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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.

7 thoughts on “Nespresso: Protecting the World’s Best Coffee

  1. Great article! Thanks for an interesting read, Brooke! I am not familiar with coffee industry and gained a lot about its supply chain issue under the pressure of climate change from you. I did some research on it and learnt three additional considerations that Nespresso could consider:

    1. Technology can play a key role in coffee industry. Per Washington Post, modifying coffee seeds might be an effective alternative method to help coffee plants withstand climate change and to keep coffee plantations from relocating. (https://www.washingtonpost.com/opinions/theres-more-to-do-to-save-coffee/2017/10/25/102b39aa-b808-11e7-9b93-b97043e57a22_story.html?utm_term=.03e0e128d005) The downside in my opinion is the heavy initial outlay of investment, cost of R&D and a long-term trials and wait for the return on investment.
    2. Your article mentioned the concept of “growing under trees”. It is completely new to me. I read about this concept and this is what I found: traditional coffee-growing methods is not as immediately economical as conventional methods, but growing coffee under trees increases bio-diversity and soil quality and removes the need for pesticides, resulting in a healthier environment. By hybridizing coffee seeds and using traditional farming methods, farmers can farm more sustainably. (https://www.greenbiz.com/article/tilling-transformative-approach-crop-and-climate-risks) It makes sense that Nespresso traces the supply chain to the planting method.
    3. Integrating supply chain could be a real challenge. Recall the IKEA case, Option 1 was to own the forest, but it requires huge cost upfront and ongoing maintenance, in addition to fighting uncertainties of regulatory environment. Further, it is hard to convince other players along the supply chain the value of the new technology or harvesting methods. I doubt Nespresso has the ability to make such an investment in a near term. As such, more immediate actions should be taken such as cost cutting or lobbying for government support.

  2. Some tough questions for Nespresso! To address the question as to whether customers would pay for the increase, I think Nespresso capsules are still way cheaper than buying coffee from outside, and way better quality. From a quick Amazon search, it looks like Nespresso capsules are about $0.50 each. I would compare this to many “3rd wave” specialty coffee shops sell premium espresso drinks for ~$5 a cup (10x the price!) and are rapidly growing in popularity. If Nespresso presses on the sustainability angle with its customers as well, it may not lose much volume with customers. Nespresso has a structural advantage over specialty coffee shops in that it is able to produce a similar quality product in the home instead of in a retail store, thus at a fraction of the cost to the consumer. Yin also raises a good point above with the technology angle – these sustainable coffee beans may cost 30-40% more today, but with advances in agritech, high quality coffee bean costs will likely come down in the future.

  3. This is a great article, and I was all the more interested given most of the coffee I drink is Colombian!
    To follow-up on DM’s comment above, I also believe that Nespresso will pass on the increase in costs to the customers. Nespresso’s share of the market is high, and customers who already own a machine will likely not switch machines and instead will agree to pay more per capsule.
    Your article also raises a good case of “practice what you preach”: it is great that Nespresso has launched a recycling program for its aluminium capsules, but could they go further and get rid of the large amount of cardboard packaging that comes when you buy Nespresso pods? Or, better still, invest in changing the single-serve aluminium pods that create unnecessary waste (https://www.theguardian.com/sustainable-business/2015/may/27/nespresso-sustainability-transparency-recycling-coffee-pods-values-aluminum)?
    Lastly, another option that Nespresso could look into, apart from the vertical integration solution, is to promote coffee farming in new regions of the world where the long-term climate and ecological conditions might be advantageous. Your article mentions that it takes about ten years for trees to reach maturity, so they should probably start soon.

  4. Thanks for sharing Brooke! As an avid coffee drinker, I found to be a very interesting read. It is encouraging that one of my favorite products, Nespresso, is investing in sustainability initiatives. Though, it is also concerning to hear that only 1-2% of coffee grown meets their quality requirements!

