Nestlé: Conserving Water as a Strategy to Sell More Water
Nestlé’s struggle to balance conserving water with maintaining a necessary level of control and access to water supply
Nestlé is one of the world’s largest suppliers of bottled water, with sales of CHF 7.6 billion in 2015 for their Nestlé Waters business. The company sells bottled water under its flagship brand Nestlé Pure Life and through local brands such as Poland Spring in the U.S., Buxton in the United Kingdom and Sta.Maria in Mexico1. Nestlé extracts water from the ground, which it then typically transports via pipeline to its water bottling factories before selling it on to consumers. However, this reliance on groundwater makes Nestlé’s business highly likely to be affected by climate change.
One of the primary impacts of climate change has been depleted water supply and concern for future water shortages around the world, due to melting glaciers and snowpack and changing patterns in rainfall2. A depleted water supply goes directly to the heart of Nestlé’s business, as lower levels of ground water mean there is less raw material available for Nestlé to produce its bottled water. Nestlé needs to make sure that its water supplies are sustainable and that it can adequately measure and manage the water it is taking out of the ground to sell compared to what is being replenished. According to the company’s projections, global withdrawals of water are expected to exceed the available supply of water by 40% in 20303. In order to manage this risk, Nestlé has implemented several initiatives to try to improve water efficiency across its entire business, not just the Nestlé Water business. Examples of these initiatives include introducing zero water technology at factories to reduce use of groundwater in operations, treating and recycling waste water, and instituting Water Resource Reviews. As a result, as of 2015, Nestlé had reduced their direct water withdrawal per product ton by 41% compared to 20054.
Another risk that could impact Nestlé in the short-term is the growing opposition to having corporations control water supply. Nestlé has already stirred up controversy in places around the world where local populations and environmental activists view Nestlé as appropriating natural resources that belong to local populations and then selling their own water back to them for a profit. During the drought in California in 2015, Nestlé extracted 36 million gallons of water from a national forest while only paying $524 annually to the government for the pipeline permit that transports the water from the source to their plant. Environmentalists are pushing for the government to prevent Nestlé from accessing the water until a study can be done to assess the water levels and how much can sustainably be removed from the ecosystem, as government officials acknowledge that “they have no idea how much water is too much to remove, because it’s never been studied”5. Issues such as these not only bring negative publicity to Nestlé and harm its brand, but also increase the likelihood of new potential regulations that restrict Nestlé’s access to water sources as governments either raise the price of allowing Nestlé access to land with large water reserves or limit Nestlé’s ability to buy rights to the water in the first place. As climate change continues to impact water supply, governments and the public will turn a more critical view to what entities are controlling the water supply and act against those they feel do not work in the best interest of the local population.
Nestlé does address climate change not only internally to make its operations more efficient but also externally to increase awareness and drive change outside of its own organization. The firm chairs the 2030 Water Resources group, which aims to address water supply issues by 2030, and is a signatory to the UNGC CEO Water Mandate, working on issues such as policy engagement and the idea of a human right to water6. These initiatives are a way for Nestlé to generate positive press and demonstrate to the public and the government that it does take climate change seriously and is as concerned as the public is about the depleting water supply. If Nestlé can be seen as a partner and collaborator in combatting the negative implications of climate change, rather than an exploitative actor that competes for these scarce resources, they can more easily protect their business interests and protect their own access to the water supply.
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Sources:
1Nestlé, 2015 Annual Review, p. 48, http://www.nestle.com/asset-library/documents/library/documents/annual_reports/2015-annual-review-en.pdf, accessed November 2016.
2Rebecca M. Henderson, Sophus A. Reinert, Polina Dekhtyar and Amram Midgal, “Climate Change in 2016: Implications for Business”, HBS N2-317-032 (Boston: Harvard Business School Publishing, 2016), p. 4.
3 Nestlé, Nestlé in society, p. 26, http://www.nestle.com/asset-library/documents/library/documents/corporate_social_responsibility/nestle-in-society-summary-report-2015-en.pdf, accessed November 2016.
4Ibid., p. 27.
5Regan Morris, “Nestle: Bottling water in drought-hit California,” BBC News, May 3 2016, http://www.bbc.com/news/business-36161580, accessed November 2016.
6 Nestlé, Nestlé in society, p. 28, http://www.nestle.com/asset-library/documents/library/documents/corporate_social_responsibility/nestle-in-society-summary-report-2015-en.pdf, accessed November 2016.
Thanks, Majken. I agree with you that this is a serious issue for Nestle and it was very interesting hearing about the conflict between increasing demand of water with global warming with limiting supply for Nestle. In your last paragraph, you say that Nestle should strive to be viewed as a collaborator and a partner to protects its water supply, but do you think that this is doable? I agree with you that it would be great, but I’m not sure whether they could actually achieve it. It seems that me that there an environmental group could call them out for being hypocritical.
