Coffee: Drinking Through its Market Success

Coffee: Drinking Through its Market Success

Coffee: Drinking Through its Market Success

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As we may deem that coffee is the drink of the present, its rich history dates back to the ancient land of Abyssinia, which is now called Ethiopia. As the birthplace of coffee, Ethiopia is at the conjunction of the African and Arab worlds known as the Horn of Africa, the mountainous country, split down the middle by the earthquake-prone Great Rift Valley. Once the Ethiopians discovered coffee it was only a matter of time until the drink spread through trade with the Arabs across the narrow band of the Red Sea (Roden 1987, p.20).

As the Arabs took on the stimulating drink, according to legend, Mohammed proclaimed that under the invigorating influence of coffee he could “unhorse forty men and possess forty women.” Later on, Arabs began cultivating the trees, complete with irrigation ditches, in the nearby mountains, calling it qahwa, an Arab word for “wine”—from which the name coffee derives. Arab etymologists have traditionally explained qahwa, deriving it from the verb root qahiya, ‘not be hungry’, and it has been speculated that it may originally have referred to an alcoholic drink made by fermenting the pulp of the tree’s ripe fruits. Others, however, see its source in Kaffa, name of a part of the plant’s native Ethiopia. But whatever the true facts about the word’s birth, its subsequent history has followed fairly closely the spread of the drink coffee from the Middle East to Europe (Pendergrast 1999, p. 6).

Coffee owes its popularity in part to the stimulative effect of its caffeine constituent. Caffeine, a bitter alkaloid, can also contribute to irritability, depression, diarrhea, insomnia, and other disorders. Decaffeinated coffees, developed in the early 1900s, account for around 18% of the US market. For those without the time or the inclination to brew their own, there are instant or soluble coffees, introduced in 1867, which account for around 18% of US coffee sales.

Botany ; Ecology

  According to the International Coffee Organization (ICO) Website, coffee belongs to the botanical family Rubiaceae, which has some 500 genera and over 6,000 species. Most are tropical trees and shrubs which grow in the lower storey of forests. Other members of the family include the gardenias and plants which yield quinine and other useful substances, but Coffea is by far the most important member of the family economically.

First described by Linnaeus in the mid 18th century, botanists have failed to agree on a precise classification system of Coffea. There are probably at least 25 major species, all indigenous to tropical Africa and certain islands in the Indian Ocean, notably Madagascar. Difficulties in classification and even in designation of a plant as a true member of the Coffea genus arise because of the great variation in the plants and seeds. All species of Coffea are woody, but they range from small shrubs to large trees over 10 meters tall; the leaves can be yellowish, dark green, bronze or tinged with purple.

The two most important species of coffee economically are Coffea arabica (Arabica coffee) – which accounts for over 70% of world production – and Coffea canephora (Robusta coffee). Two other species which are grown on a much smaller scale are Coffea liberica (Liberica coffee) and Coffea dewevrei (Excelsa coffee). The ICO Website describes the two major coffee types as follows:

Arabica coffee – Coffea arabica was first described by Linnaeus in 1753. The best known varieties are ‘Typica’ and ‘Bourbon’ but from these many different strains and cultivars have been developed, such as caturra (Brazil, Colombia), Mundo Novo (Brazil), Tico (Central America), the dwarf San Ramon and the Jamaican Blue Mountain. The average arabica plant is a large bush with dark-green oval leaves. It is genetically different from other coffee species, having four sets of chromosomes rather than two. The fruits are oval and mature in 7 to 9 months; they usually contain two flat seeds (the coffee beans) – when only one bean develops it is called a peaberry. Arabica coffee is often susceptible to attack by pests and diseases, therefore resistance is a major goal of plant breeding programs. Arabica coffee is grown throughout Latin America, in Central and East Africa, in India and to some extent in Indonesia.

Robusta coffee – The term ‘robusta’ is actually the name of a widely grown variety of this species. It is a robust shrub or small tree growing up to 10 metres in height, but with a shallow root system. The fruits are rounded and take up to 11 months to mature; the seeds are oval in shape and smaller than those of C. arabica. Robusta coffee is grown in West and Central Africa, throughout South-East Asia and to some extent in Brazil, where it is known as Conillon.

