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
to exceptional cup quality. However, in the pursuit of the best
coffee beans, there was also a recognition by its management that
quality was inextricably linked with sustainability. A sustainable
approach to coffee production – one that considered both the
social and environmental impacts of the sourcing process – was
the key to preserving the ability to produce consistent quality
for the future. Real brand leadership was not just about selling
a unique, high quality product, but also about ensuring that the
social and environmental performance of that product spoke with
the same authority as its quality.
The Nespresso concept was the brainchild of a Swiss coffee
pioneer and inventor who was determined to create an espresso
extraction system that would enable discerning espresso coffee
consumers to prepare excellent quality espresso coffee at home.
The patented system uses a unique extraction method encased
in stylish machines to extract consistently high quality espressos
from top exceptional coffee blends in portioned aluminum
capsules. Created in 1985 Nespresso revolutionized in-home
coffee cup quality and gave rise to the entirely new home use
portioned coffee category in the coffee sector.
Nespresso’s CEO Richard Girardot had already committed the
company to the concept of Creating Shared Value: “We are a
part of Nestlé – Nestlé has committed to ‘Shared Value’ as an
operating principle.” This principle, developed by Harvard
Professors Michael Porter and Mark Kramer in 2006, maintained
that companies had a responsibility to create and share value not
just for shareholders but also for the communities in which they
operated - from farmers through to customers and ultimately
consumers.
In the years since 2007, Nespresso’s Vice President for Marketing
and Sustainability Guillaume LeCunff, had led a team from
various Nespresso departments in several countries, along with
some external advisors, to bring Nespresso’s environmental and
social performance up to what he considered the same level of
performance as their now-famous high quality coffee.
In programs developed since 2009, the team could see that
Nespresso’s initiatives on energy efficiency and environmental
impacts of their machines were advancing well. And results from
their new initiatives to increase recycling of their coffee capsules
were also looking positive. However, while the third leg of their
sustainability strategy, coffee sourcing, was making some good
progress, the issues the team encountered were proving more
complex and challenging.
This case was written by Lawrence Pratt of INCAE Business School, and Dean
Sanders of Goodbrand, and Bernard Kilian of INCAE Business School, to serve as a
basis for class discussion and not as an illustration of correct or incorrect handling
of an administrative situation.
RESTRICTED DISTRIBUTION © 2012 INCAE Business School.
This case study has not been reviewed or approved by Nestle Nespresso S.A. or its
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
or omissions. DO NOT CITE OR QUOTE.
The patented technology has created a product advantage for
Nespresso during the course of the last quarter century, allowing
it to significantly outscore other espresso brands according to the
Nestlé 60/40 plus principle whereby all products must outperform
category competitors in consumer taste tests by a 60 to 40
advantage. The company has not stopped with the one invention
but has continued to innovate with new machines, introducing
milk solutions for certain markets and more affordable machines
as well as super premium machines; it has also developed
specific formats for use in out-of-home channels such as high
end hotels, restaurants, catering and travel as well as solutions
for offices.
The Nespresso business model is based on a threefold
commitment to the unique extraction system, an innovative and
efficient direct-to-consumer club membership model (whereby
those who buy a Nespresso machine automatically become
members of the Nespresso club) and 24/7 service that allows
club members to order capsules, send machines for repair and
ask any questions related to their consumption of Nespresso.
In addition to technological, and therefore product, superiority
Nespresso has created an iconic brand which stands for luxury,
exceptional quality and a lifestyle experience. The individual
coffees in the range are described not as varieties or flavours,
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
capsules online, club members can also shop in Nespresso
boutiques, which are always located in the high-end luxury retail
areas of major global cities. Advertising and marketing campaigns
seek to convey a brand story that positions Nespresso as ultra
premium, further justifying (in addition to product delivery)
consumer price premiums. In addition to machines and coffee
capsules, Nespresso has had great success in selling espresso-
Nestlé Nespresso: Creating Shared Value / Background
-3-
related accessories created by top designers and has sponsored
high-end events such as the Cannes Film Festival and the Swiss
challenge for the Americas Cup sailing competition, as well as
using celebrities like George Clooney as brand ambassadors.
The overall profile of Nespresso consumers is upmarket, slightly
older coffee consumers. The home market of Switzerland
and other European markets with a tradition of espresso
consumption still constitute a significant proportion of total
sales, though the brand is also growing in so called ‘white cup’
markets such as the US, Asia and South America. A customer
segmentation study conducted in 2008 identified 6 main groups
of customers motivated by different aspects of the brand and the
product, including a group of 16% of consumers defined as ‘ecocommitted’ and described as liking the good things in life but in
a responsible way. This group is significantly more interested in
Nespresso’s sustainability program than other segments.
