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Professor Ray A. Goldberg and Lorin A. Fries (HKS 2012) prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2012, 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

R A Y A . G O L D B E R G

L O R I N A . F R I E S

Nestlé: Agricultural Material Sourcing Within the Concept of Creating Shared Value (CSV)

As we look ahead to the next ten years, it seems wrong to talk about “the future of sustainable agriculture.” Simply put, there is no future without sustainable agriculture.

— Peter Brabeck-Letmathe, Chairman, Nestlé1

Now after more than ten years of focusing on sustainable agriculture, many food processors and farmers are collectively working to redesign the whole food value chain to make it sustainable.

— Hans Jöhr, Head of Corporate Agriculture, Nestlé2

Hans Jöhr stood from his chair and walked to the window to think. It was a quiet morning at Nestlé, but his mind raced in anticipation of the executive board meeting that afternoon. As the company’s Corporate Head of Agriculture, Jöhr recognized the meeting as a key opportunity to strategize far into the future, reexamining how his team’s efforts in sustainable agricultural sourcing supported Nestlé’s position as the world’s leading nutrition, health and wellness company. The company had undertaken to impact three of the world’s most urgent challenges—nutrition, water, and rural development—and Jöhr’s team was fundamental to each of these pillars. Yet the forces changing the global food system were formidable: unprecedented levels of hunger, obesity, and chronic disease; land degradation, frequent natural disasters, and critical threats to water supply; population growth by the billions in the coming decades, along with increased urbanization; and a volatile and tentative world economy. In the face of such threats and complexity, how could Hans Jöhr ensure that Nestlé’s agricultural raw materials were safe, high quality, of consistent supply, and sustainably and ethically and economically produced? How can the procurement process enable the small scale producer to become a viable partner in the milk production models that Nestlé has developed in the developing world? Further, how could his team excel beyond the company’s day- to-day business and enable Nestlé’s visions for the future?

A leading food company in the 21st century faced increasingly complex trends that affected its core business model and strategic approach:

 Globalization led firms to rely on multiple origins of supply and multiple national governmental programs that impacted each of its major commodity systems.

 Production and consumption becomes more and more geographically decoupled worldwide, hence open trade is critical for food security.

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 Operational consolidation was occurring at every level of the supply system, forming long- term relationships focused on removing inefficiencies and preparing for shocks along the value chain.

 Emerging technologies, especially synthetic genomics, placed increasing emphasis on the nature of each component of the supply chain and its impact on the ultimate consumer.

 Consumers had increasingly diverse consumption demands, and food companies were becoming more adept at catering to such personal preferences, while remaining attentive to food safety concerns.

 With scarce available natural renewable resources on one hand and enormous losses and waste of food on the other, the food system players have to innovate to match future needs. There was increased understanding of the role of food and nutrition to human, animal, and plant health, and innovation centers focused on new challenges in these areas.

 In many markets consumers placed value on sustainable and ethical production practices, which required upstream traceability in the supply chain.

 World leaders had prioritized food security as among the most crucial and urgent issues for economic development, security and human well-being.

 Actors in the private, public and not-for-profit sectors were increasingly collaborating in innovative partnerships to tackle development challenges and pursue economic opportunities.

For Hans Jöhr, a key piece of this puzzle was sustainability. By organizing agricultural sourcing to support producers and their environment through his team’s Sustainable Agriculture Initiative at Nestlé (SAIN, pronounced “sign”), the company could depend on a more consistent supply and quality of raw materials. Further, Nestlé’s direct relationship with 680,000 farmers called “Farmer Connect” sourcing program with full traceability, safety, and quality control is one big part of the entire puzzle of responsible sourcing differentiating raw materials: Jöhr saw a significant opportunity to link sourcing to nutrition through biofortification—the process of breeding crops in a way that increased their nutritional value. This could not be done with traditional commodities purchased through a long and anonymous supply chain. “Every day there are hundreds of millions of hands that take, or don’t take, a Nestlé product,” Jöhr explained. “How is this linked to agricultural sourcing? That’s the real question.”3 In a tumultuous global food system amid growing momentum to align business, environment, and social objectives and with customers increasingly demanding sustainability and high nutritional value products, the key objective is to understand how consumer trust is linked to sourcing activities and the natural quality of agricultural materials. Jöhr felt the winds changing in the food and beverage industry. Business as usual would no longer suffice for the company, its customers, its broader stakeholders, and the planet. These new realities prompted urgent questions for Jöhr to address at the executive board meeting:

1. How does Nestlé develop, with other stakeholders, incentives on water and land management that are fair and equitable, so that current and future needs of the rural and urban populations are met?

2. How does Nestlé provide new development models that utilize current and future new technologies that can be accessible to all at every level of the food chain, at every stage of development?

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3. How does Nestlé develop better feedback mechanisms from every sector of the vertical food chain so that it can encourage the more urgent introduction of its products, with their improved nutritional components, for the improved health of its consumers?

4. How does Nestlé find impartial third-party evaluators of its programs who can measure and provide valuable feedback as to their impact on health, nutrition, economic development, and waste management?

5. How does Nestlé both compete and partner with entities in a changing, complex food system? In addressing the above issue, how does Nestlé accomplish progress at all levels of the food chain in terms of efficiency and creativity, to enable it to remain a profitable and competitive leader in the global food system?

6. How does Nestlé encourage the co-existence of alternative sources of supply from local unique organic crops to global multinational firms and farm cooperatives?

7. How does Nestlé encourage the development of genetically modified crops that both improve commodity productivity and improve nutrition in an environmentally sound manner?

8. How does Nestlé and its new human nutrition center help the consumer better understand the importance of food and its relationships to his or her health management needs?

The world has changed a great deal. Companies such as WalMart are demanding more from their supply chain in every form. Managers now take a systemic view of the global food system (see Figures 1–6). They want total shared value and are doing so with public-private-NGO partnerships that they never dreamed of needing to have. In addition, at every level of the food chain (from input technology to the end consumer), leadership on sustainability, health, nutrition, the environment, land, water, waste management, and economic development is expected as part of the “new normal“ business relationship. The demand for accountability and positive creativity in tackling these manifold expectations is also a new critical factor. A whole new industry of impartial firms that measure the results of these activities is being developed. How to manage these new private–public partnerships and how to instill these values throughout the company and how to provide compensation to managers who excel in these areas are again new to most companies. The legal profession has to find new ways of creating these new partnerships while protecting the unique creativity of the firms and their heavy investment in sensitive research. It also has to protect the independence of the public and NGO entities involved. Jöhr said:

We do need to capture this new world and the increased expectations that society has from Nestle and the expanded new leadership Nestlé must bring to this arena.

Nestlé has set the tone, has created the SAI Platform and has helped to establish a totally new level of awareness and standards on how to source and interact with farmers, traders and primary processors. It’s like we have created a new discipline within the “Olympic games” or global food system, not to say new levels of standards within several agricultural raw materials (commodities). Ten years ago I couldn’t have dreamed about such changes.

Obviously, the economic, political, and even social environment (and nature per se) changed a lot during the past years. These changes manifested themselves through different perceptions and media and our sometimes-wrong politics and inflamed crises, etc., which helped us to drive the Sustainable Agriculture Initiative at Nestlé and create the Creating Shared Value concept around the entire Nestlé group—not only on sourcing.

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Jöhr had a small magnet on his desk lamp that read, “Go—See—Think—Do.” This was his mantra, he explained—a cyclical pattern that fueled informed, reflective, proactive work. Eleven years after creating SAIN and its Farmer Connect program, it was time again to think. “We have a big tanker,” Jöhr reflected. “We need to know where the winds are blowing to set the sails: what are the issues for our stakeholders, especially our consumers? What is changing in our operating environment?”4 Nestlé leaders’ ability to predict and navigate these trends had far-reaching implications for the company’s continued success; the well-being of upstream producers, workers and communities; and greater sustainability throughout the global food system.

Nestlé’s Vision

Nestlé had an ambitious vision. It was a company that looked decades into the future to frame its strategic decisions. Far beyond food supply and even food security, the company saw that it could make a critical contribution to disease prevention and health science (see Exhibit 1). Most recently the company invested in Accera, an innovative medical food company. This was an unusual notion for a leading food company: not only could Nestlé sell high-quality and dependable products to its consumers, it could provide nutritional and health solutions. In orienting toward the future, Nestlé was also acutely aware of the trends that were shaping the food system. It built its strategy around the three core topics within the “creating shared value” (CSV) concept [www.nestle.com/CSV] most critical to their business: nutrition, water, and rural development. The company’s corporate business principles reflected these priorities and included particular commitments on agriculture and rural development, environmental sustainability, and water (see Exhibit 2).

