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Why and How Coffee Can Command More Value From Consumers

by Michael Sheridan of CRS Coffeelands Blog

Last month I published a post under the snarky title “It’s the market, stupid” along with snide Tweets like this one:

I suggested that the best way to understand what happens (or doesn’t) at origin is to watch closely what happens (or doesn’t) in the marketplace. A few weeks later, SCAA Executive Director Ric Rhinehart opened the 2014 Symposium by making the same point, only better and more politely, when he suggested that coffee must command more value in the marketplace if it is going to deliver more value at origin.

(more: Counter Culture Buyers Ionescu and Hill on a ‘Coalescing’ Direct-Trade Philosophy)

“BACK-OF-THE-COCKTAIL-NAPKIN” CALCULATIONS

Working from “back-of-the-cocktail-napkin” calculations, Mr. Rhinehart estimated the economic contribution that coffee makes to the people who depend on it for their livelihoods at just $0.54 per day. Check his work here:

  • 100 million bags of exportable coffee
  • 13.2 billion pounds of exportable coffee
  • average price of $1.50/lb.
  • $19.8 billion of revenue flowing to origin countries
  • 25 million families dependent on coffee for their livelihoods
  • 100 million people dependent on coffee for their livelihoods
  • $198/person/year of coffee revenue
  • $0.54/person/day of coffee revenue

This rough estimate comes in well below the $1-a-day extreme poverty threshold, and neither takes into account the fact that only a part of the FOB price reaches farmgate (to say nothing of farmworkers) nor discounts costs of production–two measures that would knock the estimate down well below $0.54/day.

Yikes.

THE SOURCES OF COFFEE’S VALUE IN THE MARKET (AND ITS IMPACT AT ORIGIN)

Mr. Rhinehart’s comments – and the whole of Symposium – were focused on two related ideas: (1) coffee’s future depends on industry’s ability to generate more value for the people who grow it and harvest it, and (2) industry can most reliably drive more value to source if it can position coffee to command more value from consumers. Mr. Rhinehart’s contribution to the conversation was not, mostly, focused on coffee, but on what coffee might learn from wine in this regard.

(more: How Matters: Communicating the Impact of International Development Work)

He told the tale of two bottles of wine featuring the same grape varieties – one that retails for around $18 and another that sells for $275 – and explored the factors that account for the difference in value. There is a clear difference in the intrinsic quality of the two wines, but the quality gap doesn’t fully explain the price gap, Mr. Rhinehart insists. Consumers pay different prices for them because they experience the two wines differently.

What constitutes a consumer experience is tricky stuff. It may be as much about perception as reality, which means we may need to pair the rigor of coffee science at World Coffee Research with something as robust in the area of consumer research.

Mr. Rhinehart suggests that information about the provenance of wine (and coffee) plays a central role in creating the perception of quality. But service and the consumer space are also critical aspects of the value storyline. Mr. Rhinehart owns one of the $275 bottles of wine that starred in his story. When he is ready to uncork it, he will do so with people he loves. And he’ll seek just the right place for the experience – one that combines good hardware (the right glasses, the right decanter) and great software (a sommelier who knows and delights in his craft) in a physical space that will unlock the full value of that bottle of wine. Coffee, he argues, must make this migration from beverage to experience if it wishes to command more market value.

Ric Rhinehart SCAA executive director

Ric Rhinehart at Symposium. SCAA photo.

THE VOCABULARY OF VALUE

I heard in Mr. Rhinehart’s presentation echoes of the one that Oliver Strand of The New York Times delivered to a Let’s Talk Coffee audience in El Salvador last year. Like Mr. Rhinehart, Mr. Strand invoked the example of wine to illuminate a way forward for coffee. Mr. Strand focused his comments particularly on communication–the kinds of vocabulary that might help evoke the ideas of the consumer experience Mr. Rhinehart describes.

Mr. Strand held up the “three vees” of wine as an example of an effective and elegant approach to communicating value: vineyard, variety and vintage. He suggested coffee may opt instead for three Rs, and wonders whether it may have already two of them in roaster and region. (He thinks the emphasis on relationships that has characterized lots of the Direct Trade communications–the potential third R–misses the mark. He said, memorably, that knowing who raised his pig doesn’t make his pork taste better.)

