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Nespresso: Protecting the World’s Best Coffee

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Given Nespresso’s insistence on the best quality, are its sustainability programs enough to protect its supply chain in the long-term?

The 400 billion cups of coffee that the world drinks every year are in jeopardy due to climate change.[1] Fluctuating global weather patterns caused by excess greenhouse gases, including drought, landslide, plague (e.g., coffee-leaf rust), and flooding, are affecting both the quality and quantity of coffee harvests. Going forward, the situation is expected to worsen. The Climate Institute predicts that areas suitable for coffee growth will shrink by 50% in 2050.[2]

Source: Climate Institute

These environmental pressures currently impact the rising raw material costs of Nespresso, a luxury coffee supplier, and the longer-term feasibility of its supply chain. Compared to its competition, Nespresso’s longevity is particularly affected due to its emphasis on high quality. The company “estimates that only 1-2% of the coffee grown globally meets its specific taste and aroma profiles, and quality requirements.”[3] Further stress due to climate change on that already limited supply could exaggerate product costs or force Nespresso to compromise on quality. In response to these threats, Nespresso has launched a multitude of sustainability initiatives, most notably: a AAA sustainability program focused on teaching and incentivizing sustainable coffee farming best-practices, an agroforestry initiative, and a capsule recycling program.

In 2010, in coordination with the Rainforest Alliance, Nespresso founded the AAA sustainability program to mitigate both the immediate impacts and the long-term damages associated with climate change for coffee farmers and the company’s supply chain. The program seeks to educate all 70,000 Nespresso farmers located in twelve countries on sustainable farming practices in an attempt to secure their futures along with Nespresso’s. These practices include soil management, which has tangible, short-term impact, along with longer-term initiatives, such as water conservationism and pesticide reduction. A study in Colombia found participating farms had 22.6% better social conditions, 41% better economic conditions, and 52% better environmental conditions than non-AAA farmers.[4] Nespresso has committed to this program for the long-term, and will source 80% of its coffee from these farmers by 2020 despite the 30-40% higher raw material costs.[5]  It is unclear if Nespresso will increase the price of its capsules or take a hit on its margin to accommodate these increased raw materials costs.

Source: Nespresso

After witnessing the global coffee supply decline by almost 30% between 2002-2010 due to plague (e.g., coffee-leaf rust), and landslides in South America, Nespresso also launched an agroforestry initiative with the goal of planting 10 million trees by 2020. The loss in coffee supply was particularly problematic for Nespresso because 40% of its coffee supply comes from that region.[6]  Nespresso believes that “planting trees within and around coffee fields helps … protect the crops. Thanks to their canopy and rooting system, [trees] reduce the impact of climate deregulations.”[7] This is a medium-term initiative with the trees expected to reach maturity within ten years. In the future, the trees will also provide the necessary shade for the coffee plants in the face of increased global temperatures and supplemental income for farmers in the form of fruit and timber sales.[8]

Last, Nespresso has urged its customers to combat climate change themselves. To reduce consumers’ long-term environmental impact, Nespresso developed an aluminum pod recycling program for its ubiquitous coffee capsules. In Nespresso’s commitment to be Carbon Neutral by 2020, it states that they “will expand [their] capacity to collect used aluminum capsules to 100% wherever the company does business” and aim to ensure that “100% of [their] virgin aluminum capsules to be produced with material compliant with the new Aluminum Stewardship Initiative standard”.[9]  Nespresso has had great success: by 2015, “[they] had reached 86% global recycling capacity”[10]; quite an accomplishment with over 6 billion pods sold annually.[11]

 

Source: Nespresso

 

What additional steps can Nespresso Take?

Nespresso has largely focused on medium-term projects and mitigation solutions, and I recommend they also look to support longer-term projects. From an adaptation perspective, Nespresso could collaborate with World Coffee Research to develop and plant a more climate resistance coffee bean that meets Nespresso’s quality standards. Second, Nespresso should protect its downside and invest in product diversification, such as tea and snack products that would not be as susceptible to the same climate pressures.

 

What are outstanding questions? 

 

Given the rising cost of sustainably farmed coffee beans (30-40% markup on current market prices), is Nespresso able to maintain its commitment to sourcing these types of beans as they scale? Will the Nespresso customer be willing to accept a price increase to accommodate a more sustainable bean? If not, can Nespresso afford the necessary cut to their margins by sourcing more expensive, sustainable beans? Second, recognizing Nespresso’s focus on quality, are these practices enough to maintain sufficient, high-quality coffee supply? Should Nespresso lower its quality standards? Should they look to purchase coffee farms and implement sustainable practices through a vertical integration scheme? Finally, will Nespresso customers be comfortable with a genetically modified coffee bean?

(Word Count: 776)

 

[1] Fairtrade Foundation, “About Coffee,” accessed November 2017, http://www.fairtrade.org.uk/en/farmers-and-workers/coffee/about-coffee.

[2] Peter Laderach, “Climate Change Adaptation of Coffee Production in Space and Time,” Climatic Change, (September 2015), accessed November 2017.

[3] Nespresso, “Product Related FAQs,” accessed November 2017, https://www.nestle-nespresso.com/about-us/faqs/product-related.

[4] Diane Duperret, “Nespresso Sustainability Approach Across Its Coffee Value Chain,” April 2015, http://3blmedia.com/News/Nespresso-Sustainability-Approach-Across-Its-Coffee-Value-Chain, accessed November 2017.

[5] The Guardian, “Nespresso Coffee Farmers: Growing Green,” The Guardian, https://www.theguardian.com/nespresso-discover-sustainable-quality-coffee/2016/dec/14/nespresso-coffee-farmers-growing-greenprocess, accessed November 2017.

[6] Nespresso, “Product Related FAQs,” accessed November 2017, https://www.nestle-nespresso.com/about-us/faqs/product-related.

[7] Tristan Lecomte, “How Agroforestry can increase coffee farms resilience to climate change,” accessed November 2017, https://www.nestle-nespresso.com/newsandfeatures/how-agroforestry-can-increase-coffee-farms-resilience-to-climate-change.

[8] Ibid.

[9] Jessica Lyons Hardcastle, “Nespresso Pledges Carbon Neutrality by 2020,” Environmental Leader, (August 2014), Accessed November 2017.

[10] The Guardian, “Encapsulating Business with a Sustainable Process,” The Guardian, https://www.theguardian.com/nespresso-discover-sustainable-quality-coffee/2017/feb/21/encapsulating-business-with-a-sustainable-process, accessed November 2017.

[11] Christina Passariello,Nestlé Stakes Its Grounds in a European Coffee War,” The Wall Street Journal, April 28, 2010, https://www.wsj.com/articles/SB10001424052748704388304575202402216730116, accessed November 2017.

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