Grant X. Storer
Seattle Pacific University
Development Economics, Spring 2017

June 9th, 2017

Abstract

Coffee is one of the most consumed beverages in the world with over 9 billion kg consumed annually. However those who are tasked with producing it typically live in the impoverished regions of the world and barely make enough to get by with slim profit margins. Interventions like Fair Trade have sought to remedy this problem, but further analysis indicates that it fails to provide any meaningful positive impact to coffee farmers. This report observes the underlying changes in the coffee market that have shifted coffee to be treated with the same level of connoisseurship as wine; paving the way for the Third Wave of coffee to maximize the quality in coffee. This change has opened the opportunity for Direct Trade to emerge and provide a more sustainable method of providing more value to coffee producers through product differentiation. I propose research to be conducted to observe the drivers of demand for Direct Trade coffee, in particular to which is a more successful marketing approach between highlighting the high quality of the coffee compared to the social aspect of the coffee sourcing.

Introduction

Ever since Samuel Adams led the Sons of Liberty to board trade ships by the East India Company in 1773 and dumped over 45 tons of tea into the Boston Harbor (BostonTeaPartyShip.com), America has been explicitly a coffee nation. Based on data compiled by Euromonitor International, tea is only about 1/4th the size as coffee in America (P.J.W. , 2013). Americans lead the world in coffee consumption with an estimated with over 1.4 billion kg consumed in 2014, in a global market that consumed a total of 9 billion kg (ICO, 2015).

While coffee is the preferred caffeinated beverage of the developed world, the production responsibility falls on a workforce of 25 million laborers and small independent farmers in developing nations along the equator (Renner, 2014). The coffee that we consume on a daily basis primarily is known as Arabica coffee, that comes from the tree coffea arabica. They are short shrub-like trees that grow in the shade of larger trees in high mountainous regions (Hoffman, 2016). The reason for coffee production to be limited by geography is that the coffea arabica is a delicate tree that needs to have a minimum of 50 inches of rain, but not to have harsh winds, controlled sunlight, and most importantly a temperature range of a high of 77 degrees and a low of 59 degrees. The dilemma that pushes the need for high elevation is that coffee needs to have the seasonal climate of the equatorial environment, but without the strong heat, thus the higher elevation brings a more lower and more stable climate (Thurston, 2013). Sunlight must also be controlled since the arabica does not have ability to control fruit production like how apple and mango trees do when they drop premature fruits to maintain equitable production. This means that excess photosynthesis will cause the arabica to over-produce and drain all the available resources; thus harming future crop production (Thurston, 2013).

The critical problem is that within the geographical region suitable for coffee production, there are essentially no barriers to entry to produce coffee and that coffee is an undifferentiated commodity that creates an almost perfect competition market that leaves producers as price-takers. This means that many small players all join in the market and saturate the production so that there is very little profit margin gained from green coffee, and since these producers are all small players, there is not a large enough scale of production that can allow for sustainable growth for these farmers like how the large box stores are able to operate on slim profit margins. To make matters worse, that slim profit margin can be completely wiped out during periods of over-saturation that lowers the selling price of coffee.

Fair Trade Coffee

To try and remedy this dilemma, one of the most popular interventions in the coffee industry is the implementation of Fair Trade Certified coffee. While there multiple components to the Fair Trade certification, its primary focus is to provide more value to coffee producers. The central feature of this certification is that it creates a price floor of $1.40/lb of green coffee that allows for a livable profit margin, and an added $0.20/lb goes towards investment in community projects (Fair Trade USA, 2017). TransFair and Fair Trade USA have been very successful in tapping into the public’s demand for more ethically sources of coffee, and since 1998, over 1 billion pounds of coffee consumed in the U.S. as Fair Trade Certified (Fair Trade USA, 2017).

The unfortunate reality is that Fair Trade fails on multiple levels to achieve its goal of adding value to coffee producers. The price floor is meant to work as a form of crop insurance to the producers, but since there is no restrictions on production, all the potential benefits get washed out by over-saturation. The strongest benefit Fair Trade is supposed to have is when there’s a large drop in the commodity price of coffee, like in 2002 where the price dropped to $0.63/lb due to high robusta coffee production in Vietnam, which in theory would mean that coffee farmers would receive a $0.62/lb premium (after fees and dues to the cooperative) (Janvry, 2010). Instead, since there is no restriction in production, what results is “the tragedy of the commons” where it is in the best interest of each individual to shift their coffee to Fair Trade certified, which then exceeds the market demand quantity of Fair Trade Coffee, thus only about 15% of the farmer’s yield can actually be sold as Fair Trade (Janvry, 2010). When the price of coffee rises and exceeds the price floor of Fair Trade, coffee farmers also lose out since they receive no better price compared to the open market by selling Fair Trade, but yet have to pay $0.03/lb certification fee on average. There is still the $0.20/lb premium, but that is only indirectly received since it goes to the cooperative for public investment projects (Janvry, 2010). On average, with fluctuations in price levels in coffee and the corresponding factors that has on Fair Trade farmers, research conclude after observing 13 years of data that on average, a farmer in Guatemala received $3-$11 in additional revenue per year through Fair Trade (Janvry, 2010).

