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18-09-2010 01:01 Nestle Adapts To Web, Supply Challenges
By Agnese Smith
ZURICH (MarketWatch)--Swiss food giant Nestle (NSRGY) is having a good year.
Not only has the maker of KitKat chocolate bars, Gerber baby foods and Nespresso coffee recently reported better-than-expected financial results but also, it is enjoying an improved public image thanks to changes that highlight its increased concern about the environment and its relationship with some of its suppliers.
The company may have little choice. The threat of disruption in the supply of raw materials has forced international corporations such as Nestle to focus on ensuring future sources rather than paying lower prices in the short-term. The growing use of social media forums like Facebook and Twitter, and other Internet sites, has given Nestle an incentive to polish its image. Together, those factors might push the world's largest food maker to adopt a more enlightened self-interest.
"This is crucial," said Marco Gulpers, senior equity strategist at ING in the Netherlands, referring to Nestle's increased environmental and public awareness. "Sourcing could become constrained and companies that source well and market well will be the clear winners."
During the past few years, many raw materials prices have surged, thanks in part to rising consumption in Asia, where many economies are racing ahead. Prices for coffee and cocoa, two commodities that are essential for Nestle, have been on the rise for years. Coffee hit a high of $1.94 a pound on Sept. 14, its highest level since September 1997. Cocoa, which hit a record in December, has fallen back but is still trading at lofty levels.
The same is true for the price of wheat. A drought and wildfires in Russia have destroyed as much as a third of this year's wheat crop. Russia, one of the world's biggest wheat exporters, last month imposed an export ban, which sparked supply fears and drove prices sharply higher.
China recently surpassed Japan as the world's second-largest economy after the US, while economic growth in India continues to expand its middle class. The prospect of more increases in demand in the world's largest population centers and weather-related crop failures have sparked concern over global food supplies. Sustainability is back on the agenda both for the public and corporations.
Shared Value
For several years, Nestle has been promoting its Creating Shared Value philosophy, which maintains that it is in the corporation's best interest to develop bonds with the societies in which it works. "In order to create long-term value for our shareholders, we must at the same time create value for society at large," Nestle says in its literature.
The focus is on nutrition, water and sustainable rural development. Nestle says it's the same philosophy that has guided the company since the 1860s, when Henri Nestle developed a formula for babies who couldn't breast-feed.
But the sight of orangutan-suited Greenpeace activists disrupting its annual shareholder meeting and an Internet advertising campaign that features bloody orangutan fingers might also be a motivation. Earlier this year, Greenpeace staged several well-publicized demonstrations accusing Nestle of contributing to destroying orangutan habitat in Indonesia through its use of palm oil. More than a million people reportedly watched related videos on YouTube. The videos led to much vitriol against Nestle on social networking sites such as Facebook. Nestle declined to comment for this article.
Following the protests and the Internet response, Nestle said it was inviting a not-for-profit group to audit its supply chain and promised to end contracts with any company found to be chopping down rainforests to produce the oil. NGOs around the globe welcomed the move.
"Recently, the share of positive news compared to the negatives has increased," said Antoine Mach at Geneva-based Covalence, which measures corporate ethics. "In other words, the ethical reputation of Nestle has improved."
Nestle recently said it plans to invest half a billion dollars over the next 10 years to help coffee farmers. The company said it will provide technical assistance and high-yield, disease-resistant trees. It will also purchase more coffee directly from producers. The moves follow a plan to assist cocoa farmers in Ivory Coast, among the world's largest producers of the beans.
Observers say it's difficult to assess to what extent Nestle's CSV platform permeates the company and guides executives' overall strategy--or even if shareholders care about anti-corporate actions such as boycotts so long as the company does well. Nestle shares have risen about 7% so far this year while Switzerland's stocks market has fallen.
Battling Boycotts
While Nestle is popular with the financial community--it ranks among the most admired companies by business leaders, according to Fortune magazine--lots of people still loathe it.
As the world's largest provider of baby food, Nestle is roundly condemned by those who oppose the marketing of breast-milk substitutes. Breast-feeding activists such as Baby Milk Action in the UK accuse Nestle of failing to follow international guidelines on baby formula marketing, particularly in developing countries, and have sought to widen a boycott of Nestle products.
More worrying for Nestle, the boycott, which has been going on in various forms for more than three decades, has gained the support of some fairly influential--and mainstream--parenting forums like Mumsnet in the UK. The Internet group's public influence in Britain was illustrated in the last election, which was called by some "the Mumsnet election." Until last month, Mumsnet displayed the 'Ban Nestle' logo prominently on its home page. Managers are currently reviewing this policy pending talks with Baby Milk Action next month.
"Many of our members feel strongly about the way Nestle promotes formula milk in the developing world," said co-founder and managing director Justine Roberts. "Mumsnet is here to make parents' lives easier and we don't think Nestle's actions are compatible with that goal so we would rather not do business with them."
While Covalence's Mach says "noise" regarding Nestle's formula business has decreased in the past few years, it wouldn't take much to stoke interest. A number of parenting bloggers have registered their disapproval of people who do business with Nestle and criticized other bloggers. Even Hollywood star George Clooney, the face of Nestle's highly profitable Nespresso coffee system, has been criticized for his part in the successful coffee ads.
The Past Is Present
Part of the problem is that thanks to the Internet, Nestle's previous gaffes and public-relations breakdowns are all recorded and easily accessible. Just as individuals can no longer erase their past, companies are stuck with their histories.
One need only look at Wikipedia to get an illustration of the problem. Information about boycotts of Nestle products is prominent. The Internet also makes it easy to find news about one of the more cringe-inducing events, which occurred in 2002.
As Ethiopia suffered drought and famine that year, Nestle reportedly forced the cash-starved government to pay a nationalization fine that related to a German company it had taken over. Nestle said at the time that it was the principle of the matter, though it later claimed it was intending to give the money to charity all along.
How Nestle handles the relatively new forum of social media will also become increasingly important as it faces its critics.
The company's record so far suggests it will be a challenge to adjust. During the palm-oil demonstrations, discussions on Nestle's fan page on Facebook reportedly became heated, particularly after the company tried to force YouTube to remove the orangutan advertisements.
The incidents illustrate the difficulties facing consumer companies as they try to cope with news that goes instantly viral. And once an item is on the Internet or part of a Twitter feed, there it remains until something comes along to replace it.
In a recent report entitled The Third Industrial Revolution, ING's Gulpers wrote that food producers will materially benefit from efforts to act responsibly because an ever-growing number of sustainability-aware consumers will demand it.
"A revolution in marketing/sales is coming," Gulpers wrote in the report published in March. Many people "are no longer willing to compromise on responsible behavior from companies."
-Agnese Smith; 415-439-6400; AskNewswires@dowjones.com
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Dow Jones Newswires
September 17, 2010 19:01 ET (23:01 GMT)
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A management professor from the University of Zurich puts it bluntly: