The coffee industry
As the world’s second most tradable commodity[1], coffee is in high demand. Coffee export alone is a $20 billion industry[2]; coffee is primarily produced in developing countries and imported by developed ones. As shown in Figure 1[3], global consumption of coffee has grown steadily at an average annual rate of 1.3%, with an estimated 151.3 million 60kg bags of coffee consumed in 2015/2016.[4] Figure 2[5] shows the average annual growth rate in coffee consumption. While coffee is grown all over the world and consumed primarily by industrialised nations, the growth in emerging market consumption reflects new opportunities for the industry. As evident from both these figures, the coffee supply chain is inherently global in nature and touches the lives of millions of people.
Because coffee is an agricultural product, coffee cultivation and consumption have direct social and environmental implications. They demand the cultivation efforts of millions of farmers and their families, the labour of those who process the beans into their final form, and the efforts of those who participate in the supply chain that eventually transports coffee vast distances into the supermarkets and cafes from where it is bought and consumed.
Figure 1: Global Coffee Consumption, 2012 – 2016[2]
Figure 2: Average Annual Growth Rate in Global Coffee Consumption since 2011[2]
Given the size, scale, and continuing growth of the coffee industry, and the people whose lives are intertwined with it, it is critical to ensure that the industry maintains high environmental and social standards. Equally important is the fact that coffee trade flows from poorer countries to richer ones – this sets up a global power dynamic whereby developed countries can potentially take advantage of lower social and economic standards in developing markets. As seen in similarly structured industries like the textile industry, there is a lot of room for the coffee industry to prosper on the back of poor social and environmental standards with long-term negative consequences not only for the people living in coffee-producing countries but also the rest of the world.
The Ethics and Standards of Coffee
With a growing global coffee culture, companies like Starbucks and Dunkin Donuts have made huge profits selling coffee all around the world. While businesses focus on making money – that is their job after all – the question remains whether the benefits of this booming industry are felt by those right at the bottom of the supply chain. Are the millions of dollars made in this industry slowly trickling their way into the lives of the smallholder farmers who actually harvest the coffee beans? Is our global demand for coffee causing environmental damage? How do we ensure that this industry, which forms the backbone of our daily lives, is being held to the highest standards of social and environmental impact?
Unfortunately, the answers to these questions reveal that there is a lot of room to improve the standards in the coffee industry. Traditionally, the complexities of the supply chain have meant that the 100 million people growing coffee around the world are excluded from the huge profit making potential of coffee.[6] On average, coffee farmers in developing countries (usually smallholder farmers) receive only 10% of the eventual retail price.[7] It is clear that the ‘benefits’ of the industry are primarily being felt elsewhere and not by those who, arguably, deserve it the most.
Similarly, the increasing demand for coffee puts a strain on the environmental resources at our disposal to grow it. Farming practices and land use, especially in developing countries, are not always well-regulated particularly from a long-term sustainability perspective. The biggest source of environmental damage comes during the production of the coffee beans themselves.[8] Traditional methods have been replaced by newer practices focusing on large-scale production to meet increased demand. In particular, the practices of monocropping and sun cultivation, whereby forestry is cleared to produce coffee on plantations, has led to widespread deforestation practices with as much as 2.5 million acres of forest in Central America reportedly cleared to make way for coffee farming. Moreover, 37 of the 50 countries in the world with the highest deforestation rates are also major coffee producers.[9] While increasing demand puts pressure on coffee production today, and we have found ways to respond to this demand, the long-term consequences of our response will be felt by future generations.
Our own standards
Although there are many stadards that have been set by the industry and independent organization (e.g. rainforest alliance, fairtrade, international coffee agreement etc.) they are just a first step towards a more sustainable coffee industry. And the coffee industry in general is a leading example in voluntary sustainability standards[10]. However, given the vulnerability of the producers and the impact of the entire industry, more progressive sustainability goals should and could be established for the industry. Considering the UN sustainable development goals for example, the coffee industry still has a gap to bridge for even the most basic of these goals. Given the current state and initiatives in the industry, we believe priority should be given to:
- 1&2) Eradicating poverty and hunger: The current share of revenues for the coffee growers is limited, and could be fairer to eradicate poverty and hunger, establish a positive future perspective for young people to enter the coffee growing industry and provide a stable income. Especially with respect to this last notion, stable income, the industry could make an effort to protect the vulnerable coffee growers from fluctuations in coffee prices and ensure a stable income and promising future perspective.
- 8) Decent work and economic growth: The working conditions, and especially slavery in the coffee supply chain are still issues to address. Coffee companies could make an effort in this by creating more transparency in the supply chain. An example that could inspire the coffee industry is the Dutch chocolate company “Tony Chocolonely”. They have a vision to create a slave-free industry, which they are working towards by increasing transparency and cooperation in their own supply chain[11]. Combined with promoting entrepreneurship and job creation, work standards and economic growth at the grower level can increase in this industry.
- 9) industry, innovation and infrastructure: Many of the coffee growers still have no access to basic infrastructure, and the coffee growing and harvesting process in general is in need of innovation. Increasing for example the yield could reduce deforestation. Connectivity to internet could help growers become more integrated in the supply chain and the industry to become more inclusive. Also, initiatives like block chain could improve the transparency of the supply chain and ensure better adherence to social and environmental sustainability goals.
- 15) life on land: Restoring ecosystems, preventing deforestation, reducing pesticide and chemical use are just several of the topics that should be addressed by the coffee industry. As mentioned before, the deforestation is a large issue in coffee producing countries. Innovative growing methods, mixed plantages, organic farming etc. could contribute to the improvement of life on land and the natural ecosystems in the coffee growing areas. Although organic is a major topic in many of the current initiatives and standards,
- 17) Partnerships for the goals: Many cooperations have been already been established through the various initiatives in the coffee industry. This however is also a threat for individual coffee growers, as their power decreases and they risk not being able to meet standards, scale and demand. Future initiatives should focus on inclusion of all coffee growers, supporting them to improve their business, yield and adherence to the industry standards and goals. Through partnering with Western companies, local growers could increase their position.