Fair Trade calls upon the wrong economic incentives and drivers to push money back up the value chain. The problem is that Fair Trade tries to demand a premium price and have bargaining power on what is an undifferentiated commodity product. There is nothing objectively better about Fair Trade coffee beans over any other batch of coffee, in fact, Fair Trade encourages the opposite to happen. Since Fair Trade certification ensures a price floor, adverse selection occurs as coffee farmers have incentive to dump their lowest passing quality coffee in Fair Trade coffee (Wydick, 2014).

One of the more shocking disappointments about Fair Trade coffee is that the consumer pays a premium for the same coffee with the intention of sending more money back to the farmer, but the money never makes it back there. On average, consumers are willing to pay about $0.50 extra for a cup of coffee for ethically-driven purposes (Wydick, 2014). Consumers imagine that they are in sense making a donation to the farmer by paying extra for the same coffee, but when evaluating Fair Trade coffee in Finland, data shows that in fact the opposite is happening. When comparing the distribution share of coffee sales between free trade coffee and Fair Trade coffee, we first see that half the value going to the consuming country, 2% goes to transportation and insurance, and the remaining 48% goes back to the producing country. Then the distribution goes the wrong direction and the consuming country gains 10% more at 60% of the value, while 5% goes to certifications and fees, and then the producing country now only get 35% of the value. We as consumers are willing to pay more, but all that does is increase revenue for those at the end of the supply chain (Valkila, 2010).

Thesis

This project proposes that a solution can be found in the growing market of Direct Trade coffee. With the rise of independent coffee roasters and more efficient methods of distribution, coffee has now been able to be roasted and consumed shortly after harvest. When the batch is produced from a single producer, it yields a unique tasting experience that is further amplified when using manual brewing methods like Chemex or Aeropress. This change in roasting and brewing methods has allowed coffee to have the capacity of being treated as a differentiated product rather than purely as a commodity, similar to how fine wine is separated from generic wine.

As Direct Trade continues to gain momentum, it will encourage farmers to focus more on quality of production rather than quantity, which then allows farmers to demand a higher price from roasters. The farmers gain bargaining power since they now provide a differentiated product to roasters and with the growing prevalence of regional taste scoring conducted by Cup of Excellence to help provide a platform to display their farming batch. Roasters are willing to pay a premium price on this coffee since it cuts out wholesalers out of the process, which not only reduces the quantity of hands that need to pull out profits along the value chain, but also reduces the time required from harvest to roasting. Therefore roasters save money while not only receiving a differentiated and higher quality product, but in the freshest state possible as well. For those who do not differentiate their product and sell as a commodity, they should expect to gain from this trend as well since the increased in specialized coffee is no longer competing for space within the commoditized coffee market.

Literature Review

Wine Market

To understand how coffee can create an established niche market of differentiated products that can demand a premium price, we need to understand how fine wine has been able to establish itself as a luxury item even when it’s actual taste differential from generic wine has been proven to be only psychological.

During the early 1990s, Australia entered the wine market in a big way. With new wineries opening up with the emergence of new technologies, Australia quickly became a market leader in “new world” wine by providing consistent high yields of fault-free wines. The utilization of new technology allowed producers to provide many varieties of wines to appeal to a wide base of consumers. By 2000, there were over 1300 producers in Australia and was the ranked as the fourth largest exporter of wine, bringing in $1.5 Billion per annum (Aylward, 2007). Australian wine found a market in a younger demographic of wine drinkers who were price-sensitive but preferred the sweet flavor of Australian wine and enjoyed that it was readily available everywhere. The problem was that the Australian wine’s market identity was on the aspect of convenience, which led to the wine to be treated as a commoditized product and the over-produced supply caused the price to drop and kill all the producer surplus (Aylward, 2007).

