Value Chain Analysis of Coffee, Marketing Plan Example

Executive Summary

Coffee is among the five top products in trade. During the year 2005, the global sales for coffee retailed at around $ 382 million; this was a big 38% increase from the year 2004 [1]. Coffee is largely found in tropical parts of the world, and is considered a tropical tree crop which is produced by smallholder farmers. These countries include Brazil, Cote and Indonesia; all these countries are very important when it comes to coffee trade and crops.

During the early 2000s, the world experienced a phenomenon which involved coffee and the “coffee house”; this was largely because of Starbucks Coffee [2]. The beverage chain ranks number one currently in the hot and cold beverage industry, and until this day, more and more Starbucks Coffee houses are seen being built.

This paper will discuss the Coffee industry’s value chain and will analyze Starbucks’ part in the process. Information was found on-line, and then analyzed for a more comprehensive study.

Value Chain

The trade of coffee involves the organization of economic activity between both markets and its actors. The commodity chain of coffee is organized vertically as a network of labor and its production processes; this is seen through a series of different transactions which result in a finished commodity. The coffee’s value chain is said to have a bi-polar nature – this is seen where the production takes place in tropical countries (most of the time developing countries), and the main roasting, commercialization and the consumption are seen in industrialized countries.

The coffee processing firms are referred to as “roasters”. These roasters are found in the consuming countries, and they sell directly to retailers; these retailers are the supermarkets and the coffee houses. Their retail products may come in two forms – coffee beans or ground coffee. The first figure shows how farmers sell the coffee to international companies for export. Please see Diagram 1: exporting prosses

The structure of the coffee chain is almost similar in all countries. It involves the plantation, collection, processing, roasting and marketing of coffee; this involves numerous actors within the coffee trade industry. Please see Diagram 2: coffee process.

Step 1:Fresh cherries are planted this is seen at around $13, 780

Step 2 (Dry Crops): Crops are harvested and collected which costs producers $14,950

Step 3: The coffee beans are moved to the factory where they are sorted as unwashed green beans

Step 2 (Wet Crops): Crops are harvested and collected

Step 3: The coffee beans are moved to the factory where they are washed

Step4 (Both dry and wet process): The beans are moved for export and are ready to leave the producing country at $113,080 cost to the producing country

Step 5: The coffees beans are put in freight and insurance is paid for them

Step 6: The coffee beans are imported to the consuming, industrial country where they must be first cleared for the market

Step 7: The coffee beans are distributed to dealers

Step 8 (Processing company): The coffees go through a factory where they are processed and packaged; $13, 650

Step 9: Coffee is roasted and ground

Step 10: Coffee is ready for retail and is sold for home markets

Step 8 (Coffee House/Starbucks): The coffee goes through the coffee house’s factory where it is processed and categorized, this is where flavors are added.

Step 9: Coffee is roasted and ground

Step 10: Coffee is distributed to Starbucks Coffee houses ready for commercial retail.

Transportation costs in processing and finance are seen at around $22,300, for the producing country, where as the roasting, storage, transportation and, finance and advertising cost the consuming country $29,100 [3].

There are two processing methods – these are the wet and the dry processes[4]. The dry process is the cheaper alternative and has been used since the start of the coffee trade. It is used in countries when there is a water shortage, and this creates coffee of lower quality. The wet process requires the producing countries more effort, however the coffee beans are produced better in quality, and have higher value. Only ripe berries can be used in the wet process, these are washed in huge basins, peeled using machines and then left to ferment for 12 – 40 hours. If the producers choose to sundry the cherries, this makes the process vulnerable to bad or rainy weather.

Starbucks Coffee claims that it contributes positively to producing countries as well as serving the environment[5]. It has made a commitment to make its workforce aware of global, environmental and poverty issues. The company pledged to support and provides for its coffee producing countries, and develop a clean-water system for high quality coffee beans. Starbucks claims to have a direct relationship set up with cooperative mill owners, they also help in financing crops in the producing countries. See Diagram 3: STARBUCKS VALUE CHAIN

Step 1: Small farmer produces coffee cherries$103,221

Step 2: This is then passed to the mill owner for distribution

Step 3: The mill owner then sets up his marketing board

Step 4: The coffee beans are sent to the importer

Step 5: The coffee beans are processed in the Roaster at $83,370

Step 6: The coffee beans or ground coffee are delivered to Starbuck, the operating expense is seen at $210,693

Step 7: The coffee is made for the consumer

The finances focus more on the production stage where coffee beans are roasted or ground, because Starbucks is known for their quality coffee and their consistency in presentation, a lot of investment is placed in their store operations. Since they have set up a relationship with a producing company and certain coffee mills, they have additional expenses, yet good quality coffee beans. For an ideal coffee house to create more profit, yet less investments as compared to Starbucks, one would have to set-up a long term relationship with a producing country, and isolate coffee beans harvested in that area, then have a privatized exporter deliver to the consuming country, where coffee is roasted. The roasting process will be kept at the same quality, producing good coffee beans, not ground to reduce costs. Coffee made for the consumer can be ground on site to keep freshness and also to reduce costs. Operating expenses in the coffee house can be cut at the start.

See diagram 3: my coffee value chain

Step 1: Small farmer with long-term relationship with my company produces coffee cherries for harvest.

Step 2: Coffee beans go directly to the exporter after processing in mills

Step 3: Coffee is sent from the private exporter to my roasting houses where coffee beans are roasted

Step 4: The coffee beans are sent directly to my coffee houses where they are packaged in bulks

Step 5: The coffee is prepared for the customer

By privatizing the export process, I can be sure of a consistent strategy to obtain the coffee beans, and this also ensures that I will get the same grade quality for my coffee everytime. Additionally, there is no need to pay for marketing expenses of the producing company, since the coffee they produce will go directly to my privatized exporter.

[1] Emmylou Tuvhag. “A value Chain Analysis of Fairtrade Coffee”. August 2008.

[2] Tuck School of Business at Dartmouth. “Starbucks Coffee Company”. 2004.

[3] Christopher L. Gilbert. “Value Chain Analysis and Market Power in Commodity Processing with Application to the Cocoa and Coffee Sectors”. 2005.

[4] Christopher L. Gilbert. “Value Chain Analysis and Market Power in Commodity Processing with Application to the Cocoa and Coffee Sectors”. 2005.

[5] Tuck School of Business at Dartmouth. “Starbucks Coffee Company”. 2004.