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Mars report Document Transcript

  • 1.  Evaluating Policies and Actions on Cocoa Sourcing and Marketing & Health Issues Page No. 1 of 8 London 2013 Mars Evaluating Policies and Actions on Cocoa Sourcing and Marketing & Health Issues Travis High
  • 2.  Evaluating Policies and Actions on Cocoa Sourcing and Marketing & Health Issues Page No. 2 of 8 London 2013 1. Executive Summary Historically consumed as a special treat, chocolate bars are now a regular delight for consumers worldwide and mean big business. However, several externalities have been revealed in the cocoa supply chain. The focus in this paper is on ethical sourcing on the back end and nutrition challenges at the consumer level. As the world’s largest chocolate supplier, Mars is an interesting company on which to base an analysis of the policies and actions of a major chocolatier. This paper will first review the Mars context, second, its business model including the Five Principles and its supply chain, third, how it stacks up against its competitors on cocoa sourcing, fourth, its promotion of consumer health, and finally, some concluding remarks on the case for change. 2. Mars: History and Financials Mars, Inc. is one of the largest privately owned corporations in the United States and is based in suburban Washington, DC. Begun in 1911 by Frank C. Mars in Washington state, the company is now is a multinational corporation and features six divisions: Petcare, Chocolate, Wrigley’s, Food, Drinks, and Symbioscience. (Mars, n.d.) The focus of this paper is on the operations of the Chocolate division. The estimated value of the company was $30 billion in 2012. (Yahoo! Finance, n.d.) As a private company, further information on its financials are not available, but the Mars founding family is known to be among the wealthiest in the U.S. In the global confectionary market, Mars is the market leader in a crowded, fragmented market, as seen in Table 1. (MarketLine, 2012) Chocolate accounts for 52.6% of the confectionary market value. Table  1   Global confectionary market by value, 2011 Company % Share Mars, Inc. 16.8% Kraft Foods, Inc. 15.4% Nestle S.A. 9.1% The Hershey Company 6.8% Other 51.9% 3. Business Model Mars Chocolate has a business model based on commoditization of chocolate candy bars, to be sold in grocery and retail stores worldwide. Similar to Coca-Cola, the aim is to have a universal presence in order to be top-of-mind. As a commodity, the pricing strategy is to price low in order to be competitive with other offerings. 5 Principles Mars has a set of five core principles on which it aims to measure its performance. They are: quality, responsibility, mutuality, efficiency, and freedom. (Mars, 2003) By responsibility, the company means that employees at all levels are to be responsible for results, but also to act
  • 3.  Evaluating Policies and Actions on Cocoa Sourcing and Marketing & Health Issues Page No. 3 of 8 London 2013 responsibly and ethically. Mutuality means “mutuality of benefits” in business relationships, a key standard from the early days of the company. (Mars, n.d.) It also purports to offer mutual benefits to the communities where Mars operates. (Mars, 2003) By freedom, the company means specifically the financial freedom that private ownership permits. Supply Chain The supply chain for Mars Chocolate is highly sensitive to the price of cocoa beans, which are a commodity like any other. Figure 1 shows that in the past decade the price has been rising, although the price has recently fallen to an intermediate value of $2,000 per metric ton. (Index Mundi, 2013) Meanwhile, productivity has fallen around the world. (Mars, n.d.) (Fair Labor Association, 2012) (Cameron, 2009) Mars expects demand to outstrip supply by 2020.   Figure  1 Although cocoa only represents 3.2% of the raw material input (by volume) across all Mars businesses, it is one of the most critical for the business. (Mars, n.d.) Cocoa is the focus of the company’s efforts in the area of sustainable sourcing and indeed may prove to be a model for other commodities. Mars has a Code of Conduct that it implements in all of its business units. With regard to its supplier relationships, the company stipulates the following: - Suppliers must be compatible with the 5 Principles. - The Code of Conduct follows ILO standards. - Reports on risk, including social and environmental risk, are gathered from Maplecroft, a consultancy. - At-risk suppliers are selected for self-assessments. - Mars appoints independent auditors to audit its suppliers. Corrective action plans are developed for identified suppliers. - There is a global Center of Excellence to support and train purchasing teams in best practices for their line of work. (Mars, n.d.) This analysis of the Mars chocolate business found two major categories of possible externalities: cocoa sourcing at the suppliers in Africa, Southeast Asia, and Latin America and