Wine’s value is highly dependent on its regionality; when a wine has high regionality, it can be the difference between selling a $10 wine to being a $300 wine (Beckert, 2017). Regionality are all the factors that influence the customer’s perception of a wine and it is regionality that separates the fine wine of the “old world” wine from the commoditized “new world” wine. A study conducted by Chris Easingwood evaluated 14 drivers for regionality that fit with 7 categories: Specialization, Volume Production, Opinion Formation, Quality, Heritage, Distinctive, and Terroir. The top three drivers were identified as: Specialization, Opinion Formation, and Distinctiveness (Easingwood, 2011). What these drivers point to is that regionality comes from the emergence of “Regional Heroes.” What Regional Heroes are is a particular brand that have a unique taste and clear story for its climate and process. When a Regional Hero emerges and other producers all follow the same process, the region as a whole develops a differentiated identity that becomes a hook for experienced wine drinkers to que off from. The flaw in the Australian wine market was that they focused on ubiquity of access to Australian wine but never developed a narrative of what an Australian wine is supposed to taste like (Easingwood, 2011). Based on the three main drivers of regionality, Easingwood concluded a handful of steps that contribute to these drivers for regionality:
• Specialize in wine style
• Have wine heritage
• Produce distinctive wines not made elsewhere
• Produce a wine that is made possible by the region’s particular terroir
• Enter the discussion of opinion formers.

One of the impacts that regionality has on wine is its contribution to connoisseurship and how regionality helps to shape a narrative of the wine and to provide a deeper level of education to enhance the distinction for the connoisseur. Wine has moved from purely a binary evaluation of flavor with the presence or absence of flaws to being a comprehensive experience. The enhanced sensitivity of taste and the narrative of regionality utilizes language to be as critical factor to the experience as is taste. A wine connoisseur will not describe a wine as good or bad, but will use words like terroir, dry vs wet, age, body, tannins and oxidative to describe a wine and its characteristics (Elliott, 2006).

Coffee’s transformation

Coffee may have been adopted as the patriotic caffeinated beverage of the United States of America, but it also historically became the synonymous with the traditional blue collar working class as well. Tea was observed as being posh and delicate, while coffee was a rugged utilitarian means of stimulating the American dream. For the past few centuries, it didn’t matter where the coffee came from or how it was roasted, as long as it came out black and you didn’t accidentally grab the decaffeinated pot, you were all set to go. But in the past 40 years, that narrative has started to change. It began to shift with Howard Schultz’s trip to Italy in 1983 and imagining how a coffee shop could become the “Third Place” in American life that bridges between the productivity environment of one’s workplace, combined with the leisure of one’s home (Schultz, 2014). This new perspective of how people –particularly Americans– interacted with coffee began to shift how people thought of coffee. Starbucks was able to provide a personalized experience with coffee at a large scale; everyone had their own preferred customized order of a latte. Starbucks changed Americans’ view of coffee from not just a means to an end with a high yield drink of caffeine, but to create a personalized expression of individuality; Starbucks made everyone a connoisseur of coffee: the everyman’s version of fine wine (Elliott, 2006).

Coffee is now entering the world of specialization and connoisseurship. Starbucks invested heavily in providing extensive education on coffee to a workforce of primarily multitasking college undergraduate students, who then enthusiastically shared to perplexed first-time customers who are trying to figure out how big a “tall” latte is, the difference between “wet” and “dry” cappuccinos are and how their 100% Arabica coffee is a more flavorful and superior product than the cheaply produced Robusta coffee, or how the Sumatra roast is going to be darker and bolder when compared to the Guatemala Antigua roast is going to be more balanced flavor with notes of cocoa and spice (Folmer, 2014).

In order to determine if there is potential for coffee to develop a robust market demand for premium coffee that will add profitability to coffee producers, we need to see that coffee has the same components as wine; we need to be able to observe that coffee can be differentiated and has or can develop regionality. Just because coffee can have the internal capability of developing a premium market, there also needs to be a market demand for it as well. We will now observe five components of coffee that confirm that coffee has the internal capability of developing regionality and as well as a growing
market demand for premium-priced coffee.

Single-Origin Coffee

The public’s education and enhanced vocabulary on coffee has enhanced the pallet of consumers to be more sensitive of variations in taste, which has led to the emergence of single-origin coffee. Again Starbucks has been a major contributor by selling whole bean bags that came from a particular country, or sometimes even more narrower with highlighting a specific region. But now the trend has pushed single-origin to identifying the actual farm and farmer that produced a particular batch of coffee.

This transition has now placed coffee in the same kind of discussion of connoisseurship that wine is at. Now that coffee is moving from a generalized blended roasts to small batches from single producers (for larger farms it’s often called “Micro Lots”), coffee roasters have started to use techniques found in the wine culture to sell their product. A quick glance at an independent Seattle roaster, Zoka Coffee’s website displays the following details on its single producer/micro lot batch of “Guatemala Gesha Natural”:
• Notes: Citrus Peel, Light Body, Sugarcane, and Clementine
• Region: Acatenango Volcano Valley
• Elevation: 4,680-5,400ft
• Producer: Anabella and Antonio Meneses
• Process: Natural
• Varietal: Gesha
• Cupping Score: 90 (Zokacoffee.com)

What we observe with Zoka Coffee’s display of their Gesha Natural coffee is that it utilizes the primary drivers of regionality seen in the wine market. By listing the unique coffee varietal, Gesha, and as well as emphasizing terroir with the not only the particular region listed within Guatemala, but also its elevation; these all indicate specialization. The cupping score is emphasizing opinion formation by using a standardized scoring metric that determines its relative value. We later on describe how the Cup of Excellence competition has been utilized in making this standardization more broadly used and thus deepening its authority in opinion formation within the coffee community. The flavor notes then also display distinction in identifying the flavors expressed within this batch of coffee. These all help the coffee to develop regionality.

