GCR linkedin Logo

Valuing coffee’s intangibles

From the January 2018 issue.

A new report looks at how the industry can leverage intangible assets to grow and redistribute value throughout the coffee industry.

Coffee intangibles

From the late 1950s, when an oversupply of coffee in world markets sent prices paid to producers plunging, the Colombian industry surfed from a First Wave ‘market-driven’ model to a Third Wave ‘quality-driven’ sensibility on the backs of a fictional farmer named Juan Valdez and his mule Conchita.

An advertising campaign first featuring the sombrero-wearing farmer carefully harvesting and drying hand-selected beans and later traveling further afield to help the world ‘wake up to Juan Valdez’ put a literal face to Colombian coffee and conveyed to consumers that origin was an important consideration in their choice of beverage.

According to Luis F. Samper, a former Director of Intellectual Property for the Colombian Coffee Federation (FNC) responsible for the brand’s marketing strategy, the Juan Valdez brand succeeded in changing the global image of the nation’s coffee from that of a ‘homogenous quality’ origin to ‘an origin with a portfolio of diverse, high quality coffees’.

Lessons learned from the Juan Valdez success at leveraging intangible assets and intellectual property strategies, such as branding, trademarks and Geographical Indicators, are part of a paper sponsored by the World Intellectual Property Organisation, or WIPO, which examines how to grow value throughout the coffee value chain, benefiting agents at each step along the way.

The report, The Powerful Role of Intangibles in Coffee Value Chains: Emerging Solutions to Grow Value and Distribute it More Equitably, was co-authored by Samper, now President of 4.0 Brands; Daniele Giovannucci, President and Co-Founder of The Committee on Sustainability Assessment (COSA), and Luciana Marques Vieira, Professor in Sustainable Management at the Getulio Vargas Foundation (FGV).

The paper helped nurture WIPO’s biannual economic report and was released publicly at a press conference in Geneva on November 20.

The authors state that not only is coffee a vital presence in the daily life of the beverage’s consumers – a significant share of the world population with about 3 billion cups enjoyed daily – but it also has a significant social and economic impact on 25 million farming families in more than 50 producing countries.

Those producing countries earn less than 10 per cent of the estimated US$200 billion annual industry value for their coffee exports, with small farmers receiving an even smaller percentage of the price paid by consumers.

However, significant changes in the demand side of the industry in the past few decades have brought new opportunities for expansion and for farmer and origin differentiation, which are increasingly being embraced by large roasters.

Coffee’s Third Wave, or ‘experiential’ segment is also putting more emphasis on the supply side of the value chain, driven both by a consumer focus on where and how their coffee is sourced and by a growing number of large roasters intent on building stronger relationships with producers and ensuring the sustainability of a high-quality product.

“By developing individual and joint intangible values,” Samper, Giovannucci and Vieira write, “this business model provides incentives for establishing longer term relationships at prices not limited by the vagaries of commodity markets and can develop a relational value chain governance where both farmers and retailers depend on one another to create additional value.”

Samper tells Global Coffee Report the entire coffee industry is aware of the vulnerability of high-quality coffee production due not only to environmental and climate change concerns, but also to an ageing farming population because of low incentives for the next generation of growers to remain in rural communities.

“The traditional business model has to change if we want to see the coffee industry continue growing,” he says, “and more and more people have come to realise this.

“We are talking about both value creation and redistribution,” he says. “Under the premises of transparency, knowledge and quality,” which the paper identifies as the pillars of brand differentiation, “brands from different segments can create and better distribute value.”

Coffee cherries

Large roasters are looking at Third Wave brands as a crucial part of their portfolios, Samper says, citing JAB’s acquisition of Peet’s Coffee and then, through that, Intelligentsia and Stumptown; and Nestle’s recent purchase of a majority stake in Blue Bottle and its Nespresso AAA Sustainable Quality Programme.

Traditional Second Wave brands, such as Starbucks and McDonalds, are also responding to such value drivers, with the former focusing on its Starbucks Reserve brand and McDonalds strengthening its relationships with growing communities.

“There is definitely interest in catering to this consumer trend and firm possibilities to create more win-win opportunities for both farmers and large coffee brands,” Samper says.

However, the question remains, according to the paper’s authors, how an increasing number of growing communities and a larger number of farmers can further leverage those opportunities and improve their abilities to create their own ‘brand equity’.

“This requires vision, organisational skills and legal tools,” Samper says. “Their formal and informal intangibles need to be developed. Sustainability indicators for both individual communities and markets need to be reviewed.”

