On a recent trip to Germany, I was surprised to notice that the Fairtrade mark was missing from a Kit Kat chocolate bar I saw in the supermarket. So I picked up the bar to take a closer look and realised that I unfortunately, I wasn’t mistaken – Kit Kat is not Fairtrade certified in Germany in contrast to the variety sold in the UK. It seems that not all Kit Kats are created equal.
So I decided to take a closer look at how Nestle, the producer of Kit Kat in the UK and Germany (and many other European countries), approaches the matter of using cocoa sourced on fair and sustainable terms. Unfortunately, I’m still a little confused. Consistency and transparency are required in order to provide confidence for consumers.
Let me start on a positive note. Nestle and other large food companies have started to take a more proactive stance on responsible sourcing of commodities in their supply chains. Much of this can be attributed to greater demands from consumers as well as activism on the part of groups such as Fairtrade International and its related organisations.
This is certainly a positive trend and there is no doubt about the positive impact on producers in developing countries. However it is both the small relative percentage of fairly sourced commodities and the selective approach to certification used by multinationals such as Nestle which is cause for confusion. In addition to the Kit Kat example, others include Mars who use Fairtrade cocoa for Maltesers and Starbucks who use Fairtrade coffee, both in the UK. These practices are not used globally, with varying levels of commitment towards greater use of certified ingredients.
Taking an economically rational perspective, would it make sense for a profit maximising firm to engage in certification? The answer to that is that it depends on whether consumers of the firm’s products demand that certification. This angle possibly helps to frame the use of a selective approach to certification by Nestle and other large food companies.
It is well documented that the UK has both the highest awareness and trust in Fairtrade, as well as the highest sales of Fairtrade certified products. In fact, according to the 2013-14 Fairtrade International Annual Report, the UK’s sales of Fairtrade products came in at just over EUR2 billion (see Figure 1 below). Meanwhile, the sales for France, Germany, Ireland, Netherlands, Sweden and Switzerland (the 6 biggest Fairtrade European markets apart from the UK) amounted to a combined total of just under EUR2 billion. It’s pretty easy to understand why a corporate would focus more on certification in the UK than elsewhere.
Figure 1: Estimated Fairtrade retail sales by country in 2013 – Europe
Source: Fairtrade International.
Turning back to the Kit Kat bars, one thing in common to both the UK and German versions is the Nestle Cocoa Plan logo on the back of the package. In 2009, Nestle launched this program committing to investing CHF110 million over a 10 year period. While it’s impressive that Nestle have made these commitments, the impact has been modest to date. (A full copy of Nestle’s 2013 Creating Shared Value report can be found here with the cocoa section on beginning on page 158).
According to Nestle in 2013:
… we purchased 62 299 tonnes (about 14.5% of our cocoa) through the Nestlé Cocoa Plan, of which 75% was certified UTZ or Fairtrade
What confuses me about this statement is that it implies that cocoa sourced under the Nestle Cocoa Plan isn’t necessarily certified. That seems a little contradictory as the only way for consumers to really know that Nestle is living up to its promises is through independent verification. Further, based on these figures, roughly 11% of Nestle’s cocoa was actually certified. Put another way, 89% of Nestle’s cocoa is not certified and 85% is not sourced under the terms of their program. Surely that’s not a great outcome so far.
Additionally, Nestle have failed to provide a breakdown of how much of their cocoa has been certified by each of UTZ or Fairtrade. This matters because the two certification organisations have different requirements. For example, one of the clearest differences between UTZ and Fairtrade is that the latter ensures that both a minimum price and a guaranteed Fairtrade premium is paid to producers (more on this later).
As a consumer, this is a really important distinction. What does Nestle stand for? Are they for a minimum price and a guaranteed premium or not? Given their current approach, the cynic could easily make the accusation that Nestle are for these pricing mechanisms, but only in markets where consumers demand it.
Nestle will naturally argue that their program goes beyond certification – their plan includes farmer training, building new schools, child labour monitoring and distribution of plants. This is all well and good, but instead of unilaterally devising their own program, surely consumers would have more confidence in a program that is fully verified by an independent third-party such as Fairtrade?
Looking at it from another angle, how expensive would the use of fully certified cocoa be for Nestle? Based on the 2013 numbers above, it seems that Nestle sourced a total of around 430,000 tonnes of cocoa in 2013. If all of this was purchased on Fairtrade terms, the premium would have totaled USD86 million (assuming a Fairtrade premium of $200 per metric tonne). Considering that Nestle recently announced an impressive net profit of USD15.4 billion, I’m sure that shareholders wouldn’t complain too much!
Returning to UTZ and Fairtrade, it’s important to recognise that both are trying to play their part in promoting ethical sourcing despite the different philosophies of the two organisations. As indicated earlier, one of the key differences between UTZ and Fairtrade relates to negotiated premiums without a minimum price (UTZ) versus guaranteed premiums and a minimum price floor (Fairtrade). My previous blog post discussed the importance of these mechanisms especially as commodity prices fall.
According to Han de Groot, executive director of UTZ Certified (as reported by ConfectionaryNews):
Premiums are important, but are part of a market mechanism. We think a negotiated premium is more effective than a fixed premium – the productivity can be far more significant for farmers.
But the evidence is to the contrary. According to a report by KPMG published in 2012 (downloadable here), the average premiums achieved for UTZ certified cocoa are lower than Fairtrade, as shown in Figure 2. Also, the net benefit of Fairtrade cocoa certification is higher, however KPMG do point out that:
… the data reliability used for this study is limited… It is desirable at this stage of data collection not to derive definitive conclusions on differences between schemes
Figure 2: Comparison of cocoa certification schemes
Sources: KPMG; CURRENTLY UNDER DEVELOPMENT.
Regardless, these results should be unsurprising considering the power relationships involved. In the case of cocoa, you have small-scale farmers “negotiating” with large-scale traders and manufacturers. So it is to be expected that those negotiating their own premiums are likely to be disadvantaged relative to those who have a fixed premium.
As for many aspects of international trade involving developing countries, providing added safety nets such as a fixed premium for cocoa farmers can act to redress the power imbalance. This is not to say that there won’t be examples where negotiation can benefit small-scale producers, but the balance of probabilities still favours those who have traditionally held the upper hand.
Questions for Nestle
So the bottom line is that I have two questions for Nestle which should be pretty easy to answer:
- How much of the cocoa that Nestle purchases is on Fairtrade terms and, separately, how much is UTZ Certified?
- Why is Kit Kat certified Fairtrade in the UK but not in Germany?
Nestle have made some good attempts at being transparent about their sourcing practices. Greater transparency and consistency will enable consumers to be less confused and more confident in sharing their values.