The unique features of the Nespresso system and business
model have led to phenomenal growth rates, an average of
30% per annum in recent years, resulting in a turnover in 2010
of more than CHF 3 billion, making Nespresso one of Nestlé’s
fastest-growing businesses and a so-called ‘billionaire’ brand.
In 2010, the company demonstrated strong growth of over 20%,
with double-digit sales increases in all markets around the globe.
The brand is now available in more than 50 countries. One of
Nespresso’s main strategic challenges in recent years and in the
future will be to manage this growth, in all areas of the business,
including human resources, customer service and supply chain
management.
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
that its quality proposition continues to set it apart.
the correct quality level, flavor and aroma profile for the Nespresso
grands crus. Given this constraint in coffee sourcing options and
the significant growth rates of the business, securing a stable,
long-term supply of highest quality green coffee will continue to
be a significant challenge for the Nespresso management.
III. Coffee Markets
Coffee has been traded internationally for hundreds of years.
Its genetic origins are found in what is now Ethiopia. Coffee
was widely traded by the 16th century, and Arab traders brought
coffee to Europe and parts of Asia in the 17th Century. Coffee was
introduced as a cash crop in many countries, including Costa Rica,
Colombia and Guatemala in the late 18th century and has played
a critical role in the economies of these and other exporting
countries ever since.
Coffee is grown in many countries. However, only a few countries
are significant exporters of coffee. (Table 1 shows country
export volumes by category.) Coffee comes in many varieties,
but generally falls into two categories - Arabicas group and
Robustas group. (see Appendix 1 for additional information on
these groups). Robusta is produced in very large volumes and is
considered of lower quality than Arabicas. Arabicas are produced
in smaller volumes (frequently on farms of less than 1 hectare, but
sometimes on farms of over 1,000 hectares), and are generally
of high to extremely high quality. The are the nearly exclusive
choice for consumers interested in cup quality. Nespresso and
Table 1. Major Coffee Export Countries (June 2009 – May 2010).
In 2010, two new competitors entered the portioned coffee sector
with capsules they claim are compatible with the Nespresso
machines. Interestingly, each of these new competitors has
chosen a specific sustainability attribute to challenge Nespresso’s
sustainability position. One has focused on biodegradable
capsules (as compared to Nespresso’s recyclable aluminum
ones) and the other is ensuring that 100% of the coffee in their
capsules is certified to the European-based agricultural standard
“Utz Certified.”
According to studies conducted on specialty coffee and product
sensory profiling by the internal green coffee experts within
Nespresso, only around 1% of the worldwide coffee harvest is of
Nestlé Nespresso: Creating Shared Value / Background
COUNTRY
ROBUSTA
ARABICA
000” MT
Brazil
36
1156
Vietnam
690
---
Colombia
---
330
Indonesia*
251
28
India
102
138
Honduras
---
168
Guatemala
---
162
Perú
---
108
* Estimation based on historical proportions of Arabica and Robusta.
Source: ICO (A and B), 2010.
-4-
Chart 1. Green coffee prices 2000 to 2010.
250
YEARLY
CONSUMPTION
CONSUMPTION
kg/capita
(million 60 kg bags)
200
150
100
50
3.2
3.1
France
5.6
5.4
Source: ICO (c), 2010.
An interesting aspect of international coffee markets is that
although Arabicas and Robustas compete in very different
segments, they are frequently substituted for each other in blends
produced for mass markets. The result is that the international
market price for Arabicas is highly dependent on the supply and
demand in the much larger Robusta market. (Chart 1 shows
historic coffee prices for the principal coffee groups)
In 2001, coffee markets were made more open when a longstanding producer-country cartel was abandoned. In the following
years, producers and producer countries (particularly of Arabica
coffees) shifted their emphasis toward more differentiated
markets, as aspects of quality and flavor profile became more
important for a variety of international markets and trading
companies.
This market liberalization opened up new possibilities for traders
and roasters. Many companies entered this new market space.
In the U.S. companies like Starbucks, Pete’s, Green Mountain
Roasters, and many other smaller roasters redefined the retail
coffee industry.
10
09
ja
n-
08
ja
n-
07
ja
n-
06
ja
n-
05
04
n-
ja
n-
ja
n-
ja
Brazilian Naturals
Robustas
Source: ICO(a), 2010.
