How Big Chocolate plans to save its cocoa supplyFebruary 7, 2012: 9:45 AM ET
Hershey is looking to secure its supply chain through a combination of philanthropic efforts aimed at cocoa farmers. Will the efforts actually help these farmers?
FORTUNE -- A Hershey's Kiss is more complicated than it looks. Most of the cocoa in it and other chocolate candies comes from West Africa, and it makes its way through a long supply chain to get to U.S. factories.
Now more than ever, Fortune 500 companies such as Hershey (HSY) have to take responsibility for every link in that chain. On January 30, Hershey announced plans to put $10 million towards solving child labor problems on West African cocoa farms by 2017. The money should also help farmers access educational programs and improve their cocoa yield.
Hershey's latest move is part of a larger effort to secure the cocoa supply chain, a campaign that began with the founding of the World Cocoa Foundation (WCF) in 2000. The WCF joined big chocolate companies -- including Hershey and its competitors Mars, Nestlé, and Kraft (KFT) -- with governments and farmers in cocoa-producing nations.
Big businesses run on growth and profit, two figures that aren't necessarily linked to the well-being of small farmers in foreign countries. But certain characteristics of cocoa may put the chocolate industry in a sweet spot for sustainable development.
What goes into making our cocoa
Sustainable cocoa development requires competing companies to work together to help farmers, no small hurdle. "The global confectionery packaged goods industry is intensely competitive," Hershey said in its 2010 annual report. "Some of our competitors are much larger firms that have greater resources and more substantial international operations."
But there is common ground. All industry players benefit if farmers produce more cocoa. Market demand is growing. As nations like India and China grow wealthier, new members of their burgeoning middle classes have developed an appetite for luxury goods such as coffee and chocolate.
At the same time, companies are keeping an eye on environmental and political threats to cocoa yields. Space to grow cocoa is limited; it only thrives in equatorial climates. About a third of the crop grown every year is trashed because of pests and disease. Unstable political conditions in cocoa-producing nations also adds to the volatility in the market. Cote d'Ivoire, for example, produces over a third of the world's cocoa. In 2011, political unrest surrounding a local election caused the government to cease all exports, which limited the cocoa supply and sent cocoa prices skyward.
Companies need to get on the ground to ensure their supply. Hershey, for example, introduced a program called COCOALINK in 2011. COCOALINK distributes information about climate and pest control via SMS to farmers with cell phones, which most of them already have. "We're starting to see the benefits when you really get to the farmers and give them the best information," says Andrew McCormick, the vice president of public affairs at Hershey. "The preliminary results are that it will double crop yields in a couple of years."
Chocolate companies are also working on other kinds of community outreach. In 2009, several companies joined the Bill and Melinda Gates foundation on a $40 million project to boost education and improve farming practices in cocoa-growing regions.
Improving cocoa yields can help communities in other ways. For example, the crop depletes the soil of nutrients, so it grows best on plots with other plants. This means that companies with a vested interest in healthy cocoa need to work with governments and NGOs to encourage sustainable farming in general, not just for cocoa.
Companies also benefit from supporting education in local communities. The average age of cocoa farmers is about fifty, says Bill Guyton, president of the World Cocoa Foundation. In an ideal situation, education programs can ensure that there is a generation of cocoa farmers for these corporate players to work with 20 years from now.
Education goes both ways. "Candidly, we don't have as big of a physical presence in West Africa as we should," says Hershey's McCormick. But part of COCOALINK involves setting up research centers in West Africa. "We're doing a heck of a lot of cocoa research for future product formulations," he says. "We're going to use our farm to get our scientists closer to the farmers and the farm."
Philanthropy vs. taking care of business: room for both?
There's clearly a business case for companies, but how far will these efforts go towards helping farmers? The chocolate industry has an ugly history in West Africa. Around 2000, when the WCF formed, Congress received reports of serious violations of child labor laws on West African cocoa farms. In some cases, third parties were trucking children in to cocoa-producing regions and reports said that many kids were exploited and forced to work without pay. In other cases, cocoa-farming families encouraged children to work with them in the fields, often putting them in dangerous situations: wielding machetes, exposure to pesticides.
It can be difficult for companies alone to enforce child labor laws, but they will have to push to do so. "Companies do need to play a role in the child labor issue and they are," Guyton says. "It's a shared responsibility with the African governments and also the communities where it happens."
But sharing responsibility can make it difficult to enforce standards, especially when governments don't have child labor laws that meet U.S. standards. Big corporate investment could deliver benefits because of increased transparency demands from consumers and NGOs. From a business standpoint, these companies can't afford lawsuits and bad public exposure.
Fortune 500 cocoa-hungry companies stand to be a force for good, says Osita Ogbu, an economics professor at the University of Nigeria and a fellow with the Brookings Africa Growth Initiative. "Anything that improves the productivity of cocoa farmers that increases the rural income, and at the same time addresses environmental scarcity, is welcome," he says.
And successful philanthropy often requires for-profit organizations, NGOs, local people and governments to work together, a path that the chocolate industry is pursuing.
But the real step towards sustainability will come when companies expand their thinking beyond helping farmers and start to manufacture chocolate locally. That's where you'll start to see significant profit margins for West Africans and job creation, says Ogbu. "Is it possible that the sons of daughters of cocoa farmers will not be cocoa farmers but will work in chocolate factories?" That, he says, will mark the beginning of a truly sustainable Kiss.