Coffee is playing off of the advantage of regionality to shape the narrative of the consumer’s interaction with coffee. While each batch has been able to highlight its unique characteristics, the two major producing continents of Africa and South America have been able to utilize regionality to create a distinction with African coffee typically highlighting the fruity and acidic bite in coffee flavor while the South American coffee is known for its more smooth and chocolatey taste. This emphasis in regionality has brought the discussion of legally protected Geological Indications (GI) as a tool of product differentiation for this emerging specialty coffee sector with single origin producers. In fact, there have already been 86 identified distinct “designated micro-climates” based on a set of variables, including: location, rainfall, altitude and processing methods (Tueber, 2010).

The Growing Specialty Market

While the coffee market has not matured enough to provide explicit parameters around categorical coffee market terms, Single Origin, Specialty, Gourmet, and Micro Lot coffee all tend to be referring to the same general market, but this sense of ambiguity makes it hard to narrow in on industry trends relating to these segments (ITC, 2012). One of the more reliable metrics used to define this market is that it possess one or more of the following characteristics:
• “Produced with a focus on quality: When farmers receive higher prices for their crops, they are more likely to invest in husbandry and processing best practices, which helps yield and quality of the final product.
• Shipped with a transparent & traceable supply chain: Commodity coffee is typically blended in large batches from multiple producers, farms, regions and origins. Specialty coffee consumers increasingly want to have a tie to a specific country, region, varietal or even farm.
• Grown using fair labor practices: Given the vagaries of the futures market and influences on the price that may or may not be driven by supply and demand fundamentals in the short run, farmers may not generate enough cash to pay their labor and maintain their crops. In theory some of the premium price of specialty coffee is intended to eventually trickle down to the farmers.
• Sourced with a focus on crop sustainability: If a commodity crop prices plummet – as they did in the so-called “coffee crisis” of the early 2000s, when the nearby contract on the New York futures exchange traded at below $0.50/lb. – many farmers will choose to switch crops or abandon their farms altogether. Given the premium value, specialty growers can be somewhat insulated from price fluctuations.” (Vellucci, 2015).
With these loose parameters on specialty coffee, there are some very exciting trends coming out from major research firms on differentiated coffee. According to the Specialty Coffee Association of America, in 2015 the U.S. Coffee market was a $48 Billion industry with now 55% of that value has come from defined specialty coffee (SCAA, 2015). This would imply that specialty coffee was a $26 Billion market in 2015. Either due to variance in evaluation or a significant increase in market share, in 2012, specialty coffee in the U.S. was a $12 Billion market (Wilson, 2012). In any case, in the U.S. market alone, premium coffee is capturing a significant portion of value. In the National Coffee Association USA’s 2017 report, it reported that gourmet coffee had surpassed non-gourmet coffee in surveys asking about coffee consumed in the previous day, which went from 46% in 2012 to 59% in 2017 (NCAUSA, 2017). The biggest driver for this upward trend is the Millennials’ embrace of specialty coffee, with the 18-24 demographic having the most change going from 13% in 2008 to 39% in 2017 consumed gourmet coffee within the past 24 hours. 25-39 has also gone from 19% in 2008 to 41% in 2016, then jumped up again to 50% in 2017 (NCAUSA, 2017). A further highlight of this trend in the NCA 2016 report that said, “Data shows that the factors driving coffee consumption are fundamentally changing. The next generation of consumers has a more personal relationship to the products and brands that they support (NCAUSA, 2016).”

Third Wave Coffee

Much of the emphasis has been on the demand side of gourmet coffee so far; by showing the maturing of the consumer behavior to treat coffee more as a specialized product has increased the demand for high quality single origin coffee. But the other critical factor is the incentive structure and trends on the supply side: do coffee growers have incentives to specialize and do coffee roasters have the incentive to pay a premium for it?