  • 4.  Evaluating Policies and Actions on Cocoa Sourcing and Marketing & Health Issues Page No. 4 of 8 London 2013 the effects of unhealthy eating on consumer health. The following sections examine these in greater detail. 4. Sustainable Cocoa: Policies and Actions Many analyses have been made of chocolate company sustainability programs, but there have not been many cross-company studies to add perspective. In order to understand Mars Chocolate, it is helpful to compare it with its main rivals in the industry. Table 1 provides such an analysis for three of the leading companies mentioned earlier. Table  2   Company Mars Nestlé Hershey Revenue from Chocolate $20b1 $8b2 $6.6b3 Program funds Principles in Action report does not reveal amount dedicated to cocoa sustainability. CHF 110m over 10 years (1999- 2008) = CHF 11m/year = $11.8m4 $10m over 5 years (2013- 2017) = $2m/year7 Proportion of sales (est.) NA 0.147% 0.030% Program Details Sustainable Cocoa Initiative - expand certification, research on cocoa breeding, investing in sourcing areas. Certification through UTZ, the Rainforest Alliance, & Fairtrade International8 Nestlé Cocoa Plan - Includes Plant Expertise and Propagation, Training, Traceability, Farmer Premiums, and Social Projects4 Bliss line of certified chocolate - small line meant to be premium, CocoaLink mobile program in the Ivory Coast, Hershey Learn to Grow Farm and Family Development Center in Ghana, $10 million to reduce child labor5 Fair Trade Commitments 100% certification by 20206 Varies by region. 100% in Europe and Canada by 2014.7 100% certification by 20208 Fair Trade Progress 10% certified as of 2011, 20% as of 20126 100% UTZ certification already in UK, U.S, Oceana Other market data is not provided.7 Currently only in certain smaller brands like Bliss and Scharffen Berger8 1. There is no reliable estimate of the Mars chocolate business. Estimate is 2/3 of total sales of $30b (Yahoo! Finance, n.d.) 2. Total Nestlé revenues CHF 92b ($102b), of which CHF 7.5b ($8.0b) are from chocolate – 8%,
  • 5.  Evaluating Policies and Actions on Cocoa Sourcing and Marketing & Health Issues Page No. 5 of 8 London 2013 based on exchange rate of 1 CHF=1.06871 USD. (Nestle, 2013) 3. (The Hershey Company, 2013) 4. (Fair Labor Association, 2012) 5. (Kim, 2012) 6. (Mars, n.d.) 7. (Nestle Cocoa Plan, n.d.) 8. (The Hershey Company, 2013) The table reveals that the companies are all moving towards full fair trade certification of cocoa beans in their products. However, there is an interesting divergence in application. Mars is steadily moving in the direction of 100%, whereas Nestlé is nearly there or already there in some countries. Hershey, meanwhile, only in October 2012 moved to announce its commitment. (The Hershey Company, 2013) Fair trade, or alternative trade organizations, aim to ensure adequate compensation to farmers and positive social impacts in the communities. The concept involves the forming of farmer cooperatives in order to maximize bargaining power and coordination of resources. A study of TransFair USA certified coffee farms in Nicaragua, Peru, and Guatemala found that participation in the cooperatives was correlated with higher income and education compared to non-participants, although the effects appeared to be uneven. (Arnould et al., 2009) There is no universal agreement on the utility of fair trade organizations, but it is encouraging to note that large companies have increasingly thrown their support behind it. Indeed, they have committed to 100% certification. In addition to certification, Table 2 also shows commonality across thematic areas in the companies’ sustainability programs. Increasing productivity, community welfare, environmental protection, and child labor elimination are common features. For productivity, there is a very clear business imperative, a business problem, that the initiatives respond to. As mentioned earlier, there has been a decline in productivity worldwide. This hurts chocolate companies, their suppliers, and the workers who depend on it for their livelihood. Child labor is a risk, particularly in West Africa. However, elimination is difficult because it is sometimes expected that children help out on the family plot. It is the physical hazards in cocoa farming that pose the greatest risk for children, and that is the danger of using child labor. Both are to be eliminated in accordance with standards set by the International Labor Organization and other actors. For Nestlé, training programs emphasize that hazardous work should only be done by adults and that children should have the opportunity to go to school. (Fair Labor Association, 2012) In Hershey’s case, opposition from the Raise the Bar, Hershey Coalition may have led to the announcement of child labor eradication programs. (Kim, 2012) Mars and other chocolatiers must actively engage with their stakeholders to understand their needs, not impose ones dreamt up at corporate headquarters. A survey in Kenya found that not all concerns of smallholders are addressed by ethical sourcing programs. (Blowfield, 2003) That may be because of a failure to think locally. 5. Marketing and Health Issues Another case is the health impact of selling chocolate. Chocolate is like many substances; it can be dangerous if consumed out of moderation. Obesity is rising around the world, especially among children. One of the causes is snack food consumption. A recent UN FAO report reveals that Mexico is now the most obese industrialized nation at 32.8% of the population, compared with the U.S. at 31.8%. (Food and Agriculture Organization, 2013) Diabetes is one of the leading causes of death in Mexico. (The Economist, 2013) Rising snack food consumption in that country since the 1990s is one of the culprits.