IV. Recent Market Conditions
With this increased demand for high quality coffee, many analysts
predicted skyrocketing prices for Arabica coffees. However, new
entrants in the Robusta market, most notably Vietnam supported
by a massive World Bank program, begun in the late 1990s,
flooded international markets with Robusta coffee driving down
Robusta prices, and taking with them the Arabica prices.
The overall result of market conditions for the past 20 years has
been decreasing real prices (inflation adjusted) for Arabica coffee.
(Chart 2 and Chart 3 present annual average prices, nominal and
real for New York “C” coffee3).
Unfortunately for the world’s Arabica producers, production costs
have also increased. Compared with 1995 levels, fertilizers have
increased in cost by a factor of 4 or more (largely correlated with
Chart 2. Nominal prices for Arabica coffee from sources
reputed for quality.
250
US cents/lb
UK
Other Milds
n-
Colombian Milds
ja
5.9
03
5.8
n-
Italy
ja
6.5
n-
8.9
ja
Germany
01
4.13
00
21.4
02
0
U.S
ja
COUNTRY
US cents/lb
Table 2. Major coffee consuming countries (2009).
n-
its principal competitors are interested in Arabica coffee and
generally compete with each other for supply and suppliers.
(Table 2 provides an overview of coffee consuming countries.)
200
150
100
50
Nestlé Nespresso: Creating Shared Value / Background
19
3. The Coffee “C” contract is the world benchmark for trading of Arabica coffee. The contract
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/
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.”
8
19 0
8
19 2
8
19 4
8
19 6
8
19 8
9
19 0
9
19 2
9
19 4
9
19 6
9
20 8
0
20 0
0
20 2
0
20 4
0
20 6
0
20 8
10
0
Brazil
Costa Rica
Colombia Guatemala
Mexico
Source: ICO (d), 2010.
-5-
V. Creating Shared Value,
Nespresso AAA Sustainable
Quality Coffee Program and
Real Farmer Income
260
240
220
200
180
160
140
120
100
80
60
40
20
0
19
8
19 0
8
19 2
8
19 4
8
19 6
88
19
9
19 0
92
19
9
19 4
9
19 6
98
20
0
20 0
0
20 2
0
20 4
0
20 6
0
20 8
10
US cents/lb
Chart 3. Real prices for Arabica coffee from sources
reputed for quality.
Brazil
Costa Rica
Colombia Guatemala
Mexico
Source: ICO (d), and OECD, 2010.
oil and natural gas prices). Labor costs have also increased,
particularly in Central America and Brazil where pay levels have
increased due to economic growth. Since chemical inputs typically
represent around 1/3 of production costs, and labor costs over
half – profits have been squeezed, and in many cases eliminated.
In other agricultural sectors, prices have also decreased (mostly
due to increased supply and flat demand), but producers have
managed to maintain profit levels through increased productivity
(defined as total output per hectare). However, in the case of
Arabica coffee, there have been no major technological changes
to increase productivity in the past 20 years or more. In fact,
productivity has actually been decreasing in most Arabicaproducing regions as declining profit margins have slowed reinvestment in new coffee plants, genetic upgrades, machinery
and even chemical inputs. (Table 3 presents historic information
on coffee yields for selected countries).
Table 3. Average coffee yields of five representative countries,
measured in “quintals” (46 kilo sacks of green coffee)
per hectare (2.47 acres).
COUNTRY
1990
1995
In recent years many corporations have been working through
their own responses to the challenges of the Corporate Social
Responsibility (CSR) and sustainability agendas. Companies
have been developing strategies to address issues that have
been raised by NGOs, key opinion leaders, media, activists and
other stakeholder groups demanding more transparency around
the way companies create value especially with regard to the
exploitation of natural or human resources.
2000
2006 2007 2008
qq/ha
Brazil
10.9
10.8
18.2
24.2
21.6
27.4
Colombia
18.4
21.0
20.5
20.1
20.6
20.4
Guatemala
18.0
17.2
24.8
19.6
22.4
22.6
Kenya
14.8
12.9
12.9
6.2
7.1
5.9
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
Many companies have been forced to develop rapid reactive
responses to some of these pressures, which while potentially
mitigating short-term reputational risk are more often than not
unsustainable in the long term. In their work, published in the
Harvard Business Review in December 2006, Michael Porter and
Mark Kramer analyze some of the reasons why corporations
engage in CSR and sustainability programs and suggest that
these are misguided in that they see creation of value for
business as inconsistent with the creation of value for society and
communities.4
In the Creating Shared Value approach they advocate, companies
identifying a ‘sweet spot’ or point of connection between the
activities and needs of a company and the activities and needs of
society, and call this a process of mapping social opportunities.
