Nutella, Why U No Last Forever?
Nutella is one of the most globally loved tastes. The question is: Will it be around for our kids to love?
Shocking news for some of you out there: The great creation called Nutella is not produced by the Germans, but Italians. And some bad news: Nutella, produced by Italian chocolatier Ferrero and loved almost globally by every child and adult, may not be around for too long. The reason? Global warming, a phenomenon exacerbated by the need for one ingredient making up of the Nutella awesomeness, destroying the natural habitat of other two key ingredient crops.
Ferrero sources the best ingredients out there to produce its iconic product Nutella: Hazelnut from Turkey, palm oil from Malaysia, cocoa from Nigeria, and sugar from Brazil come together at one of the 20 factories across the world to create the unique hazelnut chocolate spread. The company consumes one quarter of the world’s annual hazelnut supply1.
Not for too long, it seems. Production of palm oil, a key ingredient to Nutella, is an exacerbating factor to global warming, which threatens production of hazelnut and cocoa, the other two key ingredients.
Palm oil is used in thousands of products that many people use every day, from baked goods and ice cream to household cleaning products and shampoo—and can even be found in fuel
tanks. Palm oil production often cause the destruction of carbon-rich forests and peatlands. When deforestation and peatland drainage occur to make way for oil palm plantations, the isolated carbon is released into the atmosphere as carbon dioxide, contributing largely to global warming.2
To what extent is the supply of cocoa and hazelnut affected by global warming?
According to PWC, the supply risk can be viewed in two dimensions3:
- The magnitude of impact of climate change on the commodity
According to International Center for Tropical Agriculture, vast areas of the world’s top cocoa producers will become less and less suitable for cocoa production as global temperatures climb up4. Studies have shown that hazelnut yields are also highly sensitive to temperature and highly dependent on constant rainfall5.
- The concentration of suppliers
If a certain area can no longer produce a crop, is Ferrero not a large enough organization to secure the supply elsewhere? Unfortunately, supply of both crops are very concentrated. Nearly two-thirds of the global crop comes from just four countries in West Africa: Côte d’Ivoire, Ghana, Cameroon and Nigeria.6 Turkey, the leading producer of hazelnuts and providing about 72% of the world supply, is one of three European and Central Asian countries which will be most affected by extreme weather events in the future7.
What actions should Ferrero take moving forward, as it faces an unsustainable model, inflicted partly by its own actions?
There seems to be three strategies, with differing levels of feasibility:
- Change the product mix to become less dependent on crops that are at high supply risk
In short term, this solution is the least feasible to implement. With hazelnut and cocoa key ingredients to almost all iconic products produced by Ferrero, it takes a long-term view for the chocolatier to largely move away from products that are dependent on cocoa and hazelnut. Also, this approach would mean moving away from the core company competency of producing fine chocolate.
However, given that global warming is highly likely to reduce global supply of both crops and hence increase prices; the company’s profit margins would benefit from mixing products with less supply risk such as dried fruit, to its chocolate products.
- Enforce sustainability in own supply chain
Ferrero is already a member of The Roundtable on Sustainable Palm Oil (RSPO), formed in 2004, the major certification body for palm oil. Though the RSPO provides criteria for “certified sustainable palm oil” (CSPO) and offers that certification, their standards do not yet represent the best science regarding forest conservation and carbon emissions. Certified sustainable palm oil is not guaranteed to be deforestation-free, nor is the destruction of peatlands banned2, 8. Clearly, given its market power, the company could advocate for higher transparency of palm oil sources within the organization.
- Invest in supplying from a larger number of producers that are geographically dispersed
Although production of cocoa and hazelnut seem to be under threat in the primary regions that source these crops, there are still other parts of the world that can produce or are expected to start producing these crops with the changing climate. Ferrero could take a longer-term view and look into sourcing from more suppliers; however this would have a negative effect on overall transportation and supplier management costs and does not necessarily guarantee secure supply of the crops as these new regions could also be adversely affected by global warming in longer time periods.
