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Can Nestle be a Good Global Citizen?

Nestlé_GF_GL-300dpiBy Alan Bright, Judy Buhrman, Jenni Ellingson, Jon Harrop, Marra Longo, Anu Narayan

Switzerland-based Nestlé, SA, touts itself “the world's leading Nutrition, Health and Wellness Company.” Their mission, described as "Good Food, Good Life," is to “provide consumers with the best tasting, most nutritious choices in a wide range of food and beverage categories and eating occasions.”[1] However, their size and global ubiquity is also marked with a checkered past of questionable marketing and sourcing practices in the developing world, which has long made them a target of boycotts by human rights watch-groups. In the 1970’s Nestle gained notoriety for its role in the well-known Nestlé baby formula scandal, in which predatory promotion methods that targeted poor mothers were linked to deaths and malnourishment among infants in lesser-developed countries (LDC’s). More recently, Nestlé has come under fire from groups like the International Labor Rights Fund, Global Exchange, and Green America, for its failure to ensure that its commodities, such as cacao, are purchased from suppliers that do not exploit child labor.[2] In spite of a 2005 pledge to eliminate child labor from their supply chain by 2005, Nestlé’s Chairman and former CEO Peter Brabek-Letmathe recently called such a goal “nearly impossible.”[3] Emerging markets play an increasingly important role in Nestlé’s portfolio and global strategy Nestlé’s vulnerability to public relations attacks – and apparent inability to account for all of their global business practices – is due in part one of their biggest strengths as a global corporation: the flexibility and independence they have accorded to their subsidiary operations in emerging markets.

According to a recent Nestlé press release, developed markets grew by 3 percent in early 2011, while emerging markets achieved double-digit growth approaching 12 percent. Sales in developing economies account for approximately one third of the company’s revenue, and Nestlé’s aggressive acquisition strategy, which is closely aligned with their R&D investments, is highly focused on these markets, which offer the greatest growth potential.7 Most of all, these markets may offer the greatest opportunities for the innovation and improved efficiencies that Nestlé expects will drive growth in the future. Experiments with supply chain approaches in LDCs, as well as new sales and marketing strategies, are paying big dividends, and earning the company access to the dynamic and growing segment of urban and rural poor that, at 4 billion people, make up the largest market in the world – collectively referred to as the bottom of the pyramid (BOP).[4],[5]

As Nestlé seeks greater BOP penetration, a it would seem they are acknowledging their hard-learned need to anticipate assaults on the wholesome brand image they would prefer to cultivate.  The company has begun to demonstrate an interest in aligning its business interests with social good in what they have termed  “Creating Shared Value” with their global suppliers Nestlé asserts in their 2010 Report, Nestlé and the United Nations Millennium Development Goals that as a basic business principle “they can only create value for the shareholders if at the same time they create value for society.”  Drilling down, the company has identified nutrition, water, and rural development as focus areas for optimizing this “social value creation.”[6] These are human and infrastructure issues that are critical to developing sales and supply channels in new markets, but which are also high-profile social issues that provide an opportunity for Nestlé to demonstrate that it can also be a good global citizen.

The opportunity. The discretionary incomes of the nearly 4 billion people around the around the world making less than $3,000 USD may not seem like much, individually, but globally, BOP spending adds up to an estimated $5 trillion that is increasingly attractive as growth in developed markets slow. A breakdown of the markets segments among BOP economies, including health, communications technology, transportation, water, energy, housing, and food sectors, shows that food is by far the largest at about $2.9 billion.[7] This fact has not been lost on Nestlé, which is attempting to position itself at the forefront of product and packaging innovations that cater to and provide better value to the poor. Consumers in these markets often do not have the cash flow to buy in bulk, and have traditionally paid higher unit prices for identical goods, when appropriately packaged. In India, Nestlé’s Maggi line of noodles is an example of a product designed and priced for the poor, and the company’s “cube Maggi” bouillon is a staple seasoning in dishes throughout Africa, the Middle East and Asia. Nestlé’s Nescafé brand has also trended toward individual serving sizes as a means to make the company’s flagship product more affordable and available to emerging market consumers.