As a tropical plant, coffee is best cultivated between the latitudes of 25° N and 25° S, but requires very specific environmental conditions for commercial cultivation. Temperature, rainfall, sunlight, wind and soils are all important, but requirements vary according to the varieties grown. deal average temperatures range between 15 – 24° C. for arabica coffee and 24 – 30° C. for robusta, which can take hotter, drier conditions but does not tolerate temperatures much below 15°, as arabica can for short periods. All coffee is easily damaged by frost, a danger either in southern Brazil or, closer to the Equator, at altitudes around 2000 meters.

In general, the ICO website informed that the coffee plant needs an annual rainfall of 1500 to 3000 mm., arabica needing less than other species. The pattern of rainy and dry periods is important for growth, budding and flowering. Rainfall requirements depend on the retention properties of the soil, atmospheric humidity and cloud cover, as well as cultivation practices. On the other hand, Robusta coffee can be grown between sea-level and about 800 meters, Arabica does best at higher altitudes and is often grown in hilly areas. As altitude relates to temperature, arabica can be grown at lower levels further from the Equator, until limited by frost. All coffee needs good drainage, but it can grow on soils of different depths, pH and mineral content, given suitable applications of fertilizer. Wind-breaks are sometimes planted to protect coffee plantations. Shade trees, which may be economic crops such as bananas, are a commonly used to protect coffee plants because they mimic the natural habitat of coffee.

World Production ; Trade

At the onset of the twenty-first century, the total global coffee retail trade was valued at US$33 billion. Global exports, according to an Observer report, were US$10 to US$12 billion per year in the 1990s, and retail sales of coffee contributed some US$30 billion to the world economy. But by 2003, coffee consumption was growing much more slowly than production (Madeley, April 2004). In a report from the Foreign Agricultural Service of the United States Department of Agriculture, world coffee consumption for the 2000-2001 crop year (which varies by region, but starts in April, July, or October) was estimated at 111.1 million bags (one bag equals 60 kilograms). But while production grew by about 3 percent, reaching 115 million bags in 2002 and 119.44 million bags in 2003, demand grew by only about 1 percent. As of early 2003, according to the New York Times, green coffee prices were at their lowest point since the early 1970s, and, adjusted for inflation, real prices were the lowest in one hundred years. The value of world coffee exports plummeted to only US$4.8 billion. Small and medium-sized producers were the hardest hit; the economies of many coffee-exporting nations were all but destroyed. Taking advantage of extremely deflated prices, roasters and distributors were able to reap hefty profits, with retail sales of coffee worldwide rising to more than US$70 billion in 2002. Proper marketing to consumers of gourmet coffees also enabled large companies to increase prices while keeping costs low (Smith, November 2003).

While Arabica beans continued to command the largest market share through the 1990s and early 2000s, the demand for Robusta beans increased following the introduction of commercially produced soluble instant coffee. The Robusta bean’s ascendance was fueled by its higher yield of soluble extracts than Arabicas during the processing for instant coffee; robustas are also considerably cheaper. According to Richard L. Lucier in The International Political Economy of Coffee (1988), Robustas rose from only 8 percent of world production in the late 1940s to nearly triple that in the 1970s. In the same period, soluble coffee’s share of the world market went from almost zero to about 25 percent.

The International Coffee Organization categorizes types of coffee as follows: Colombian milds, which made up 15 percent of the world’s coffee production at the beginning of the 2000s; other milds (25 percent of world production); Brazilian and other Arabicas (35 percent); and Robustas (25 percent). As the second most traded primary commodity after crude oil, coffee generates more than $15 billion in export revenue (evaluated at 1997–98 average prices and volumes). All coffee is produced in the tropics, primarily by smallholders, in which most is consumed in high-income countries. Latin America accounts for 60 percent of global output, followed by Asia (24 percent), and Africa (16 percent). According to the US Department of Agriculture data (see Table 1), more than half of global coffee output is accounted for by the three dominant producers: Brazil (33 percent), Colombia (10 percent), and Vietnam (10 percent). However, some other African and Latin American countries are heavily dependent on their exports of coffee, despite their low share in global output. For example, coffee accounts for more than half of total merchandise exports in Burundi, Rwanda, and Ethiopia and more than 20 percent in Guatemala, Honduras, and Nicaragua. More than 80 percent of coffee production is traded internationally.

