Digital Coffee

On Beijing's fashionable Jian Guo Men Wai Avenue, yuppies drink coffee from Seattle.. As you know, coffee doesn't grow anywhere near Seattle. Coffee grows in Brazil, Colombia, Uganda, Ethiopia, etc., and other places where, generally, the men play soccer better than the women. Coffee produced by Ethiopia is processed and sold to China by Starbucks. This is the global economy. It is a beautiful thing, imagine the human chain: the farmer in Sidamo, the truck driver, the import-export guys in Addis, the international traders, the marketing people in Seatle, all working together in harmony to produce that espresso in the hand of the ex-Tianenmen-demonstrator-turned-yuppie's hand in Beijing.

What's wrong with that? To put it bluntly, the guy in Sidamo is getting shafted big time. As Ross Perot would say, take a look at this here chart showing the commodity market price of coffee, and the price of Starbucks stock (SBUX). If you had bought $1 worth of coffee in August 1993 (about 1.3 pounds), and somehow miraculously preserved the freshness and held on to it for six years, it would now be worth $1.30 in 1999. If you had bought $1 of Starbucks shares, they would be worth $6.00 in 1999.

Ok, financial types will jump on me saying that the stock price reflects the expected future production of Starbucks, so a fairer comparison would be of annual sales. Well, Starbucks annual sales went from 0 to $1.6 billion, while the Ethiopian coffee production has been chugging along at a couple of hundred million dollars a year. You get the point. Basically, Starbucks' revenues grows when they find ways to make more people fork over $3.50 for a latte (what is that? ... surely more than $100 a pound), while Ethiopia's coffee revenues grow when there's bad weather in Brazil.

Now the only part of the coffee process on which I'm an expert is the imbibing. But even I can see that at the end of the chain it's $100 a pound, while on the commodity markets it's $1 a pound, and the grower probably gets $0.10. At least $99 is left somewhere on the road from Jimma to Moscow, and I suspect a good chunk is in Seattle.

Common sense says that, of all the people in that value chain, the grower who plants and harvests, understands the soil, the rain patterns, has hundreds of years of experience handed down from generation to generation, that person is not the least valuable in the chain. Surely the grower contributed more than 1% to the joy of your cup of Java.

Disintermediation or dissed by intermediaries?

So, in the case of coffee, who are the intermediaries eating the growers lunch? Is it the commodity markets? If so, we can imagine an internet-based global network of alternative markets for coffee. They can maybe get $10 a pound back to the grower. But what about the remaining $90?

Is it in the preparation and service? Now, we all know that the good ol' machiato at any old Addis Abeba cafe, beats the pants out of a doppio-ice-frappucino in a plastic cup, no matter if it's tall or grande. We not only grow the stuff, we know how to make a mean brew and serve it, traditional style, machiatto, you name it.

So what's going on? The coffee industry is usually second only to the oil industry in value. Over 25 million people around the world earn their living from coffee. So Ethiopia should be in a position similar to Saudi Arabia's.

The old fashioned way to get there would be to form a cartel of producers, create a shortage, and then raise the prices. Can you imagine? Without coffee, students unable to stay up late cramming would fail exams, research would fall behind as scientists around the world dozed-off during seminars, culture wither as writers's and artists' inspiration dried up. Faced with nothing less than the end of civilization, the rich world would cave in and pay the poor farmers their due, coffee prices would go through the roof, and the streets of Jimma would be paved with gold. It worked for oil! But there is a difference. There's a naturally fixed amount of oil to be extracted from the ground, so it's easy to get the producers to work together. For coffee, shortage wouldn't work because other producers can jump into the game if the profits are high enough. Plus even if it did work, it would be just as immoral as the current situation.

So what is the solution? I don't know. All I know is that most of the value of Starbucks coffee is in information. You heard it here first: Coffee is becoming information (one might say that drinking espresso makes you wired in more ways than one). It's all about creating a brand, managing the consumer experience. When you walk into a Starbucks, everything from the color of the walls to the background music is part of an orchestrated scheme to put you in the mood pay $100 a pound for coffee.

By eliminating the oppressive power of people who deny information to others, the information revolution can make the world a better place. But naive techno-utopians of the world must think again. The flip-side is that this revolution gives more power to people who create new value out of information. And the power comes, not in a trickle, but in an avalanche. The best basketball player is a million times more famous than the second best player. If you make software that's 10% better than your competitor's (say it has some slightly more user-friendly feature), you don't just get 10% more market share, you get 99% of the market. And better does not even necessarily mean the product in the traditional sense performs better, it could be bad software that is really good at getting to the customer. Similarly, when you produce coffee, it doesn't matter if you put in 90% of the labor, the guy with the nice logo will get 99% of the revenue.