Spurred by climate change critics and sourcing difficulties, Ferrero built a unique advantage when it comes to raw material sourcing, and is ready to take it to the next level.
WHAT PIETRO FERRERO DIDN’T THINK OF IN 1944
When Pietro Ferrero invented a delicious, yet affordable chocolate spread in the 1940s, he probably didn’t know he laid the foundation for what is today a global confectionary business recognized by consumers worldwide, including brands such as Nutella, Ferrero and Kinder. What he probably also didn’t know was that his ingredients of choice – cocoa, hazelnuts and palm oil – would be under great pressure from climate change.
Palm oil, providing Ferrero’s products with their characterizing texture, is widely criticized for causing deforestation, thereby releasing greenhouse gasses that accelerate global warming. Whereas Ferrero only consumes 0.3% of global palm oil production, its brands were repeatedly attacked publicly as culprits of global warming, notably by France’s former minister of Ecology.
Cocoa and hazelnuts, on the other hand, are seeing decreasing yields due to changing temperature and precipitation patterns. While cocoa has a more or less global supply base, 70% of the world’s hazelnuts are grown in a small region in Turkey, making the crop particularly sensitive to local climate swings. As Ferrero purchases roughly one out of every four hazelnuts produced globally, climate change directly affects the Italian icon’s ability to procure one of its critical ingredients.
HOW FERRERO TURNED ITS WEAKNESSES INTO STRENGTHS
Where many consumer goods manufacturers are tweaking their recipes to accommodate the consequences of climate change, Ferrero took a fundamentally different approach. The Italians embraced their legacy recipes, and radically upgraded their supply chain.
Firstly, Ferrero became the industry’s role model when it comes to sustainable sourcing of palm oil. After implementing a fully segregated, RSPO certified, supply chain for sustainable palm oil in 2015, Ferrero is now rolling out the “Ferrero Palm Oil Charter”. This charter goes well beyond RSPO’s requirements and includes full traceability (up to the fresh fruit bunch) as well as community needs and economic benefits3. In doing so, Ferrero moved from a tactical buying approach to developing close relationships with suppliers, up to the point where they develop individual roadmaps for suppliers to achieve the charter.
When procuring hazelnuts, the makers of Nutella are taking a much longer-term approach to ensure accessibility to this critical ingredient. Through acquisitions, they have established a 25-30% market share position in global hazelnut supply, exactly matching their procurement needs. In addition, Ferrero established several programs to optimize hazelnut yields globally3, and identify new growing locations to reduce climate sensitivity, leveraging their own “nursery farms” and processing facilities. As a result, Ferrero is evolving from a large hazelnut buyer to the single most important supplier, processor and buyer across the entire hazelnut value chain.
There is no doubt recent achievements and ongoing initiatives will enable the Ferrero family to continue indulging the world, but there is more that can be done.
Firstly, there is a significant opportunity for Ferrero to own the palm oil debate and transform it into a competitive advantage. So far, they have – understandably – remained in the background. Recent efforts as well as Greenpeace’s public recognition6, however, put Ferrero in a unique position to communicate credibly to consumers worldwide about the benefits of palm oil (e.g. the fact that it is the lowest footprint vegetal oil once production is up and running2), and its efforts in leading the industry to a more sustainable future.
Secondly, Ferrero should expand its efforts in the hazelnut industry from merely ensuring sufficient supply to establishing clear sustainability standards, so far lacking. Claiming the first mover position in this space can further reinforce Ferrero’s leadership, and competitive edge towards consumers.
Finally, on a more controversial note, Ferrero should carefully evaluate its group strategy of not using GMO ingredients. While there continues to be a significant debate around possible negative consequences of GMOs, there might be opportunities that outweigh these concerns (e.g. weather resistance of hazelnut trees, yield improvement).
CALL FOR INPUT
Do you, as a reader of this essay, believe a company like Ferrero should be on the forefront of the sustainability debate, and lead discussions around e.g. the use of palm oil or GMOs? How can it do so without negatively impacting its reputation?
 D. Mitzman, “Nutella: How the world went nuts for a hazelnut spread”, BBC news, 05/08/2014
 World Wide Fund for Nature, “Why a scorecard?”, accessed at http://palmoilscorecard.panda.org/why-a-scorecard on November 8th 2017 and Greenpeace, “FAQ: Palm oil, forests and climate change” accessed at https://www.greenpeace.org.uk/what-we-do/forests/indonesia/faq-palm-oil-forests-and-climate-change/ on November 8th, 2017
 V. Wong, “Nutella Hogs Hazelnuts to Meet the World’s Insatiable Craving for Chocolaty Goodness”, Business week, 08/17/2014; A. Wexler, “Hazelnuts Stir Trouble in the Land of Sweets; Prices Double for Prized Chocolate Ingredient After Frost in Turkey”, WSJ, 12/05/2014; E. Teranozo, “Ankara’s buying to support producers lifts hazelnuts nearly 10% in two weeks: Commodities”, Financial Times, 05/10/2017
 S. Kroger, “#NutellaGate and the trade in deforestation” accessed at http://www.greenpeace.org/international/en/news/Blogs/makingwaves/nutella-palm-oil-deforestation/blog/53269/ on November 8th, 2017
 Case M.7340 – FERRERO INTERNATIONAL/ OLTAN GROUP Commission decision pursuant to Article 6(1)(b) of Council Regulation No 139/20041, accessed at http://ec.europa.eu/competition/mergers/cases/decisions/m7340_20140912_20310_3876537_EN.pdf , on November 8th, 2017
 “Ferrero invests $70 million in hazelnut project”, Retail World, 01/24/2014
 K. Hall, “How GMOs Help Us Address Climate Change”, Forbes, 09/29/2016, accessed at https://www.forbes.com/sites/gmoanswers/2016/09/29/gmos-help-address-climate-change/#6d5f940238e6 on November 8th, 2017