming years new players should help increase world supply:
http://www.npr.org/sections/thesalt/2014/09/16/347749070/thanks-to-nutella-the-world-needs-more-hazelnuts
Very Interesting, Thanks Giovanna!
Really wonder how far Ferrero will go to ensure and preserve supply of Hazelnuts through Oltan.
It is also interesting to see how media manipulate public opinion, with just one side of the story (Palm oil).
Finally, to answer Nidhi’s question, here is the website of Palm oil Most famous certification, delivered by RSPO (and the one held by Ferrero): http://www.rspo.org/certification/how-rspo-certification-works
I had no idea that Ferrero consumes so much of the world’s supply of hazelnuts!
It’s really interesting how it reacted to the climate change by acquiring Oltan Group in order to have more control of its value chain.
This strategic acquisition makes sense when you think about its focus on the taste and quality of its products. To ensure pure consistency, Ferrero is going to have to stick to the formula regardless of environmental changes.
I think they are leveraging on Oltan’s know-how to ensure consistency in the hazelnut of supply chain. They even have a separate company that deals uniquely with the hazelnut supply chain and they sponsor awards for R&D in the field. Read more on https://www.hazelnutcompany.ferrero.com/Ferrero-Hazelnut-Company
Very interesting to read Giovanna!
I did not realize how climate change can even impact a company’s M&A strategy. Reflecting on this, and thus the company has already embraced M&A activity as a solution to surges in pricing, we could expect a potential acquisition in the cocoa segment.
This would enable the company to assure 100% certified cocoa at the same time!
I did a quick search and it looks like some companies (e.g. Mars) already operate on a bean-to-bar model. Because of Ferrero’s structure and focus on independence, however, I’m not sure they’d be willing to pursue this strategy for the time being – they have sufficient buyer power to ensure they can source cocoa in the quantity and quality they need. Founder Michele Ferrero died 2 years ago, I’m curious to see if his heirs will go for a more decisive change in strategy.
These problems show how companies like Nutella have an opportunity to at once secure their supply chains and establish more sustainable production practices. Some have already made a step in that direction, like Switzerland-based Barry Callebaut. It will work closely with cocoa farmers in Africa to help them improve their yields, use more sustainable growing practices and hence ensure that it does not fall short of supply.
https://www.ft.com/content/203e7816-b2fa-11e6-a37c-f4a01f1b0fa1
From what I read Ferrero uses B2B actors (like Barry Callebaut) to source cocoa and chocolate. Thanks to their huge supplier power the hope is that they can pass on their sustainability requirements and standards to producers and help bring forward a new sustainability standard in the industry.