The Coffee Clash
Many firms see a marketing advantage in selling politically correct beans. Will Starbucks get hurt?

By MARGOT ROOSEVELT/HUATUSCO
Monday, Mar. 01, 2004
 

Green Mountain’s Bolger pays twice the world price for some beans
 

In a corner of a dilapidated brick coffee mill, Lindsey Bolger is deep in concentration. Outside the window, the lush cloud forest of Mexico's Veracruz state stretches to a blue-green horizon, and hummingbirds dip into the wild hibiscus. The American, 40, closes her eyes, bending over a row of 12 white cups on a round metal table. Each contains coffee from the new harvest, toasted at 400ºF in a small roaster on the counter. Bolger shakes each cup and sniffs deeply. "I'm looking for defects," she says. "Underripe beans, overripe beans, sour flavors, mold. If even one bean out of 60 is flawed, you can tell."

Bolger is chief buyer for Vermont's Green Mountain Coffee Roasters, the Mexican mill's largest customer. For the 1,900 farmers who belong to the Huatusco cooperative, her opinion can mean food on the table — or not. If her standards are high, it is understandable. She pays twice the market price for 456,000 lbs. of their coffee. Why? Co-op president Josafat Hernandez has a simple explanation: "It allows us to survive." Coffee prices on the world market have fallen by two-thirds in the past five years to below what it costs to grow the beans here. Misery stalks the co-op's 43 hamlets, where as many as half the men have emigrated to Mexico City's slums or the U.S. Along the roads, children as young as 5 pick coffee, baskets strapped to their waists.

But the sweet deal — in which Green Mountain guarantees the co-op at least $1.26 per lb. for some of its coffee even though the world price is around 60¢ — also helps the $117 million company position itself as a socially responsible corporate citizen. On 42 of the 100 varieties of coffee that Green Mountain sells in supermarkets, gas stations and offices, it pastes an official seal that reads fair trade certified, proof that it paid a living wage to the growers. "The Taste of a Better World" is Green Mountain's marketing slogan, and its Fair Trade sales grew 92% last year. Says spokesman Rick Peyser: "Fair Trade puts the farmer's face on the cup of coffee. Our customers want the human link."

Coffee, the world's most valuable traded commodity after oil, is a flash point in the struggle over globalization, and the drama is being played out everywhere, from supermarkets to college cafeterias. A decade-long supply glut has impoverished some 25 million small farmers in 50 countries. Three American multinationals — Kraft, Procter & Gamble and Sara Lee — plus the Swiss giant Nestle together buy almost half the world's beans, and their profits have percolated as farmers' incomes have dripped dry. With human-rights activists crying foul, some consumers are turning to Fair Trade — and away from unfettered "free" trade — as a way to help.

But are they really helping? To orthodox capitalists, the glut can be remedied only by cutting supply or increasing demand. Fair Traders counter that giving consumers product information to make a choice is merely classic marketing. Fair Trade coffee is a better product because growers can afford to invest in their farms, argues Paul Rice, the head of a nonprofit that certifies Fair Trade. Moreover, consumers are connoisseurs. "They don't just want French roast. They want Guatemalan Antiguan, and they know where Antigua is," he says. "Fair Trade fits that because we tell a story about helping people to help themselves — not a story about poverty that makes you feel guilty."

If Fair Trade is taking off in the U.S.--and it is — much of the credit goes to Rice, 43, a Texan who, as a Yale senior, went to Nicaragua to study Sandinista land reform. He stayed a decade, setting up a cooperative for 2,500 coffee farmers. Five years ago, armed with an M.B.A. from the University of California, Berkeley, Rice raised money from the Ford Foundation and others to set up TransFair USA, a certification agency. Under the system, first launched in Europe, co-ops in 25 countries agree to divide their profits equitably and open their books to inspectors. To earn the label, companies must prove they paid at least $1.26 per lb. ($1.41 for organic) and also offered preharvest financing.

Last year Rice's agency certified $208 million worth of Fair Trade coffee. That's not much, given the $19.2 billion American coffee market. But Fair Trade sales have tripled in the past three years and constitute a growing slice of the booming $8.4 billion gourmet-coffee market. Today Fair Trade coffee is imported and roasted by 280 U.S. companies and sold at 18,000 retail outlets.

