Coffeenomics, social responsibility, and CAN coffee (a review)

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Classical economic theory proposes that the sole purpose of a business is to enrich the shareholders of a company. The profits it generates will eventually circulate into the wider economy and improve the material well-being of everyone in the society (the idea that a “rising tide lifts all boats”). The conclusion of this is that focusing on anything other than profits would hurt the value of the company and therefore society.

The theory is controversial, to say the least. In the short term, its implementation ignores many externalities (pollution, labor market instability, etc.) that are detrimental to society as a whole. Another weakness of the theory is that it relies on the belief that money (and what it buys) is the equivalent of satisfaction (utility). Notwithstanding, it is an idea that many people subscribe themselves to. They believe that profits are the only important thing in business, and any discussion of business’ effects on the environment or the rest of society are dismissed as leftist conspiracies to bring down capitalism.

While there are some leftists who do want to get rid of capitalism, there is a wide middle ground between the two viewpoints. More today than ever before, select business leaders realize that taking care of the environment and the people who work for them are important too. In Portland, for example, many coffee companies have taken up the mentality that they want to treat their employees and coffee growers fairly. Portland Roasting is a leader in this area, but is not the only one building stronger links between the coffee growers and coffee drinkers. If you stop in at Stumptown’s Annex, for example, you can learn about several of the growers  who raise coffee for the company. By raising the profile of the growers, roasters can differentiate the coffees more easily and sell them at higher prices.

Whereas Portland is the leader in producing more sustainable coffee, the city’s coffee companies do not hold a monopoly on trying to make the world a better place. Smaller roasters in Seattle, San Francisco, Chicago, Kansas City, Durham and other cities across the country are building a movement that is benefiting coffee drinkers and coffee farmers.

CAN Coffee

One participant in this movement is an organization known as the Community Agroecology Network (CAN), based in Santa Cruz, California. In 2001, CAN was founded by Dr. Stephen Gliessman, a researcher in environmental studies at UC Santa Cruz, and Robbie Jaffie, also a lecturer in environmental studies at UC Santa Cruz. CAN comprises a network of coffee cooperatives that includes communities in four coffee-producing countries—Mexico, Costa Rica, El Salvador and Nicaragua—as well as resources from UC Santa Cruz. The coffee is grown and processed outside the US by the cooperatives then sent to the United States. Santa Cruz Coffee Roasting Company roasts the coffee once it arrives and CAN sells it under the AgroEco label.

CAN recently sent me a bag of AgroEco coffee for review [note: CAN sent the coffee at no charge, but none of the links are affiliate links]. The coffee arrived at my house in a vacuum-packed bag. It was labeled as a single-origin, light roast from a coffee cooperative in Nicaragua called Union de Cooperativas Augusto Cesar Sandino (also called UCA San Ramón, or UCASR). I looked for a roast date on the package, but could not find one. When I asked Daniel Fuentes, CAN’s Marketing Coordinator, about this, he told me the company roasts in small batches and goes through its inventory in less than two weeks, so when the coffee arrives in the customer’s mailbox, it will have been between one and three weeks since being roasted. CAN will grind the coffee if a customer chooses (but if you care about freshness, why would you do that?).

Fresh out of the French press, the coffee had a sweet aroma, but the sweetness did not dominate the coffee. I picked up hints of unsweetened baker’s cocoa and rose petals in the medium-bodied brew.

The thing that stood out the most to me about CAN’s coffee was its unique label. Most coffee labels trumpet the coffee’s unique flavors, or highlight its story, but the AgroEco label was primarily used to give the facts about the coffee’s sustainability. If you look at it in the picture, you can see what makes the label unique. CAN is very transparent about where the coffee came from, the demographics of the coffee farmers in the cooperative, and the prices that farmers received for the coffee. The cooperative received $3.42/lb for the coffee, significantly higher than the Fair Trade price or the market price for coffee.

How can the farmers be paid a higher price for the coffee and the roaster still make money? One of the ways CAN does this is by cutting out middlemen between the growers and the roaster. Coffee typically passes through several hands before it reaches the consumer, each of which take a cut of the purchase price. In this case, the coffee goes from the coffee cooperative through an importer directly to the roaster, who then sells the roasted coffee to consumers. The more direct supply chain lowers overhead costs, making the coffee more profitable for both producer and roaster.

Though not certified as organic, the coffee from UCASR is grown without pesticides or herbicides. The costs involved with obtaining certification can be too high for some farmers, and the return on the investment does not always pay off. One of CAN’s goals is to help promote farmers who produce their coffee without chemicals, whether or not they obtain the official organic certification.

The coffee from UCA San Ramón is also shade-grown, so instead of clear-cutting forests to grow only coffee, the coffee is grown beneath other trees. Mango, citrus and cacao trees are grown in and around the coffee, providing additional food and income for cooperative members. Thus, the shade-grown coffee helps diversify the farmers’ production risk and increases their food security. Raising coffee this way also provides more habitat for wildlife, especially migratory birds.

CAN shortens the supply chain to provide more benefits to growers

Overall, the quality of the AgroEco coffee was somewhere between Ristretto (perhaps Portland’s best) and Starbucks coffee. If social and environmental issues factor heavily in your coffee-purchasing decisions, AgroEco coffee would be worth checking out. Given the company’s transparency, you can feel confident you are supporting coffee growers and their communities. In a country where the collective spending decisions of consumers shape the direction of both economic and political decisions, choosing which products to carries much responsibility. The choices are yours, make them wisely.

For more information about CAN, visit http://www.canunite.org.

Vacation caffeination

I’m on vacation the next couple weeks, which really means that I went home to work harvest. If you missed it last year, I wrote a few stories about harvest. Here’s one of my favorites that I wrote while I was in Beijing (link). I’ll try to post a few times while I’m here, spending all day in the field doesn’t leave a lot of time for writing.

Here are a couple links from around the coffee world:

Headed to LA and need some coffee recommendations? Oliver Strand, who writes The New York Times’ Ristretto column, just visited and has some thoughts to share with you. link

Could coffee drinkers finally getting some good news about coffee prices? It appears so, at least if you drink Maxwell House. link All of those recent price hikes? They’re working, at least for shareholders (according to the video embedded in the article).

Starbucks’ Howard Schultz is urging CEOs of American corporations to stop all political campaign donations until Congress starts compromising and coming up with forward-thinking, long-term solutions to our nation’s economic problems.  link [Note how the content of the article was molded to fit the WSJ’s political viewpoint. The CEO quoted in the article was not even a part of Schultz’ group and he was only quoted as concerned with cutting spending.]

I know it’s bad form to answer a question with a question, but the answer to this headline should be, “Will anyone care?” link According to the author, DD’s “pastries and coffee are craved by a large portion of the western United States.”  Really? How many DDs are there in Portland?

And with that, I’m out…

Coffeenomics, Dunkin’ Donuts and Private Equity

Today, in case you  missed it, Dunkin’ Donuts (DD) held its initial public offering (IPO) on Nasdaq. By all accounts, it was a successful IPO. The stock was originally supposed to be priced at $16-$18 per share, but the day before the sale, the owners raised the target price to $19 because they sensed there would be more demand for the stock than originally believed.

The sellers were right. On the first day of trading, Dunkin’s price jumped nearly 50%, closing at $27.85 per share. It was a good day for the owners.

I don’t want to dwell too much on the stock’s price or where it might be going, though that would be an interesting discussion (Forbes has a somewhat pessimistic take here). What I do want to talk about is a small part of the Forbes article that caught my eye:

“The members of the consortium recently paid themselves $500 million in a special dividend, which ended up as debt on the company's books, so the IPO proceeds will essentially go to pay for that little kicker.”