Nestlé’s future focus would seem to lie primarily in innovating improvements in its supplier-buyer dynamics – and emerging markets offer enormous potential for. When it comes to the corporation’s global reputation, though, its supply chain activities are the area where Nestlé has the most potential for gain, and risk. For example, Nestlé is the third largest exporter of cacao products from countries known to have exploitive child labor practices.[8] Nestlé views responsible sourcing as an internal procurement process for their buyers to ensure that suppliers meet the requirements of their Nestle Supplier Code – a centerpiece of their new “Creating Shared Value Program.” Operationally, this includes audits of suppliers’ sites.[9] Human rights activist groups, though, continue to challenge Nestlé to make these responsible sourcing audits transparent, and to involve third-party verification.

Multinationals need a stable and affordable supply of raw material, but in countries like Cote d’Ivoire and Ghana, aging cocoa trees and plant disease are leading to supply challenges. Productivity is declining, and political risk, drives up prices even more. The result is a situation where it is in the interest of multinationals like Nestlé to support farmers to grow more and higher quality product in a sustainable manner. Nestlé’s partnership with World Cocoa Foundation is an example of how the private sector can address supply chain challenges responsibly. Nestlé has created a Cocoa Plan to guide millions of dollars in investment to encourage plant science and sustainable production in Ecuador, Venezuela and Cote d’Ivoire, which are the world’s largest cocoa producers. Nestlé hopes to help farmers run profitable farms, operate respectfully and harmoniously with the environment, and enjoy a better quality of life by making bigger profits and sustaining jobs, which can be carried on by their children. In this case, competitors have come together to face this critical supply issue and have helped develop and roll out trainings on improved farming practices. These include more environmentally friendly practices such as integrated pest management as a system to reduce pesticide use. The collaborating firms are also contributing to research on disease resistant trees and grafting techniques to introduce new high-yielding varieties.

Cacao is not the only commodity where Nestle is further integrating with suppliers to help improve raw material flows. Palm oil sourcing has presented public relations challenges for the company due to allegations of deforestation and child labor, and this has forced Nestle managers to implement new initiatives that give them more control over and information about their supply channels. Nestlé responded to its palm oil sourcing problem by partnering with The Forest Trust (TFT) in order to develop responsibly sourcing guidelines and to assure that their products will not be sources of deforestation anywhere. Similarly, Nestlé has teamed with other international organizations such as the Round Table on Sustainable Palm Oil. They are focused on combining their extensive knowledge from R&D expenditures with that of their partner organizations.  By undertaking in-depth analysis of their palm oil supply chain, Nestlé has worked attempted to improve transparency and come up with actionable plans.[10]

From these examples, what is clear in their operations is that Nestle is taking corporate social responsibility increasingly seriously, both for the economic and image benefits they are reaping. To implement their programs, the company has engaged a network of approximately 800 agronomists to work with farmers to improve productivity through adoption of improved farming practices. The solutions are simple, cost-effective changes that can make a positive impact on farmers’ incomes. Other initiatives include training on improving food safety and handling standards with women’s groups in Pakistan, local refrigeration hubs in India to help cut down on transaction costs for dairy farmers, and establishment of microcredit funds to support investment in agricultural infrastructure.[11]

Buyer-supplier relationships are often complex, but the new economic rationale behind “responsible sourcing” are relatively simple. Empowered suppliers will have enhanced incomes that will improve the security and quality of their supply chain. This will also improve livelihoods indirectly in the these BOP communities, allowing them to become greater consumers, as well as suppliers of Nestlé products – improving company synergies, including efforts protect the environment, and investments in the social welfare of supplier communities. However, this ethic is far from embraced at every level of the company. Brabek-Letmathe recently stated, “I think anybody who does philanthropy, should do it with his own money and not the money of the shareholders."[12] These attitudes at the highest level of the company shed doubt on the authenticity of the global giant’s commitment to improving their record in the developing world.