Table 1. Coffee Production, Selected Years (thousands of 60-kg bags)

In the ICO January 2006 report, based on official estimates of the Brazilian crop for the year beginning in April 2006, the production remain unchanged at between 120 and 122 million bags. Since Brazilian production is characterized by a marked biennial cycle with an abundant crop in one year followed by a much smaller crop in the next, there will be a production increase in crop year 2006-2007. The first estimates of the coffee authorities indicate a crop of between 40.43 and 43.58 million. This year, the volume of total production is estimated at around 107 million bags. More importantly, it could be noted that there are difficulties in supplying the market during this crop year due to some factors like increased transport costs, as a result of the rise in prices for petroleum products, and problems related to infrastructures and logistics in some exporting countries.

Exports for the month of December 2005 totaled 6.91 million bags compared to 6.28 million bags in November 2005. It is worth noting that monthly exports in the first half of 2005 were above the 7 million bag level while those in the second half (with the exception of month of August) were below 7 million bags. This situation is reflected in the behavior of the market during the second half of the year. The total volume of exports for calendar year 2005 (January-December) was 86.45 million bags, representing a fall of 4.67% compared to total exports of 90.69 million bags in 2004. For the same period, exports of Arabicas and Robustas fell by 5.66% and 2.80% respectively. More specifically, increased exports were recorded only in the case of Colombian Milds (5.39%). Brazil as the largest exporter in 2005, totaled 26 million bags and domestic consumption accounted for 15.5 million bags, giving a total demand figure of 41.5 million bags. In these circumstances, the volume of opening stocks on 1 April 2006 is likely to be of the order of 9 million bags, comprising 6 million bags held by the private sector and cooperatives and 3 million bags held by the government (ICO, January 2006).

Prices of the industry’s raw material, green coffee beans, are highly volatile and influence the industry’s financial performance. In general, when green coffee prices are high, coffee growing is more profitable, and conversely when prices are low, coffee roasters profit. This year, on the month of January, the recorded coffee marked price volatility, with the standard deviation for variations (which measures volatility) in daily composite indicator prices increasing from 1.40% in December 2005 to 1.51%. The monthly average of the ICO composite indicator price was 101.20 US cents/lb in January 2006 compared to 86.85 US cents/lb in December 2005, an increase of 16.52%. There was a market correction on February 9, where it was marked at 98.60 US cents/lb. The movements in the ICO daily composite indicator price since 2 January 2005 is shown in Figure 1.

Figure 1. Daily composite indicator price 2 January 2005 – 9 February 2006

(Source: ICO)

Policies

Beginning in the 1990s and continuing into the twenty-first century, coffee beans began to be certified in a new manner, based not on flavor or aroma, but on human rights and environmental concerns. Starting first in Europe and then moving to North America and Japan, a fair trade consumer movement led to the establishment of labeling coffee that passes certain criteria, namely that coffee importers pay at least US$1.26 per pound for green coffee. The fair trade certification program assists “marginalized” coffee growers–typically family-run farms, cooperatives, and plantation workers–by ensuring that they are paid fairly rather than allowing middlemen to absorb overly large shares of profits, leaving the producer at times with barely enough to cover production costs (Krivonos, 2003).