For the roasters, there has been a growing trend that has emerged and is pushing forward for higher standards in the end product of coffee, and that is what is called “Third Wave Coffee.” What this describes is the progression that the coffee culture has gone through and how coffee is provided. The first wave of coffee is the purely commoditized coffee that was purely about price, this was much of the what coffee has been at for the past few centuries and with the prevalence of large-scale producers of coffee like Folgers or Maxwell House. The second wave of coffee was started with Starbucks and the introduction of artisan coffee through espresso-based drinks. Third wave coffee is now the shift from large chain cafes that while provide artisan coffee like a vanilla almond milk latte with extra foam, still use imported roasted beans with blended bean varieties. Third Wave is when a small independent shop with only a few locations handles all processing functions of the coffee. The café is the roaster and the retailer, and all the coffee is freshly roasted using primarily single-origin or narrow regional blends (Manzo, 2015).

What Third Wave Coffee has done is push these roasters to compete on quality not only in performance of pulling espresso shots but also as the gourmet coffee source for customers who want high quality coffee at home. With the emergence of high quality home brewing methods with the Chemex and the Aeropress, home coffee consumption of gourmet coffee has started to grow significantly since these brewing methods help to amplify the unique characteristics of the coffee (Pipunic, 2015).

Direct Trade

This push for higher quality has resulted in these independent roasters to seek out individual farms with unique production characteristics and buy directly from the farm. This is driven by the roaster’s need to lock in a unique product while cutting out the middlemen that not only increase the processing cost, but also delays transportation, thus diluting the end product of the coffee. The reason why the farmers seek to make these deals is that for the first time, the farmer is the one with the negotiating power and can sell the coffee at price well above Fair Trade prices.

There currently are not any standardize parameters of what is considered Direct Trade, but for this research the term Direct Trade Coffee refers to the following criteria:
• Coffee that comes from a single geographical region of a country
• Roaster buys directly from either a single farm, a cluster of nearby farms, or local cooperative.
• All coffee has the same varietal, milling process, and within 500ft. of altitude.
• The producer is identified (individual, family or cooperative).
• Coffee was purchased above Fair Trade total prices
Cup of Excellence
It is great when the end transaction occurs after a roaster has identified a producer and has directly purchased coffee, but one lingering issue is how do the two parties find each other? Especially since these producers are typically low income earners, there usually isn’t an easy access to markets for these producers. That is where the Cup of Excellence comes in.
The Cup of Excellence is an annual competition that takes place in many of the of major coffee-producing countries in the world. Every year, professional coffee tasters come in and taste small samples of thousands of batches of coffee produced in that country. The sample is then tested on multiple criteria to determine what are the highest quality coffees in that country based on a scoring range of 0-100 with a score above 84 is considered “Excellent” (SCAA.org). The winner then gets to sell their coffee on an online public auction that independent roasters compete for access to internationally certified premium coffee. In 2012, the Guatemalan Cup of Excellence winner that used a Mocha bean variety sold for a record $500/lb. when the commodity price during that time fluctuated between $1.13 and $1.46 per pound (Max Plank Institute).
On average, a batch of coffee that receives at least a score of 84/100 at the Cup of Excellence can expect to receive at least 4.5 times the selling price of commodity coffee (Wilson, 2014). There are strong upside incentives to compete in the Cup of Excellence because on average, every point increase after 87 generates an additional 15% increase in selling price. In addition to that, any coffee that is scored above 90 is then given an individual ranking which then makes the coffee batch gain more notoriety with buyers. Placing in the top 3 is exponentially better as well, with 3rd place typically receiving a selling price of 25% above coffee not in the top 4, 2nd place receives 37% above, and 1st place is a whopping 144% above 4th place prices; all this happens even though the average variance in CoE scoring of 1.9 points (Wilson, 2014).
The Cup of Excellence has become a platform for these small individual farmers to broadcast to the market their product and to obtain a marketable certification. Many roasters either have tasters participating in the judging of these events or will send down buyers to then make deals with the farmers.

Research Proposal

Literature Limitations

While there is a lot of data on overall coffee sales and import quantity, there is a very glaring hole in how to split the coffee market up appropriately to see how much certain types of coffee are being sold, like single-origin vs. blended coffee. We cannot clearly observe industry trends to see how big directly traded coffee is growing and is this producing new consumers or what kind of coffee is being substituted for specialty coffee.

On the roaster side, we do not know how big of a driver the Direct Trade coffee is for business. While preliminary research indicates almost all local roasters in the Seattle area have some form of single origin & explicitly stated direct trade coffee, there is no sales data to show how popular this is with consumers.

On the consumer side, there is no data to show consumer preferences towards Direct Trade coffee and how much of a premium they would put on the product. Since this coffee is usually sold both as a luxury item and as a social impact, we do not know what is the main driver for the accepted price premium by the consumer, are they buying a premium product or are they exercising goodwill?

On the producer side, we do not know how much more they receive on average from conducting Direct Trade, and what the impact it has on their livelihood. Nor do we have data to see what are the externalities that result from conducting Direct Trade.