In this way, business organizations can be much more targeted
and efficient in assessing the way their business activities create
value that is shared with other stakeholder groups. The Creating
Shared Value (CSV) approach to CSR and sustainability has been
adopted by Nestlé which uses the framework to report on the
ways its business creates shareholder value for investors, whilst
simultaneously creating value for a wide range of stakeholder
groups from farmers through to customers and ultimately
consumers. Given the nature of its business Nestlé has identified
water, rural development and nutrition as its main strategic CSV
focus and social opportunity areas.
Informed and inspired by the CSV approach, Nespresso identified
its own social opportunities and areas of interdependence with
wider society within its value chain. On this basis, Nespresso has
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.
Nestlé Nespresso: Creating Shared Value / Background
-6-
launched an integrated CSV framework, “Ecolaboration™” to
group together its value chain sustainability efforts in the area of
carbon footprint reduction, sustainable coffee farming and spent
capsule recycling.
By applying the CSV thinking especially in the area of sustainable
coffee farming, Nespresso soon realized that its requirement
for long-term sustainable sources of green coffee overlapped
completely with the farmers’ own need to improve their longterm economic prospects and a wider societal need to improve the
effectiveness of coffee farming in conserving natural resources.
This led to the Nespresso AAA Sustainable Quality™ Coffee
program, a unique coffee sourcing program co-developed by
Nespresso and Rainforest Alliance, originally rolled out in 2003,
but which now focuses on helping coffee farmers continuously
improve their performance in producing highest quality coffee,
on-farm sustainability and farm productivity. The unique
dimension of this program is the way in which it combines these
three issues simultaneously and, importantly, acknowledges the
absolute requirement for AAA farmers to improve their incomes –
an insight that resulted in the conceptualization of a farm income
focus called Real Farmer Income™ (RFI) by Nespresso.
From its original inception in 2003 and through its subsequent
redefinition and expansion to include Real Farmer Income™
as a metric, the AAA Program has now grown to be a sourcing
program that reaches 40,000 farmers in seven countries and
twenty growing regions (referred to internally by Nespresso as
“clusters”), and is set to grow further to up to 80,000 farmers in
the next three years. The key characteristics of the Program are
to pay premiums to AAA farmers for quality, incentivize them to
comply with the Rainforest Alliance standard (environmental,
social and various management variables) and initiate projects to
boost yields and income. Nespresso also supports agronomists
in the field who offer training and technical assistance through
farm visits and workshops to help farmers improve performance.
As a consequence Nespresso is gradually building ever-closer
relationships with its global community of AAA farmers.
VI. Real Farmer Income™
Approach
As a consequence of these ever-closer relationships Nespresso
is learning more about the needs of AAA farmers, frequently
smallholders with very low incomes and limited opportunity to
invest in improving their farms.
In 2008, Nespresso committed to RFI as one of its strategic
pillars. Nespresso President Richard Girardot ““We are a part of
Nestlé – Nestlé has committed to “Shared Value” as an operating
principle. We have taken the decision to increase Real Farmer
Income´ as the expression of our commitment to share value with
our critical farmer partners. RFI is critical to us, because of our
corporate culture, because it maintains the health and vitality of
our supply chain, and because it is the right thing to do for the
farmers who are such an important part of Nespresso’s success.”
While most Nespresso executives saw RFI as a critical strategic
approach, farmer well-being has not been an explicit part of the
traditional coffee buying and trading culture. Historically, the
relationships between roasters/brands, their trader suppliers
and farms has been of a “transactional” nature, and nearly always
based on negotiations for the current years’ harvest, although it is
not unusual for farmers to sell to the same buyer for many years.
Beyond this cultural paradigm difference, RFI’s most strident
supporters pointed out that there are significant institutional and
practical challenges to improving RFI. For example, Nespresso’s
head of Green Coffee, Karsten Ranitsch, noted some of the
important challenges. “We have always had a very small technical
and buying team. Our strategy, from the beginning, has been to set
very high quality, environmental and labor standards, and work
with the most experienced and effective coffee trading companies
present in the region. They help us identify producers capable
of meeting these standards. We pay a price premium to these
traders who use these funds to provide a variety of advisory and
technical services and pass through part of the price premium to
the producers.”