[770 words]
[1] Thanks to Nutella, the world needs more hazelnuts http://www.npr.org/sections/thesalt/2014/09/16/347749070/thanks-to-nutella-the-world-needs-more-hazelnuts
[2] Palm oil and tropical deforestation http://www.ucsusa.org/global_warming/solutions/stop-deforestation/palm-oil-and-forests.html#.WBvqk_orJPY
[3] Business-not-as-usual: Tackling the impact of climate change on supply chain risk http://www.pwc.com/gx/en/services/advisory/consulting/risk/resilience/publications/business-not-as-usual.html
[4] Predicting the future climatic suitability for cocoa farming of the world’s leading producer countries, Ghana and Côte d’Ivoire https://www.researchgate.net/publication/257548214_Predicting_the_future_climatic_suitability_for_cocoa_farming_of_the_world%27s_leading_producer_countries_Ghana_and_Cote_d%27Ivoire
[5] The effect of climatic conditions on hazelnut yield in Giresun (Turkey) http://www.marmaracografya.com/pdf/26.15.pdf
[6] Cargill corporate website http://www.cargill.com/corporate-responsibility/responsible-supply-chains/cocoa/index.jsp
[7] The calm before the storm http://www.wwf.eu/?255876/The-calm-before-the-storm
[8] Ferrero corporate website https://www.ferrero.com/group-news/Ferrero-Palm-Oil-Charter
I’m a huge Nutella fan, so very interesting write-up! I think out of all the options, I’d vote for #2 in the short term. It seems pretty ridiculous that they haven’t already enforced this standard–just seems like a minimum. Once sustainability measures are outlined, Nutella could look into investing in a larger number of producers that are geographically dispersed, and they would already have a set of guidelines for these new folks in their supply chain to follow.
I, too, am a fellow Nutella addict and completely agree with Rachel’s comment above. I would invest in strategies #2 and #3, while looking into #1 to see if any alternative ingredients could be used without compromising taste. That being said, other agricultural products used (e.g., almonds) might also suffer from the effects of climate change and be as limited in supply as hazelnuts and cacao trees. Additionally, it seems as though the makers of Nutella could band together with companies like Mars, Nestle and Hershey who are outside of the RSPO, but who also source cacao and other ingredients from the same regions. These companies would also be interesting in advocating for CSPO (and other sustainable agricultural standards) so as to maintain their supply chain long-term.
To me, all three options seem critical to a strategy that balances both short and long term considerations. First and foremost, I recommend option 1 – a shift away from palm oil to more sustainable sources of oil such as sunflower or soy. Both crops grow in a multitude of environments, maintain the low cost requirement of the company, and soy in particular replenishes nitrogen content in the soil and would be an important counterbalance to the deterioration of key compounds in soil through climate change degradation. They’re both also more nutritious for consumers (like me) who eat a lot of Nutella. Many agricultural companies have made significant shift toward more sustainable oil sources and it is time Ferrero did the same.
Second, to address the uncertainty in the cocoa and hazelnut supply chains, increasing sustainability of existing producers while geographically diversifying with new suppliers seems prudent. Ultimately, these ingredients are not replaceable if we’re going to keep getting that classic Nutella goodness. Any producer will need to have streamlined operations that continue to improve on their sustainability if they are going to last; by diversifying over the coming years, hopefully Ferrero can limit the risk that any one producer will be unable to meet their needs.
Fascinating read. While supplier security affects many of our food categories, you point out some really strong strategies, particularly around the product ingredient mix. Palm oil has now become a huge political issue for companies to manage as consumer groups firmly have their cross-hairs on it. It is claimed by many that the production of this ingredient has a double whammy effect: it takes away precious land from more staple-type crops, thereby leaving more people hungry, and also it has environmental ramifications. One needs to recognise though that the popularity of palm oil was primarily due to its cost advantage as a substitute to ingredients like cocoa butter which were much more expensive. Some clever chemistry could certainly help to find new substitutes no doubt, as the economics start to play against it.
Cocoa though is facing a large number of tangential issues. The no.1 threat in the short term is a people problem. Young people coming from farmer families don’t want to go into cocoa due to the fact that it is dangerous and not respected by communities; instead they choose to move to urban centres. In order for cocoa to be more sustainable, it is important to have companies like Ferrero, who also source cocoa for their chocolate products, become leaders in the arena of making farming more respected, safer and more profitable.
Fascinating and tragic! Would option 2 be sufficient to curb the impact of climate change on key supply chain inputs: cocoa and hazelnut?
Although Ferrero sits as both a contributor and sufferer of climate change, it may need to intervene across the entirety to mitigate product impact.
In addition, therefore, to producing more sustainable palm oil (or finding a chemical alternative, as is mentioned above), could Ferrero consider locking supply contracts in the future for cocoa and hazelnut? Nestle seems to offer a parallel, having set up its in house commodity price analysis teams (http://www.plasticstoday.com/content/hedging-corner-smart-chocolate/44411889815957).
It is not clear whether there might be the possibility of locking in such contracts so far in advance, but could represent an additional option if new regions are not able to bring new supply to the market.
