Nespresso’s AAA bottom line

As a Swiss company, it should come as no surprise that Nespresso has great timing. The single-serve pioneer, however, has taken this penchant for punctuality one step further. Nespresso’s consistency in being ahead of the curve has become as much a hallmark for the company as its distinctively coloured coffee capsules or, indeed, brand ambassador George Clooney. Established in 1986, Nespresso led the way in the single-serve coffee phenomenon that has been powering the domestic consumption of quality coffee for some years. The company’s position as market leader is so entrenched that at a recent meeting of some of the global coffee industry’s leading figures in Melbourne, one of Nespresso’s key European competitors used the company’s Clooney-fronted ad campaign as an example of exactly how to build brand loyalty. But Nespresso’s good timing goes beyond its creation of a brand new market segment. On the sustainability front, Nespresso, which is an autonomous arm of the Nestlé Group, has also managed to run ahead of the pack. Launched 10 years ago, the Nespresso AAA Sustainable Quality program is unique in that it was first conceived as an answer to the company’s business needs, rather than as a feel-good add-on to the product’s overall offer. “Without high quality coffee and product consistency, we couldn’t sustain the growth of Nespresso,” the company’s International Marketing and Strategy Director, Guillaume Le Cunff, tells Global Coffee Review. “Without sustainable farmers, we had some doubts about the sustainability of our value chain and, by consequence, for our business. So [AAA] was a business proposal first.” Nespresso estimates that just 1 to 2 per cent of the world’s coffee matches up with its quality  and aroma profile requirements. Le Cunff says because of the company’s completely vertically integrated structure, the need to secure that supply was imperative. “To address this business concern, our company decided to create and organise a program to make our value chain more sustainable,” Le Cunff says. The result is AAA, a co-creation between the company and Rainforest Alliance. Le Cunff says this is one of the points of difference between AAA and other certification programs, which can function as an end in themselves, rather than as a framework for doing business. “Certification is a point of  reassurance for consumers, so I think [AAA]  has a lot of value for many customers, but it can also be confusing because you have a lot of different types of certification available,” Le Cunff says. “The certification is serving as a diploma for farmers, but the end-game [with AAA] is to have the farmers using the right level of sustainable farming practices on a dailybasis on their farms.” The AAA program is built on three pillars – quality, sustainability, and productivity. While Nespresso sets the quality requirements according to its own coffee sensory profiles, the sustainability aspect is informed by the standards of the Sustainable Agriculture Network (SAN). These standards include both social and environmental criteria, with those farmers who achieve them also enabled to apply for Rainforest Alliance certification. Le Cunff says these SAN standards are a target for aspiration rather than a starting point, which is the quality of the coffee. “We are going out to find the coffee we need, not the other way around. We cannot go to farmers and tell them, ‘you have the coffee we want, but now you need to go away and get certified and then come back to us’,” says Le Cunff. “You cannot ask a smallholder farmer of one hectare in Colombia to reach the SAN standards in two days. It’s a long journey for them, so it’s all about defining where they stand when they’re entering the program: what are the gaps that they have to face to get up to the SAN standards? It’s also about bringing them the assistance and training so that over time they can close these gaps and reach the right level of practices.” This approach seems to be working. Nespresso has a target of sourcing 80 per cent of its coffee from AAA farmers by the end of 2013, which Le Cunff says, they will definitely achieve. This will build on the 52,000 farmers Nespresso currently works with in eight countries – Brazil, Colombia, Mexico, Costa Rica, Guatemala, Nicaragua, India and most recently Ethiopia. Another plank of the program’s sustainability platform is improving farmer’s livelihoods, which also ties into the third pillar, productivity. Nespresso already pays AAA farmers 30 to 40 per cent above the market price for their coffee, which is 10 to 15 per cent above the price of coffees of a comparable quality. However, Nespresso’s approach goes beyond simply paying a premium for good coffee. Drawing on the findings of a study by the INCAE Business School in Costa Rica that showed the key driver for a farmer’s profitability is not price, but quality and productivity, Nespresso has developed its own concept called Real Farmer Income. This framework aims to increase the net profitability of farmers by equipping them with the knowledge and technology they need to improve the quality and productivity of their farms. “We are rewarding the improvement of the farmers,” Le Cunff says. “Each time they lift their standards and improve their quality, they are sure to sell their coffee to Nespresso, because we purchase the coffee they are producing as soon as they reach a certain level of quality.”                           This assistance has yielded real results – not just for Nespresso, but also for the farmers themselves. A May 2013 study conducted by Colombian research firm, the Centre for Regional Entrepreneurial and Coffee Studies (CRECE) found that in comparison to other farmers, the lives and businesses of AAA farmers were measurably better on a range of key indicators.
Evaluating the scores of AAA farmers against non-AAA farmers on three indices – social, environmental, and economic – the study found marked advantages for the AAA group in all three. Using a points system, CRECE found that AAA farmers were 22.6 per cent better off than the control group on the social index, 52.1 per cent better off on the environmental index and ahead by 41 per cent economically. This is the second time the study has been done, with the results also showing that the positive outcomes for AAA farmers were growing over time relative to the control group. Interestingly, more research by CRECE and other partners in Costa Rica, Mexico, Guatemala and Nicaragua into the relative effects of the coffee leaf rust crisis on farmers in Central and South America found that AAA farmers were consistently better of than their non-AAA counterparts. In Colombia, the study showed that 49 per cent of non-AAA farms were affected by the disease, as opposed to 33 per cent of AAA farms. According to the report, AAA farmers also receive 40 per cent more technical support than other farmers, which has directly improved their ability to deal with the crisis. Of course in the general marketplace, Nespresso faces numerous challenges, with the number of competitors in the single-serve market growing rapidly over the past few years. Figures from international research firm Euromonitor show that while the global markets for coffee pods has grown explosively – from US$2.4 billion in 2007 to more than US$8 billion in 2012 – Nespresso’s market share has been declining steadily, from 33.9 per cent to 25.8 per cent over the same period. However, while the company does not release its sales figures, Nestlé Group’s 2012 Annual Report states that Nespresso continues to experience double-digit growth, making it the group’s fastest growing brand. As Le Cunff points out, however, the company’s vertically integrated business
model dictates that it is not just the growing competition that the company must manage, but also how it plans for growth. Nespresso places a great emphasis on maintaining long-term relationships with farmers, meaning the company must manage any expansion very carefully.
“The challenge is not to be overpromising,” Le Cunff says. “If we have too many farmers joining the AAA program and we are not managing to sustain or support this promise, we are destroying these values.” However this will not dull their ambition. “We are engaged in a long-term journey – sustainability based on the principle of continuous improvement. You can imagine the logic, coming from 80 per cent [of coffee sourced from AAA famers], is to bring some more ambition to that,” Le Cunff says. “Of course we are thinking about how to make that 100 per cent AAA. This should be seen as the end game for us.”