Nutrition The first core topic, nutrition, was of paramount importance in a world plagued by both malnutrition and obesity (see Exhibits 3 and 4). In 2010, those suffering from hunger numbered 925,000,5 while chronic diseases were the world’s leading cause of death (see Exhibit 5).6 Recognizing the increased demand for available and convenient packaged foods, the company built nutritional solutions into its products. Given the critical role of diet in preventive health and disease management, Nestlé saw that its products and services could help foster healthful lifestyles among its consumers. This was a natural role for a company that had begun, in 1866, by selling infant formula to mothers unable to breastfeed their babies. Now more than a decade into the 21st century, Nestlé sought to “expand the boundaries of nutrition”:7 its most recent investments included the creation of Nestlé Health Science S.A. and Nestlé Institute of Health Sciences to target new opportunities at the intersection of the food and pharma industries. Accordingly, their creations were often called “nutraceuticals.” These organizations focused on what the company called “personalized health science nutrition,” developing nutritional products for health conditions such as diabetes, obesity, cardiovascular disease, and Alzheimer’s disease.8 In addition, Nestlé’s Clinical Development Unit, established in 2012, allowed the company to expand its clinical trials to assess the impact of its products on human health.9 In 2012 Nestlé also acquired a company that would allow it to research and develop “brain food,” medical food designed to improve mental functions such as memory and cognition. Nestlé Chairman Peter Brabeck emphasized that the company sought not only to extend consumers’ lives, but also to sustain the quality of those lives.10 Thus, from infant formula to personalized products for the aging, Nestlé sought to provide “nutritional solutions” to its customers throughout their life cycle.

Water Nestlé’s second core topic was the natural resource most vital to its operations. Yet water was being used at unsustainable rates—a growing crisis that Brabeck had taken on as his top policy priority. By 2005 the world was already using more water than could be naturally regenerated (see Exhibit 6), and Nestlé calculated that by 2030, water withdrawals would exceed natural renewals by 60%.11 Critically for the food and beverage industry, agriculture accounted for 70% of global water

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usage.12 As Brabeck summarized, “You need [to invest] 1 liter of water for any calorie you eat that comes from a plant, and 10 liters for a calorie that comes from meat. [In New England] each day we consume about 4,500 liters of water.”13 Heretofore a free resource for much of the world, water scarcity was often a tragedy of the commons: without incentives or collective action mechanisms for water stewardship, few users sought to limit their extraction. “Water is the most valuable thing in the world, and yet we don’t give it a value,” Brabeck observed.14 Though improved irrigation and other technologies could help producers reduce water usage dramatically, weak systems for transferring and incentivizing these practices prevented their wide-scale adoption.

Rural development Nestlé’s third core topic was rural development. The company was invested in this area because it recognized that many of the farmers upstream in its supply chain, as well as an emerging segment of its consumers, were constrained by the daily burdens of poverty and underdevelopment. Further, the poor often suffered the most in the face of the increasingly volatile food prices (see Exhibit 7) as well as natural disasters, which had increased in number and severity in recent years (see Exhibit 8). Investing for development made sense both for the company and for rural communities: highly productive and more resilient agriculture benefitted the company’s supply chain and increased farmers’ incomes; improved infrastructure enabled more efficient supply chain logistics and connected the rural poor to resources like markets, health facilities, and schools; and better health and nutrition among rural populations helped maintain Nestlé’s supplier and consumer base while improving life and economic productivity within such communities.

