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, as a responsible world citizen with Internet access, we must ask
ourselves what's going on. This Information Age thing was supposed to
be the golden opportunity for the so-called third world to leapfrog
into "development". Even though, as Fela would
say, "we are no third world, we have always been first"... but I digress.
The great force of information technology was to allow us to
benefit from "disintermediation", the elimination of
middle-men. Disintermediation is what gives you better deals on
airline tickets, lower commissions for trading on the
stockmarket, etc. Basically, anybody who is in the business of making a
profit on you just because they have information that you don't
(e.g. the travel agent on the cheapest fare, the stock broker on the
best asking price for a share of SBUX), is going the way of the
dinosaurs. One can longer simply hoard information. To survive in the
new economy, the intermediaries have to actually provide a valuable
service, like give advice in the above examples.
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.
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
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.