    Continuing the conversation you kicked off, I think Nespresso can afford to raise prices on consumers for their coffee pods in order to support their sustainability sourcing practices. Nespresso has built a business model with high fixed investment (the machine) and relatively low variable costs for consumers (pods ranging $0.5-0.75). Given this high fixed investment, I believe consumers are likely to be less price-sensitive on the pods, hoping to “get the most of their machine.” Especially for first-time home buyers or new residents, if Nespresso is the only coffee machine in the apartment or house, consumers have fewer cheap substitutes for homemade coffee.

    That being said, I agree with you that Nespresso can do more. I think Nespresso could explore expanding the AAA sustainability program beyond training and education to including financing. Starbucks has a Global Farmer Fund that provides financing access to farmers to invest in infrastructure and new technologies [1]. Additionally, Nespresso could explore diversifying its product line to include other beverages such as tea or hot chocolate pods to lessen its dependence on a single resource.

    1 “Starbucks more than doubles Global Farmer Loam Commitment to $50M.” Press Release, Jun 22, 2015. https://news.starbucks.com/news/starbucks-more-than-doubles-global-farmer-loan-commitment

  5. As someone who recently purchased a Nespresso machine on black Friday and who has a love of coffe, I am not encouraged by the vulnerability of Nespresso’s sourcing of high quality coffee to the impacts of climate change. However, I am encouraged by the company’s focus on taking action.

    It appears that Nespresso’s actions fall into two categories: mitigation and adaptation. Through Nespresso’s commitment to recycling and to becoming carbon neutral, they aim to limit the impact of their operations on the environment. However, many of the initiatives you describe above fall into the adaptation category. As global temperatures continue to rise, Nespresso aims to protect its coffee crop through tree planting and soil conditioning efforts, rather than working with other players in the agriculture industry to prevent these measures from being necessary in the first place.

    As for the short- to medium-term risks to Nespresso, I believe they are doing a sufficient job protecting themselves. Their AAA sustainability program provides a positive outlook for their supply chain and I am not concerned about the potential price increase to consumers. Owning a home brewing machine (especially one with such a high price tag) provides high switching costs for current consumers. In addition, the Nespresso brand provides an air of exclusivity already, meaning their consumers are likely not as price sensitive as Keurig’s for example.

    I agree with you, Brooke, that Nespresso may want to diversify its product offerings to protect itself from future risk. However, climate change will have major impacts on all agricultural products, including tea and food products. Perhaps another option is for Nespresso to diversify into high-end kitchen appliances, a category Nespresso machines would slot nicely into. Either way, this issue helps to highlight the important role of companies in reacting to and preventing climate change.

  6. I agree with all those who have already posted that Nespresso will likely be able to pass off the cost increases from their sustainability efforts onto consumers. I wonder, though, whether they might also consider searching for ways to increase the supply of high quality coffee available. Increasing the number of suppliers who are able to produce high quality coffee, whether through improved quality of the trees or enhanced farming practices, will both increase sustainability and create competition amongst suppliers, thus pushing down price for Nespresso while insulating the firm from overdependence on a small set of actors.

    With the above in mind, as Nespresso (hopefully) follows Jenny’s wonderful advice to add innovative financing to their AAA sustainability initiative and Helen’s insightful suggestion about the promotion of coffee in new regions, they should also seek to implement a program to improve coffee cultivation practices for their current farmers, while also teaching new farmers to operate with the best possible methods.

  7. Sounds like a tough bean to grind… However, to your questions on passing on price increases to consumers, sufficiency of current plans, owning farms, and technological innovations with climate change pressures in the background there is real trouble brewing for Nespresso.

    On pricing, it may be difficult to pass on price increases to consumers as there are a multitude of organic or sustainably produced competitor pods already on the market [1]. Nespresso has gone towards a locked-down system with their Vertuo maker, which may be able to act as a testing ground to see if consumers would be able to handle price increases on this system, at least in the near-term.

    In terms of technological innovation via genetic engineering, Nespresso may be able to start including genetically-engineered coffee beans in a small portion of their products. Some considerations though are new regulations on labeling around genetic engineering, especially in Europe.

    [1]: http://www.independent.co.uk/extras/indybest/house-garden/coffee/best-coffee-pods-for-nespresso-machine-compatible-price-reviews-a7758216.html

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