A Closer Look at Value Distribution in Specialty Coffee Markets

Image courtesy of author Karl Wienhold.

We recently published a study in World Development that shows — using real coffee transaction data — how most of the economic benefits associated with quality improvements are not reaching the people who grow and process green coffees. Instead, our findings indicate that specialty coffee segments are characterized by less equitable revenue distribution than what we see in mainstream coffee markets.

Specialty coffee is supposed to be a safer haven for specialty coffee producers than the undifferentiated (and unforgiving) mainstream markets. Following the logic of value chain upgrading, which is supported by variants of neoclassical economics, improvements that lead to elevated consumer valuations, and therefore higher retail prices, are supposed to be shared among chain actors based on their respective contributions. In other words, value added equates to value capture. 

This belief in meritocracy is comforting because it fits with the dominant worldview in the global North. However, it also depends on several assumptions that should not be taken for granted (like perfect competition and perfect information). Our study interrogates this worldview and concludes that:

The rising tide of retail specialty coffee prices is not (yet) lifting all boats.

As a baseline to assess value distribution along specialty coffee value chains, we created a model that represents all of the world’s coffee, updating John Talbot’s (1997) influential analysis. In doing so, we found that, through the first quarter of the 21st century, the overall distribution between farmgate, FOB, and retail prices has remained relatively constant. Indeed, the 2015-2019 FOB share of retail prices was 23.5%.

To calibrate value distribution outcomes in different specialty coffee market categories, we took a closer look at retail price data collected as part of the Specialty Coffee Retail Price Index (SCRPI) program and green coffee contract data collected as part of the Specialty Coffee Transaction Guide program. Matching on quality, lot size and certification status, we were able to connect export prices with retail prices for low-end certified and uncertified specialty coffees. Disappointingly, the shares of FOB prices were little more than 13% of retail prices. While typical FOB prices were marginally higher in these specialty market categories, retail prices were as much as four-fold higher.

For high-end specialty coffees characterized by greater product diversity, a more granular approach was taken, comparing contracts from the Specialty Coffee Transaction Guide with retail prices posted in 38 roasting companies’ on-line stores. Taken together, these data paint a similar picture: as retail valuations rise, FOB prices also rise, but at a much lower rate. 

In all the cases we analyzed, the share of retail coffee prices that reverts to the people who work in coffee-growing countries is much lower than in mainstream coffee markets. Nevertheless, a small glimmer of optimism is found in this company-specific analysis, which shows how a handful of specialty coffee companies are building business models around value distribution outcomes that come close to preserving those observed in commercial coffee markets. 

This is frustrating from a practical perspective because (arguably) coffee producers generate much of the value that drives prices in quality-conscious retail markets and are incurring higher production costs. However, most of the incremental revenues are appropriated as profits or in elevated cost structures before they can find their way back to producers. Indeed, across all the differentiated specialty coffee segments that we analyzed, the people working in exporting countries (including producers) only absorbed between 7 and 16 cents of each additional dollar generated through higher prices.

It is also frustrating from a theoretical perspective because the fragmented nature of specialty coffee value chains makes it hard to explain disappointing value distribution outcomes with reference to well-worn ‘consolidation leads to monopsony’ arguments. Influence over pricing mechanisms clearly favors those working in consuming countries regardless of respective business size and level of concentration, suggesting other sources of asymmetry, such as unequal access to information, inefficient pricing structures and institutional factors.

Image courtesy of author Karl Wienhold.

Our observations cast serious (and hopefully temporary) doubt on the prospect of value chain upgrading, and in the belief that improved quality will lead to correspondingly higher producer incomes. They likewise suggest that efforts on behalf of roasters, traders and others to help producers improve coffee quality (often with government and philanthropic support) help downstream profits and salaries more than they help those whose efforts and investments give rise to that improved quality.

In the end, we believe in the potential for more widespread prosperity in coffee-growing communities. This is seen in the steady rise in retail specialty coffee prices and by the prolific references to specific coffee producers in the marketing of those coffees. However, this potential will not be realized until the industry starts thinking and talking differently about how specialty coffee valuations are translated into prices at the different stages along specialty coffee value chains.

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