Those formal intangibles – trademarks, patents, copyrights, software, trade secrets, geographical indicators and new plant varieties – will only create value when combined with informal intangibles, the paper states, such as human capital in the form of education, training and creativity, and the structured capital of know-how and organisational and relational processes.

Intangible assets are the most important source of value in the modern economy, the authors say, and the ability to create and extract value from them mostly depends on the capacity of the owners to efficiently manage them and extract their full potential.

Addressing the supply side, the reports authors say the capacity to use intangibles in many agricultural commodity industries such as coffee is often limited by a number of considerations that include economies of scale, farmer governance, availability of funds or the capacity to develop an intellectual property strategy.

Giovannucci, who researches the conditions of small farmers as part of the work COSA does, identifies the most important asset to enable good outcomes for growers as the quality and capacity of the producer organisation or cooperative uniting any group of farmers.

That function, he says, is necessary in many coffee-producing countries that lack the active presence of a ministry of agriculture or the like to provide services to growers as a group, unlike Colombia where the formation of the FNC in 1927 established the conditions that led to the creation of the Juan Valdez brand.

The paper uses the brand as a case study in how grower organisations have used intangibles to gain more diverse and rewarding market opportunities.

Giovannucci and his colleagues wish to continue the discussion of how other farmers can engage from a position of creating value to access the market power that accompanies that value.

That can be achieved firstly through effective groupings of producers, he says, and through those groupings leveraging value creators such as flavour profiles, as the wine industry does with terroir, and cultural practices, as in Europe where cheeses made in a historic way fetch premium prices.

Drying coffee

In utilising such intangibles, the growers are creating more than a commodity and adding value at origin, Giovannucci tells GCR. They are not simply asking the roaster, or trader, or any other actor up the supply chain for more of the financial pie, but creating a novel value that grows the pie.

That benefits not only the small farmer, but also the consortium of farmers, the wider community and all actors along the value chain.

“Because the small farmers are all of a sudden earning 20 per cent more, so are the labourers who work there, so are the truck drivers who transport a more expensive product now, so are all of the people who are processing a more expensive product, who take a percentage of a more expensive product, so are all the traders.”

“You’re creating a self-propagating kind of value.”

Giovannucci says the smarter of the large roasters are taking the lead to invest effectively in sustainability, realising that a large and diverse supply of high-quality coffee is vital for the continued growth of the industry.

“They can begin to see a variety of risks, both in terms of consistent supply, the right levels of quality and even reputational risk associated with what kind of supply,” he says.

He cites the Nariño origin as an example of a successful relationship between growers and large roasters, in this case Starbucks, which grew the community from a very poor and remote coffee-growing region of Colombia to a recognised and respected origin.

The relationship, brought about by the vision of Starbucks to feature the Nariño flavour profile and reinforced by the appreciation of consumers and markets, changed the coffee industry in the region in just a few decades.

“It’s created higher land values,” Giovannucci says, “it’s created better labour conditions, it’s created a lot of things locally that benefit communities and every company associated with that has to be proud of that process.

“They don’t have to worry as much about schools and labour problems because more and more, this is a thriving community that they helped to create.

“What better partnership could you want as a company that your product comes from a thriving community that’s doing okay?”
Samper says growers cannot wait on large roasters to find them, however, but must do their own work to create a value chain more driven by relationships than simply dictated to by buyers.

“Content is key,” he advises producers. “Think about how you will support your client to sell your coffees and your origin.”

Growers are no longer simply selling coffee, he says, but selling coffee with services such as origin and local knowledge, and those services are becoming increasingly more valuable for consumers, and therefore, large roasters.

By identifying and utilising intangibles that add value not only at origin but throughout the value chain, all actors can achieve win-win outcomes.

“This is not a good guy, bad guy industry game,” Samper stresses. “Rather, think about how developing your own origin intangibles with relevant sustainability indicators will give you opportunities to engage in relational value chains where value is created and better distributed.”

Giovannucci agrees that value creation involves all actors in the chain, while also benefiting all actors.

If nobody is distributing your product, he says, it doesn’t matter if you have the best product in the world.

But when a company puts a high-quality product on the shelf and asks a consumer for a relatively high premium for that product, “it’s warranted for every reason you can imagine,” he says, “including sustainability of the farmers who produce the quality of that product. That’s where the bottom line is.”

We’re not suggesting traders should make less or farmers should make less,” he continues. “We’re suggesting that if we can create a greater value product, then why not? What’s wrong with farmers getting a good piece of that if you’re getting a share too?” GCR

  • GCR Newsletter

    Sign up now to Global Coffee Report's newsletter and keep up to date with everything coffee.

© Copyright 2018 Prime Creative Media Pty Ltd. All rights reserved.

ABN: 51 127 239 212

X