  • 6.  Evaluating Policies and Actions on Cocoa Sourcing and Marketing & Health Issues Page No. 6 of 8 London 2013 Of course, food health is a multifaceted problem that involves government regulation, individual choice, exercise behavior, sedentary habits, as well as dietary choices. However, it is also believed that company marketing may be behind the poor dietary choices of consumers. Mars recognizes this. Increasingly, it is engaging in what has elsewhere been called choice editing, or the offering of products that meet a higher standard of sustainability and corporate responsibility. Responsible marketing is an important aspect of this. One example of choice editing is its restricting of advertising to children below 12. (Mars, n.d.) Another is the target to implement Guideline Daily Amount nutritional information on all confectionary products by 2013 and all other food products by 2014, even in countries where it is not required. These are positive steps forward. However, at the end of the day, like Coca-Cola, Mars is a company that sells products – chocolate in this case – that are known to cause a host of health issues. An interesting case is the company’s plan to stop selling any chocolate product with calories above 250 by 2013. (Jaslow, 2012) The Snickers king size chocolate bar has 540 calories, so it is one of the targets for elimination. However, even though king-sized Snickers bars are to be removed, the plan is to repackage it so that individually wrapped portions can be saved. (Jaslow, 2012) According to Mars, the intent is to “enable sharing or saving a portion for later.” (Forer, 2012) However, Dan Ariely, professor of behavioral economics at Duke University, comments: “there’s a question of whether you would be able to stop after the first or you just take another bite, and another bite, and not stop until you finish the whole package.” (Forer, 2012) The utility of the change for the goal of reducing snacking is thus somewhat limited. Finally, it is pertinent to this discussion to ask whose responsibility is it to encourage healthy consumption. A study of consumers in the UK found that consumers believe people themselves are the most responsible for poor dietary habits, secondly the confectionary manufacturers. (Bhate, 2007) Consumers do realize they have the responsibility to choose healthy products. However, if manufacturers collectively continue to provide the unhealthy products, there is an element of enabling that should not be overlooked. To that end Mars does spread word on healthy eating through online content and other promotions. (Mars, n.d.) 6. Case for change Consumer awareness is often cited as one of the reasons for the rising preference for products with fair trade-certified ingredients. While this is increasingly true, fundamentally the decision to pick up a candy bar remains taste. It is about indulgence. Therefore, the case for change in supplier relationships lies elsewhere: it is in the deteriorating productivity of the farms that grow cocoa. This paper has found that sustainability programs in this industry target productivity increases, which are good for the company and farmer stakeholders. The other pressure comes from the industry; indeed, Hershey switched tack in 2012 because it was falling behind Mars and Nestlé. There is also a compelling business case for change in how companies like Mars comprehend their responsibilities in nutrition. First Lady of the United States, Michelle Obama spoke at the Grocery Manufacturers Association urging companies to take healthy food promotion seriously, to not mislead consumers, and in particular not market unhealthy food to children. (Nestle, 2010) Politicians are also taking concrete action; New York City Mayor Michael Bloomberg made headlines with the proposed ban of large sodas. Snack food is the next target. Meanwhile,
