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NESTLE’S COMMITMENT TO A SUSTAINABILITY CHINESE

COFFEE INDUSTRY

NESTLE CSV BUSINESS UNIT

Roman Irurre – Wolfisberg, Creating Shared Values Manager

Jillian Watson

Andrew Winnett

Behlool Khan

CHINESE COFFEE FARMER

v  Family coffee farm, she does most of the intense physical labour

v  2 children under the age of 5

v  Living below the poverty line

v  Informally educated by father when she was a child

v  Unaware and un-accustomed to innovations available to improve farming

WEI, 30, Coffee farmer

NESCAFE’S COMMITMENT TO CHINESE COFFEE FARMERS

Key Issues Analysis Alternatives Action Plan Contingencies

Farming

Consumption

Financing

Legitimizing coffee farmer career by educating, training and empowering the youth of rural China c

Share farmer’s story through various media outlets & product labels, promoting programs through media in schools

Introduce Green Bonds to finance these initiatives

ISSUES WITH NESCAFE’S PLAN

ISSUES FACING NESCAFE’S PLAN


Farmers are slow to change behaviour

Which certification is resonates with

customers and aligns with Nestle

Younger generation not interested in

farming

Increasing demand may drive

unsustainable oversupply

Low margins associated with

farming

Lack of control over environmentally

sustainable supplier practices

Farming Production Consumption

ISSUES WITH NESCAFE’S PLAN


Farmers are slow to change

Which certification

Younger generation

Demand may drive oversupply

Low margins in farming

Lack of control over supplier

practices

IMPORTANCE à

UR

GE

NC

Y à

ANALYSIS

NESCAFE - TRIPLE BOTTOM LINE


Economic

Environmental

Social

Procuring 90,000 tons of green beans in accordance with Rainforest Alliance and the Sustainable Agriculture Network by

2020

 Nutrition – Water – Rural Production  $350 Total Investment

  v  Compliance of Farmer

Connect network

v  Doubling amount of green beans purchased

v  Distribute disease-resistant coffee

plantlets

Key Takeaway.. Nescafe has made significant progress with it’s CSV plan, but there is opportunity to implement initiatives that can be marketed to boost consumption of the products

90% of coffee sold is produced locally 40,000 tons produced in 2009 up from 20,000 in 2004


-

500

1,000

1,500

2009 2010 2011 2012

Retail Coffee Sales in China (US$ Millions)

SUPPLY & DEMAND IN CHINA

Key Takeaway.. Chinese coffee market is growing, and is expected to become one of the strongest markets. This is expected to further drive supply in this area

CHINESE FARMERS LIFECYCLE


Farming family raises children to

work on farm

Children learn from their elders on coffee business

As young adults these children are open to change

Young adults utilize technology to

improve production

Inspired young adults choose to stay on farms


improve production



Key Takeaway.. Chinese coffee market is growing, and is expected to become one of the strongest markets. This is expected to further drive supply in this area

ALTERNATIVES

ALTERNATIVES FOR NESCAFE’S PLAN GOING FORWARD


Work with Chinese farmers to improve productivity

Pay a premium for Chinese coffee beans using certification

Backward Integration into coffee farming in China

1.

2.

3.

1. WORK WITH CHINESE FARMERS TO IMPROVE PRODUCTIVITY


- Empowering coffee growers

- Furthering efforts to create a sustainable industry

- Solidify Nestle as coffee market leader in China

- Not using known certification

- Not easy to implement

- Have to provide higher prices to farmers


2. PAY A PREMIUM FOR CHINESE COFFEE BEANS USING CERTIFICATION

- Empowers & supports farmers

- Legitimizes product as sustainable

- Premium paid will be paid by consumer

- Oversupply of Fairtrade branded coffee already exists

- Costly (paying more to farmers)

- Makes Nescafe products more niche (potentially reducing sales volume)


3. BACKWARD INTEGRATION INTO COFFEE FARMING IN CHINA

- More control over supply chain

- Faster adoption of productive technologies

- Potential to reduce costs

- Low margins in coffee production

- Does not align with Nestle expertise

THE BEST ALTERNATIVE FOR NESCAFE’S PLAN


Weight Work with Farmers Certification Backward Integration

Farmers slow to change 0.3 5 3 4

Younger generation not interested

0.3 5 2 2

Lack of control over supplier practices

0.2 3 4 5

Low margins associated with farming

0.2 4 4 1

TOTAL 1.0 4.4 3.1 3

1 – Does Not Address 3 – Somewhat Addresses 5 – Directly Addresses



Farming

Consumption

Financing




ACTION PLAN

PLANNING FOR THE NESTLÉ'S FUTURE IN CHINA


Farming Consumption

FINANCING  Sustainable green bonds

 Issue approximately $50 million worth of green bonds

 10% of proceeds will be used towards rural development initiatives

 Bonds will be issued at the beginning of 2014

 Benefit:

•  financial resources

•  positive brand image

•  use and control of funding for initiative


FARMING Fostering innovation through incentives

Incentivizing farmers to attend Nestlé's existing Coffee Farming Institute

Farmers who attend and are able to prove* that they’ve implemented learnings receive an 18% premium on the purchase of their product

* Nestlé representatives will visit the farm of program attendees on a semi- annual basis to ensure standards and being met

Participating farmers will visit for a week and Nestlé will provide daily meals and transportation


FARMING Implementing a pipeline for the future

Re-capture interest in the coffee production industry by targeting youth through two streams:

1.) Camp Nestlé

Targeted towards children between the ages of 5 – 12

Camp Nestlé is a week long program that teaches children about sustainability (e.g. planting their own coffee beans, introduction to technology and how it aids production, tour of a coffee grower, etc.)

Targeted towards urban children


FARMING Implementing a pipeline for the future

Re-capture interest in the coffee production industry by targeting youth through two streams:

2.) Nestlé Work Away Program

Targeted towards 17 – 25 year-olds

Participants stay at a coffee grower for 2 weeks and are exposed to farming practices and the country side

Incentives include tours, accommodation* and culture exchange

* Nestlé will build accommodation on farms as required


CONSUMPTION Marketing and communications Corporate bonds

•  TED talk

•  Press release

•  News articles in relevant publications (Wall Street Journal)

Communication of rural farming initiatives

•  Story of female employee on packaging

•  Event: we sponsor a farmer’s market in urban centers, introducing customers to growers

•  Television commercial and print ad promoting the pipeline programs

•  Connect with schools and major employers


FINANCIAL COSTS

 Based on Fair Trade Premium   2320/Ton (original Price)   2800/Ton (Fair Trade Price)   Represents 18% premium   $480/Ton x 10,500 Tons   Represent approximately $5M in costs   $50M corporate bonds (10% of proceeds go to farming initiatives)

TIMELINE


•  Issuance of bonds •  Incentives for Farmers •  Camp Nestle •  Nestle Work Away

Program

Farming

•  Corporate Bond marketing initiatives

•  Rural Farming Marketing Initiatives

Consumption

2013 2014 2015

IMPACT ON CHINESE FARMERS LIFECYCLE

Farming family raises children to

work on farm

Children learn from their elders on coffee business



improve production



improve production




IMPACT ON NESTLE’S TRIPLE BOTTOM LINE


SOCIAL: Legitimizing coffee farmer career by educating, training and empowering the youth of rural China ENVIRONMENTAL: More control on supply chain and influencing sustainable changes in industry ECONOMIC: Given the potential for growth in China’s retail coffee market, we anticipate to capture an additional 1.6% of global coffee market by 2018

RISKS & CONTINGENCIES


Risks Likelihood Impact Mitigant

Overproduction due to premiums offered

Medium Supply > Demand Incentivize them to produce in manageable

amounts

Marketing efforts don’t resonate with consumer

Low Flat Sales Conduct increased market research to develop

appropriate campaign

Poor uptake of farmer training initiatives

Medium Future labour shortages, not uptake of innovations

Coordinate with Chinese government to promote &

subsidize education


Farming

Consumption

Financing




FINANCIAL PROJECTIONS

2010 2011 2012 2013 2014 2015 2016 2017 2018

Chinese Coffee Market -‐ -‐ $ 11,400,000,000

$ 12,572,114,751

$ 12,993,125,752

$ 13,428,235,435

$ 13,877,915,934

$ 14,342,655,192

$ 15,319,344,000

YoY Growth Chinese Coffe 10% 3% 3% 3% 3% 7% Nestle Mkt. Share -‐ China 69% 70.40% 72.70% 72.70% 72.70% 72.70% 72.70% 72.70% 72.70%

Nestle $ 16,732,800,000

$ 17,293,142,711

$ 17,872,250,002

$ 18,470,750,255

$ 19,089,292,895

$ 19,728,549,094

$ 21,072,000,000

Market Share 22.40% 22.6% 22.8% 23.1% 23.3% 23.5% 24%

Global Coffee Market $ 68,800,000,000

$ 74,700,000,000

$ 76,444,359,583

$ 78,229,452,639

$ 80,056,230,355

$ 81,925,666,134

$ 83,838,756,105

$ 87,800,000,000.00

YoY Growth* 8.6% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% *CAGR of 2.3% assumed from 2012-‐2018

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