Nespresso case competition by william_perico

Table of Contents EXECUTIVE SUMMARY .................................................................................................................................. 3 INTRODUCTION ............................................................................................................................................... 4 BACKGROUND AND CURRENT SITUATION ............................................................................................ 4 STRATEGY ......................................................................................................................................................... 4 ASSUMPTIONS .................................................................................................................................................. 5 RECOMMENDATION – 10+ PROGRAM ...................................................................................................... 5 10+ PROGRAM: ACTIVITIES RECOMMENDED........................................................................................ 6 1.

FERTILIZATION (45%-55% OF CARBON FOOTPRINT OF COFFEE PRODUCTION) ....................................... 6 a) Stakeholders and incentives ........................................................................................................................ 6 b) Implementation Cost and Emissions Caused .................................................................................... 7

COFFEE MILLING (30%-35% OF CARBON FOOTPRINT OF COFFEE PRODUCTION) .................................... 7 a) Stakeholders and incentives ........................................................................................................................ 7 b) Implementation Cost and Emissions Caused .................................................................................... 8

OFFSETTING ............................................................................................................................................................. 8 a) Stakeholders and Incentives ........................................................................................................................ 8 b) Implementation Costs and Emissions Reduction ............................................................................ 9

GHG FINANCE INITIATIVE ..................................................................................................................................... 9 a) Stakeholder and Incentives........................................................................................................................... 9 b) Implementation .................................................................................................................................................. 10

IMPLEMENTATION OF NESPRESSO’S 10+ PROGRAM .......................................................................10 FINANCING NESPRESSO’S 10+ PROGRAM .............................................................................................11 MARKETING NESPRESSO’S 10+ PROGRAM ...........................................................................................11 CONCLUSION ...................................................................................................................................................12 REFERENCES ...................................................................................................................................................14 APPENDIX 1 – NESPRESSO’S 10+ PROGRAM OUTLINE AND INCENTIVE ALIGNMENT AMONG STAKEHOLDERS ..............................................................................................................................................15 APPENDIX 2 – NESPRESSO’S 10+ PROGRAM IMPACT; ASSUMPTIONS AND FINDINGS; AND POTENTIAL FINANCING FROM THE 10+ COLLECTION ........................................................................16 APPENDIX 3 – GHG EMISSION CALCULATOR .........................................................................................17

Executive Summary The purpose of our analysis is to “propose a greenhouse gas strategy that will allow Nespresso to continue to make a positive impact on AAA farms and coffee communities while creating sustainable economic and environmental value for the company and its consumers.”(Nespresso Case, 2014) The 10+ Program, our recommended strategy, represents a flexible and effective solution to Nespresso’s current challenges regarding the coffee production portion of its Supply Chain. Taking into consideration the fragmentation and differentiation between production practices among Nespresso’s coffee suppliers, our team believes that a single prescribed solution would not be effective or feasible to incentivize all farmers to reduce their carbon emissions. Therefore, it is our suggestion that Nespresso creates the 10+ Program, which provides farmers with freedom and flexibility to choose which, if any, activities to adopt. By giving farmers the ability to choose and implement specific activities, the strategy also allows them to gradually adopt the Program as they experience productivity improvements and are financially compensated by Nespresso for adopting sustainable practices. As a result, farmers’ profit margins will be increased by both lower costs and higher sales revenues. The program suggests the implementation of an additional premium of up to 10 percent that Nespresso would pay to farmers who implement sustainable practices. The 10 percent premium will be paid if, and only if, farmers adopt the solutions provided by Nespresso in three of the four activities suggested by the company. The four activities are Fertilization; Wet Milling; Offsetting; and the Farmer’s Self-Developed Initiative. Farmers receive an additional three percent premium for every activity implemented, and are allowed to choose any combination of up to three activities to implement, since, when chosen, the fourth activity necessarily excludes one of the other three. Therefore, an additional 1 percent premium is paid to those who adopt three of the practices recommended as a means to incentivize farmers to pursue carbon neutralization on the coffee production spectrum of Nespresso’s Supply Chain. The strategy will then be communicated to consumers through market campaigns and the creation of the 10+ Collection of coffees. This collection consists on a selection of existing Grand Crus from participating regions, and would be sold at a three percent premium above all other coffees. This collection would be clearly marketed as being an environmentally-conscious line of coffees that provide the customer with the ability to directly fund environmentally-sustainable farming practices across the coffee supply chain. The 10+ Collection would be shipped with informational material regarding the sustainable practices being used in the program as well as specific examples on how particular AAA farmers are making a difference.

Introduction This report addresses Nespresso’s need for a greenhouse gas (GHG) strategy that will allow the company to continue to make a positive impact on its suppliers while creating sustainable economic and environmental value for the company and its consumers. Nespresso’s suppliers are very fragmented and diversified, which makes any “one-size fits all” strategy unfeasible and ineffective. Therefore, our team recommends the 10+ Program, which provides farmers with the freedom to choose when and which activities to implement in their farms. Nespresso would pay an additional three percent premium for each activity adopted by farmers. To incentivize the adoption of as many activities as possible, if, and only if, farmers adopt three of the four recommended activities, Nespresso would pay a 10 percent premium for their coffee.

Background and Current Situation This report addresses Nespresso’s need for a greenhouse gas (GHG) strategy that will allow the company to continue to make a positive impact on its suppliers while creating sustainable economic and environmental value for the company and its consumers. After addressing the use of coffee machines and capsules, the two main sources of GHG emissions in Nespresso’s Supply Chain, the company is now looking for ways to reduce emissions at its coffee production level, which includes more than 64,000 farmers around 9 different countries (Nespresso Case 2014). The matter is of great importance. Not so much because coffee production is a large contributor to GHG emissions, but mostly because coffee production is severely affected by climate change, and it is in Nespresso’s best interest to reduce environmental impacts as much and quickly as possible. This report provides Nespresso with a recommendation that is not only capable of substantially reducing farmers’ emissions, but also completely neutralizing them.

Strategy Utilizing existing infrastructure along Nespresso’s supply chain and customer outreach, we believe the 10+ Program can successfully reach thousands of farmers and coffee drinkers around the world. The program places significant emphasis on outcomes that benefit every stakeholder Nespresso interacts with. The techniques and process improvements learned along the way would be available to any participant of the AAA program. Given the investment Nespresso would dedicate to this venture, it is equally important to establish an effective communication strategy to increase consumer awareness and be seen as a leader in corporate social responsibility. The 10+ Program has two main components: Implementation and Outreach. The implementation arm of the strategy is further divided into

four sections/recommendations: 1. Improved fertilizer use, 2. Alternate techniques for coffee milling, 3. Increased biomass offsets, and 4. Farmer’s self-development initiative. The outreach component of the proposed strategy combines the efforts from all the aforementioned initiatives and connects them to the farmer and end consumer.

Assumptions In order to analyze the costs and benefits associated with each activity recommended, assumptions were required. Every assumption was made based on information provided on the case and external research. Appendix 1 demonstrates the general outline of the 10+ Program and indicates how interests and incentives are aligned between Nespresso, its suppliers, and all other stakeholders for all activities included in the recommendation. Appendix 2 indicates the total GHG emissions, area used, average productivity, and implementation cost associated with each activity recommended by the 10+ Program. It also indicates the source for every assumption made, and demonstrates the potential economic and environmental impacts of each activity both at Nespresso’s entire Supply Chain coffee production level, and at the farm level on a per hectare basis. Lastly, Appendix 3 contains a table with our assumptions and a GHG and Cost calculator, in which all farmers must do is answer simple set of questions regarding their farms to instantly estimate the environmental costs and GHG emissions of their farms.

Recommendation – 10+ Program Our recommendation has the objective of providing Nespresso’s farmers with freedom to choose how they will implement sustainable practices in their own farms. The reason for that is because the coffee production side of Nespresso’s Supply Chain is very fragmented. With more than 64,000 farms in three different continents supplying to the company, a single prescribed solution would not be feasible or effective, especially when the fact that processes and techniques in coffee production varies widely between regions, as well as climate and geological conditions. +

As the name indicates, the 10 Program suggests the implementation of an additional premium of up to 10 percent that Nespresso would pay to farmers who implement sustainable practices on their processes. The 10 percent premium will be paid if, and only if, farmers adopt the solutions provided by Nespresso in all three activities suggested by the company. The activities are: 1) Fertilizers and Coffee Production, 2) The Coffee Milling Process, and 3) Offsetting. For every activity implemented, farmers receive an additional 3 percent premium paid by Nespresso, and farmers can choose any combination of activities to implement. Therefore, an additional 1 percent premium is paid to those who adopt all

practices recommended as a means to incentivize farmers to pursue carbon neutralization on the coffee production spectrum of Nespresso’s Supply Chain.

10+ Program: Activities Recommended 1. Fertilization (45%-55% of carbon footprint of coffee production) a) Stakeholders and incentives Fertilization represents the larger component of Nespresso’s coffee production carbon footprint. Many farmers are neither trained nor equipped to apply fertilizers in the most effective and efficient manner. Moreover, many of them are not aware of the existence of more efficient products, such as slow-release Nitrogen (N). With that in mind, our team came up with the idea of having Nespresso opening negotiations with the largest fertilizer manufacturers in the world, such as Syngenta and Monsanto, with the objective of negotiating prices of technologically advanced fertilizers on behalf of all of its farmers. By negotiating with Nespresso, a supplier can get a contract with more than 64,000 farms at once. An example of such relationship can be observed in the strategy adopted by Sadia, a major Brazilian food company. In order to benefit their suppliers, ensure the application of best practices and reduce GHG emissions at the farm level, Sadia negotiates directly with its farmers’ suppliers. Once a farmer becomes a supplier to Sadia, specific partners supply the required infrastructure; optimize processes and fertilizer use; and provide the education for farmers to run their operations as efficiently and effectively as possible (UNDP, 2007). In order to ensure the potential efficiency gains provided by this alternative, farmers must be provided with technical labor and support. To make this economically and operationally viable, our team recommends involving two external stakeholders who have the ability to serve all of Nespresso’s sourcing farms simultaneously, depending on their interest, capacity and implementation costs. Nespresso could incentivize three-way collaboration between Nespresso; local farmers, mills and cooperatives; and universities, similarly to what Syngenta is doing with their NuCoffee program. Large fertilizer manufacturers have global reach and all the information and resources required to optimize the application of fertilizer throughout all farms Nespresso sources from. These manufacturers would not only be benefited by the large scale of the contract, but also by gaining access to certain information regarding Nespresso’s global coffee production supply chain. Secondly, this strategy can connect universities with farms, and provide great benefits to farmers, students and the environment. Emissions will be significantly reduced, farmers will have their processes optimized free of charge, and students will have an opportunity to develop skills on actual businesses.

b) Implementation Cost and Emissions Caused On average, slow-release fertilizer is 15 to 20 percent more efficient than standard fertilizer (Nespresso Case, 2014). Although it is more expensive, with Nespresso’s bargain power, slow-release fertilizer prices could be reduced to the same levels as regular fertilizer is commercialized for. Therefore, by simply changing from regular Nitrogen to slow-release Nitrogen, farmers can save US$68.00 per hectare annually due to efficiency gains. Moreover, if all farmers adopt this activity, CO2eq emissions caused by Nespresso’s Supply Chain could be reduced by 6,408 tons per year (refer to Appendix 2 for calculations, assumptions and list of sources). Optimizing the use of fertilizers can reduce GHG emissions in coffee production by 8 percent (Nespresso Case, 2014). With Nespresso bringing an external stakeholder as a partner to assist on the implementation of this strategy, the implementation cost to the farmer would be US$68.00 per hectare. With this investment, if all farmers adopt this activity, CO2eq emissions caused by Nespresso’s Supply Chain could be reduced by an additional 5,183 tons per year (refer to Appendix 2 for calculations, assumptions and list of sources).

2. Coffee Milling (30%-35% of carbon footprint of coffee production) a) Stakeholders and incentives Coffee milling is the second largest contributor to Nespresso’s coffee production carbon footprint, and most emissions are caused by the release of wastewater to the environment with no previous treatment. In order to solve this problem, consolidating the resulting wastewater and organic matter from the process and taking it into a reactor that will produce biogas (methane), which can then be burned in the coffee dryers. Two main approaches are possible: To implement improved wastewater treatment systems in small farms; and to form community coffee-processing centers under the form of cooperatives. Community coffee-processing centers represent a much cheaper and more efficient alternative, since it provides farmers with economies of scale, which maximize farmers’ profits by reducing their average cost per hectare. Also, it generates significantly less CO2eq emissions than having one system per farm, and contributes to aligning incentives among local farmers. Thus, our recommendation is that Nespresso only pays the three percent for this activity if farmers participate on cooperative processing centers. In order to properly implement this strategy and incentivize farmers to adopt this activity, Nespresso can seek support from two different external stakeholders. Existing cooperatives can provide coffee growers with an opportunity to join them, provided that they have capacity, thus significantly reducing required investments. Also, existing cooperatives can provide farmers with information regarding efficiency gains and cost savings associated with community coffee-processing centers. By expanding and updating existing cooperatives, and building new ones, coffee farmers can achieve substantial economies of

scale, maximize profits, converge interests, and significantly reduce CO2eq emissions. The second stakeholder would be Coffee Growers’ Associations. These institutions concentrate information regarding productivity and best practices on global, national and regional scale, thus being able to provide great assistance when it comes to optimizing processes, costs and production throughout Nespresso’s entire coffee production Supply Chain.

b) Implementation Cost and Emissions Caused By dividing the total implementation cost of this strategy by the total number of hectares used by Nespresso’s coffee producers, the average implementation cost for farmers to establish a new cooperative is US$756.00 per hectare. With this investment, if all farmers adopt this activity, CO2eq emissions caused by Nespresso’s Supply Chain could be reduced by an additional 11,288 tons per year (refer to Appendix 2 for calculations, assumptions and list of sources). As a result, assuming that all farmers Nespresso sources from adopt both activities one and two, farmers would have to invest on average US$756.00 per hectare to reduce carbon emissions by 22,878 tons per year, which corresponds to around 18 percent of Nespresso’s Supply Chain total GHG emissions. This investment will only be required on the first year. Once both activities one and two are implemented by farmers, they will receive a 6 percent (three percent from each activity) price premium from Nespresso, which corresponds to around US$146.00 per hectare per year, or US$73.00 per hectare per year for each activity implemented by the farmer (refer to Appendix 2 for calculations, assumptions and list of sources).

3. Offsetting a) Stakeholders and Incentives A third facet of the solution is the use of increased and/or diverse biomass in order to compensate for GHG emissions. We believe that while the off-farm option offers the easier alternative, a successful program needs full involvement along the supply chain – from the farmer to the seller. Hence, we are recommending that Nespresso focus on an on-farm offset program. We understand there is an opportunity cost associated with the supplementation of coffee plants with alternative crops. However, the benefits associated with increased biodiversity and local native species for the protection of the crops could be an added benefit to the farmers. In addition, promoting the cultivation of native species, indigenous to each particular region, and encouraging the planting of trees that can be used as lumber can provide additional sources of funding. As an incentive for participation, we believe it is important to provide direct monetary benefit to the farmer. For this reason we are recommending adding a three percent premium

if they choose to participate in this offsetting program. Any additional revenue from the sale of planted offsetting plants will go to the farmer. We expect there to be a learning curve when implementing this strategy. For this reason, participation from local growers and universities will be key for success.

b) Implementation Costs and Emissions Reduction When carbon reduction strategies reach their technical or financial limitations, offsetting allow companies to completely neutralize its carbon emissions, and even become carbon negative. According to our calculations and assumptions, it would be necessary to offset 129,000 Tons of CO2eq per year to completely neutralize the emissions caused by coffee production in Nespressoâ&#x20AC;&#x2122;s supply chain. Assuming that all farmers Nespresso sources from adopt this strategy, its estimated implementation cost would be of $767.00 per hectare owned by each farmer. This cost assumes no participation, cost sharing or financial support from Nespresso, NestleÂŽ, and/or other multinationals. Provided that Nespresso accepts to partially support the initiative and is able to bring in more sponsors to the initiative, implementation costs at the farm level could be significantly reduced.

4. GHG Finance Initiative a) Stakeholder and Incentives The last portion of our 10+ Program invites farmers to provide alternatives to solve the GHG problem. We believe there may be much untapped potential at the local level to find local solutions to a global problem. Unfortunately, there may not be an equal amount of opportunity to fund this potential. The GHG Finance Initiative will fund conservation projects dedicated to the reduction of GHG emissions in the areas of: 1. Better fertilizer alternatives; 2. Improvement in milling techniques; and 3. Open ended projects. This program intends to increase access to capital for farmers in rural areas. However, participation is not limited to farmers. Any party interested in submitting a proposal for any of the areas mentioned above would be welcomed. However, the initiative would only fund actionable projects that could potentially have a direct impact on GHG emissions and the lives of farmers. For this reason, while the applicant does not need to be a farmer, farmerâ&#x20AC;&#x2122;s participation is necessary. Additionally, participants will be required to report on progress and success of the idea. If found successful, the idea will become public access information to anyone participating in the Nespresso AAA sustainability program. Through the use of an informational portal, we believe it is important to share with other farmers across the world the successes that come from this initiative. While we believe that Nespresso should be the main stakeholder in the management of this program, participation from other NGOs is crucial. Local environmental organizations add recognition and the technical expertise necessary to evaluate projects on a timely basis.

Additionally, there may be financial alignment with some of these organizations that could provide additional financial backing to the program. Agreements with local governments would ensure that any regulatory or political issues are resolved, when needed. The GHG Finance Initiative program is part of the 10+ Program. As such, if the financed project has been found to be successful and can be replicated across various farms, then the farm will qualify for a three percent increase in purchase price.

b) Implementation To begin the implementation portion of the project, participants must be given the opportunity to establish a baseline from which to measure success. One of the key problems when measuring GHG emissions is the complex nature of the calculations. We are recommending standardizing the measuring process in an easy to achieve method. Using the calculator we have built, any farmer with knowledge of the size of his/her farm, annual yield, farming techniques, and annual energy usage would be able to easily calculate his/her farm’s estimated GHG emissions. This calculation would then be used as a baseline to establish progress and success of the financed project.

Implementation of Nespresso’s 10+ Program a) Phase I – Coalition building and program infrastructure development: The first few months of the program would be dedicated to building partnerships with local NGOs, regulatory institutions and universities. The goal of this earlier part of the project is to build a coalition dedicated to reducing GHG emissions along the Nespresso supply chain. Alignment between all institutions is key for program success. Realistic goals and expectations should be clearly outlined and agreed upon by all stakeholders. b) Phase II – Program roll-out and baseline establishment: The second phase of the program starts with the establishment of baseline measurements – a key component to track improvement. Educating key stakeholders along the supply chain on the importance of improving these metrics will increase buy-in and participation in the program. Once support has been garnered, Nespresso may begin to offer the incentives to all participating farmers. Keeping farmers involved throughout the process, from beginning (education and application into the program) to end (premium recertification) will ensure that appropriate practices are being enforced. This phase of the program should be completed by the end of year one. c) Phase III – Evaluation and results dissemination: One of the more important tasks is to show that Nespresso’s investment has made an impact on its supply chain GHG emissions. While we recommend using a standard measuring calculator for the farmers to easily calculate their farm’s GHG emissions, we recommend conducting a full analysis of the impact of the program by an external auditor at

the end of year two of the program. The results of this study would then be shared with all of Nespresso’s stakeholders.

Financing Nespresso’s 10+ Program Besides engaging external stakeholders to make the 10+ Program operationally and economically feasible, Nespresso must also engage its customers to support reductions in GHG emissions throughout its supply chain. Our recommendation is that Nespresso creates the 10+ Collection, which will be offered in selected existing Grand Crus and sold for a three percent premium per capsule. The collection will be marketed to customers who are willing to pay the premium to support greener practices. According to the 2014 Nespresso Case, over 80 percent of the customers are willing to pay a premium to support environmentally sustainable operations and supply chains. To be conservative, our team projects that the campaign can successfully reach 20 percent of Nespresso's customers. Assuming that sales revenues for the company will continue growing at 20 percent on an annual basis, Nespresso's projected revenues for 2014 is US$6 Billion. Initially, the program will benefit 30 percent of the farmers Nespresso sources its coffee from. If 20 percent of the customers accept to pay the three percent premium, each farmer would receive $821.74 to implement the 10+ Program activities on their farms. As the program develops and more customers support the cause, the numbers of activities supported by Nespresso customers will increase significantly. Ultimately, as the program grows and develops over the next years, the entire strategy can be financed and implemented with proceeds from sales of the 10+ Collection.

Marketing Nespresso’s 10+ Program During the implementation of the 10+ Program, Nespresso will create a marketing campaign that explains the company’s new sustainability practices to Nespresso Club members, potential customers and investors. Although many Nespresso Club members are aware of sustainability and may understand the concepts of GHG reduction and carbon neutrality, they know little about GHG emissions during coffee production. Nespresso’s marketing campaign will thus seek to educate stakeholders about coffee production and GHG emissions and how the 10+ Program reduces these emissions. The 10+ Program marketing campaign will attempt to minimize the talk/do ratio by showing, as much as is possible, the inner workings of the program. Thus, we propose that the company connect the customer with the farmer as much as possible, meaning the customer will have numerous opportunities to observe, albeit from a distance, the benefits of the 10+ Program at the farm. Alongside traditional marketing techniques, Nespresso must implement several untraditional ways to communicate sustainable practices to customers. The first is a code

system that allows Nespresso customers to learn more about the farmers of the 10+ Program. On boxes of Nespresso 10+ Collection capsules sent to Club members will be information on the 10+ Program and its website. In the information will be a short alphanumeric code that customers can enter into the 10+ Program website to learn about the specific farmers that produced the very coffee they are drinking. On the website will be a short video that briefly explains the environmental and social impact of the 10+ program. Specifically, the video will include an interview of the farmers, who will explain what they are doing to earn the premium and how the premium is benefiting their lives. The 10+ Program website will also include a page with an interactive learning animation to explain GHG emissions and coffee production. The banner at the top of the page will read “Learn how the 10+ Program contributes to Nespresso’s mission to reduce carbon emissions from farm to cup.” The customer will be able to click on three buttons: 1) Fertilizers and Coffee Production, 2) The Coffee Milling Process, and 3) Offsetting. Once the customer has clicked on a button, he or she will be walked through a process that shows how current operations and practices at the farms contribute to GHG emissions. So that customers will not be confused by technical language, only basic facts will be presented along with both animated and real images of the production process at farms. Once the customer has a decent idea of the current production process and emissions, he or she will be able to click on a button at the end of the simulation that says “10+ - See how Nespresso plans to reduce GHG emissions at its coffee farms.” The animation will then show the customer how the 10+ Program reduces GHG emissions and improves the lives of the farmers.

Conclusion By realizing that no single-strategy would effectively impact all farmers Nespresso sources its coffee from, our team developed the 10+ Program, which provides farmers with financial rewards for making their production more sustainable, along with the flexibility and freedom to choose which activities they will implement, according to their interests, capability and physical and economical resources. In order to simplify the understanding of the 10+ Program and incentivize its application, we also recommend the adoption of the GHG and cost calculator we have built, which allows farmers to quickly estimate their current emissions, potential savings by adopting each activity recommended, the average implementation cost of each activity, and the expected revenue increase generated by it. With the calculators, farmers can quickly understand the impact that every dollar spent in the program will impact in both their emissions and revenue streams, thus simplifying the understanding process and incentivizing farmers to adopt the recommended activities. In order to finance and make this strategy financially and operationally viable, however, the

involvement and buy-in of key external stakeholders is fundamental. Given Nespressoâ&#x20AC;&#x2122;s size and reputation, it is our belief that most, if not all of these stakeholders, will be more than interested in forging strategic partnerships with the company. In conclusion, the 10+ Program represents a viable and effective strategy that Nespresso can implement to incentivize the coffee production level of its Supply Chain to adopt more sustainable practices. If successful, the program has the potential to substantially reduce GHG emissions at the farm and coffee production level, if not make Nespressoâ&#x20AC;&#x2122;s Supply Chain carbon neutral or negative.

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Appendix 1 - Nespresso’s 10+ Program Outline and Incentive Alignment Among Stakeholders Activity

Recommendation

Stakeholders

Incentive Alignment

Fertilizing

Opening negotiations with major producers of efficient fertilizers on behalf of farmers. Also, incentivizing three-way collaboration between Nespresso, farmers and universities to optimize application.

Farmers

Incentivizing community coffee-processing facilities as a means to achieve higher efficiency, lower costs and higher profitability.

Fertilizer Manufacturers

Sell to 64,000+ farmers at once. Increase recurrent sales revenue. Gain further knowledge of international markets. Increased brand awareness and reputation.

Universities

Agreements of potential employment between Nespresso, local farmers and Universities. Students work on farms for free, focusing on: • Optimizing fertilizer use; and • Measuring and trying to reduce GHG emissions. Connects universities with local businesses.

Coffee Growers’ Associations

Increases strength and bargain power of countries’ coffee growers. Promote best practices to growers according to local specificities.

Cooperatives

Economies of Scale. Reduced costs/ha. Maximize farmers’ profits. Lessen CO2eq emissions. Aligns interests of local farmers.

Appendix 1 – Nespresso’s 10+ Program Outline and Incentive Alignment Among Stakeholders For every activity implemented, the farmer receives an additional 3% premium from Nespresso. When three activities are implemented, a 10% premium is paid.

Milling

GHG Reducing Activities Offsetting

Incentivizing on-farm offsetting as a means to neutralize carbon emissions at Nespresso's coffee production Supply Chain by forging relationships with other large multinationals and/or other sectors in Nestlé® to purchase the byproducts of these alternative crops.

Invites farmers who have the resources and capacity to provide

GHG Finance alternatives to reduce GHG emissions. The initiative will fund and, if found successful, the idea will become public access information to Initiative anyone participating in the Nespresso AAA sustainability program.

Nespresso’s 10+ Program 10+

Collection

Creating a marketing campaign to educate stakeholders about coffee production and GHG emissions and how the 10+ Program reduces GHG emissions. Inviting consumer participation into the 10+ Program by offering a means to directly finance the activities recommended to farmers. The 10+ Collection will be sold to customers for a 3% premium per capsule, and all proceeds will be directed to farmers.

Dissemination Communication of Value to Customers and other stakeholders.

Educational Marketing

Employing untraditional ways to communicate sustainable practices to customers. 1. Code system that allows Nespresso customers to learn more about the farmers of the 10+ Program. Information about the program will be provided on capsule boxes, and customers can enter into the 10+ Program website to learn about the specific farmers that produced the very coffee they are drinking. 2. Include a page in the 10+ Program website with an interactive learning animation to explain GHG emissions and coffee production. 3. Invest in interactive kiosks that have the 10+ Program website to reach customers at Nespresso stores.

Other Multinationals + Competitors + Nestlé®

Financial Return for every activity implemented. Operational Costs + Revenue = Profit Margins. Increased efficiency and productivity. Reduce environmental impact while cutting costs on products and services.

Offset carbon emissions with different cultures. Then, monetize production by selling products to partners with similar values but different products (i.e. Bananas), and buying their coffee production (provided that quality is similar). Face similar situation with their suppliers, as several large brands also source from pulverized farmers and deal with similar challenges. Allows Nespresso to share both the implementation costs and the benefits of every improvement achieved. Win-win solution, in which multiple brands with shared values and objectives fight for the same cause and make it even more impactful. Increases customer awareness, thus adding 15value to the brand.

APPENDIX 2 - NESPRESSO'S 10+ PROGRAM IMPACT IMPACT ON NESPRESSO'S SUPPLY CHAIN (Coffee Production only)

IMPACT ON FARMER (Per ha)

Appendix 2 – Nespresso’s 10+ Program Impact; Assumptions and ACTIVITY Findings; and Potential Financing from the 10+ Collection Nespresso Coffee Demand (Coffee qq/Year) 1,612,224

Nespresso Coffee Area Used (ha)

Average Productivity (Coffee qq/ha/year)

140,193

Coffee Production (Coffee qq/Year)

Farm Size (ha)

Average Productivity (Coffee qq/ha/year)

11.5

1.0

11.5

COFFEE PREMIUM

UTILIZATION OF SLOW-RELEASE FERTILIZER A

FERTILIZERS

Avg. N required per Farm (Kg of N/year)

Avg. Cost per Farm (US$/year)

28,992,000

71,196

302

453

24,643,200

64,788

257

385

4,348,800

6,408

Average Cost to Farmers (US$/ha/year)

Regular Fertilizer

42,338

Slow-release Fertilizer

35,988

Savings

6,351

(45%-55% of carbon footprint of coffee production)

GHG Emissions from N (Tons of CO2eq/year)

N Required (Tons of N/year)

Farmer Options

+3%

OPTIMIZING THE USE OF FERTILIZERS Implementation Cost (US$ Millions)

Farmer Options

Implementation Cost with

GHG EmissionsE (Tons of CO2eq/year)

PartnershipD (US$ Millions)

Avg. Implementation Cost Avg. Cost with Nespresso Partnership (US$) (US$)

Normal Use

64,788

Optimized Use

59,605

135

Savings

-20

-10

5,183

-135

-68

CENTRAL MILL WASTEWATER TREATMENT COFFEE MILLING

Farmer Options

(30%-35% of carbon footprint of coffee production) Current Process

GHG Emissions (Tons of CO2eq/year)

Avg. Cost per Farm (US$)

45,150

Energy Cost Savings (US$/Year)

Implementation Cost (US$ Millions)

Wastewater Treatment

403,056

33,863

756

Savings

403,056

-48

11,288

-756

+3%

ON-FARM BIOMASS Trees Required to Offset

OFFSETTING (100% of carbon footprint of coffee production)

Farmer Options

Current Production (Million) 0

No Offsetting

Implementation CostsH (US$ Millions)

GHG Emissions (Tons of CO2eq/ha/year)

Avg. Carbon Emissions per Farm (Tons of CO2eq/Year)

Avg. Cost per Farm (US$)

129,000

Offsetting

1.07

107.48

767

Savings

-1.07

-107.48

129,000

-2

767

+3%

+10%

IMPLEMENTING 3 ACTIVITIES

2013 FINDINGS AND ASSUMPTIONS FACTS AND ASSUMPTIONS

AMOUNT

UNIT DESCRIPTION

GLOBAL COFFEE STATISTICS Coffee Production

1 2

Average Productivity

Area utilized to produce Global GHG Emissions

Coffee Production GHG Emissions

Slow-release fertilizers are 15% - 20% more efficient than regular ones.