“In practical terms, Nespresso has over 40,000 farmer suppliers,
and no two are exactly alike in their strengths or weaknesses.
Virtually all will need some assistance to increase their income,
most will need a great deal of help – and not just in production,
but in quality management, and reducing their environmental
impact.”
VII. Farmer Study
Nespresso had the initial idea of focusing on shared benefits for
farmers based on direct experience working on a quality and
productivity project conducted in the Caldas region of Colombia
with the U.S. non-governmental organization Technoserve.
Then, in 2008, Nespresso commissioned a detailed study to better
understand the economic situation of the producers that supply
Nestlé Nespresso: Creating Shared Value / Background
-7-
Table 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).
COFFEE
REGION
FARMERS FARM SIZE FARM YIELD
(2009) Mean/median/ Mean/median/
PORTION OF
PRICE
PREMIUM PRODUCTION PRODUCTION FARMS WITH
COST
COST
HARVEST
RECEIVED RECEIVED
NEGATIVE
Mean/median/
Mean/median/
SOLD AS AAA
COSTS
US$/qq
US$/qq
StdDev
StdDev
number
hectares
quintals/ha
%
US$/qq
CR - SM
780
4.8/1.0/9.6
27.3/25.7/14.7
57
CR - LG
2210
2.8/2.0/2.1
44.4/24.3/71.5
Guatemala
430
10/2.2/23.3
Colombia - Caldas
4320
Colombia - Nariño
20000
Brazil
750
Mexico
2250
StdDev
StdDev
US$/qq
US$/qq
US$/qq
%
105
5.7
2096/2003/1357
86.7/73.8/48.5
26
88
106
5.7
2201/1913/1032
92.0/93.6/40.4
43
27.5/25.4/12.5
62
103
11
1970/2006/788.5
99.3/75.6/173
11
2.4/1.6/2.2
13.6/12.2/8.1
84
124
6
925/773/648
88.9/64.5/104
17
1.3/1/0.95
18.6/19.3/8.4
76
130
10
1540/1430/838
93.2/79/62.6
15
37.5/25/36.5 39.7/37.2/19.6
45
80
10
3396/3288/1550
99.4784.8/56
45
73
90
5
890/800/502
110/112/13
42
1.8/1.4/1.7
9.9/8.3/6.2
Source: CIMS (a), (b), 2010.
them with coffee. A research team from the Sustainable Markets
Intelligence Center (CIMS) based in Costa Rica studied hundreds
of farmers in all main Nespresso producer regions to understand
their revenue, cost structure, production strategies and ‘on farm’
conditions. The researchers effectively created new, comparable
income statements for over 500 randomly-selected Nespresso
suppliers in seven of their preferred coffee growing regions in
Latin America (in Mexico, Guatemala, Costa Rica, Colombia and
Brazil) and nearly 250 control farms (similar farms from the
same regions that do not supply Nespresso, randomly selected).
The methodology was based on internationally accepted criteria
developed by the Committee on Sustainability Assessment
(COSA), a consortium of independent research organizations that
study the economic, environmental and social aspects of coffee
production (see http://www.iisd.org/standards/cosa.asp).
The study revealed some significant challenges in the value
chain that apply generally to all Arabica-growing regions across
Latin America. Among the most important findings on the farm
economics (Table 4 summarizes the key findings):
a) Farmers are generally unprofitable.
b) Nespresso and other purchasers of Arabica coffee could
reasonably expect large-scale exit of coffee producers from
coffee-producing zones they depend on for their highest quality
coffees.
c) Nespresso needs to respond to the likelihood of decreased
coffee production in zones it was planning to EXPAND sourcing to
meet its strategic goals.
d) While there was evidence of positive farmer benefits from their
relationship with Nespresso (through technical assistance and the
pass through of the price premiums) the “bottom line” impacts on
farmer’s income were not strong enough to be transformative.
VIII. Value Chain Strategy
Nespresso chooses very select coffee-producing regions
around the world that provide the unique flavor and aroma
characteristics that define its blends, grand crus and by extension
their brand. Nespresso then identifies and enters into long-term
relationships with experienced coffee buying companies working
in those regions who are contracted to provide coffee according
to Nespresso´s demanding quality requirements. In addition,
the buyers assist Nespresso and supplier farmers in advancing
toward compliance with the AAA program.