The Fairtrade Labeling Organizations International (FLO), established in 1997, was the umbrella organization that oversaw worldwide fair trade labeling programs for products such as coffee. Coffee retailers paid the FLO (or one of its regional affiliates) a licensing fee that allowed them to label their products with the fair trade seal. The consumer, who has been educated to look for this seal, is willing to pay a higher price for the coffee at a retail outlet, knowing that the coffee producer is being paid fairly and that in many cases the producer uses sustainable agricultural practices (Progressive Grocer, 2002). In 2000, Starbucks, the leading gourmet coffee retailer in the United States, agreed to become the nation’s first coffee retailer to sell fair-trade-certified beans in more than 2,000 of its outlets after activists and consumer groups threatened a large scale protest. Other companies in North America followed suit, including Sara Lee Coffee ; Tea, Green Mountain Coffee Roasters, Tully’s, Mountain View Coffee Co. in Canada, and many other regional and independent roasters and importers. According to TransFair USA, the US member of FLO, Fair Trade coffee is also served in the European Parliament and in Toyota and Warner Brothers Europe’s corporate headquarters. The New York Times reported that, since 2000, approximately 140 coffee companies in the United States were offering fair-trade blends in some 10,000 outlets throughout the country (Smith, November 2003).

Processing

Coffee may be roasted from light to dark according to preference. Light roasts are generally used in canned and institutional roasts, and medium is the all-purpose roast most people prefer. Medium beans are medium brown in color, and their surface is dry. The manufacturers perform the coffee bean processing that roast the beans for packaging. Also, roasters often further process the beans to be sold for brewing and instant coffee. At least until the mid-1980s, coffee produced in the United States was thought to be inferior to that of other countries (Perry 1991, p.8). Some industry observers attributed this to the dominance of multinational conglomerates within the industry, which were preoccupied with profits and quantity instead of quality processing. Presently, the United States has become the largest importer of the beans, purchased from producing nations through traders. For this reason traders play an important role in the U.S. coffee industry, albeit one constrained by their obligation to serve the requirements of roasters. Thus, the National Coffee Association (NCA), formed in the early 1970s, is dominated by the roasters.

In processing, roasters stock the purchased beans in silos until they are blended, which occurs immediately prior to roasting. Control of the blending process is usually done electronically, with preset percentages of the different varieties going into the blend. In addition to the type of bean used in a blend, roasting plays an important role in the resulting coffee’s taste. Roasting eliminates the moisture from the bean, releasing the flavor. The color of the roasted beans determines the flavor, and consistency of color throughout a bean produces a high-quality brew. The beans should be dark enough to give the maximum amount of flavor, though not so dark that the coffee tastes scorched. In large commercial operations, computers determine when to end the roast using photometric reflectance instruments that measure the color of the roast as it relates to the temperature of the beans. There are myriad degrees of roast, but they can be simplified into four categories: light, medium, dark, and very dark. Each variation has a distinct flavor (Encyclopedia of Global Industries, 2006).

Leading manufacturers of coffee in the United States, despite their dependence on imported beans, managed to resist any competition from among the coffee-producing nations. One key advantage was patented technology and consequently automated production on a huge (and therefore highly economical) scale. Eliminating much repetitive labor in loading and unloading, the continuous roaster enabled a single person to operate two units continuously producing 5,000 kilograms per hour, thereby doubling productivity to the level of 1,600 bags per person per day. The developing coffee-producing nations could neither match this technological advantage nor afford to compete with US manufacturers in a field characterized by heavy promotional and advertising costs.

Another obstacle preventing coffee-producing nations from manufacturing coffee for the US market was that the industry leaders had used their technological advantage to shape local tastes to specific blends manufactured with great consistency. A single coffee-producing nation could not possibly draw on a sufficient variety of coffees to match these exact blends. With the shift in national taste toward specialty coffees, quality of beans became a paramount concern for new producers entering the developing gourmet market. In response, the established American manufacturers began experimenting with refined versions of popular lines and researching possible new products, such as iced and other specialty coffee (Specialty Coffee Association of America, 2001).

Distribution, Consumption & Market Trends

            In the early 2000s, four multinational companies accounted for the bulk of coffee sales, but the industry was characterized by intense competition. The global in-home coffee market was controlled by Nestlé SA with 22 percent and Kraft Foods (formerly Philip Morris, which continued to retain part ownership) with 14 percent. Sara Lee Coffee & Tea Worldwide accounted for 6 percent, edging out Proctor and Gamble, which captured 5 percent. More than one third of market share was controlled not by a single, large company but by smaller, specialized coffee roasters.

