As the world’s biggest food producer, Nestlé is grappling with giant-sized versions of two challenges faced by every one of its peers: high commodity prices and the management of complex supply chains, which are extending ever deeper into emerging markets.
Peter Brabeck-Letmathe, the company’s chairman, told beyondbrics that part of its solution is to build direct relationships with individual farmers across Africa, Asia and Latin America. It already has ties with 600,000 small farmers and it wants to double the proportion of coffee and cocoa they supply over the next five years from its current 7-10 per cent range.
Some of that coffee goes into the pricey capsules that are gobbled up by Nestlé’s Nespresso premium coffee machines.
In common with many of its peers, Nestlé has decided it cannot avoid raising the shelf prices across its product range: Brabeck-Letmathe said they would go up by 3 per cent this year, following a 1.6 per cent rise last year.
He also said that most of the company’s hedges – forward purchase contracts – do not extend beyond a year. In an age of long-term commodity “super-cycles,” this can seem a risky strategy, but agricultural markets have a tendency to turn on the next monsoon.
Nestlé’s relationships and contracts with producers – managed through some 17,000 “extension workers” or agricultural advisers – help to mitigate some of the effects of high commodity prices.
They give Nestlé better intelligence about what’s happening on the ground – it can find out, for example, where hybrid coffee crops have been introduced instead of pure strains. And they give it more bargaining power with commodities traders, the traditional middlemen who help it secure the rest of its supplies.
“Knowing what’s going on on the ground means better management of raw materials,” Brabeck-Letmathe said in an interview in New York.
This is not a new discovery on Nestlé’s part. The chairman noted that as long ago as the 1920s the company had factories working directly with milk producers in Brazil and parts of Africa. But in today’s business world it is all the more relevant.
Brabeck-Letmathe explained Nestlé’s policy in the context of its approach to corporate social responsibility in the developing world, adding that it would invest CHF 600m in rural development programmes through to 2020.
But he set himself apart from peers whose efforts come with over-the-top emotions by saying bluntly: “I do not need to give back to society because I have not been stealing from society … The CEO of a public company has no right to make philanthropy with the money of the company.”
Like rivals such as Procter & Gamble and Unilever, Nestlé is spending a lot of time and money developing cheap products that can be sold in small quantities to the world’s poorest consumers. Its Maggi chicken stock cubes, which sell for the equivalent of just a few US cents, are a prime example.
Nestlé’s focus on sourcing agricultural commodities directly helps small farmers to improve their livelihoods, but it also helps Nestlé – in more ways than one. “We need to help transform farmers into future consumers,” he said.-----
