BUSINESS (NO PLAGARISM A+ WORK, ON TIME)

Why Kraft Foods Cares About Fair Trade Chocolate

SEPTEMBER 2012

REPRINT NUMBER 54126

Interview with Chris McGrath (Kraft Foods)

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As vice president for sustainability at Kraft Foods, Chris McGrath has been pivotal at guiding the company’s sustainability efforts. With its global reach and massive market shares, the company is setting new standards on how to source through sustainable agriculture and keep packaging out of landfills.

CHRIS MCGRATH (KRAFT FOODS), INTERVIEWED BY NINA KRUSCHWITZ

Why Kraft Foods Cares About Fair Trade Chocolate

With 23 years in the food industry, Chris McGrath is responsible for balancing the environmental, social and economic considerations across Kraft Foods' global portfolio. Her job: helping to ensure that sustainability is a part of every business decision. McGrath works with business teams around the world to reduce Kraft's environmen- tal global footprint and deliver Kraft's sustainability commitments.

Last year the company laid out a plan to divide into two independent public companies — a North American grocery business, Kraft Foods Group, Inc., and a global snacks busi- ness, Mondelēz International, Inc. McGrath will become vice president for external affairs at Mondelēz International, with broad oversight for the new company's sustainability, health and wellness and public af- fairs initiatives, beginning October 1.

Among the Kraft brands are staples of many American children's lunches: Oscar Mayer hot dogs and lunch meats, Capri Sun and Kool-Aid beverages, JELLO-O gelatin desserts, Nutter Butter and Oreo cookies.

In 2010, Kraft acquired the esteemed U.K. chocolate company Cadbury, and, according to Forbes, became a confectionary powerhouse: "Kraft has now become the biggest player in the global chocolate industry with popular brands like Dairy Milk, Creme Egg, Flake, and Green & Black's." Forbes estimated that Kraft's global market share in chocolates and candies was 12.5% in 2011. [See http://bit.ly/S8n3RT.]

The Cadbury product line has opened up new sustainability avenues for the U.S. company. "Kraft Foods has been on a sustainability journey for quite a few years," says McGrath, "but we've had an increased sense of focus since 2006. Much of what we'd done in the past was in our manufacturing operations and was viewed as efficiency — doing more with less. That work continues, but we've gone beyond that by building sustain-

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ability into our business strategy and changing our corporate culture. A particular focus is to invest in the sustainability of the key agricultural commodi- ties that we buy." In 2011, for instance, Kraft increased its sustainable sourcing of agricultural commodities by 36%. It's now the world's largest buyer of Fairtrade Certified cocoa and Fairtrade Organic cocoa.

In a Q&A with MIT Sloan Management Review's Nina Kruschwitz, McGrath talks about Kraft's multi- year support for sustainable development programs and commodities certification, its partnership with the upcycling company TerraCycle and setting met- rics for everything from how much waste water the company is creating to the weight of its packaging.

You're a food company, which means you're dependent on the earth for your raw materi- als. How does that influence your sustainability strategy?

It's not just the food that goes into our products, but the materials we use to package and ship them. Ob- viously these resources aren't limitless, which is why we've been looking at how we source, produce and transport our products to find opportunities for change.

It might surprise a lot of people to hear that we've been working in sustainable agriculture for nearly 20 years, starting with coffee in 1993 and expand- ing to cocoa in 2005. In fact, our relationship with agriculture in developing countries goes back much further. Our Cadbury brand has been working in Ghana for about 100 years.

We take a three-pronged approach to sustainable agriculture. We're focused on commodities certifi- cation, support for industry-wide sustainable development programs and our own projects man- aged by some of our brands. Together, we're using our scale to help make improvements in the system.

Let's talk about sourcing some of your food ingredients first.

Sustainable sourcing is a key part of our strategy. To date, we have defined sustainably-sourced as third- party certification or verification. That's because models like Rainforest Alliance, Fair Trade, and UTZ Certified help boost crop yields, protect the environment and they help farm workers and their families improve their livelihoods. And they can help boost overall capacity more quickly.

I'm proud we've played a unique leadership role in bringing certified coffee and cocoa to mainstream consumers. Last year alone, we increased our sus- tainable sourcing of agricultural commodities by 36%. We're among the world's largest buyers of cocoa from Rainforest Alliance Certified farms and the world's largest buyer of Fairtrade Certified cocoa and Fairtrade Organic cocoa. Today, more than 15 of our brands now carry the Fair Trade or Rainforest Alliance marks.

Most people have probably heard of fair trade coffee, but not cocoa. Can you talk a little bit about that initiative?