In terms of per capita consumption, ICO statistics showed that Finland led the world in 2004, consuming 11.99 kilograms. Denmark came next with 9.46 kilograms, just ahead of Norway with 9.31 kilograms. Belgium/Luxembourg consumed 8.15 kilograms, Sweden consumed 8.06 kilograms, and Austria’s consumption was 7.64 kilograms. Germany’s per capita consumption was 7.01 kilograms. Per capita consumption in the United States was 4.62 kilograms, while it reached only 2.43 kilograms in the United Kingdom. US consumers favored roast and ground coffees while those in the United Kingdom greatly preferred soluble (instant) coffee. Japanese per capita coffee consumption in 2001 was 3.36 kilograms.

Although coffee consumption declined significantly in the United States from 3.1 cups per day in 1962 to 1.6 cups per day in 1996, coffee consumption rebounded to 3.3 cups per day in 2000 and the size of the cup increased over time so that it averaged nine ounces. According to Nation’s Restaurant News’ report of the National Coffee Association’s (NCA) annual survey, coffee consumption hit an all-time high in the United States in 2000 when 79 percent of adults, or 161 million people, indicated that they drank coffee (Ruggless, February 2001). There is an estimate of 54 percent consumed coffee on a regular basis, while 25 percent were occasional drinkers. NCA also found that about 18 percent of coffee drinkers consumed gourmet coffee on a daily basis. DSN Retailing Today (23 July 2001) reported that in the United States, retail coffee sales reached US$18.5 billion in 2000. The U.S. market remained flat in 2003, however, with a slight decline in volume sales offset by an increase in coffee prices. In 2004, according to ICO figures, Americans consumed a per capita average of 4.62 kilograms of coffee.

Like tea, coffee faces strong competition from the soft drink industry. In 1970 annual per capita consumption of soft drinks in the United States was 86 liters; in 1999 it exceeded 200 liters, according to the US Department of Agriculture. With the exception of a few coffee producers, low-income countries that have high income growth potential and high income elasticities for food do not consume much coffee. Efforts to penetrate new markets (China and Russia, for example) have only recently begun. Even if such efforts succeed, two points must be made. First, success is likely to come at the expense of tea consumption, which is often produced by the same countries that produce coffee (the tea industry has also engaged in efforts to increase consumption). Second, any increase in coffee consumption by developing countries is likely to come in the form of soluble coffee, which, as mentioned earlier, requires lower quality beans (Baffes, Lewin ; Varangis 2005, p. 307)

In fact, a study of 95 markets and regions worldwide, Nestlé SA developed a profile of coffee drinkers as “Sophisticated,” those who drink one or more cups daily; “Intermediary,” those who drink somewhere between one cup per day to one cup per week; and “Starting,” those who consume only one cup a week or less. The vast majority (57%) of people labeled themselves as starters, while sophisticated drinkers made up about 17 percent of the population. Yet, as expected, the sophisticated group consumed the majority of the world’s coffee at 65 percent, while intermediate drinkers accounted for 29 percent. Crain’s Chicago Business reported that Kraft Food’s coffee sales dropped almost 20 percent after 1996 (Gallun, April 2001). A major reason was that many consumers prefer going out to a coffeehouse, café, or a restaurant for a gourmet cup of coffee. Much of the surge in interest in gourmet coffee was fueled by Starbucks, which opened up a new market in the United States.

According to Crain’s New York Business, sales in the United States for regular Colombian coffee stagnated, while demand for Guatemalan Antigua, Kona, Mountain, and other premium coffees and blends flourished as consumers grew more sophisticated in their tastes. Premium and flavored coffees can be readily purchased at fast food chains and delis. The trend toward gourmet coffee and the increasingly consolidated coffee processing industry favored small, independent roasters. Such regional roasters often specialize in providing unique blends customized to local tastes along with a high level of customer service, and are adept at providing a constantly changing array of flavors that consumers seek (Flamm 1991, p. 17-18).