The Nespresso AAA Sustainable Quality™ Program pays
premiums for both quality and sustainability. The premium is
around 30 % to 40 % above the standard market price for coffee
and 10 % to 15 % above the general local market price for coffees
of similar quality. Karsten Ranitzsch pointed out, however, that
“the program is about more than paying a premium, it is about
building a long-term relationship with coffee farmers. The buyers
Nestlé Nespresso: Creating Shared Value / Background
-8-
use this premium, as they determine, to secure the supplies of
the high quality coffee and advance AAA compliance. Buyers also
take on significant risk – notably the risk of acceptance/rejection
by Nespresso due to lack of required quality, the costs and risk of
maritime transport from origin to Nespresso´s Swiss warehouse,
among others.”
An important aspect of Nespresso’s supply chain is that usually
only a relatively small percentage of each producers´ coffee
is eligible to receive Nespresso´s AAA premium (only this
percentage passes the quality test due to size of beans, harvesting
approach, and post-harvest handling). Buyers and farmers have a
strong incentive to work to increase this percentage, but progress
has been slow.
IX. Alternatives
Nespresso has aggressive growth targets – seeking to increase
coffee sales volume at least 20% per year for the next 4 years. Yet
their own research showed that a large percentage of the farmers
in their target coffee regions are at risk of leaving the business
due to lack of profitability.
There has been only one new large-scale Arabica-producing area
entering the market in the past 15 years. That is the Brazilian
Cerrado region. This means however, that there are no other new
areas of production, and Nespresso has decided that the current
regions are the ones they prefer for their coffee flavor and aroma
profiles.
Nespresso management is concerned that if they do not increase
farmer incomes in their producing regions, there is a significant
risk that they may not even be able to maintain current purchase
levels, as yields decrease and farmers continue to leave the
business. They identified at least three ways they could increase
RFI.
Traditionally, this is the way most coffee traders reward coffee
producers for particular attributes. Nearly every sustainability
certification program (organic, Fair Trade, Rainforest Alliance,
Utz, etc.) use this mechanism. Coffee companies pay a price
premium to their buyers who, in principle, pass some of this
premium to producers. The coffee trading companies, in turn,
pass this higher price to retailers who add their mark-up. The
advantage of this approach is clear – the trader pays its buyers for
the attributes and the entire value chain works exactly the same
as before, except for some additional paperwork to document the
coffee’s path from farm to trading company. The disadvantage of
this approach was revealed in previous CIMS research – it is very
inefficient for the trading company. Nespresso could realistically
expect to pay US$.07 to US$.10 per pound of coffee for each
penny per pound that the farmer would receive. Furthermore,
the Nespresso team does not believe that this approach would
address the underlying issues of reduced farm yield and quality
management. Nonetheless, the Nespresso strategy is predicated
on quality, productivity and a commitment to selling coffee
certified to international standards for sustainability performance.
However, in the international coffee trade these sustainability
attributes had always been recognized through price premia,
usually based on certifications.
Another approach would be to short-circuit the supply chain and
simply pay farmers a premium for being a Nespresso supplier.
The payment could be adjusted according to the volume of coffee
supplied to Nespresso. The advantage of this option is that it
transfers a much greater percentage of Nespresso´s willingness
to pay to the farmer, eliminating most of the inefficiency of
the price premium system. However, the record-keeping and
transaction costs could be very high, and would likely require
Nespresso to hire agents (or their buyers) to do this.
A third approach is for Nespresso and other investors (such
as development banks like the World Bank or Interamerican
Development Bank) to help coffee farmers by financing
improvements on their farms that would make them more
productive and profitable. These loans could be repaid, in theory
at least, with the profits from the increased coffee production
resulting from the investments.
Farmers could make needed upgrades to their plant stock,
improve pruning and chemicals management, and ensure proper
fertilization programs. Guillaume and his advisory team were
very excited about this approach –because it seemed to offer
a broader range of possibilities, and addressed the root of the
farmer’s problem – their long-term productivity and profitability.
Philosophically, it also seemed more consistent with Shared
Value and RFI, as Nespresso was investing in farmers’ long-term
well-being, not merely passing through a bit of extra cash.
Of course, the critical question was whether or not it made
financial sense (or was even logistically possible) for Nespresso
or the farmers to engage in a massive program of this type.
Nespresso discussed this option internally and with its coffee
buyers. It hosted meetings with experts in the field, and tasked a
manager to explore all possibilities.
Nestlé Nespresso: Creating Shared Value / Background
-9-
X. Drivers of Real Farmer
Income™
Chart 4. Farmer income in Nespresso purchasing regions
in five countries, in US$/ha (ordered from least to most
profitable farm).