The ‘consortium’ consists of three private equity firms: Bain Capital (Mitt Romney’s former company), the Carlyle Group and Thomas H. Lee Partners. They had previously purchased Dunkin’ in a leveraged buyout (LBO), meaning they borrowed a lot of money (~$2.4 billion) to buy the company.

Leveraged buyouts are nothing new—they are what private equity firms do.  The firms borrow huge sums of money to buy a company that has a lot of cash or saleable assets, with the idea that they can dispose of the non-performing assets and make the company more profitable. The buyout firm is supposed to improve the operations of the company to make it more profitable and attractive to future buyers. They come in, turn the company around, and sell it after a few years for a big profit.

At least that’s how it is supposed to work.

Often, however, when the private equity firms buy a company, they saddle the company with huge amounts of debt, making it harder for the company to be profitable. Dunkin’ Donuts’ LBO is a typical example—the debt used to purchase the company ended up on the company’s balance sheet, and payments on the debt have been dragging down DD’s earnings. The money raised in today’s IPO was being used to pay down the debt.

This might lead you to ask, if Dunkin’ already had a lot of debt, why would the owners pay themselves a “special dividend” that only increases that debt? The short answer: because they can. As owners of a company, they have the right to do just about whatever they want to with the company’s assets, so paying themselves this kind of dividend is common. The investors get paid, regardless of whether or not the buyout actually improves the long-term health of  the company.

In order to make the LBO successful, the new owners ratchet up pressure on managers and employees, pushing for higher productivity and profitability. The push to make higher profits often leads to cuts in salaries and benefits, store closures and layoffs.  

The private equity firms  argue that they are just squeezing inefficiencies out of the system. They fail to advertise that these “inefficiencies” are often peoples’ jobs, pensions and by extension, their lives. Just ask the people who worked for the Chicago Tribune. The beneficiaries of the LBOs are the investors, not the system.

Here’s the bottom line: Billionaires can play games with other people’s money and lives in a way that the rest of us can only dream about.

Whether we like it or not, that’s how it is, and I don’t see it changing anytime soon. To tell you the truth, I can’t decide whether to rail against the system or try to start my own private equity fund. Maybe I’ll just start the prep work for a successful Caffeinated PDX IPO. . . How does the year 2020 sound?

Thoughts?

Walking for Water in the Rain

Despite the cold, rainy and windy weather, there was a good turnout for the Walk for Water in downtown Portland yesterday. The official figures are not in yet, but from my estimation, approximately 800 people gathered at the covered plaza at the World Trade Center to take part. We were there to raise money to build a well in a village in either Kenya or Malawi.

Walkers enjoyed free coffee from Portland Roasting and some snacks provided by local businesses. Five members of Boka Marimba, a marimba and percussion group, enthusiastically entertained the crowd with their energetic music.

Boka Marimba

Several non-profit groups also set up informational booths to let people know what they were up to and to sign up new members. Upon seeing the booth for PHLUSH, an organization that campaigns for the construction of more public toilets in Portland, Bill Mikesell, who was photographing the event, quipped that “in Portland, even the public toilets have an advocacy group.”

Of course they do. . . is that weird?

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Sustainable Harvest - Changing the way coffee business gets done

Whenever you buy something, it is easy to forget that your transaction goes beyond the store where you purchased it. Whether you think about it or not, what you choose to buy affects other peoples’ lives, and these purchase decisions have economic, social and environmental consequences.

The coffee we buy, for example, is at the end of a long and complicated supply chain that begins in some very remote places. There are over 25 million coffee growers in the world, many of whom have very small plots of coffee trees. Trying to make a living off a small coffee farm is very difficult, especially if the companies purchasing the coffee are solely motivated by profits.

To learn more about how the system works, I visited Sustainable Harvest, a green coffee importer based in Portland. Dane Loraas, a Quality Control Manager for the company and Katie Gilmer, a Relationship Coffee Manager, were my hosts when I visited the company at its Pearl District headquarters. They spent an hour with me explaining the company’s business model and answering my questions.