Protecting and rehabilitating the global brand. Nestle has a checkered past, with its damaging infant formula scandal at the root of a decades-long boycott that is ongoing. Its strategy of taking a more active role in the activities and profitability of its supply chain, and enforcing a corporate ethic throughout its subsidiarie,s has put the company on the right path, but vigilance is essential. Public relations have changed significantly with the popularization of social media.  Protesters have posted negative videos on YouTube, deluged Nestlé's Facebook page and peppered Twitter with claims against Nestlé, such as that they are contributing to destruction of Indonesia's rain forest. Nestlé’s most recent public relations debacle resulted when critics of Nestlé began posting altered Nestlé logos, which offended the company. Responses from Nestlé included: "To repeat: we welcome your comments, but please don't post using an altered version of any of our logos as your profile picture--they will be deleted."[13] A defensive and confrontational attitude only fuels critics’ ammunition against the company by making Nestlé appear insensitive towards these issues.

For company like Nestlé to change entrenched global operations is a tall order, and one that will take time. The vast scale of Nestlé’s presence in developing markets demands an authentic investment in finding solution to the supplier-buyer dynamic in both Nestlé’s efficient supply chains, and ethical consumer relationships. In the meantime, Nestlé could work on improving their responses to the negative publicity, particularly in regards to the Facebook incident. Nestlé could take a look at other companies, such as Starbucks, and the Body Shop that have successfully implemented an integrated approach to responsible sourcing in the developing world. Social media should be seen as a way for Nestlé to show their human side – not just a liability to manage.

It will take more than a few development projects and rigid Facebook logo management to improve Nestlé’s CSR reputation. Consumers are increasingly savvy to “greenwashing” and PR-intensive CSR with damage control as a primary motivation. Specifically - pervasive social media, corporate responsibility watchdogs, and influential web bloggers have leveraged criticism from human rights organizations against Nestlé. Legitimate complaints against Nestlé include the company’s resistance to any third-party oversight; Nestlé’s internal metric of social responsibility may be neither stringent enough to impact the lives of BOP supplier communities and consumers, nor particularly credible given their history. In light of this, the company will need to undergo operational and business strategy changes in order to improve their true impact in the global BOP community and ultimately their public image. Nestlé needs to work closely with its subsidiaries and incorporate middle and lower management solutions, gain the ideological buy-in of their Board, and ease their resistance to third-party accountability, as they work toward adhering to their own internal standards of social progress.

Appendix

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Chart 1: BOP market breakdown -     http://archive.wri.org/image.cfm?id=2768


[1] http://www.Nestlé.com/AboutUs/Pages/AboutUs.aspx

[2] www.greenamerica.org

[3] Josephs, Leslie. “Nestle: ‘Nearly Impossible’ To End Rural Child Labor.” Dow Jones Newswires. 22 Mar 2011.

[4] http://www.businessweek.com/news/2011-04-15/Nestlé-sees-profitability-improving-after-sales-beat-estimates.html

[5] http://www.Nestlé.com/RandD/GlobalNetwork/Pages/GlobalNetworkPage.aspx?Region=Global

[6] http://www.community.Nestlé.com/Pages/focus.aspx

[7] http://pdf.wri.org/n4b_chapter1.pdf

[8] “Cacao and Child Labor.” http://www.laborrights.org/files/cocoakit1_2.pdf

[9 http://www.Nestlé.com/CSV_Old/RuralDevelopment/ResponsibleSourcing/Pages/Responsible-sourcing.aspx

[10] http://www.Nestlé.com/Media/Statements/Pages/Update-on-deforestation-and-palm-oil.aspx

[11] Rowenna Davis.  (2010, January 27). Self-interest drives new attitudes to agriculture. Financial Times,3.

[12] http://www.foxbusiness.com/industries/2011/03/22/nestle-nearly-impossible-end-rural-child-labor/

[13] http://www.bnet.com/blog/businesstips/Nestlés-facebook-page-how-a-company-can-really-screw-up-social-media/6786

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.