It’s concerning to hear that water shortages could have serious impacts by 2030, which is in our lifetime. While I support the initiatives Nestle has done to conserve and recycle water, I’m not sure that this is enough. I think the real way to combat the issue is for people to stop buying plastic water bottles, which is fundamentally against Nestle’s business model. I’d be curious to see if they have seen a decline in sales as millennials seem to be more concerned about climate change than previous generations.
thank you Majken, this is a very interesting article! It makes sense that giant corporations such as Nestle would be trying to mitigate the effect of climate change when it directly affects their source of revenue. If there is only enough water for 7 billion people and it is unevenly distributed, what is your sense of things when you add the aggravating reality that it is privatised ? I guess my real concern here is how does this company integrate the fact that they intend to own most of the water supply int he world with the social responsibility of providing -specially in fragile communities- this basic human need? I get the feeling this company is concerned on finding better ways to access this natural recourse without being too disruptive and not so much on the conservation of it.
http://www.bottledlifefilm.com/index.php/the-story.html
Great post, Majken! Nestle seems to be on track to defend its water sources and to shield the company from negative PR by launching campaigns to bring awareness to the growing threats to drinking water posed by global climate change. What I find curious is that given the assumed water shortage issues the world will face in the near future, why isn’t company quietly doubling down on its bottled water business by acquiring more sources of potable water so that it can sell more bottled water to water-deprived areas of the world in the near future? Perhaps I’m just a terrible person, but there seems to be a massive opportunity looming to supply water to the world which a big company like Nestle could be poised to fill, assuming they can avoid too much heat from the press and regulatory bodies in the interim.
Thank you for the very insightful and thoughtful post. I’m curious to know if the actual expense of ground water has gone up significantly in recent years to reflect any of these climate change concerns? Although this is a bit of a heartless way to look at this situation, if Nestle actually owns groundwater or the rights to groundwater could this be viewed as a potential opportunity in the future? As water becomes more scarce is there an opportunity for Nestle to capitalize on owning an appreciating asset?
Regarding the issues raised with corporations controlling water supply, this is a huge threat to Nestle’s business, and one I didn’t appreciate. Water scarcity has been identified as the biggest global risk to society over the next decade. I see this issue becoming more contentious in the future. Have any countries successfully blocked Nestle from extracting water? It seems like Nestle will be on the defensive here, and even if the legally own the groundwater rights, its going to be a public relations nightmare for them if they look like they are profiting from the shortage.
Majken, thanks for this interesting post. I researched Nestlé from the perspective of its cocoa/coffee businesses and came across some of Nestlé’s water conservation efforts. On the agricultural side, I was disappointed to see little work being done by Nestlé to reduce their water usage in agricultural commodity processing. It is somewhat encouraging to see that Nestlé’s direct water withdrawal per product ton has declined by 41% since 2005, though I think much more could be done.
I found the California controversy particularly interesting. I wrote an insight about the topic when I was working at Gro Intelligence (https://gallery.mailchimp.com/30731ba6941f8414ea83c3aec/files/Gro_H2NO_Drought_April_10_2015.pdf) and could not believe how dysfunctional the California water permit system is. There are plenty of opportunities for arbitrage among senior and junior water permit holders (https://www.caseyresearch.com/articles/a-big-arbitrage-opportunity-in-california-water). These are the same laws which allow companies like Nestlé to pay so little in taxes. The corporations like Nestlé receive all the heat for this system, while smaller market players who exploit the arbitrage opportunity even more are unknown to the public eye.
I think the only resolution to this situation is for the State of California to revisit its antiquated water permit laws and establish new laws to properly value and tax what has become an exceptionally precious commodity. Otherwise, corporations and individuals alike will continue to exploit this opportunity.
Majken, it seems to me that you’ve chosen a really interesting topic. Water bottlers both provide access to water, which becomes increasingly important in a world affected by global warming, but there is a darker side to this seemingly socially-positive business. Especially in highland areas, transporting water is an energy-intensive process, and the by-product of producing large amounts of plastic waste is environmentally dangerous. One study found that bottled water is 2,000x as energy intensive as tap water! (http://phys.org/news/2009-03-energy-bottle.html). I would be interested in understanding regulatory threats to their business given the general social swing against bottled water.
Thanks for the article, Majken. While 70% of the planet is covered by water, only 2.5% of it is freshwater with a mere 1% being accessible. As you’ve alluded, continued climate change makes Nestle’s business vulnerable to changing water sources and availability. I found the California dilemma fascinating given the state’s aquifer is fundamentally shifting away making the state more of a desert and thereby increasing the value of the state’s vital national forest water source. Given these changing dynamics and Nestle’s dependence on water for its water products as well as its other manufacturing operations, I hope Nestle continues to be an outspoken leader in water sustainability and efficiency practices. While a 41% reduction in water use is certainly admirable, the company should continue to focus on water reduction techniques and encourage other multi-national conglomerates to follow. In addition to the Water Mandate and Water Resources Group, Nestle should champion a “Nestle” standard in water efficiency and preservation to ensure its viability and the viability of all other companies dependent on water for their operations.
Thank you for this very interesting article. Reading your article, I came to have an impression that Nestle is one of the companies that care about water issues most. Its efficient water use at factories, I guess through reusing water by treating it through multiple steps using membranes, ozone and so forth, is remarkable. I guess zero-water-technology has been implemented in partnership with leading water players such as Veolia (http://www.veolia.com/en/veolia-group/media/news/water-stress-water-used-effluent-milk-nestle). I am curious whether it would be an interesting strategic option for Nestle to “internalize” water treatment division, rather than outsourcing to the third party. Some beverage companies in Japan have had their own water treatment division, which is as competitive as or sometimes more capable than third party water contractors. When I was working at a water engineering company, we proposed to outsource water treatment function (including assets and labor) to our company, but that potential client chose to keep this function in-house. Like this example, there are some companies which choose to have water treatment function internally, so learning more about Nestle’s strategy in this regard would be interesting!