Nespresso: Brewing a business case for high-risk markets

By Naki B. Mendoza 09 June 2015

Freshly picked coffee cherries. Nespresso creates shared value for smallholder farmers in fragile South Sudan. Photo by: Nestlé / CC BY-NC-ND  

The challenge to create shared value can extend to creating entirely new industries, particularly for companies operating in fragile markets newly emerging from conflict.

A post-conflict environment presents myriad opportunities for new business — opportunities that must be weighed against ever-present risks of high operating costs, value chain bottlenecks and, of course, a resurgence of hostilities.

How does a major corporation balance those tradeoffs to build a strong case for investment? That is precisely the issue that coffee giant Nespresso grappled with when undertaking a flagship project to revitalize coffee production in South Sudan in 2011.

Four years on, 2015 marks a critical next step for the project as the first year beyond initial startup phase.

From cradle to grave and back

For Nespresso, the global coffee brand of Swiss food giant Nestlé, the decision to enter South Sudan was rooted foremost in the attractive source of supply of its core product. The world’s youngest country is also one of its oldest coffee-producing cultures, home to a tradition of coffee cultivation that stretches back several millennia in east and central Africa.

“Africa is the cradle of coffee and there are exceptional coffees in South Sudan,” Daniel Weston, Nespresso’s director for creating shared value, told Devex. “We are rediscovering something that has been unexploited for many, many years.”

Much of that industry and infrastructure, however, was decimated by a long and violent civil war from which South Sudan eventually emerged as a sovereign state in 2011.

That same year, Nespresso became the first major coffee company to re-enter South Sudan. Its bold mission: to revive high quality coffee production in the country.

The traces of the conflict essentially meant that Nespresso, in partnership with international nongovernmental organization TechnoServe and South Sudanese government entities, has embarked on rebuilding an industry from the ground up.

In practice this involved a two-year upfront investment of 700,000 Swiss francs ($754,000) to prove up the potential of coffee production on a commercial scale in a nascent market. Those funds went toward technical assistance to help farmers boost their agricultural yields and to set up “wet mill” processing units that expedite the production process.

The decision to invest in South Sudan was, in a sense, business as usual. As a technical expert in development economics, TechnoServe has a long resume of working in post-conflict states that includes El Salvador, Mozambique and Rwanda.

For its part, Nespresso’s strategy in South Sudan models its practice elsewhere in the world of funding farmer trainings and paying cash premiums directly to coffee farmers that average between 30-40 percent above market prices. By forging relations with farmers through technical trainings and purchasing directly from them — rather than on wholesale commodity exchanges — Nespresso says it is investing in securing a sustainable base of its future supply. The company’s internal standards also compel it to maximize those investments in farmer relations to make sure they yield the best-quality output.

“Nespresso can only buy coffee that is of the highest quality,” Weston said. “If farmers provide coffee of lower quality, we don’t buy it.”

The practical business sense of Nespresso’s investment also had the makings of a winning shared value strategy for South Sudan. Virtually entirely reliant on oil revenues, investing to revitalize the coffee industry can boost incomes for domestic farmers over the long term and diversify the country’s economic base.

Early returns have indeed been favorable. Since 2012, approximately 300 farmers have formed South Sudan’s first three coffee cooperatives. The project yielded the first-ever coffee exports from South Sudan in 2013 when 1.8 metric tons of green bean coffee were airfreighted to Nespresso. That shipment, consequently, represented the first non-oil export from South Sudan to Europe, according to the Ministry of Agriculture.

“We are putting together the pieces to be able to construct a coffee industry,” David Browning, the global head of TechnoServe’s coffee practice, told Devex.

Still risky business

Yet its investment has not always percolated as planned in a country as fragile as South Sudan.

Just two years after the project’s launch, the country descended into a civil war that still rages today. The United Nations estimates approximately 555,000 people have fled the country and another 1.5 million are internally displaced, making South Sudan one of the worst humanitarian crises in the world.

Nespresso’s coffee project is located in the southern Yei region of the country, relatively far from the main flashpoints in the northern Unity and Upper Nile states. But macro-instability has nevertheless spilled over into Nespresso’s operating regions in the past two years, halting activities and causing a temporary evacuation of personnel on the ground.

Challenges pervade beyond the direct conflict. South Sudan is roughly the size of France but only has around 100 miles of paved roads, TechnoServe notes. Overhead costs are burdensome. According to Nespresso, the capital equipment it uses in South Sudan costs about 40 percent higher than it would in Colombia when factoring in transportation and import duties.

The ongoing risks are obvious to the partners, but all parties are sanguine about the project’s long-term viability. Having concluded the startup phase in 2014, Nespresso now plans to scale up operations toward commercial production with an additional 2.5 million francs in the coming years. Its aim is to support up to 8,000 smallholder coffee farmers by the end of the decade.

Early results toward that goal are promising. Yields for the upcoming November-March harvest season are expected to be 16 metric tons — four times greater than the previous harvest, according to Technoserve.

Now with tangible results to show, Nespresso is seeking additional partners to finance greater investment and mitigate project risk.

“By starting something you get a degree of success which enables you to create a federation of interests,” Weston said.

While no uniform strategy exists for investing in a post-conflict market, Nespresso’s experience provides a robust blueprint for creating shared value under a long-term vision.

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About the author

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Naki B. Mendozamfbmendoza

Naki is a former reporter for Devex Impact based in Washington, D.C., where he covered the intersection of business and international development. Prior to Devex he was a Latin America reporter for Energy Intelligence covering corporate investments and political risks in the region’s energy sector. His previous assignments abroad have posted him throughout Europe, South America and Australia.


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