Business Plan

            Although consumption of regular coffee suffered a slowdown in the recent years, a huge trend toward increased consumption of gourmet coffee is a worldwide phenomenon. In the United States alone, sales of gourmet coffee quadrupled between 1986 and 1997, and by the latter part of the decade, gourmet coffee accounted for about 30 percent of market sales. The bulk of specialty coffee sales in the United States came through specialty coffee retail stores. Starbucks Coffee Co. and Caribou Coffee were two of the leading specialty coffee roasters/retailers in the United States in 1998, with a spate of smaller coffee roasters and cafes spread throughout the country (Schwartz 1999, p. 204). Thus, with the increasing demand for specialty coffees suggested that consumers were attracted to higher quality brews, especially those when accompanied by lower levels of caffeine. This means that a coffee shop business in the US would be feasible, given the abovementioned data about coffee.

A coffee house business is a great way to promote diversification and integrative growth opportunities. By widening food and beverage offerings, this will be an effort to bring customers into its stores during the lunch and dinner hours and to increase the amount of the average customer sales. In addition to that, additional perks that provide customers’ generic requirements might also be helpful (for instance, reasonable price, good taste, temperature just right, convenient, atmosphere, and free wireless internet). Operating strategies of a coffee shop that instill a culture of teamwork will focus on creating an environment for information exchange that is personal. This could be a desirable environment, a unique feature that is absent to its competitors. In other words, a good strategy would be to build a place “where everybody knows your name.” Since most guests order beverage in a coffee shop, the quality of these products should be outstanding and their service temperatures are correct, and that they are served in a manner that reflects positively on the coffee shop’s image.

Bibliography

Baffes, John, Lewin, Bryan ; Varangis, Panos. 2005. Coffee: Market Setting and Policies. Global Agricultural Trade 2005, June 30.

Coffee, Roasted. 2006. Encyclopedia of Global Industries. Thomson Gale. Reproduced in Business and Company Resource Center. Farmington Hills, Mich.:Gale Group.

DSN Retailing Today. 2001. Big boxes discover perks of gourmet coffee sales.” (July 23): 19.

Flamm, Matthew. 2001. Roaster redux. Crain’s New York Business. (April 9-15): 17-18.

Gallun, Alby. 2001. A powerful pantry of brand names. Crain’s Chicago Business. (April 2): 46

International Coffee Organization. 2005, March. Coffee Market Report. Available from www.ico.org.

International Coffee Organization. 2006, January. About Coffee. Available from www.ico.org.

International Coffee Organization. 2006, January. Coffee Market Report. Available from www.ico.org.

Krivonos, Ekaterina. 2003. The Impact of Coffee Market Reforms on Producers’ Prices and Price Transmission. Washington, D.C: Development Prospects Group, World Bank.

Lucier, Richard L. 1988. The International Political Economy Of Coffee: From Juan Valdez To Yank’s Diner. New York: Praeger.

Madeley, John. 2004. Coffee price rise is just a hill of beans. Observer, April 4.

Nestlé SA. 2001. Coffee at Nestlé: A Presentation by Olle B. Tegstam, Head of Coffee & Beverages Strategic Business Unit,” October 25.

Pendergrast, M. 1999. Uncommon Grounds: The History of Coffee and How It Transformed Our World. New York: Basic Books.

Perry, Sarah. 1991. The Complete Coffee Book. San Francisco: Chronicle Books.

Progressive Grocer. 2002. Fair Trade Coffee Making Market Inroads., September 15.

Roden, Claudia. 1987. Coffee. Middlesex, England: Penguin Books.

Ruggless, Ron. 2001. Better latte than ever: Coffee players perked up over sales. Nation’s Restaurant News, February 12.

Schwartz, N.D. 1999. Still perking after all these years, Fortune, November 24, pp. 203–210

Smith, Tony. 2003. Difficult times for coffee industry as demand falls. New York Times, November 25.

Sorby, Kristina. 2002, June. Coffee Market Trends. Background paper to Toward More Sustainable Coffee. World Bank Agricultural Technology Note 30.

Specialty Coffee Association of America. 2001. Market Report. Available from http://www.scaa.com.

The Economist (US). 2002. Mug Shot; Coffee. 21 September.

US Department of Agriculture. 2001, December. Foreign Agricultural Service. Coffee Update. Available from www.fas.usda.gov.



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