5000
Net income (US$/ha)
While there were no clear answers after the first round of analysis
and discussion, the parameters were quite clear.
No two farms are exactly alike. Farmers have very widely ranging
yields and production costs, even within the same production
zone, and sometimes the same village. (See Chart 4 for summary
data). This means that most farms will need customized (or rather
specific group-oriented) plans for increasing income.
Farmers tend to focus on price as their key determinant
of profitability.
However, CIMS’ research for Nespresso
demonstrated quite convincingly that farmer profitability is very
closely correlated to yield (lbs of coffee per hectare), and hardly
at all to price. The reason for this is straightforward – increases in
yield increase sales significantly on roughly the same fixed AND
variable cost base. Production increases went nearly completely
to increased profits (adjusting only for harvesting costs). At the
same time, price premiums were relatively modest and increased
income only marginally. (Table 5 shows the statistical relationship
between yields and income and price and income).
4000
3000
2000
1000
0
-1000
-2000
0%
Brazil
20%
Costa Rica
40%
Colombia
60%
80%
Guatemala
100%
Mexico
Source: CIMS (c), 2010
Table 5. Statistical Relationships between Price
and Income and Yield and Income,
by Nespresso Coffee Producing Region.
a) Very modest quality expenditures of no more than $100/ha/
COSTA GUATEMALA COLOMBIA BRAZIL
RICA
(Nariño)
year could increase the quantity of coffee sold as AAA by 50%.
Correlation between Net Income and Price
b) Farms could reasonably be expected to return to their
Correlation -0.09031
coefficient
historical peak yields through a comprehensive program of plant
renovation, improved management practices and consistent
fertilizer applications. (Table 6 presents the yield levels that
farmers in each zone could be expected to achieve with a
comprehensive program).
p-value
0.3691
0.05854
0.06883
0,358
0,403
0.5772
0.552
<.0001
<.0001
Correlation between Net Income and Yield
Correlation
coefficient 0.84257
0.64509
0.70133
0.61
0,742
p-value
<.0001
<.0001
<.0001
<.0001
<.0001
c) Renovation can be done all at once (100% of plants removed
and new ones replanted in the same year) or staggered (for
example, 10% per year for 10 years).
d) Costs of renovation are approximately $0.40 per plant in year
MEXICO
Source: Nespresso and CIMS (a)
Table 6. Expected yields following comprehensive renovation
and management improvements.
one, plus $0.20 per plant in each of year two and three.
e) Plant productivity depends on a growth curve (see Chart 5),
so the new plants will take a while to reach maturity and full
production.
f) Proper, and uninterrupted, fertilizer management during the
first 4 or 5 years is critical for coffee plants to reach maximum
yield.
Nestlé Nespresso: Creating Shared Value / Background
CURRENT
AVERAGE YIELD
(qq/ha)
(after renovation and management
program; qq/ha) average/median
POTENTIAL
YIELD
(qq)
Brazil
37
40/45
60
Colombia
20
23/24
30
Costa Rica
27
32/38
40
Guatemala
25
30/33
35
Mexico
8
11/12
20
CLUSTER
AVERAGE EXPECTED
YIELD
Source: CIMS, (d)
-10-
Chart 5. Productivity based on Age of Arabica Plant.
1,2
Nespresso engaged in a number of pilot projects to test different
approaches to addressing its RFI-Shared Value challenges.
1
Percentage
XI. Pilot Projects
0,8
Multi-Country Public Private Partnership
0,6
0,4
0,2
0
0
10
20
30
40
Plant yield potential
Source: CIMS (a)
g) Nespresso could provide capital as cheaply as 6% p.a. before
intermediation, transaction and monitoring costs.
Nespresso also needs its producers to implement and attain its
AAA criteria to meet their quality, productivity and environmental
standards. For most farmers, this will require additional
investment. (Table 7 describes the investment needed for each
production cluster and the estimated cost range). Most of these
investments relate to environmental performance aspects
and worker protection. Without them, farms will not meet AAA
standards and risk losing their relationship with Nespresso.
Table 7. Investment required to attain AAA.
INVESTMENTS
REQUIRED
US$ / cluster
COSTS OF
INVESTMENTS
(US$ /ha terms)
595 000
113
Colombia – Caldas
4 500 000
297
Brazil
13 700 000
505
Mexico
255 000
58
Guatemala
545 000
95
REGION
Costa Rica
Source: CIMS (a)
The most challenging program undertaken by Nespresso is
a multi-country, muti-partner effort to try to rapidly increase
the scale and scope of AAA program participation. Nespresso
partnered with the International Finance Corporation (IFC,
the private sector arm of the World Bank Group) and one of its
key coffee suppliers, ECOM. The challenge was to help coffee
growers in Mexico, Guatemala, Costa Rica and Nicaragua
increase the production of AAA standard coffee in harmony with
the environment, while also maintaining the highest quality.