Background

Nestlé S.A. In 2012, Nestlé was the world’s largest food and beverage company. It ranked 40th on the Forbes Global 2000, with net profits of over CHF 9.5 billion in 2011 (see Exhibit 9).15 In the same year, it had 461 factories in 83 countries, with 328,000 employees worldwide.16 With brands including Kit Kat, Nescafé, Maggi, Lean Cuisine, and DiGiorno, the company’s agricultural raw materials sourcing totaled approximately CHF 21.7 billion each year (see Exhibit 10). With such wide scope came significant vulnerability. The company recognized that a risk to its producers had potentially severe implications for the company: “5,500 cups of Nescafe are drunk every second,” said Stefan Canz, a sourcing specialist in Corporate Agriculture at Nestlé. “This puts sustainability into a different perspective. If something goes wrong with the producers, we suffer.”17 Therefore Nestlé needed to manage risk and volatility, anticipating shocks to producers and the market; the well-being of its farmers was intertwined with its own. But, even while Nestlé pursued 5%–6% annual organic growth, it recognized the environmental implications of such expansion. Hitting this target would mean about 120,000 additional hectares of land in a given year, Jöhr calculated. “That’s like a new state in Switzerland. It means 100,000 more cows in Europe, or 500,000 buffalo cows in less productive regions like Pakistan.” Therefore, central to the company’s future was the question of protecting natural capital: “How do we use natural resources in a way that sustains growth and increasing our part of the world food system without jeopardizing natural capital?”18

The concept of Creating Shared Value (CSV) A dialogue had emerged over the last decades about companies’ interaction with society and the environment. Various approaches had emerged, including the “triple bottom line” and “corporate social responsibility.” While these concepts varied between actors, they were predicated on the notion that companies had responsibilities beyond their financial returns, and that they should divert a portion of their profits to invest in social and environmental programs. The Nestlé team saw it differently. Peter Brabeck, believed there was no place for philanthropy by businesses. “I have nothing to give back to society,” he explained, “because I have not been stealing anything from society.”19 The company recognized that its health and growth depended on having investment from its shareholders and a social license

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to operate; thus, it had to create both financial and social value.20 This approach was rooted in long- term strategic thinking: as the world’s largest food company, Nestlé was highly dependent on the communities and ecosystems that supplied its raw materials. Therefore, there was a business case for investing in environmental sustainability and social well-being. To capture this concept, Nestlé partnered around 2005 with thought leaders at the Harvard Business School and the social impact consulting firm FSG to introduce “creating shared value” (CSV) into the academic discourse. The company also adopted CSV as its guiding principle, as illustrated in its Nestlé Creating Shared Value Pyramid (see Exhibit 11).

Though CSV was new terminology, Nestlé explained that the same principles had driven the company’s strategy for decades. It pointed especially to its milk district models, a decentralized system of rurally-based delivery points that helped low-income dairy farmers access markets, reducing waste and increasing rural incomes. More recently, the company took the bold move of distancing itself from the obligation to report on short-term financial results. With near-unanimous shareholder approval, it changed the company’s articles of constitution, permitting it to withdraw from all stock markets that demanded quarterly profit reporting.21 This was part of the company’s efforts to take a holistic view of “success.” Hans Jöhr explained, “We’re not into charity; we have to measure the financials—but not exclusively. Financials are necessary like the oxygen in life. But imagine if life were only about oxygen.”22

The premise of CSV was at once revolutionary, logical, and aspirational, evolving out of the old corporate social responsibility. “We focus on creating shared value now, not on sharing created value anymore,” Jöhr noted. Its win-win premise had captured the imaginations of students, scholars, and practitioners. Perhaps there was a true opportunity to bridge the often stark divide between multinational businesses and the public sector, channeling private sector resources towards sustainable development for people, the environment, and business alike. This would represent a paradigm shift: forward-looking companies would recognize non-financial goals to be in their true long-term business interest. The idea worked because it was deeply logical. A company like Nestlé relied on the quantity, quality, and consistency of the materials it sourced. “We purchase 10% of the world’s coffee and cocoa production,” Stefan Canz of Corporate Agriculture explained, “therefore we depend on functioning ecosystems and a healthy environment.”23 Thus, safeguarding the natural resource base for production and investing in human health, capacity, and resiliency made business sense. Yet, elements of CSV were still aspirational. While business, social, and environmental well- being were mutually reinforcing in many areas, in some cases there was a negative net financial value for the company, challenging its ability to be competitive in current markets.