Research Proposal

The literature review indicates that there are many positive growing trends for coffee to be treated as a differentiated product, but this does not prove that it will help drive value back to the coffee producers. In order to confirm the thesis of this report that Direct Trade coffee adds value to coffee producers, research must be conducted to identify the drivers for demand of directly traded coffee. If Direct Trade coffee consistently attracts a premium price, we must be able to observe how the consumer identifies the product and why they are willing to buy. We also need to observe the coffee roaster as well and determine what incentives they have to conduct Direct Trade.

Consumer Research

For consumers, we need to understand what is the main driver for consumers to purchase the premium coffee. I propose that an experiment is conducted at multiple Third Wave coffee retail locations and compare the sales variance of Direct Trade coffee based on days with a promoted Direct Trade coffee focusing on its premium flavor and its regionality, compared to emphasis in promotion put on increase value to the producers. The experiment can be conducted as follows: Over three weeks, customers will be presented with three different messages. For a full week, promotional materials will be put on display to draw attention to a roaster’s selection of Direct Trade coffee; this can be a free-standing sign at the entrance, a sign near the coffee batch, and a sign at checkout.

On the first week, the signs will explicitly state that it is gourmet coffee and emphasize its single-origin location, its impact on unique flavor characteristics, and the relative freshness compared to blended coffees. Baristas will then be given talking points based on these characteristics and make sure every customer receives at least one explicit impression about the Direct Trade coffee. The following week, the signs will all emphasize the Direct Trade element of the coffee, highlighting the farmer and the farmer’s community, and the added benefit Direct Trade has over Fair Trade coffee in revenue to the farmer. Baristas will then be using these talking points when talking about Direct Trade coffee. On the final week, the messages will equally present both aspects of Direct Trade coffee, but when those who do buy a bag of Direct Trade coffee, they will be presented with a quick 1-question survey asking which factor was more important to them: Superior quality or ethical consumption. After answering this survey, they will be presented with a 50% off coupon for their next future purchase.

Sales totals for each of these weeks will be tallied and measured in total quantity and percentage of sales. By observing the difference in quantity sold will be evidence of what message is the more successful driver of sales after checking with its relative percentage of sales. By covering a full week, the experiment will be able to account for the daily fluctuations in patrons to the store and the varying schedules that patrons seek supply of coffee. The results of the first two weeks will then be compared to the survey results to see if the conscious decision making is aligned with the unconscious implicit decision making rationale. This survey also needs to account for local culture as well, so experiments need to be conducted at four geographic locations: Central hub for Direct Trade (e.g. Seattle city limits), surrounding parameter (e.g. Greater Seattle region), other strong Direct Trade community (e.g. San Francisco), and one neutral community (e.g. Iowa). The variance in results will show how much culture affects the popularity of the product and its influencing characteristics.

Roaster Research

Since the industry level statistics fail to identify the market of Direct Trade coffee, data must be collected directly from Third Wave roasters that provide Direct Trade coffee. In the geographic markets listed previously, the following data needs to be collected:
• Quantity of varieties of Direct Trade coffee provided
• Quantity of varieties of non-Direct Trade coffee provided
• Of the non-Direct Trade coffee, quantity that is Fair Trade, or Single Origin
• Quantity of Direct Trade sold
• Quantity of non-Direct trade sold
• Profit margin on Direct Trade coffee vs. Non-Direct Trade

This data will be allow the isolation of data that is Direct Trade coffee and compare it’s relative popularity to other forms of coffee provided. That data plus the profit margin will help clarify the incentives for roasters to put the added effort to provide Direct Trade coffee.
Preliminary Research
Seattle is one of the main growing markets of the Third Wave Coffee trend, and over the past decade many independent roasters have emerged and have found niche followings. Initial research was conducted via passive online sampling of products listed by 16 roasters. Information collected included:
• Do they provide any coffee that meet the stated Direct Trade Coffee requirements listed in this research?
• The quantity of Direct Trade coffee
• The quantity of non-Direct Trade coffee
o Of The quantity of non-Direct Trade, how many were listed as Fair Trade Coffee or Organic Coffee
• The average selling price of Direct Trade coffee and the average selling price of non-Direct Trade Coffee.
The results were that of the 16 roasters, 12 had at least one coffee listed online that met the Direct Trade Criteria, while only 3 had any type of Fair Trade coffee and 10 had organic coffee. There were 89 varieties of Direct Trade coffee listed compared to 81 non-Direct Trade coffee listed. The average selling price of Direct Trade coffee was $17.92 and non-Direct Trade Coffee was $15.50.