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
best practices. Since 2007 around 6,000 farmers across four
clusters in Mexico, Guatemala, Costa Rica and Nicaragua have
been trained in sustainability and productivity best practices. The
first phase of the project ran until 2010.
This first phase of the project has helped farmers to continuously
improve in all three areas of the AAA Program: quality,
sustainability and productivity. Farmers are supported in two
ways. First, they receive extra technical support and training
to complete the self-assessment part of the Nespresso AAA
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
help them meet the standards of the program. The results of
this pilot effort were interesting in that Nespresso was convinced
that partnerships between major financial institutions, critical
trading partners and their environmental NGO partners could be
scaled up significantly. The concern that emerged, however, was
that farmer’s needs are very different across countries (and even
across villages) and this type of program would necessarily be
focused on the “typical farmer” and risks being too much of a
“one-size-fits-all.”
Central Mill in Jardin, Antioquia, Colombia
In 2010, Nespresso co-funded a new community coffeeprocessing 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
Nestlé Nespresso: Creating Shared Value / Background
-11-
coffee farmers to double the volume of coffee meeting the AAA
standard, securing a higher price premium. In the near term,
farmer’s net income is expected to increase to 30% above their
pre-center income. In addition more water-efficient facilities
and better waste management systems at the mill are helping to
protect the local ecosystems.
The mill currently benefits 110 farmers in Jardín and will be
extended to benefit more than 800 farmers over the next two to
three years. This approach could be replicable across Nespresso
and other buying areas, since currently, less than 5% of Colombian
coffee is processed in this type of central mill.
Improving farmer business skills in
Huehuetenango, Guatemala
Every smallholder coffee farmer tends to have a natural instinct
for business, even if they do not have a formal education. Often,
gaps in their knowledge mean they can struggle to profitably
manage their farms. Recognising the importance for famers
to develop good business skills, in 2010, Nespresso funded a
12-month project with Root Capital to provide business training
to over 300 farmers in Huehuetenango, Guatemala. The training
seeks to improve accounting practices and ensure effective
financial decision-making to improve the profitability of their
farms. The project has been extended for another 12 months and
in 2011 will seek to benefit over 650 farmers.
Interestingly, Nespresso’s principal supplier in Brazil COOXUPE
(one of the largest coffee producer organizations in that country)
assured Nespresso that they would engage in their own set of
pilot projects, and did not need specific outside support. No
results have been shared yet, but COOXUPE has a long, successful
track record of implementing programs to support coffee trading
partners expectations. The Nespresso team is confident that
COOXUPE will produce good results.
quality ranges of coffee, and the increased financial speculation
that accompanies volatile prices in commodity markets. A similar
phenomenon was observed in cocoa a few years before.
Nespresso saw this situation as a mixed blessing. On one hand,
their input prices increased dramatically, along with all their
competitors. But on the other hand, Nespresso believed that
the price increase might be high enough to keep many farmers
in their supply regions in the coffee business a while longer,
allowing enough time for the AAA program and their other efforts
with farmers to achieve their desired results.
Nespresso quickly commissioned a study in mid 2011 to figure out
how farmers were responding to the price increase. The results
were encouraging. With the peak prices, in theory, no Nespresso
farmer supplier should be losing money. Nearly 100% of farmers
across all of their Latin American “clusters” intended to stay in
the coffee business, rather than use their profits to change crops
or leave the countryside. More than half stated that they intended
to reinvest a large portion of their profits in improving their farm
operations. However, the study also found that farmers expected
the high prices to last no more than 2 to 3 harvests (years).
This meant their investments would be in short and medium
term improvements (such as better fertilizer and chemical
management, better pruning, harvest quality practices).
It was clear for Nespresso that for smallholders, and particularly
in certain “clusters”, these investments alone would not
transform their long term situation, not even for those part of
the AAA program. The challenge of creating an integrated set of
partnerships, initiatives, tools, programs and practices to help
AAA farmers evolve towards more sustainable farming, continues
to be a key target for the management of the company.
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 50140 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
Nestlé Nespresso: Creating Shared Value / Background
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Appendix 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)
Nestlé Nespresso: Creating Shared Value / Background
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