The Role of Agricultural Sourcing within Nestlé

Hans Jöhr could summarize his job in a single hefty objective: “to ensure the delivery of safe, quality assured, regulatory compliant, and competitively priced agricultural materials supplied through Farmer Connect to serve Nestlé’s brands and consumers.”24 But this summary masked enormous complexity. Hans Jöhr’s job was far more than a logistics supply chain: it was an integral foundation of Nestlé’s vision to be the world’s leading nutrition, health and wellness company. Sourcing had to be an enabler for this vision.25

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Creating the Sustainable Agricultural Initiative at Nestlé

Creation of SAIN and the SAI Platform

Nestlé’s concern for sustainable production was already embedded in the company’s agricultural portfolio. More than a decade prior, in 2000, Hans Jöhr and his team had created SAIN, the Sustainable Agriculture Initiative at Nestlé. SAIN encouraged good agricultural practices among its suppliers, providing technical assistance through a team of extension workers. These activities sustained and were fully aligned with the company’s later created CSV approach: productive farmers who were stewards of natural resources represented a more reliable and sustainable source of quality raw materials for the company. Though Nestlé in many countries does not legally contract with farmers, it described significant producer loyalty in the majority of its markets.

SAIN was designed as a bottom-up approach. Several barriers to sustainable agriculture were systemic, however, and necessitated broader changes in the industry and in policy. Therefore Nestlé joined with Unilever and Danone to create the Sustainable Agriculture Initiative (SAI) Platform in 2002. By 2012 the Platform, www.saiplatform.org, had 43 active members including Coca-Cola, PepsiCo, General Mills, Kraft, and McDonalds. These partners worked in pre-competitive and collaborative forums on sustainable agriculture, which they defined as a "productive, competitive, and efficient way to produce agricultural products, while at the same time protecting and improving the natural environment and social/economic conditions of local communities.”26

A Decade of Progress in Sustainable Agriculture

Calls for Sustainability in the Global Food System

Natural resource scarcity and climate change Nestlé’s sustainable agriculture activities were situated amid increasing international attention to natural resource scarcity and climate change. There was a growing body of evidence about such threats, accompanied by tools to measure the environmental “footprint” of a wide range of human activities. Shocks like the food price crisis of 2007–08 and the financial recession shook the world, prompting urgent calls for more sustainable practices in individual lifestyles and business operations. Many of the threats had already reached critical levels; among the most prominent issues overlapping with agriculture were climate change and deforestation.

In the first decade of the 21st century, climate scientists provided irrefutable proof of climate change and its links to anthropogenic, or human, activities. The problem was divided into two main issues: mitigation and adaptation. Mitigation focused on slowing or reversing the pace of global warming and associated climatic changes, while adaptation sought to address those threats that had already manifested. There were several key overlapping issues between climate change and agriculture. Production activities—especially where land was cleared of forest or cattle were reared— could generate high levels of carbon and methane, the two primary greenhouse gases. Indeed, agriculture and forestry activities together represented up to 30% of global emissions.27 Yet farmers also suffered many of the effects of climate change: natural disasters had spiked in number and increased in severity,28 and the majority of these had direct implications for agricultural production. Less dramatic changes, such as increasingly erratic rainfall, also had devastating effects. While U.S. farmers faced the worst drought since the 1950s in 2012, a highly-publicized hardship, countless smallholder farmers lost their entire harvest due to miscalculating when the rains would come.

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Forests also attracted significant attention as society began to appreciate their role in global climate change. Not only could forests absorb greenhouse gases—a critical counterbalance to emissions—but the activity of clearing land for agricultural production resulted in substantial emissions itself. Yet at the turn of the century there were few immediate incentives for preserving forested land when production on the same land would be profitable. During this period, governments such as Brazil’s made significant strides to reduce deforestation through legislation, international bodies like the United Nations designed financial incentives for preserving forest, and advocacy groups like Greenpeace pressured companies to prove that their products did not contribute to deforestation.

Trends in consumer demand The first decade of the 21st century also saw significant changes to consumer trends. The first concerned demographics: the global population hit 7 billion in 2011 and was projected to be 9.1 billion by mid-century. In 2008 the world became more urban than rural, a trend that was projected to accelerate especially in Asia and Africa (see Exhibits 12 and 13).29 And poor consumers in emerging economies were increasingly participating in markets as many emerged from poverty and businesses became more adept at reaching those at the base of the socioeconomic pyramid. And as the global population skyrocketed, farmers represented an ever smaller and older d

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