There are a few limitations with this data, in that the selections provided online may not be all the available varieties that a roaster provides and can under-represent the amount of varieties that single-origin coffee is provided due to short-lived cycle compared to the less volatile blended roasts. With the rigid restrictions of the criteria for being considered Direct Trade and the passive nature of this study means that quantity of Direct Trade coffee will be under-represented since a selection that fits the criteria of Direct Trade, but does not explicitly state these characteristics will be counted as non-Direct Trade; therefore under-represents the quantity of varieties of Direct Trade, and artificially raises the average price of non-Direct Trade coffee.

Interview with James Lim

I was able to set up a meeting with the Director of Education at Caffe Ladro, James Lim, and while we did not discuss hard numbers as listed in my proposed research, we did talk extensively on coffee sourcing and single-origin coffee. A few notable takeaways were that Ladro conducts more Direct Trade than what is observable from the coffee packaging. Currently there are three different coffee roasts that are described as Micro lots, and while Lim warns that micro lot does not always correlate with Direct Trade, for Ladro though those micro lots come from direct trade. He went on to say that their staple espresso roast, “Ladro Blend” is actually a compilation of directly traded coffee that was paid a premium price for, but since it was a blend it cannot be considered single-origin. James also expressed how much collaboration there is between independent coffee shops, and while they do compete for business, they work together to educate the public on the higher standard of coffee provided by these Third Wave coffee shops. As the public becomes more educated on the complexity of coffee and the quality difference between a fast coffee shop like Dunkin’ Donuts or a Starbucks compared to a specialty coffee shop like Ladro or Slate, the overall market demand will shift as well as the willingness to pay a higher price for a cup of coffee.

Coffee shops will even collaborate on organizing sourcing trips together. Caffe Ladro and Zoka Coffee use the same building to roast their coffee and they typically travel together for coffee sourcing that is usually put together by an exporter. It appears that the role of the exporter has changed to accommodate for the rising demand for Direct Trade coffee, and so the merchant exporter has shifted to being a finder and a tour guide to coffee roasters. Caffe Ladro and Zoka Coffee typically use a Brazilian-based coffee exporter, Ally Coffee, to set up tours of coffee farms to meet. This then helps the exporter to have a more secure connection to a roaster and while blended coffee is still significantly more popular, the exporter now usually is the first contacted by the roaster to purchase non-direct trade blends of coffee.

When asked about the overall popularity of the Micro lots, he said that it still is far behind the blended coffees and the Diablo dark roast coffee is the most popular overall. This highlights one of the major hurdles that single-origin Direct Trade coffee has in public perception, the single-origin coffee is typically light roasted to highlight the flavor notes, but the average coffee consumer associates light roast with weak coffee. People have been engrained since the original First Wave coffee that coffee needs to have a strong and bold bite of flavor. This creates a dilemma in that the packaging fails to properly communicate the unique flavor experience of the micro lot and can even deter people away when indicating it is a light roast. This means that the uneducated coffee consumer is not going to passively learn the high quality that the coffee contains unless they ask a barista about the coffee. Zoka Coffee has tried to mitigate this problem by not listing the type of roast on their single-origin Direct Trade coffee, this would in theory remove the negative stigma of light roast while the ambiguity of its roast length would encourage customers to reach out and ask a barista. One unfortunate myth was debunked by Lim, in that light roast does not actually contain more caffeine. This is because caffeine does not burn out of the bean until after 500 degrees, but typical coffee roasting is done at around 400 degrees. The reason for the notion to come about is that when you compare scoop-full comparisons of light to dark roast, the light roast has more smaller beans compared to the expanded dark roast beans, therefore the light roast has ultimately more beans and thus more caffeine but when all grounded up, there is still the same caffeine ratios between the roasts.

Future Concern

My research is focused on if there is a sustainable market to depend upon to provide a more equitable income capacity for coffee farmers, but just like solely observing demand for Fair Trade coffee would leave the observer unexposed to the fundamental flaws of Fair Trade, there will have to be further research conducted on the externalities of Direct Trade for coffee farmers and their community. In addition to that, if Direct Trade is a viable model that has scale to improve the income capacity for many farmers, this also means that there is a considerable amount of producer surplus in the market. My concern is on the future dynamics of coffee sourcing, if there is large amounts of profits to be made for the producer, could this open up larger firms to now have the incentive to buy out these farms and produce the coffee for themselves?

Conclusion
Coffee is a commodity, and while currently many of the producers are vulnerable to the price fluctuations in commodity prices, there is hope for a brighter future. As coffee continues to become more nuanced, the level of education that the average consumer will continue to rise. The rise in education will help with public awareness about coffee producing conditions and can help push for more economically and environmentally sustainable methods that will not only provide more value to the farmer but to society as a whole.

