How climate change put Ferrero in a unique position

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.

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[1], 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[2]. Whereas Ferrero only consumes 0.3% of global palm oil production[3], its brands were repeatedly attacked publicly as culprits of global warming, notably by France’s former minister of Ecology[4].

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[5].

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[6] 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[7]. In addition, Ferrero established several programs to optimize hazelnut yields globally3,[8] 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.

WHAT’S NEXT?

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[9] 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?

(725 words)

————————————————

REFERENCES

[1] D. Mitzman, “Nutella: How the world went nuts for a hazelnut spread”, BBC news, 05/08/2014

[2] 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

[3] Ferrero, Seventh report corporate social responsibility and broader CSR website, accessed at https://www.ferrerocsr.com/ on November 8th, 2017

[4] https://www.theguardian.com/environment/2015/jun/17/stop-eating-nutella-and-save-the-forests-urges-french-ecology-minister

[5] 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

[6] 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

[7] 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

[8] “Ferrero invests $70 million in hazelnut project”, Retail World, 01/24/2014

[9] 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

 

Previous:

Let’s Get Digital, Digital!

Next:

Too warm for the fleece: Patagonia’s quest for relevance amidst climate change

5 thoughts on “How climate change put Ferrero in a unique position

  1. FD, thank you for the article, it was a very interesting read. I would like to offer my perspective on the question you posed at the end. I firmly believe that a company like Ferrero has the responsibility to be at the forefront of the sustainability debate and lead discussions around topics such as the use of palm oil or GMOs. In fact, I actually believe it’s in their own best interest to do so. We live in an era of increased transparency: we, as consumers, are better informed and concerned about the impact the products we purchase have on the environment, and we publicly talk about it. NGOs are closely scrutinizing businesses all day long and they publicly talk about it. Governments are constantly examining the impact of the private sector in their own countries and they publicly talk about it. In our day and age, the dialogue around sustainability is inevitable. Therefore, I don’t think that by avoiding the sustainability debate is Ferrero hedging against the risk of a negative impact on its reputation. In fact, I believe it’s the opposite.

    In a different space, both H&M and IKEA (as we discussed in class) are examples of winning companies that are leading these discussions in a successful way (i.e., without negatively impacting its reputation).
    On the one hand, by leading this dialogue they are positioning themselves as a worldwide reference in the industry – positive and free PR as some people like to put it. On the other hand, they are also sending the message that “we are all in this together”, therefore, shifting the traditional confrontation between private companies and NGOs to a collaborative approach.

    All in all, in order effectively lead the sustainability dialogue from the private space I believe it’s a matter of 1) engaging the right stakeholders and partners with a long term and holistic approach (such H&M’s partnership with WWF) and 2) ensuring some accomplishments are achieved every year so that consumers and other stakeholders acknowledge the relevance, commitment and tangible impact the company has in helping move the conversation forward.

  2. As a frequent consumer of Nutella, I am fully in favor of Ferrero taking leadership on ensuring that hazelnut supply remains abundant for the forseeable future.

    The two questions you pose are particularly interesting given the scale involved. If Ferrero only consumes 0.3% of global palm oil production, why is it that they have been so criticized by the media? Is there a worse offender who is currently being overlooked by the public at large? For me, I’m not sure if Ferrero being at the forefront of the sustainability debate is necessarily a competitive advantage. I buy chocolate based on taste, not because of the company’s sustainability practices. I think in any sustainability discussion there is a question of where value lies — either in the tangible impact to the business, or the visibility to the customer and if that visibility will allow the organization to price higher or sell more units. In this case I feel like the majority of the value comes from the former.

  3. I agree with the author that Ferrero should be taking the next step in establishing standards for hazelnuts; as highlighted, the ability to have an upstream impact is key, and Ferrero has demonstrated success in doing so. However, responding to GA’s comment above as well as the author’s prompt, I agree that Ferrero lacks the scale to drive the palm oil debate. However, where Ferrero does have clout is within the confectionery industry. Using its position as a globally recognized, premium chocolate product, as well as one whose hazelnut consumption is well known, Ferrero can push for standards within the industry. Establishing industry standards for palm oil is more likely to have an upstream impact on the supply chain, as suppliers will have stronger incentives to meet RSPO guidelines should more of their customers care. While starting with a standard and then working on suppliers is the opposite order from how Ferrero has approached hazelnuts, the difference reflects the need to adjust their sustainability strategy based on their position in the market.

  4. Thank you for sharing! I agree with both Alex and Paula that Ferrero should be driving the sustainability debate. As I read your article, I recognized many parallels with the IKEA case we studied in class. In fact, Ferrero seems to have adopted many of the options IKEA faced in the case – from vertically integrating with hazelnuts and working with suppliers to meet stricter standards. Just as Alex prompted, I am slightly skeptical on how much influence Ferrero will have on the palm oil debate given its consumption is only 0.3% of world’s production. Yet, IKEA only accounted for ~1% of all industrial wood sourced on the planet and has been able to influence the supply chain.

    With regards to hazelnut, I agree that Ferrero should be strongly incentivized to invest in long-term sustainability goals and well-positioned to do so, but I wonder if being vertically integrated has conflicting short-term goals. Given they have matched exactly their procurement needs, will they be blinded in the short-term against investing in potentially more expensive, sustainable practices?

  5. Ferrero, is in an interesting position to use sustainability to its advantage and align it with Ferrero’s strategic goals. As you mentioned, the company is already chartering sustainable practices in farming using its “Ferrero Palm Oil Charter” and so should use this as a marketing tactic offensively (instead of just defending its use of palm oil when faced with criticism). You made the point that Ferrero could communicate this to customers better, but I think Ferrero could even criticize competitors’ use of palm oil irresponsibly to further maximize the marketing potential inherent in its use of sustainable practices.

    Ferrero could also use its own “nursery farms” for hazelnut growth to combat the long-term impact of global warming. As its competitors become susceptible to natural disasters and climate swings, utilizing a greenhouse or nursery could hedge against risks as other chocolatier’s face them with frequency. Perhaps Ferrero could also invest in storing or adding preservatives to hazelnuts so that they are even less impacted by the increased weather changes and natural disasters associated with climate change. As long as Ferrero can extricate itself from the stressors that its competitors face due to global warming, it can continue to maintain its competitive advantage and mitigate the effects of global warming on its supply chain and overall business.

Leave a comment