Sure. Since 2008, our Cocoa Partnership, estab- lished by Cadbury, has committed approximately $70 million to invest in cocoa farming over ten years. The objective is to make cocoa farming sus- tainable by focusing on better farming practices as well as community development. The program is now in 200 Ghanaian communities and has forged alliances with The Ghana Cocoa Board and Kuapa Kokoo, a Fairtrade co-op helping 60,000 farmers and their families.

You can see the success we're having in our choco- late brands. Fairtrade certified varieties of Cadbury Dairy Milk bars are now available in six countries and we've already quadrupled the volume of cocoa sold under Fairtrade terms from Ghana — about 20,000 tons of Fairtrade cocoa per year. That trans- lates to approximately $5.7 million in premiums that are available to improve farming communities' livelihoods.

Last October, we expanded the Cocoa Partnership

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into the Dominican Republic, an important source of cocoa for our Green & Black's chocolate, with a five-year commitment with the United States Agency for International Development. The pro- gram will reach nearly 10,000 small-scale cocoa farmers of the Conacado cooperative and increase the supply of organic Fairtrade cocoa and provide an additional social premium for community in- vestment.

In Europe, our Côte d'Or and Marabou chocolates have purchased significant volumes of Rainforest Alliance Certifed cocoa.

In addition, we have opportunities to go beyond buying certified ingredients to help build sustain- ability in our supply chains. Some of our biggest work to date involves support for two initiatives through the Bill & Melinda Gates Foundation to in- vest $90 million over five years to advance sustainable production of cocoa and cashews in West Africa. It's projected to create 5,500 new jobs, impact 1.4 million family members in the region and help break the cycle of poverty for 200,000 cocoa farmers and 150,000 cashew farmers.

And our own Cocoa Partnership provides a model that can support increased direct investment in our cocoa supply chain in the coming years.

Kraft has been doing similar work with cof- fee, correct?

We've been a pioneer in bringing sustainable pro- duction of coffee to mainstream brands around the world. Last year, our European coffee brands com- mitted to sustainably source 100% of their coffee by the end of 2015. Our consumers and customers care about the benefits certification and verifica- tion deliver, which is good for business and brings our work full-circle.

One of our biggest successes for coffee has been in the U.K., where we positioned our Kenco brand with the Rainforest Alliance Certified seal that gen- erated double-digit revenue growth and spurred further product innovation. In Sweden, we've seen

sales of instant and espresso coffee with the Rain- forest Alliance seal double for our "away from home" customers.

Our coffee purchases from Rainforest Alliance Cer- tified and 4C verified farms represent more than 15% of the coffee demand for Kraft Foods Europe, and we expect this amount will continue to grow in the coming years through planned investment in key origin countries such as Vietnam and Brazil.

How do you establish and measure sustain- ability goals at Kraft?

It's easier to improve something if you measure it, so we began by establishing a solid baseline under- standing of our situation and we've been working ever since then on continuous improvement.

Since we can't do everything, we've used our focus to concentrate on the areas that matter most to our business and where we can make the biggest im- pact: agricultural commodities, packaging, energy, water, waste and transportation and distribution.

In 2006, we set aggressive goals against these areas to track our progress and to hold ourselves ac- countable. We used 2005 as our base year and looking to 2010, we made steady progress, and we greatly exceeded several of them. We more than doubled our goals for manufacturing waste, water, and far exceeded our goal on packaging.

Can you share some of the specific results? From 2005 through 2010 our energy use was down 16%. Our CO2 emissions were down 18%. Incoming water was down 30% and net waste was down 42%. And packaging was down 200 million pounds. In ad- dition, we removed more than 60 million road miles from our transportation and distribution network.

In early 2011, we expanded our sustainability goals. We did this to include the Cadbury and LU busi- nesses acquired since 2007 and to build on our previous success. That's when we added targets for transportation and agricultural commodities, and

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we've also begun looking at our supply chain around the world for opportunities to make a dif- ference there.

Where are you in the process of looking at your supply chain? That's a hugely compli- cated task for a company as big as Kraft Foods.

You're right. To get the biggest impact, you have to look across the supply chain end-to-end. We re- cently completed a pioneering survey that maps our company's total environmental footprint. This was a first-of-its-kind project for our industry. We'd been working since 2009 to measure, understand and manage our global environmental footprint — not just the carbon footprint for climate change, meaning air, but for land and water use, too.

We did the footprinting work to better understand our impacts and gain more insight into where we can make the greatest difference. Having this knowledge can help us improve our capabilities and effectiveness in sustainability projects. And to help ensure we got it right, we found some excellent partners and had the work reviewed by World Wildlife Fund and notable academics at the Univer- sity of Minnesota's Institute on the Environment.

Our footprint shows clearly that our focus should remain on sustainable agriculture as that is where the majority of our impact lies.