References:

Aylward, D. (2007). Differentiation or path dependency: a critical look at the Australian wine
industry. Strategic Change, 16(8), 385-398. doi:10.1002/jsc.806
Beckert, J., Rössel, J., & Schenk, P. (2017). Wine as a Cultural Product. Sociological Perspectives,
60(1), 206-222. doi:10.1177/0731121416629994
Boston Tea Party Facts | Boston History. (n.d.). Retrieved May 17, 2017, from

Boston Tea Party Facts


Easingwood, C., Lockshin, L., & Spawton, A. (2011). The Drivers of Wine Regionality. Journal Of
Wine Research, 22(1), 19-33. doi:10.1080/09571264.2011.550759
Elliott, C. (2006). Considering the Connoisseur: Probing the Language of Taste. Canadian Review of
American Studies, 36(2), 229-236. doi:10.1353/crv.2006.0041
Fair Trade USA. Price and Premium Database. (n.d.). https://fairtradeusa.org/certification/pricing-database?
product%5B%5D=Arabica%2BCoffee&loc%5Bhsid%5D=0&loc%5Bhierarchical_select%5D%5Bs
elects%5D%5B0%5D=label_0&hs_form_build_id=hs_form_5973f446d89aa517aee13d80d7313
7c3&ww=1
Folmer, B. (2014). How can science help to create new value in coffee?. Food Research International,
63(Part C), 477-482. doi:10.1016/j.foodres.2014.03.020
Hoffmann, J. (2016). The world atlas of coffee: from beans to brewing: coffees explored, explained and
enjoyed. Richmond Hill, Ontario: Firefly Books.
ICO. The Current State of the Global Coffee Trade | #CoffeeTradeStats. (2017, January). Retrieved May 17, 2017,
from http://www.ico.org/monthly_coffee_trade_stats.asp
Manzo, J. (2015). “Third-wave” coffeehouses as venues for sociality: On encounters between employees
and customers. The Qualitative Report, 20(6), 746-761. Retrieved from

Click to access manzo2.pdf


Quality and inequality: Taste, value, and power in the third wave coffee market (Max Planck Institute)
Pipunic, A. (2015, September 14). Everything You Need to Know About Single Origin Coffees. Retrieved May
17, 2017, from https://www.perfectdailygrind.com/2015/09/everything-you-need-to-know-about-
single-origin-coffees/
Renner, M. (2014, August 5). Coffee Production Near Record Levels, Sustainable Share Rising. Retrieved
May 17, 2017, from http://www.worldwatch.org/coffee-production-near-record-levels-
sustainable-share-rising-1
SCAA. Cupping Protocols. (n.d.). Retrieved May 17, 2017, from http://www.scaa.org/?
page=resources&d=cupping-protocols
SCAA. U.S. Specialty Coffee Facts & Figures. (2015, December). Retrieved May 17, 2017, from
http://www.scaa.org/?page=resources&d=facts-and-figures
Schultz, H., & Yang, D. J. (2014). Pour your heart into it: how Starbucks built a company one cup at a
time. New York, NY: Hachette.
Teuber, R. (2010). Geographical Indications of Origin as a Tool of Product Differentiation: The Case of
Coffee. Journal Of International Food & Agribusiness Marketing, 22(3/4), 277- 298.
doi:10.1080/08974431003641612
Thurston, R. W., Morris, J., & Steiman, S. (2013). Coffee: a comprehensive guide to the bean, the
beverage, and the industry. Lanham, MD: Rowman & Littlefield.
Vellucci, M. L. (2015, December 1). The Continued Rise of Premium Coffee in the U.S.: Will It De-
Commoditize Coffee? Retrieved May 17, 2017, from https://www.bbh.com/en-us/insights/the-
continued-rise-of-premium-coffee-in-the-u-s—will-it-de-commoditize-coffee-/10966
W, P. J. (2013, December 16). The coffee insurgency. Retrieved May 17, 2017, from
http://www.economist.com/blogs/graphicdetail/2013/12/daily-chart-17
Wilson, B. R., Conley, J. F., Harris, T. M., & Lafone, F. (2012). New terrains of taste: Spatial analysis of price
premiums for single origin coffees in Central America. Applied Geography, 35(1/2), 499-507.
doi:10.1016/j.apgeog.2012.10.004
Wilson, A. P., & Wilson, N. L. (2014). The economics of quality in the specialty coffee industry: insights from the
Cup of Excellence auction programs. Agricultural Economics, 4591-105. doi:10.1111/agec.12132
Wydick, B. (2014, August 07). 10 Reasons Fair-Trade Coffee Doesn’t Work.
http://www.huffingtonpost.com/bruce-wydick/10-reasons-fair-trade-coffee-doesnt-
work_b_5651663.html
ZOKA Coffee. Guatemala Gesha Natural. (n.d.). Retrieved May 17, 2017, from
https://shop.zokacoffee.com/products/guatemala-gesha-natural?variant=34358123082