Million qq

Slow-release fertilizer is reduces CO 2eq/bag by 9% on avg.

11.5

qq/ha

Assumption: By starting strategic partnerships with colleges, Nespresso can reduce the labor costs of sampling and analyzing soil costs by 50%.

Million ha

Billion Tons of CO2eq

Slow-release fertilizer is reduces CO2eq/bag by 8% on average.

7.6

Million Tons of CO2eq

Assumption: Around 300 Central Mills will be built to support all of Nespresso's farmers.

Tons of CO2eq/ha

Assumption: On average 8 trees are required to offset 1 ha of coffee.

U$/qq of coffee

Assumption: Average implementation cost of $1,000 on 1st year.

0.60

156.86

Average Price

Slow-release fertilizers are 15% - 20% more efficient than regular ones.

147

Emissions/ha

Nespresso 10 Program Notes (Based on information given in the case) A.

NESPRESSO'S COFFEE PRODUCTION Number of sourcing farms

64,000

2013 Findings and Assumptions Sources and Methodology

farms

2.3

(Barone, 2012)

Nespresso's demand of coffee10

1.6

Million qq of coffee

(Volcaf Especialty, 2013)

Area utilized to produce11

140

Thousands ha

Coffee Production/area utilized

of total coffee production

(CNN, 2013) Estimated based on information in the case (Global GHG emissions*14%(Agriculture)*0.14%(Coffee))

Average farm size9

Nespresso purchased12

1.10%

Nespresso's GHG emissions 13

129,000

Tons of CO2eq/year

Fertilizer emissions(55%)14

70,950

Tons of CO2eq

Coffee GHG emissions/area utilized

Milling emissions (35%)15

45,150

Tons of CO2eq

(NASDAQ, 2014)

Price paid by Nespresso16

211

U$/qq of coffee

Estimated based on information in the case

Average Sales Growth Rate17

20%

per year

Given in Nespresso's 2013 Case Competition

2013 Sales Revenues18

5.04

US$ Billions

10.

Projected based average farm size, number of farms, and average productivity

2014 Sales Revenues Forecast19

6.04

US$ Billions

11.

Estimated based on Nespresso's area utilized to produce and average productivity

12.

Estimated by dividing Nespresso's coffee demand by global production

13.

1.1% (Nespresso's demand of coffee production) of total Coffee Production GHG emissions

14.

Given in the case, represents 55% of Nespresso's GHG emissions on coffee production

Potential Financing from 10 Collection 2014 Sales Revenues Forecast +

10 Collection Customers (20%) Proceeds to the cause (3% Premium) Farms initially participating (30%) Proceeds per hectare

6.04 1.21

US$ Billions

15.

Given in the case, represents 35% of Nespresso's GHG emissions on coffee production

US$ Billion

16.

(FAO, 2013) (Bloomberg, 2012)

US$ Millions

17.

19,200

Farms

18.

(Bloomberg, 2012)

821

US$/ha

19.

Forecasted based on previous years' sales revenues and average sales growth rate

36.2

Appendix 3 â&#x20AC;&#x201C; GHG Emission Calculator

APPENDIX 3 - GHG EMISSIONS CALCULATOR Questions: Size of "productive" land in farm (in hectares): Average total yield in the last two years (qq/ha):

Inputs 2.3 11.5

Tons of CO2eq/ha 1.38 1 *Average productivity = 11.5 qq/ha

Cherry-picking method: (Mechanical = M /human = H)

0.0138

Milling technique: Wet = W /Dry = D

0.828

Average bags of fertilizer used in the past two years:

7.7625

Total employees:

10.8

Any other offsets currently being done in the farm: Use of non-fossil energy sources (Yes/No) Waste handling and disposal (Yes/No) Wastewater treatment (Yes/No)

no no no

1 1 1

GHG EMISSIONS:

10.9

Total Tons of CO2 eq emissions / year

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