What other ways are you using to measure your impact?

We've used lifecycle assessment [LCA], which builds on our footprinting project in figuring out how to reduce our environmental impacts. LCA measures the footprint of what goes into making a product, from farm to fork and beyond.

LCA gives us a competitive advantage because it gives us more insight into how to reduce our prod- ucts' footprints, find efficiencies and validate and explain those benefits to customers and consumers. When we're making more efficient designs and

more effective use of the raw materials to make our products and packaging, we're making changes that benefit our business, the environment and our cus- tomers.

Can you give us some examples of how that lifecycle assessment has been used to come up with new packaging designs?

Sure. Here in the U.S., we came up with a totally new salad dressing package design for our foodser- vice customers — in restaurants, cafeterias and hospitals, for example — called the YES Pack. It takes 50% less energy to produce, uses 28% less pri- mary packaging material and has 70% fewer CO2 emissions from transportation than the previous pack. Restaurant operators love it because it's a su- perior design that's easier to use in their kitchens and lets them get more product out of the package; it delivers a competitive advantage over the typical dressing package design.

In the U.K., the Kenco coffee team used LCA to confirm that its new Eco-Refill package delivered a 70 percent savings in the packaging's carbon im- pact footprint compared to its glass counterpart.

How do these kinds of examples fit in to your overall business case — the financial case —for sustainability?

While we don’t share the specific financial data for our projects, I can tell you that our sustainability projects have to make business sense. Any project requiring capital needs to make sense for our busi- ness, the environment and society. The return on investment may take time, but it needs to pay off in the long run — otherwise it's not sustainable!

One of our biggest success stories has been the Kenco coffee brand in the U.K. that I just men- tioned. Kenco’s marketing strategy is based on three platforms — sustainable sourcing, packaging, and energy reduction and efficient resource use. We now source 100% of our Kenco coffee beans from Rainforest Alliance Certified farms. Those Eco-Re- fill packs weigh 97 percent less per gram of coffee

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than any of our glass jars. That means that once used, less waste is sent to landfill. And to provide an alternate end-of-life solution, the company Terra- Cycle, which provides free waste collection programs for hard-to-recycle materials, helps con- sumers collect used refill bags to be “upcycled” into new consumer products, keeping the packaging material out of landfills.

Have you had new kinds of collaborations as part of your sustainability work?

Well, a great example is our work with TerraCycle. They have consumers send them non-recyclable packaging and then reward consumers for sending it back rather than putting it in the trash. They have a great, unique business model.

TerraCycle had approached us with a novel way of turning used packaging into brand new products like tote bags and folders. We wanted to find solu- tions to help divert packaging that can’t be recycled from going to landfill, and we knew that working with TerraCycle would raise our brands’ profile and influence our consumers to make better choices.

We were the first major company to partner with TerraCycle when they were still very small. Our Capri-Sun beverage brand took a risk. Because Ter- raCycle gave us a unique solution, that relationship has blossomed.

Today, several of our brands are working with Ter- raCycle and we’re the largest sponsor of TerraCycle brigades, which we’ve helped expand to 11 coun- tries. We now have more than 130,000 locations around the world with around 2.5 million people collecting post-consumer waste. TerraCycle has en- abled us to divert more than 170 million household packages and 3,800 tons of manufacturing waste from going to landfills or incineration.

That sounds like a really exciting partner- ship to have watched blossom.

As much as we can do by ourselves, we can do even more with others. By partnering, we share funding,

training and know-how. We’ve been fortunate to find great partners in sustainability projects over the past several years, from the Bill & Melinda Gates Foundation and the World Wildlife Fund to the World Cocoa Foundation, Fairtrade and Rain- forest Alliance. These collaborations boost our scale and help accelerate development and change in more areas, and in more commodities, more quickly than if we were to go it alone.

Sustainability is now part of how we do business. It's a priority across our organization, from man- agement to marketing, operations, R&D and beyond. It's a priority from the senior most levels on down. We deliberately have a lean core team that provides strategic direction from the center of the company. That central team helps provide focus, direction and leadership, but ultimately, it’s up to our business leaders for each of our product catego- ries to decide and execute specific projects that impact their business. They are autonomous busi- ness units and financially accountable, and they are held to these goals.

Success at sustainability takes focus, great partners and seeing opportunities across the whole spec- trum of the value chain. Kraft Foods has had a lot of success because we’ve stayed focused on what mat- ters most — to our business and to our stakeholders — and by raising the bar across the company. It’s a journey. And it’ll take years. But done right, we know that building sustainability into our business is good for the planet, the people and ultimately, our profits.

Nina Kruschwitz is managing editor and special projects manager of MIT Sloan Management Review.

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