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  • 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 worlds 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, Wrigleys, 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. Table1 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. Figure1 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 companys 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. Table2 Company Mars Nestl 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 Nestl 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 Nestl 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 Nestl 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 Nestl, 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 Hersheys 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 sourc