Additionally, coffee companies and organizations should consider partnering. Currently there are many sustainability initiatives, creating a scattered, hard to navigate sustainability landscape. The industry as a whole could benefit from a single standard and tools, like the SAC[12] in the apparel industry. Especially common standards and measurement methodologies could help not only the industry to work towards these sustainability goals, but also the growers to adhere to one set of standards and fair pricing.
These suggested goals are more ambitious than the currently set standards/goals in the various sustainability initiatives in the coffee industry. To be able to make these goals work, value must be created from these actions to sustain the coffee business as a whole and ensuring social and environmental sustainability. One way to ensure this, is by developing new business models for the coffee industry, to capture and share more value.
Business Model innovation
Generally speaking, sustainability initiatives have already been able to add value to coffee companies. However, this value, so far, has not trickled down to the start of the supply chain (yet). Many companies such as Starbucks and Dunkin Donuts have put in place their own sustainability measures. For example, Starbucks Coffee Company initiated C.A.F.E. (Coffee and Farmer Equity) Practices to evaluate, recognize, and reward producers of high-quality sustainably grown coffee. C.A.F.E. Practices is a green coffee sourcing guideline developed in collaboration with SCS, a third-party evaluation and certification firm. C.A.F.E. Practices ensures that Starbucks is sourcing sustainably grown and processed coffee by evaluating the economic, social and environmental aspects of coffee production. These aspects are measured against a defined set of criteria detailed in the C.A.F.E. Practices Generic and Smallholder Scorecards.[13] According to an impact study performed by Conservation International, C.A.F.E. Practices has significantly benefited more than one million workers employed by participating farms. However, a recent article also points out that merely 8.5% of Starbucks coffee is Fair Trade certified, the rest of Starbucks’ coffees are “ethically sourced,” according to the coffee king.[14]
Meanwhile Dunkin Donuts announced the launch of DD Green, a green building certification program designed to help franchisees build sustainable, energy-efficient restaurants. Dunkin’ Donuts will work with franchisees and construction managers to build 100 new Dunkin’ Donuts restaurants DD Green certified by the end of 2016.[15]
Other examples of business model innovation in the space include:
1) Building Coffee Farmer Resilience in Peru: CAC Chirinos: a Peru-based coffee cooperative providing top-notch services to its members in the Cajamarca region of Peru and premium coffee to specialty buyers in the United States and Europe. Confronted with challenges like climate change and market volatility, C.A.C. Chirinos has taken many proactive measures to ensure the continued resilience, productivity and profitability of its 600 members.[16]
2) Leveraging Financial Advisory Services to Grow a Coffee Cooperative in Chiapas, Mexico: Triunfo Verde is a coffee cooperative that grows organic and fair trade-certified coffee. Triunfo Verde is known for its transparent accounting and management practices. [17]
3) COOPCAB: Rebuilding a Coffee Business in Haiti: COOPCAB, a Fair Trade coffee cooperative, is located in the mountainous village of Thiotte in southeast Haiti, an area of extreme poverty. In a country where less than 1.5 percent of the land is forested, COOPCAB operates in one of Haiti’s few remaining tracts of rainforest. Through its reforestation program and purchase of fairly priced specialty coffee, COOPCAB provides a powerful link between environmental conservation and economic benefit for its 5,000 producer members.[18]
4) Bio Bean: bio-bean is an award-winning clean technology company that has industrialised the process of recycling spent coffee grounds into advanced biofuels and biochemicals.[19]
[1] https://www.theguardian.com/environment/2011/oct/04/green-coffee
[2] http://www.wevio.com/global-coffee-industry-facts-statistics-of-2014-2015/
[3] http://www.wevio.com/global-coffee-industry-facts-statistics-of-2014-2015/
[4] http://www.ico.org/monthly_coffee_trade_stats.asp
[5] http://www.wevio.com/global-coffee-industry-facts-statistics-of-2014-2015/
[6] https://www.theguardian.com/environment/2011/oct/04/green-coffee
[7] https://www.theguardian.com/environment/2011/oct/04/green-coffee
[8] https://www.theguardian.com/environment/2011/oct/04/green-coffee
[9] http://www.onegreenplanet.org/animalsandnature/coffee-and-its-impact-on-people-animals-and-the-planet/
[10] Samper, L.F. and Quiñones-Ruiz, X.F. (2017), Towards a balanced sustainability vision for the coffee industry, Resources 2017, 6, 17, accessed through: http://www.mdpi.com/2079-9276/6/2/17/pdf
[11] http://www.tonyschocolonely.com/en/our-mission/our-recipe-for-slave-free-chocolate/
[12] http://apparelcoalition.org/
[13] https://www.scsglobalservices.com/starbucks-cafe-practices
[14] http://www.binghamtonhomepage.com/news/a-starbucks-boycott-percolates-over-fair-trade-and-organic-ingredients
[15] https://news.dunkindonuts.com/news/dunkin-donuts-launches-dd-greenTM-an-initiative-to-build-sustainable-and-energy-efficient-restaurants
[16] https://www.rootcapital.org/portfolio/stories/building-coffee-farmer-resilience-peru
[17] https://www.rootcapital.org/portfolio/stories/leveraging-financial-advisory-services-grow-coffee-cooperative-chiapas-mexico
[18] https://www.rootcapital.org/portfolio/stories/coopcab-rebuilding-coffee-business-haiti
[19] http://www.bio-bean.com/