Book Review: “God in a Cup” Part 2

2011 June 28
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Let us deal with some of the issues that are distinct undercurrents in “God in a Cup”. The author illuminates these issues and has some commentary, but leaves them unresolved. It is certainly a bit presumptuous of me to address these themes and I will try to avoid abject speculation.

The Motivation of the Coffee People

It is virtually impossible to really know what motivates people to do what they do. Often, we do not dig that deeply to figure out what motivate us to do certain things: fear, pride, expectations, a sense of justice, etc. The three main characters in the book obviously have an intense desire to pursue quality coffee. Many people in the industry (and consumers) will say that they share this intense desire, but their actions do not match up with their words. This trio backs up their words with consistent action. Moreover, much of their joy in life is bound up in this pursuit.

As human beings, none of us have entirely pure motives. Selfish motivation is always mixed with our best motivations. In the case of the coffee people, there seems to be a mixture of desiring the betterment and education of the coffee farmers (who by and large are exceedingly poor) to improve quality, personal and corporate competitiveness, and pride. Pride can be further divided into pride of doing a good job, pride of serving the best, and garden variety “pride of life” which is a basic selfish motive.

From the book, it seems clear that Peter (Counter Culture) is pretty altruistic. He volunteers huge amounts of personal time to help with various aspects of the SCAA (Specialty Coffee Association of America) with no real hope of compensation. It also is implied that he is more closely teamed with a farmer year in and year out, even if that farmer’s cupping score for a particular year was not high. He seemed more in it for the long-term betterment of willing farmers.

The other two firms, Intelligentsia and Stumptown, also seem interested in the well fare of farmers, but were portrayed as being more concerned about the cupping score. It was not clear that they were interested in working in long-term arrangement with farmers who may have an occasional low score. The role of competitive spirit and being “the best” was also mentioned. None of this is bad, but as demand exceeds supply of the finest coffees, the relatively friendly competitiveness may go by the wayside. They do care about the farmers, but they appear to care more about being “the best” and “the most successful”.

How Direct is “Direct Trade” and What About “Fair Trade”?

Direct trade is the attempt to directly reward a farmer or a co-operative of farmers for growing outstanding coffee (typically as indicated by a threshold cupping score). This is a contractual arrangement between a roaster and the farming organization. A price is arranged between the two organizations for certain performance. After that, the others in the coffee pipeline have negotiated prices for the services they provide. The coffee pipeline is not so simple: there are several “middle men” that provide services along the way including crop financing, hauling, milling, exporter, shipping, and importer. However, in the ideal world, the farmer has a locked in price for his efforts, assuming that they meet the roaster’s standards.

Direct trade does not have a uniform set of standards, at the moment. Each roaster works under their own set of standards, which may include social and ecological requirements as well as cup quality. Some spell out their standards more than others. Here is the public information from the websites for Counter Culture Coffee, Intelligentsia Coffee, and Stumptown Coffee. Smaller roasters for whom the cost of travel and staff to administer direct trade relationships is cost prohibitive, coffee brokers/importers who attempt to maintain similar relationships exist. A good example is Sustainable Harvest, a firm that is very transparent in showing exactly where all of the money in the pipeline for a particular coffee goes.

As indicated in the book, direct trade is fraught with difficulties. In some cases, the money never gets to the farmers through bureaucratic problems and out right fraud (not by the roasters, but in the countries of origin). In other cases, pay differential may cause social problems for the farmer, as neighbors are not that happy about their success. Detractors will also say that it is unregulated: there is no third party confirmation of social and ecological standards – it is reliant strictly upon the roaster to monitor, which is very difficult. Even so, direct trade has had a positive effect on the quality of coffee and the lives of farmers who have been able to produce coffee to the required standards.

Fair trade coffee is mechanism by which co-operatives (not individual farmers) are guaranteed a “fair” price for their coffee, so long as they meet certain social and ecological standards. There are no quality standards and it is a certification program (similar to USDA Organic) which is monitored by third party certifying  organizations, such as TrasFairUSA. The cost of certification is reckoned to be about $0.10 per pound of green coffee. Detractors lament the lack of cup quality as a standard, no support to individual farmers, and the cost of certification. However, fair trade has also been beneficial to farmers (via co-operatives), particularly in down markets, by setting a base price that is sustainable.

Both direct trade and fair trade are well-intentioned efforts to improve the lives of coffee farmers. Each has its own mindset on how best to accomplish this goal. It does give customers a meaningful way to be able to participate in helping farmers, while enjoying a product they have purchased. Customers should do a bit of research to see which path they think is best.

What Does the Future Hold for the “Third Wave” Companies?