  • 7.  Evaluating Policies and Actions on Cocoa Sourcing and Marketing & Health Issues Page No. 7 of 8 London 2013 savvy companies are beginning to take so-called healthy, premium chocolate as a very serious growth opportunity, such as Kraft Foods’ recent promotion of Green & Black’s organic chocolate. (Joseph, 2012) In sum, the rationale for change on both fronts is there. The question is if it is powerful enough. Mars’ actions seem to recognize that it is. 7. Reference list Arnould, E.J., Plastina, A. & Ball, D., 2009. Does Fair Trade Deliver on Its Core Value Proposition? Effects on Income, Educational Attainment, and Health in Three Countries. Journal of Public Policy & Marketing, 28(2), pp.186-201. Bhate, S., 2007. Health of the nation: An individual or a corporate social responsibility? A preliminary investigation into consumer perceptions. Journal of Public Affairs, 7(2), pp.164-80. Blowfield, M., 2003. Ethical Supply Chains in the Cocoa, Coffee and Tea Industries. Greener Management International, 43, pp.15-24. Cameron, R., 2009. Cadbury Goes Fairtrade. International Trade Forum, October-December. Fair Labor Association, 2012. Sustainable Management of Nestlé’s Cocoa Supply Chain in the Ivory Coast— Focus on Labor Standards. [Online] Available at: http://www.fairlabor.org/sites/default/files/documents/reports/cocoa-report-final_0.pdf [Accessed 20 July 2013]. Food and Agriculture Organization, 2013. The State of Food and Agriculture: Food Systems for Better Nutrition. [Online] Available at: http://www.fao.org/docrep/018/i3300e/i3300e.pdf [Accessed 16 July 2013]. Forer, B., 2012. Mars Cutting King-Size Candy. [Online] Available at: http://abcnews.go.com/blogs/headlines/2012/02/mars-cutting-king-size-candy/ [Accessed 15 July 2013]. Index Mundi, 2013. Cocoa beans Monthly Price - US Dollars per Metric Ton. [Online] Available at: http://www.indexmundi.com/commodities/?commodity=cocoa-beans&months=360 [Accessed 24 July 2013]. Jaslow, R., 2012. So long, king-sized Snickers: Mars to set calorie limit on chocolate. [Online] Available at: http://www.cbsnews.com/8301-504763_162-57379369-10391704/so-long-king-sized-snickers-mars- to-set-calorie-limit-on-chocolate/ [Accessed 15 July 2013]. Joseph, S., 2012. Green & Black's readies major push for £8bn premium market. [Online] Available at: http://www.marketingweek.co.uk/news/green-and-blacks-readies-major-push-for-8bn-premium- market/4001792.article [Accessed 17 July 2013]. Kim, M., 2012. Hershey expands sustainable efforts, company’s critics claim a victory. Candy Industry, p.12. Manyika, J. et al., 2011. Big data: The next frontier for innovation, competition, and productivity. [Online] Available at:
  • 8.  Evaluating Policies and Actions on Cocoa Sourcing and Marketing & Health Issues Page No. 8 of 8 London 2013 http://www.mckinsey.com/insights/business_technology/big_data_the_next_frontier_for_innovation [Accessed 16 July 2013]. MarketLine, 2012. MarketLine Industry Profile - Global Confectionary. Mars, 2003. The Five Principles. [Online] Available at: http://www.mars.com/global/assets/documents/433657mars_the_five_principles_of_mars_without_si gnatures_V2.pdf [Accessed 17 July 2013]. Mars, n.d. About Mars. [Online] Available at: http://www.mars.com/global/about.aspx [Accessed 24 July 2013]. Mars, n.d. Cocoa. [Online] Available at: http://www.mars.com/global/about-mars/mars-pia/our- supply-chain/cocoa.aspx [Accessed 24 July 2013]. Mars, n.d. Helping People Choose. [Online] Available at: http://www.mars.com/global/about- mars/mars-pia/health-and-nutrition/helping-people-choose.aspx [Accessed 28 July 2013]. Mars, n.d. Our Strategy and Priorities. [Online] Available at: http://www.mars.com/global/about- mars/mars-pia/our-supply-chain/our-strategy-and-priorities.aspx [Accessed 17 July 2013]. Mars, n.d. Supplier Relationships. [Online] Available at: http://www.mars.com/global/about- mars/mars-pia/our-supply-chain/supplier-relationships.aspx [Accessed 17 July 2013]. Nestle Cocoa Plan, n.d. Working with partners. [Online] Available at: http://www.nestlecocoaplan.com/working-with-partners/ [Accessed 28 July 2013]. Nestle, M., 2010. Michelle Obama to Grocery Manufacturers: Let’s Move! [Online] Available at: http://www.foodpolitics.com/2010/03/michelle-obama-to-grocery-manufacturers-lets-move/ [Accessed 28 July 2013]. Nestle, 2013. Annual Report. [Online] Available at: http://www.nestle.com/asset- library/documents/library/documents/annual_reports/2012-annual-report-en.pdf [Accessed 27 July 2013]. The Economist, 2013. Eating themselves to death. [Online] Available at: http://www.economist.com/blogs/americasview/2013/04/diabetes-mexico [Accessed 16 July 2013]. The Hershey Company, 2013. 2012 Corporate Social Responsibility Scorecard. [Online] Available at: http://www.thehersheycompany.com/assets/pdfs/hersheycompany/scorecard2012.pdf [Accessed 28 July 2013]. The Hershey Company, 2013. Annual Report. [Online] Available at: http://www.thehersheycompany.com/assets/pdfs/hersheycompany/TheHersheyCompany_10K_20130 222.pdf [Accessed 27 July 2013]. Yahoo! Finance, n.d. Mars, Incorporated Company Profile. [Online] Available at: http://biz.yahoo.com/ic/40/40297.html [Accessed 24 July 2013].