Unilever to focus on low cost goods; strategy conflicts with high-cost sustainability commitments
The CEO of global consumer goods manufacturer, Unilever, recently outlined the company’s strategy to switch to lower cost products and concentrate on markets in emerging economies, following poor economic forecasts in developed markets of Western Europe and the US.
This strategy to focus on marketing lower cost goods is likely to conflict with the company’s commitments to source only products from emerging markets which comply with high-cost sustainability standards developed by NGOs.
While the strategy aims to provide lower-cost goods for emerging markets, Unilever’s commitment to comply with NGO-endorsed standards will raise costs of production. These costs will ultimately be passed onto consumers, affecting the ability of households in developing countries to afford quality products.
Unilever already reportedly generates already over half its annual sales from emerging markets such as Indonesia, China and Brazil. Only 16 and 25 percent of its annual sales are from the U.S. and Europe respectively.
Unilever CEO, Paul Polman, recently commented that Europe is facing a decade of economic stagnation while the U.S. grapples with the rise of an “emerging poor” class. In an interview with Bloomberg, Polman referred to the next decade as one of “slow economic growth in Europe” with declining consumer confidence in the United States.
This forecast appears to have lead Unilever to reorientate its strategy; the CEO now claims Unilever will focus on growth economies in the developing world, where there is demand for low cost products and brands.
Unilever claims to use around 3% of the global palm oil output, and is one of the largest buyers of the commodity. The company had made commitments to source only RSPO certified palm oil by 2015, but appears to have had problems achieving this. The company delayed the commitment by five years.
In reality Unilever uses very little RSPO certified palm oil. Unilever claims that 64% of palm oil purchases in 2012 were from sustainable sources, but concedes that most of this was in the form of GreenPalm certificates. GreenPalm certificates “support production of palm oil certified to the standard of the Roundtable on Sustainable palm oil”, but they do not represent the use of CSPO.
Unilever’s tangible commitment to meeting RSPO requirements appears less grandiose – “In parallel we have made a start on developing segregated streams”. Unilever is obviously aware of the difficulties and costs in meeting its sustainability commitments to source and use RSPO certified palm oil.
Segregated supply chains are expensive and will raise costs for Unilever. Now it appears the company intends to focus on supplying low costs goods in developing markets. It is unclear how both goals can be achieved simultaneously. Other manufacturers who also plan for growth in emerging markets would be wise to pay attention to Unilever’s predicament.
FAO: Farmers “central” to increasing investment and reducing poverty
The United Nation agency responsible for addressing issues in global food production has highlighted the need for greater investment in agriculture in order to tackle poverty and hunger in developing nations. The Food and Agriculture Organization of the UN (FAO) identified farmers as the key to increasing needed agricultural investment in their annual ‘State of Food and Agriculture’ report.
According to the report, investing in agriculture is amongst the most effective strategies for reducing poverty and promoting sustainability. The assessment shows that on-farm investment by farmers is currently the most significant source of agricultural investment; far greater than the contribution from overseas development aid.
The report highlights the need to assist farmers, who should form the central component of any strategy that aims to increase investment in the agricultural sector; and emphasises the need to facilitate smallholders operating in the agricultural sector.
This has been a key strategy of the palm oil industry, where palm oil smallholder schemes have achieved a number of noted commercial and development successes. For example, Malaysia introduced the first Malaysian smallholder cooperative scheme in the 1950s under the Federal Land Development Authority (FELDA). The Malaysian palm oil smallholder model has since become the benchmark for smallholder cooperative schemes throughout the developing world.
The palm oil smallholder model is a prime example of how investment and support for smallholders can alleviate poverty and drive economic development. Smallholders cultivate around 40-50 per cent of all palm oil grown in Malaysia and Indonesia.
Smallholders require initial investment and capital. Jakob Skoet, an FAO economist who co-authored the report, said that governments can help smallholder farmers by ensuring access to land and tenure, building rural infrastructure, and supporting producer organisations, such as cooperatives. Palm oil smallholders also require investment in processing facilities that provide a market for palm oil growers to sell their fresh fruit bunches to mills for processing into palm oil.
This type of industry and government investment has facilitated palm oil small farmers in South East Asia, and driven rural development across the region.
The report further noted that smallholders often face particularly severe constraints to investing in agriculture because they often live ‘hand-to-mouth’, and are thereby unable to save or take on additional risk. In order to facilitate their capacity for investment, smallholders require greater land tenure security and better rural infrastructure and public services.
RSPO certification not widely recognised
A recent survey commissioned by a leading UK grocery trade publication found that only 3% of British consumers recognised the label of the Roundtable on Sustainable Palm Oil (RSPO) intended to communicate compliance with the organisation’s sustainability criteria. This report is further evidence that the RSPO system is failing to deliver on its stated goal of promoting palm oil.