(more: Farmworkers: The Coffee Industry’s Ethical Blight and a PR Disaster in Waiting)

Whether or not you agree with the three-R recipe, it seems clear that we are still searching for a vocabulary that will help us communicate more effectively to consumers the sources of the value we create together. Whatever words we do decide to use, we need to charge them with meaning and infuse them with the kinds of associations to which consumers will assign greater value.

THE ULTIMATE PRE-COMPETITIVE COLLABORATION?

Repositioning coffee to command more value is a decidedly market-facing affair. But that doesn’t mean it is only for market-based actors.

Coffee’s storyline, like coffee itself, starts on farms in the coffeelands. If that storyline is going to change, everyone along the chain, from growers to baristas, have to work from the same new script.

Besides, everyone in the coffee trade stands to benefit from enrichment of the consumer experience that effectively increase coffee’s value. It may be the surest way to address the issues I have spilled so much ink on here over the past few years – seasonal hungercoffee leaf rustwater resource management,incentives for quality and, more recently, farmworker rights. This is an effort that should meet with chainwide cooperation, not just from different kinds of actors performing different supply-chain functions, but also among competitors performing the same functions. It may be the ultimate pre-competitive collaboration.

Comment

5 Comments

Andrea Johnson

This is spot on. Our farmers invest so much of their time, effort, money and themselves into this product. We should conversely invest in them. Thank you for this.

Michael

Andrea:

You’re welcome for this. Thank YOU for everything you are doing to deliver more value to growers in Jamaica.

Michael

paul

michael,
there are so many problems here. i agree with the basic premise that people who grow coffee need to get more money. discerning consumers already are doing what is suggested as i just spent $18 for 12 oz of stump town whole beans. i’m hopeful that whoever grew those beans got more than $1.50 for them. however, these comparisons to wine and other foods are so misguided. roasting is such an important step in the process, and that revenue is separated from the grower. while there are cases in wine where the producer and grower are separated (see negociant), it is mostly the producer who reaps the benefit. but expensive wine is almost always a domain operation so that production and growing is done by the same team. but the farm workers are frequently underpaid there as well. i have never read anything by oliver strand, but based on your quotes here, i could not disagree more. the most important item in wine is producer. and “knowing” who raised your pig does not make it taste better – but who raised it does make it taste better. i’m sure bill neiman would have something to say about it.

Michael

Paul:

Thanks for your comment. You raise some valid critiques of specialty coffee’s aspirations to position itself as wine has in the marketplace. The two big ones I see here are (1.) the structural differences between coffee and wine and (2.) the importance of producers in market-facing communications.

VERTICAL INTEGRATION

You point out the important structural asymmetry between coffee and wine. There are so many parallels between the two that the vital difference you mention in degree of vertical integration of the two value chains can get lost from view. The structure of the wine industry you describe, with the producers who own the land also owning the brands, is the envy of coffee growers. Without question, the disaggregation of the growing function from the roasting function (which accounts for most of coffee’s added value) does complicate matters in coffee in ways they are uncomplicated in wine.

The vertical integration of wine means that the same actors are directly managing everything from growing to marketing, which creates all kinds of efficiencies that coffee doesn’t enjoy. On a vineyard, there is tight alignment of growing and processing with marketing and frictionless “upstream” information flow to the farm about what the market wants, why and what it is willing to pay. In my experience helping build bridges between roasters and growers in coffee, this market intelligence gap is one of the most important obstacles to competitiveness among coffee growers and one that doesn’t plague vineyards.

So we can agree that the coffee’s chain is longer, kinkier and complicated than wine’s, and it makes pushing value upstream harder for roasters than for vineyards. But hardly impossible.

There are all kinds of innovative incentive programs emerging in specialty in which roasters are communicating more clearly to growers about what they want and why, overcoming the disjointed structure of the coffee trade and finding ways to push information and financial incentives upstream.

So the obstacle may be less coffee’s structure than its margins. We agree growers and farmworkers should earn more. Putting more money into the hands of roasters makes that possible, despite the inefficiencies of the coffee supply chain.

PRODUCERS or VINEYARD

You question Oliver Strand’s suggestion that knowing who raised the pig doesn’t make his pork taste better. I want to be careful not to slip into the role of apologist for Mr. Strand or Ric Rhinehart here—the wine comparisons are theirs, after all, and not mine. And I certainly don’t want to presume to speak for either of them. But in the case of Mr. Strand, I suspect he would agree with you about the importance of the producer in wine. In fact, the first V in his 3-V formulation–vineyard–speaks precisely to the tradition and credibility of the producer. When you recognize the name of the vineyard on a bottle, you make certain associations about the underlying quality of the wine that is inside.