We must save Nutella!! Interestingly enough, it may be urban legend, but Nutella purportedly started because there were serious shortages of cocoa during one of the world wars in Italy, so the company started substituting some of its cocoa with hazelnut in its chocolate spread, and now we’re thankful for it. I think Ferrero can take option 3 one step further: develop internal expertise in hazelnut, cocoa, and palm oil farming, scope out geographies in the world where growing these crops is feasible, and build the preliminary infrastructure and network so that the farms are large enough and self-sustaining for the long run. By moving upstream, they will maintain better control of their supply chain and also have the knowledge base to react to changes in climate over the long run. Granted, this is more expensive, but if done once correctly, this strategy could secure supply for years to come.
Fascinating read. I think you nailed the main challenges for Nutella going forward, with questions about its suppliers and the availability of the ingredients.
In terms of your proposed solutions, I think the main determining factor will be Nutella’s estimation of how quickly climate change will affect each of its ingredients. If they believe this will be a major concern in the next 10 years, I think option 3 is necessary for continued supply of its current product mix. But if their forecasts believe that either climate change will occur more slowly or that cocoa will only be greatly impacted once temperatures rise by an additional degree Celsius (for example), then longer term solutions may be most appropriate.
You mentioned for option 2 sustainability in its own supply chain. I wonder if there is also a place for Nutella to invest in new age agricultural techniques that may mitigate the affects of climate change on its main ingredients. Whether this includes the use of GMOs, different watering practices, or other farming mechanisms, these could produce an alternative solution to their climate change challenges.
Thanks for the post! I have never thought that Nutella might be part of the climate change, and your sharing definitely made me feel quite interested in how supply chain management could help on the climate change issues. I can think of several other industries having same issues, for example, the coffee supply chain destroyed the rain forest in South America. Change of product mix might be a bit challenging, but I like your idea to source materials from different places in the world to lower the potential impact level on a specific location. Going forward, as you mentioned, companies should really review their supply of raw materials to see that how each process or ingredient would make an impact from the global perspective.
Great post! And a great way to “popularize” the problem (*especially outside the US and the West in general, as it’s not such a high-profile issue elsewhere) – who doesn’t like Nutella?
This is also a part of a much larger issue – the future of agriculture in general. As the current geographic sources for many of the agricultural products become warmer and warmer, the production may eventually have to shift to the north. So even when/if Turkey becomes too hot for hazelnuts, maybe it can become a cocoa powerhouse, and Eastern Europe can take over the hazelnut production? I do believe there’s hope for Nutella :).
Jokes aside, this is going to be an enormous challenge for humanity. We can (barely) survive without Nutella, but staple crops such as grain, potatoes as rice, as well as livestock feed crops are not exempt either. The production will inevitably have to move away from the equator, into the northern and central Eurasia, northern US and Canada, potentially also Argentina and Australia (if it starts getting more rain).
Very interesting post! Although almost everyone in the world is impacted by climate change in way or another, I find it fascinating to hear about how businesses who rely so heavily on natural resources for their core product offering — such as Nutella / Ferrero — are preparing (or not preparing) to address the impact on their business strategy. I found it very interesting in this case that Ferrero is being impacted by climate change on so many fronts as its supply chain sources its key ingredients from all over the globe. Due to this global impact, I think that Ferrero’s best option is to invest in supplying from a greater number of producers who are geographically diverse, regardless of the costs. Option 1 does not seem viable to me as I believe changing its product / ingredient mix poses a significant risk to its business model given the distinct taste profile that drives consumers passion for Nutella today. Likewise, I feel that option 2 sounds good on paper but does not actually solve its resource problem in the long-run. Nevertheless, it will be interesting to see how Ferrero addresses this problem going forward. Until then, pass the Nutella!
Thank you for letting me know that my Nutella consumption has contributed to palm oil deforestation (and likely the death of several orangutans). I agree that changing the product mix isn’t feasible, but given the fact that Nutella has 25% of the market for hazelnuts, do you see a role for vertical integration in the supply chain? I see a few parallels to our TOM case on Ikea and sustainable wood. What’s different here is that hazelnuts may be viable in the future where they aren’t today, due to climate change, which (as you say) is a great opportunity for Nutella to diversify the geography of their supply chain.
The trends in global warming that could lead to the demise of Nutella are quite distressing to me, and so I appreciated your treatment of the topic. Given the widespread deforestation and harm to wildlife caused by the harvesting of palm oil, I would hope to see a change in the product mix of Nutella moving forward; so, option 1 seems most appealing. Of course, I would hope that this could happen without changing the taste or texture of Nutella. Given recent scientific advances that revealed yeast could potentially substitute for palm oil, perhaps there is a solution on the horizon. [3] If this panned out, perhaps we could enjoy our tasty Nutella and protect our environment simultaneously.
[1] https://www.theguardian.com/sustainable-business/2015/feb/17/scientists-reveal-revolutionary-palm-oil-alternative-yeast