The cost of climate change: chocolate!
Mars, one of world’s largest chocolate producers, is indeed facing challenges as a result of climate change in sustainable sourcing of cocoa, one of the most important ingredients of chocolate making and in its energy consumptions in operations.
Climate Change might take away one of our most innocent and wonderful pleasures: chocolate. While the claim needs further validation as the topic of climate change itself does, Mars, one of world’s largest chocolate producers, is indeed facing challenges as a result of climate change in sustainable sourcing of cocoa, one of the most important ingredients of chocolate making and in its energy consumptions in operations.
As one of the world’s largest buyers of cocoa, Mars always holds a reasonable concern about the volatility of cocoa supply. One reason is the concentration of the supply, with four countries in West Africa-Côte d’Ivoire, Ghana, Cameroon and Nigeria- supplying two thirds of the world’s cocoa. Despite incessant political instability that cut cocoa supply by 70% in years of wars, aging and low-productive trees have also added to the concerns of local farmers. Climate change will only worsen the situation. For Ghana and Cote d’Ivoire for example, a study by International Center for Tropical Agriculture predicts that the temperature in those two countries will increase by 2 degree Celsius by 2050, which will accelerate the evaporation of water from the leaves and earth, leaving less water for cocoa trees and reducing its productivity. Another negative impact of climate change on the chocolate producer is the increasing cost of energy consumption. Mars operates across multiple touch points- factories, warehouses, distributors and retailers, and consumes tons of energy to produce, warehouse and transport its products. Under the impact of climate change, the use of fossil fuel has been increasingly regulated and criticized in its operation, which has and will continue to raise the cost of different touch points across supply chain. One example is the higher commissions charged by Mars’ distributors for warehousing and transporting its products due to the increasing cost in electricity and gasoline. Besides, the use of fossil fuel also has negative impact on Mars’ government relations. For example, in China, government officials are increasingly measured against greenhouse gas emissions reduction targets. To build strong governmental relation, which is key for doing business in China, Mars has pressure to push for more green energy alternatives to fuel its business.
To solve those challenges, Mars launched “Principle in Action” program with two specific focuses on building sustainable supply chain and operations. In raw materials sourcing specifically, the promise is to help agricultural suppliers produce with higher yields and quality, but with less energy and greenhouse gas emissions. It aims to purchase 100% of several key raw materials via independent certification programs such as the Rainforest Alliance and UTZ Certified. Several innovative scientific centers have been set up to improve farming and production method. On the operation side, Mars pledges to eliminate all greenhouse gas emissions from operations by 2040 and reduce emissions from product deliveries to retail customers as much as it can. By 2015, it has met its mid-term goal to cut greenhouse gas emissions by 25%. One major initiative that year included the establishment of a new wind farm in Mesquite Creek, Texas, which enabled the company to cut GHG emissions from consumption of purchased electricity, heat or steam by nearly 40%. The use of renewable energy has become the major way to reduce fossil fuel consumption in other factories, including sourcing hydropower from local and installing solar panels on the roof of the factory.
Moving forward, I think Mars has several opportunities to mitigate the negative impact of climate change and contribute to the environment. One thing that is happening but lacks consistent execution is to reduce energy waste in offices via better employee education. Mars has offices across 74 countries in the world, which consumes far more electricity and water than factories. Behaviors such as turning off lights before leaving the room or using water-saving toilet flush when you have a choice are not followed by employees. Energy saving from this area, while with huge size of opportunity, only requires investment on cultural and awareness reinforcement. Another opportunity includes changes in its operating model. De-seasonality of the business will help reduce unnecessary raw material, finished goods and energy waste during peak season where sales people are irrationally piling up stocks in distributors, which later resulted in large goods return and write off.
Climate change impacting cocoa production is scary because I, like many others I’m sure, love chocolate and don’t want it disappear or become too expensive in the future! While the information you have noted (such as a 2 d.c. rise in temperature) seems to suggest that cocoa production will be negatively impacted, I don’t necessarily agree. I believe that the production regions for cocoa will just shift from the African nations you mention to more higher latitudes with the right temperatures — who knows, Russia and North America may become cocoa production hubs! Some external reports such as the risky business report seem to suggest this for food grains and I assume it would hold true for cocoa as well. So, I would perhaps not worry so much about cocoa (thank god!) but instead, the livelihoods that would be lost if cocoa production moved from Africa to other regions!
Here’s the link to the Risky Business Report that I was mentioning earlier – http://riskybusiness.org/report/national/
Having developed chocolates from scratch, I have to disagree here with Saurav and Ryan. As Fangfang mentioned, the supply chain of cocoa from Ghana will be disrupted and this is important because Mars and other chocolate companies source specific cocoa from specific countries and farms for their products. Mars and other chocolate companies (Mondelez, Nestle, Ferrero, Lindt) have spent decades refining their product from extremely specific cocoa sources because of the impact of origin on product taste, texture etc. A shift in source of cocoa sourcing will be disastrous from consumer acceptance, brand impact etc.
That’s a fair point, Rohit. Agree with you that consumer acceptance may be challenging but I would not go so far as to make the assumption that the cocoa sourced from the new places will not be good enough for consumers to accept. If accompanied by a good marketing campaign that raises consumer awareness and as long as the chocolate still tastes good (why would it not?), I think consumers may gladly accept and all may still be well 🙂
I also wrote about Mars, so it was great to read a different perspective on how climate change may impact Mars’ business and operating models. Particularly, I hadn’t delved into how changing governmental regulations around emissions would impact their operations, so I liked that you highlighted this risk, with your example of how the Chinese government is increasingly measured around GHG emission reduction targets.
However, I have to disagree that Mars’ cacao supply is in serious risk. At the end of the day, climate change is going to varied impacts on the vulnerability of cacao crops in West Africa. While areas near the forest-savanna line in Nigeria and eastern Cote d’Ivoire are likely to suffer from increased temperatures that reduce or destroy cacao productivity, other regions – namely, the southern parts of Cameroon, Ghana, Cote d’Ivoire, and Liberia will be much less affected. [1] This is likely to result in a geographic shift in cacao production, but not necessarily a decline in the total volume produced. The challenge here is that Mars will likely be okay, but small-holder farmers will be the ones to suffer. One question to consider is: What responsibility does Mars have to support and invest in its current cacao suppliers, whose livelihoods will become increasingly vulnerable to the effects of climate change?
[1] Schroth, Gotz, Peter Laderach, Armando Isaac Martinez-Valle, Christian Bunn, and Laurence Jassogne. “Vulnerability to Climate Change of Cocoa in West Africa: Patterns, Opportunities and Limits to Adaptation.” Vulnerability to Climate Change of Cocoa in West Africa: Patterns, Opportunities and Limits to Adaptation. Science Direct, 15 June 2016. Web. 6 Oct.
Interesting article – thank you Fangfang! An additional concern I have for Mars chocolate would be the extent to which climate change may impact the prevalence of diseases and pests to cocoa plantations in Ghana and the wider horn of Africa region. Climate changes related changes in rainfall patterns have the potential to increase the incidences of pests and diseases in Ghanian cocoa plantations, significantly increasing the risk of poor cocoa harvests [1]. Therefore, in a similar manner to how Starbucks is investing in R&D to leaf rust disease-resistant coffee beans in Costa Rica [2], I would suggest Mars invest in R&D of disease-resistant coffee beans to hedge against the risk of supply shock that may occur if a disease epidemic were to ensue in their core coffee-plantation regions.
References:
[1] Assessment of Climate Change Impacts on Cocoa Production and Approaches to Adaptation and Mitigation: A Contextual View of Ghana and Costa Rica https://elliott.gwu.edu/sites/elliott.gwu.edu/files/World%20Cocoa%20Foundation.pdf
[2] “To Stop the Coffee Apocalypse, Starbucks Buys a Farm”, Bloomberg, 2014
http://www.bloomberg.com/news/articles/2014-02-13/to-stop-the-coffee-apocalypse-starbucks-buys-a-farm
The idea of de seasoning orders is a great suggestion which helps push supply chain efficiency and I am 100% up for that. However I must argue that this rule does not apply for just every industry, and chocolate production is one of them. Chocolate is such a seasonal commodity product that it’s almost impossible to even out customer demand throughout the year. [1] However since this is a traditional food, I would say forecasting the fluctuation of demand here is not that sophisticated. I would actually suggest that Mars invest more on forecasting and fulfillment tools to achieve higher forecast accuracy to drive down supply chain unnecessary costs.
Another complication is the nature of the products, chocolate is not something we can store easily and for a long period of time. Storing cost for chocolate itself is much more expensive than other normal commodities such as chair or table where the products have to be kept under certain conditions such as refrigerated warehouse.
References:
[1] http://timesofindia.indiatimes.com/life-style/health-fitness/health-news/Chocolate-demand-rises-in-festive-season/articleshow/24337225.cms
Great article Fangfang ! Having worked in the chocolate industry before, I distinctly remember how increasing cocoa prices (specifically from Ghana and Ivory Coast) affected our business plan and this was basically due to fluctuation in temperatures which further resulted in lower crop yields. As you have rightly mentioned, chocolate production is extremely energy intensive and one of the highest energy guzzling point in a chocolate supply chain is the cold chain distribution. (especially for emerging market countries like China, India). Do you think that Mars should go outside the scope of manufacturing to develop innovative solutions in cold chain management and retailing? In India, a company named Godrej came up with a very innovative solution called ‘Chotukool’ https://www.chotukool.com/ , a natural cooling mechanism which if utilized with phase changing materials can provide constant cooling to chocolates. This solution helps farmers in India to cool water with minimal energy. Also, the main challenge for CPG companies is consumer education on sustainability. Do you think Mars will go out of its way to educated consumers about what sustainability means ?
Thanks for the article, Fangfang. In your analysis you mention how two-thirds of the world’s cocoa originates from four countries in West Africa. With Mars as one of the world’s largest chocolate producers, I’m curious about how many of their production facilities are located within these countries and what business relationships they have with the governments, communities, and cocoa industry there. I think these considerations are of critical importance to Mars’ sustainability initiatives as the IKEA cases showed us how such operational change would require industry and likely government support. Research I discovered online identifies that Mars has at least a strong presence in Cote d’Ivoire as the company has committed to building about 75 Cocoa Development Centers in the country. I would assert that converting to more sustainable practices would require the buy-in and support from employees in those countries and government regulations. It would be interesting to know how sustainable manufacturing practices are currently used or viewed within the industry heads in West Africa.
Amazing post, Fangfang! Thanks for sharing your thoughts. I agree with you that cacao supply will change as a result of climate change but I share Ryan’s sentiment and I have to disagree that Mars’ cacao supply is at serious risk. There were several suggestions that were shared by Rohit, Ryan and Saurav above and I wanted to add two additional alternatives, that could help cacao cope with climate change.
One adaptation strategy could be increasingly growing selectively bred seeds that have superior drought resistance. Another strategy involves retaining and replanting other rainforest trees in the same areas as cacoa trees so that the rainforest trees can provide cacao trees with shade. This approach could help decrease temperature and evapotranspiration and provide protection from wind and soil erosion.
There is more information on the two approaches in the article below from the National Oceanic and Atmospheric Administration: https://www.climate.gov/news-features/climate-and/climate-chocolate