One of the major incentives for companies to buy and use RSPO certified palm oil is the ability to market their product as sustainable, based on the RSPO labelling rules. The theory behind eco-labels is that they should add value to the product.
However, when recognition is low – as reported in the UK – there is little incentive to undergo the costly effort of sourcing CSPO and segregating processing supply chains.
This is especially true when there is little evidence that consumers are willing to pay more for certified product. The commercial rationale behind the RSPO system is now being questioned. – Sustainability certification was originally designed to enable producers to provide consumers with a sustainably superior product at a premium price.
To make up for lacking commercial incentive, WWF (a major stakeholder and driver behind the RSPO) pressured key players in the supply chain – especially dominant consumer goods manufacturers such as Unilever and Nestle - to join the RSPO system and pressure producers to adopt RSPO. This was also a cheaper strategy than trying to reach millions of end consumers.
Yet the processors themselves won’t fully apply the system because it is too costly to segregate supply chains. In reality, they buy little certified palm oil.
British retailer ASDA confirmed that around 80% of its claimed use of “certified” palm oil is derived from GreenPalm certificates rather than actual CSPO product. Unilever’s CSPO sustainability claims also appear to be largely dependent on the use of certificates rather than genuine CSPO supply.
What is needed as an alternative to the failing system is a defensible scheme with a recognisable label. Indonesia has recently developed a government endorsed sustainability scheme, and it appears that Malaysia is also in the process of doing so. Consumer goods manufacturers in particular, keenly await a logo that can effectively communicate their sustainability claims.
Indonesian forest moratorium threat to food security and development
Indonesian Forestry Ministry’s Secretary-General – Hadi Daryanto – recently commented that the ministry hopes to continue a moratorium announced in 2011 to impose a two-year restriction on clearing forest in return for $1 billion payment from Norway aimed at reducing emissions from deforestation.
The comments have sparked conflict between the country’s forestry and agricultural ministries. The forestry ministry is legally responsible for the management of Indonesia’s forests and implementation of the moratorium. However, the ban also has a material effect on the country’s agricultural sector. The Agriculture Minister has publically criticised the proposed extension, arguing that the ban is unnecessary and instead should be replaced by revised permit criteria for palm plantations.
Opponents of the moratorium argue that it limits agricultural production, and thereby increases food pressures and decreases economic opportunities within the country.
Indonesia is the fourth most populous country in the world, and is a net food importer of its major staple food commodities. The agricultural sector has been identified as a sector that has the potential to drive economic growth, alleviate poverty, and improve food security. Agricultural officials believe the moratorium is restricting the development of the country by forgoing opportunities for agricultural expansion on land resources.
The palm oil industry in particular – which is a large driver of development throughout the region – believes it has been unfairly penalised by the moratorium due to restrictions in the granting of palm oil plantation permits, while granting of permits for other agricultural activities have been largely unaffected. Indonesian palm oil industry attracts investment from throughout the region, including Malaysian and Singaporean palm oil companies.
Palm oil growers argue that emission reductions efforts and future land-use policy should acknowledge the role of palm oil in driving development, and relieving food security pressures in South East Asia, where land is relatively scarce, and food needs are rising. Decisions to implement and extend moratoriums affect a range of stakeholders beyond the scope of one government portfolio.
NGO U-turn: smallholder model for sustainable palm oil
Activist NGO campaign group, Greenpeace, have ‘supported’ a small village-centered palm oil project in Indonesia based on undefined sustainability claims. The NGO has recently praised the Dosan village for their sustainable palm oil operation. Palm oil is widely regarded as a sustainable crop based on high yield returns relative to small resource inputs required, but it is unclear what makes this operation any more sustainable then the operations Greenpeace has campaigned against.
Greenpeace has campaigned against the palm oil industry in particular operations in South East Asia, PNG and Africa. It has shown little concern for village-based palm oil cooperatives, and has actively campaigned against private and government sector initiatives to promote and facilitate smallholder cultivation.
Village based farming co-operatives may offer development benefits, but they are most effective when supported by private sector investment and technical expertise. Greenpeace have long opposed this type of ‘industrial’ agricultural production in rural villages, despite the obvious development benefits.
Does the new platform indicate a U-turn in support of smallholders, or is it yet another publicity stunt to appear development friendly?
Despite the communication effort to ‘support’ smallholders, Greenpeace continue to attack the private sector and government investment that is necessary to provide smallholders with technical support, start-up capital, and milling facilities that provide a market where smallholder FFBs can be sold to be processed into palm oil.
Greenpeace campaigns against palm oil continue, especially in Cameroon, PNG and Malaysia with little relation to environmental performances of the operators under attack.
The Dosan village industry appears to have been set up by the local government & tax payers and supported by local NGOs. Greenpeace is taking credit, but the strange turn of events have left many wondering what is really behind their new communication platform.