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Coffee v. Location: Location Wins (Unfortunately)

Coffee is a very competitive industry—especially in Portland. Having a coffee shop on every other corner is one of the things that makes living in this city enjoyable. You don’t have to walk very far if you’re looking for a place to get some caffeine.

Not all cafés are created equal, though, and today I would like to talk a little about what makes a café successful. There is a difference what makes a good café and what makes a café successful. What is the number one factor for coffee shop success? I wish the number one factor were high-quality coffee. Unfortunately, in my exploration of the city’s coffee I have found that location trumps quality—even in Portland.

Fast food businesses have used this to their advantage for years. I remember my economics professor at WSU leading a discussion about what makes a the fast-food industry successful. He used McDonald’s as his example.

“What business is McDonald’s in?” he asked the class.

Several hands went up. An easy question, everyone thought.

“Hamburgers,” one unsuspecting student ventured, figuring that for the first time, he knew the answer to one of the professor’s questions.

“Wrong.” The professor smiled at our naiveté. “McDonald’s is not in the hamburger business. It’s in the real estate business.”

Real estate? But don’t they sell hamburgers?

“Think about it. Which one of you would go to McDonald’s if you wanted a great hamburger?”

No one raised their hand.

“I didn’t think so.”

He had a point.

“In every city, who has a store by the most popular attractions, where the most expensive real estate is? Yep, McDonald’s. There’s a McDonald’s in Times Square. There’s one at the Pantheon in Rome. You can find a McDonald’s by the Louvre and on the Champs Élysées in Paris. In fact, you probably can’t go to any famous place without finding one nearby.”

He was selling us on the idea that even if you serve mediocre hamburgers, you can still make a killing if you have a great location. Starbucks, who has been very successful, knew this and implemented it in its growth strategy (note: I’m not implying that Starbucks has bad coffee—or mediocre hamburgers).

To give you another example, today I’m writing this article in a café that will succeed because of its location. The café is at the heart of a neighborhood, it has lots people walking by all day and it  has a large parking lot right behind it. As it has been almost every time I have come in, the café is full of people. It is going to be successful, but not because of its coffee. In fact, I don’t really like the coffee.

Why, then, do I come here? I admit (somewhat shamefully) that it’s because the café is convenient. The location is an easy walk from my house and the baristas are friendly. So even for me, someone who really likes and appreciates good coffee, the convenience of a great location sometimes trumps sub-standard coffee quality.

It would be great if the success of a café only depended on its coffee. Then we could always get great coffee no matter what the location. If all PDX coffee drinkers banded together and demanded an end to bad coffee, we could force every café in the city to serve great coffee. Maybe in the future we will.

Then again, maybe that’s just a utopian dream that could only be realized in Portlandia.

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Higher Coffee Prices Coming?

It looks like you might have to pay more for your morning fix pretty soon (Starbuckians have already felt the pain). The price of coffee hit a new 13-year high today. Arabica (the highest-quality coffee) bean prices keep rising, due to fears about the upcoming crops in Colombia, Costa Rica and Brazil. As you can see from the chart below, coffee prices, up 48% over prices a year ago, are about double what they were five years ago.

Figure 1. From the Financial Times. Prices have been volatile, but mostly rising

If you look back a little farther (Figure 2), you can see that coffee prices are not the highest they have ever been. Coffee prices spiked sharply in 1994 and 1997 due to supply problems (weather events in South America). Fortunately for coffee drinkers around the world, after each price spike there was a fairly rapid drop. This time, however, the increase in prices has been more gradual, possibly reflecting a more stable trend. It’s something to watch over the next couple years.

Figure 2. Headed for a new high?

(Note: If you want to play with the interactive chart, click on the Figure 2. Your browser will send you to the Financial Times page that looks like Figure 1. Click on the Interactive Chart link in the top left corner of the chart. A pop-up window with the interactive chart will appear and you can change the parameters and add trend lines to the chart.  It’s great fun if you’re an economics nerd like me.)