I am not sure why Mr. Strand would find vineyard or producer information so important in wine but suggest it is somehow less important in coffee. I think the two of you agree that the roaster is vital to coffee’s value proposition–you highlight it in your comment and Mr. Strand includes it in the two Rs he likes for coffee’s synthesized communications. But as Mr. Strand extends toward the source of our coffee he stops at region and does not continue on to the farm level.

As any wine enthusiast knows, just because a wine carries a well-regarded appellation doesn’t mean it’s good. Similarly, just because a coffee was grown in Denomination of Origin like Marcala or Nariño doesn’t necessarily mean it is good. The terroir of those places may be necessary to produce distinctive coffees but it is hardly sufficient. Like grape growers, coffee growers must practice careful husbandry, harvesting and processing to coax the full quality potential from their coffee. In short, I fully agree with you that producers are vital to an improved coffee storyline in the marketplace. And I agree that there are limitations to the value that producers who are successful in telling their story to the marketplace can generate from that kind of positioning.

There are some examples of coffee estates that have managed to build global brands in the specialty coffee community in the way that vineyards have done–brand names that evoke strong associations with quality. Aida Batlle’s farms in the western highlands of El Salvador, Arturo Aguirre’s El Injerto estate in Huehuetenango, Guatemala, and Price Peterson’s Panama estate La Esmeralda come to mind as growers who have gotten closest to wine in terms of their ability to create recognized brands around their estate names. But even they don’t roast their best coffee for the highest-value segments of the market–they still export it coffee green and leave it in the able hands of quality obsessed roasters in places like Portland and London and elsewhere.

Incidentally, this disconnect that is the source of your discontent around the coffee-wine comparison is precisely why I do like relationships as the third R in a three-Rs recipe for communicating coffee’s value to the market–it can help to bridge the gap between growing and roasting.

DISTRIBUTION OF VALUE

One question you didn’t raise in your comment and I didn’t raise in my post is the question of how value is distributed in the coffee chain. Creating more value in the market may make it possible for roasters to deliver more value to growers, but it doesn’t necessarily mean they will distribute that newly created value equitably. They have to want to do it and be willing to put in place the systems required to push that added value upstream to growers and farmworkers. Which is, as you point out, harder in coffee than wine. But not impossible.

Michael

paul

michael,
first off, i appreciate the response, and i’m enjoying the dialogue. i’m more of a wine nut than a coffee nut; but i do seek out quality in both items. you obviously have a wealth of knowledge of the coffee trade, and i appreciate you downloading it here.

allow me to clarify some things on the wine trade: vineyard does not necessarily mean producer. in france (especially in burgundy), there are multiple owners of most vineyards. and one producer’s Clos Vouegot, can be completely different from the next producers. which is why true wine geeks always seek out producer first, and within a specific producer’s portfolio, then some specific vineyards.

not being as knowledgeable in coffee, i seek out roasters i like and trust that the roaster seeks out the best beans. i have friends that seek out specific origin coffee, but it always comes back to the roaster first. “get me peets summatra..” (or whatever) since most of us want to brew our cup as close to the time the beans are roasted, it makes it difficult to get that vertical integration and build that name recognition, but obviously not impossible.

right now to me, it seems that it’s the roaster who is in control of this dynamic. perhaps, growers like the ones you mention, will gain enough traction in the marketplace, that they pick the roaster who is lucky enough to get their beans. and their name recognition will be what i (and others) look for in coffee. when they have that kind of power, the value will be pushed upstream to the growers. right now, i see out roasters that seem to push that value upstream; and whose coffee, of course, tastes good to me.

we see this dynamic some times in the wine business. for example, the Clos Pepe vineyard in CA has a single owner, with multiple producers (including Clos Pepe) making wine from the vineyard. but the off-site producer is the one who will say, “i was lucky enough that Wes Hagen (vineyard manager/owner at clos pepe) sold me some fruit, so i can offer a clos pepe pinot this year…”

at some time when coffee growers have that kind of power, the value will be pushed upstream.

thanks for enlightening me… i think we are more in agreement of things than not.

best, paul.

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