As some of you know, if there's one thing I love more than wine, it's coffee. I almost always have a cup of Coupa coffee in my hand (and if I don't, it's because it's empty and stashed in my bag for later because, pro-tip: Coupa refills are $1 if you keep the cup. I'm also cheap). And as we've covered the dynamics of the wine industry, I've been struck by the parallels to the coffee industry. So I thought I'd share a few of my high-level observations this week.
To start, both markets are incredibly fragmented. In total, 52 countries produce coffee through millions of small, independent growers. The coffee industry employs over 20 million growers, and a walk through any gentrified neighborhood of San Francisco demonstrates the proliferation of coffee retailers and shops.
Like wine, there are major "varietals". In particular, there are robusta and arabica. Arabica is more difficult to grow, but produces a smoother and more balanced drink. Robusta is stronger and more bitter, and often used in espresso blends (and instant coffee).
The coffee business is capital- and time-intensive. The asset base is fixed: like wine vines, it takes three to four years for a tree to come to fruition. The berries (called "cherries") then need to be harvested (and, while more expensive, hand-harvesting in preferred to ensure the cherries are picked at the optimal ripeness) and "processed". This involves removing the pith and skins covering the inner seed, mild fermentation, and desiccation. These "green" beans are then sent to roasters to be roasted, which via chemical processes (carmelization and what's called the Maillard reaction) add complexity and flavor to the beans. After that, the beans are ground up and made into what we enjoy each day (or, in my case, several times a day).
In recent years, there's been a shift to collective signaling via "free-trade", organic, and Rainforest Alliance for both social and quality concerns among consumers. While "organic" in coffee has had similar "fuzzy" distinctions, Rainforest Alliance and Free Trade Certifications are sharp and enumerates distinctions that often carry connotations of quality. And building off Thursday's class, specialty coffee is a credence good - consumers often need Starbucks or Peet's to tell them which coffee is quality.
And finally, as the chart below demonstrates, there is an oversupply in coffee as a result of emerging players, such as Vietnam. The situation is strikingly similar to what we saw in the global wine market. The oversupply has pushed global coffee prices down. And for reasons I start to describe below, the result has hurt the growers the most.
However, I do believe there is one important difference between the coffee and wine industry. The 3 Tier system notwithstanding, the coffee market is a much more intermediated than the wine market. Coffee growers are the most fragmented portion of the value chain in coffee production. Additionally, coffee growers often do only that: grow the coffee. The value-added (and often higher-margin) activities of processing, roasting, and drink preparation are often left to other players. This means most of the "value" created by the coffee industry is harvested far from where the beans are grown - and where people, arguably, have the most need.
What's this all to say? I think the wine industry has a lot of transferable lessons that I'm excited to apply to my own exploration of the coffee industry (and potentially others). By applying these lessons, my hope is that both profitable and impactful opportunities can emerge.
Sources:
IB-53: The Global Coffee Trade
GS-54: Starbucks Corporation: Building a Sustainable Supply Chain
To start, both markets are incredibly fragmented. In total, 52 countries produce coffee through millions of small, independent growers. The coffee industry employs over 20 million growers, and a walk through any gentrified neighborhood of San Francisco demonstrates the proliferation of coffee retailers and shops.
Like wine, there are major "varietals". In particular, there are robusta and arabica. Arabica is more difficult to grow, but produces a smoother and more balanced drink. Robusta is stronger and more bitter, and often used in espresso blends (and instant coffee).
The coffee business is capital- and time-intensive. The asset base is fixed: like wine vines, it takes three to four years for a tree to come to fruition. The berries (called "cherries") then need to be harvested (and, while more expensive, hand-harvesting in preferred to ensure the cherries are picked at the optimal ripeness) and "processed". This involves removing the pith and skins covering the inner seed, mild fermentation, and desiccation. These "green" beans are then sent to roasters to be roasted, which via chemical processes (carmelization and what's called the Maillard reaction) add complexity and flavor to the beans. After that, the beans are ground up and made into what we enjoy each day (or, in my case, several times a day).
In recent years, there's been a shift to collective signaling via "free-trade", organic, and Rainforest Alliance for both social and quality concerns among consumers. While "organic" in coffee has had similar "fuzzy" distinctions, Rainforest Alliance and Free Trade Certifications are sharp and enumerates distinctions that often carry connotations of quality. And building off Thursday's class, specialty coffee is a credence good - consumers often need Starbucks or Peet's to tell them which coffee is quality.
And finally, as the chart below demonstrates, there is an oversupply in coffee as a result of emerging players, such as Vietnam. The situation is strikingly similar to what we saw in the global wine market. The oversupply has pushed global coffee prices down. And for reasons I start to describe below, the result has hurt the growers the most.
However, I do believe there is one important difference between the coffee and wine industry. The 3 Tier system notwithstanding, the coffee market is a much more intermediated than the wine market. Coffee growers are the most fragmented portion of the value chain in coffee production. Additionally, coffee growers often do only that: grow the coffee. The value-added (and often higher-margin) activities of processing, roasting, and drink preparation are often left to other players. This means most of the "value" created by the coffee industry is harvested far from where the beans are grown - and where people, arguably, have the most need.
What's this all to say? I think the wine industry has a lot of transferable lessons that I'm excited to apply to my own exploration of the coffee industry (and potentially others). By applying these lessons, my hope is that both profitable and impactful opportunities can emerge.
Sources:
IB-53: The Global Coffee Trade
GS-54: Starbucks Corporation: Building a Sustainable Supply Chain
Excellent post, Gary. Will be calling on you heavily when we have Starbucks former head of Sustainability also draw parallels between the industries at the end of the quarter.
ReplyDeleteGary, thank you for an informative post. If I may share, my business partners and I, who have a wine distribution and import business in Singapore, were also struck by the similarities with the coffee business when we got to know the owners of a coffee bean importer/roaster/retailer in Singapore. We have the same philosophy - source ethically, visit the growers to ensure it's not marketing "schtick" and sell by our standards, e.g. the coffee company only provides espresso, cappuccino and cold brew. If you do go to Singapore, do visit Nylon Coffee in the increasingly hip district of Everton Park. Happy to chat more!
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