Obviously, no one can predict the future, but we can learn from history.  One can study the growth patterns of specialty food retailers and especially the growth patterns of so called “second wave” coffee companies. Will the “third wave” ones be all that different? Time will tell.

The earlier coffee companies were generally founded by passionate coffee people. Most of the best ones roasted in-store, tried to source the finest coffees available, trained their staff relentlessly, and emphasized customer education. Fundamentally, for their time, they were not that different from the best “third wave” coffee companies. Theses companies ended up going down a few different paths: small is beautiful, grow locally, other people’s money, or sale.

“Small is beautiful” is an attractive approach for the passionate owner. One just stays with one or two great units, polishing and refining. The end game is: there is no end game – we are building an institution. An example of this is Los Gatos Coffee Roasting Company, founded in 1982 by Teri Hope. The downside to this approach is that eager, young talent does not see a path for advancement, so it can be hard to retain them. The upside is plenty of control, ease in making changes, a sense of family, and peace of mind. This is the approach I now take in my restaurant ventures. A well run single unit can out-perform (net profit) a stressed out mini-chain with the owner fragmented and burned out.

“Grow locally” can also be a good approach. The idea is to slowly dominate your local market with a limited number of exceptionally run units. The end game can either be: we are building a local institution for the long run or we are building to sell. Depending on your end game, you will build your units differently. If you are building an institution, you will choose personally interesting locations, often owning your real estate, and try to grow slowly out of profits rather than leverage. If you are building to sell, you choose locations that demonstrate how well your concept works in more generic types of retail location. You also do not want to own real estate (commits capital in the short run) and you will likely want to leverage to speed growth. George Howell’s Coffee Connection (Boston) was a “grow locally” organization prior to their sale to Starbucks. According to the book, Stumptown’s initial plan was a “grow locally” plan (from which it has now departed). The upside to this approach is growth opportunities for staff, serving more customers, and (theoretically) higher profits. The downside is that it is very stressful and can dilute the brand.

“Other people’s money” (OPM) is the approach of using outside money to grow locally, regionally, or spot market. Whenever OPM is involved, there are strings attached (rightly so, it is their capital being invested). OPM will want to know the end game, return on investment, and the like. They may or may not share the passion of the owner. OPM may press for growth at the expense of training and quality. My friend, Martin Diedrich, had a company known as Diedrich Coffee, which was incredible. Wanting to grow, some OPM got involved. They ended up changing the company for the worse and, later, giving Martin the boot for being fanatical about coffee quality. The good news is that he now owns Kean Coffee, which is again superb and is of the “small is beautiful” camp. It appears that Stumptown has gone for some OPM via a venture capital firm. Starbucks grew using OPM and a public stock offering. They did the most amazing job of rolling out a concept at a high level of quality of any company in modern history. In recent years they have lost their luster (and their early distinctives), but they should be studied and admired. OPM can help or hurt; it takes a very strong leader to keep it from going sideways.

Selling the company is another approach. This can be a follow on to “grow locally” but with sale as the end game or as an end game with OPM. For many of the people I knew in “second wave” coffee, the stresses of growing a small chain and the toll on family life was the main reason for selling. At The Coffee Plantation (See earlier posts), we sold to Second Cup due to the huge stresses of growth. George Howell sold Coffee Connection to Starbucks for similar reasons and wanted to spend quality time with his family. I am quite certain that this will happen to successful “third wave” companies, as well. Selling the company means losing control (unless you hold a large amount of voting stock), which inevitably results in changes from the plan the passionate owner may have had. There is, however, cash for starting over and, perhaps, pursuing a more personally sustainable plan.

Of note is the development pattern Stumptown and Intelligentsia have begun. Interestingly, it has some resemblance to early Starbucks growth. Starbucks determined to dominate their local market (Seattle) then do targeted spot market growth. The first of those markets were Chicago, New York, and Los Angeles. Stumptown has multiple units in their hometown (Portland) and has entered Seattle and New York.  They are now speaking of doing a Chicago location and Duane Sorenson has mentioned Los Angeles, San Francisco and Europe. Intelligentsia has several units in their hometown (Chicago) and has entered Los Angeles plus has a “Lab” in New York.  Will either be the “New Starbucks”? I don’t think either company remotely wants that nor is it even possible, given the market niche they serve.

Counter Culture Coffee is a wholesale roaster exclusively, which is a relatively stable, lower margin business. They have regional training centers to help train their customers on how to properly serve coffee. One must assume that they will continue to grow as all wholesale roasters do and that is by keeping existing customers and acquiring new ones through word-of-mouth and direct sales.

The Nature of an Obsessive Quest

In my next post we will delve into this interesting topic, discuss the term “third wave”, and make some closing comments.

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