This year sales are expected to spurt, thanks to two new converts. Ahold USA — part of the Dutch conglomerate that controls Giant Food, Stop & Shop and other chains — will launch five varieties of organic Fair Trade beans (cost: $7.99 per lb.) under its Javana brand in 1,200 supermarkets. And Dunkin' Donuts, the No. 1 U.S. retailer of coffee by the cup, is rolling out an all — Fair Trade espresso line ($1.79 to $2.69 a cup) in 4,200 shops to go testa a testa with the baristas of Starbucks. "This is the beginning of a movement, and we want to get in on it," says marketing director Ed Valle. "We expect to serve 30 million Fair Trade lattes and cappuccinos this year."

The big guns are stepping in not merely because they pity poor farmers but because they sense a competitive edge. Ahold's Stop & Shop competes in the Northeast against Shaw's Supermarkets, which already offers Fair Trade. "We want our consumers to have choices," says Ahold vice president Tom Smith. Wild Oats Markets offers Fair Trade coffee to distinguish itself from Whole Foods Market, which does not. And in January Wild Oats became the first chain to offer Fair Trade bananas. "They can't compete with Wal-Mart on conventional prices," notes Rice. "Fair Trade gives added value — and gets them out of the race to the bottom."

Likewise, Dunkin' Donuts wants to make its new drinks not only cheaper than Starbucks' but also more virtuous. Says Mark Inman, a roaster who attended a session of Dunkin' franchisees: "They [Dunkin' Donuts] saw Starbucks waffling on Fair Trade, and they seized the leadership role by saying 'Yes, we care.'"

Starbucks only grudgingly entered the Fair Trade market four years ago after protesters scheduled rallies against its "sweatshop coffee." Today activist groups such as the Global Exchange in San Francisco are demanding that it hike Fair Trade purchases from about 1% to at least 5% of its coffee. The $4 billion Seattle behemoth offers only one Fair Trade variety (at $11.45 lb.) out of 20-plus types of whole beans and serves Fair Trade brew in its 3,900 U.S. shops only one day a month. Says Anthony Sprauve, vice president for worldwide public affairs: "The demand is not there."

Starbucks' reluctance has less to do with the cost of beans than with the hassle of rejiggering its supply chain. The company is no Scrooge. It pays on average $1.20 per lb. for its high-quality beans, well above average. But most of that money goes to multinational exporters, who buy from middlemen in coffee regions. The giant traders pool beans from small plots and big estates. The anonymous farmer earns a sliver of what Starbucks pays. But Fair Trade's 346 struggling farmer-owned co-ops might need hands-on training and investment to meet Starbucks' specs, an investment the company might find expensive. Indeed, to improve Huatusco Java, Green Mountain had to computerize quality control and bring Mexican farmers to Vermont for technical workshops. "With Fair Trade," Bolger acknowledges, "you have to walk the talk."

So far, the major roasters have been dragging their feet. Nestle and Kraft, unwilling to jack up costs, do zero Fair Trade business. They are taking a page from an old Nike playbook, which could be risky in today's politically charged market. When the shoemaker originally balked at changing work conditions at its contracted factories, a consumer backlash damaged the company's reputation and sales. Humanitarian groups such as Oxfam and Co-op America are now asking big wholesalers to switch at least 2% of their purchases to Fair Trade. And last November, Catholic Relief Services launched an effort to persuade the nation's 65 million Catholics "to live out their faith" by drinking Fair Trade brew. They are joining Lutheran, Methodist and Presbyterian groups organized by Equal Exchange, a Massachusetts company that sells Fair Trade products to 19,000 parishes.

Activists have managed to push two major wholesalers into Fair Trade. Sara Lee began offering Fair Trade coffee after institutional clients — hospitals and universities — demanded it. Meanwhile, groups led by Domini Social Investments, which manages $1.8 billion, jolted P&G, the nation's biggest coffee company, with a shareholder resolution demanding that it consider Fair Trade. After protest rallies and a grass-roots campaign, P&G last September launched a Fair Trade line under its gourmet Millstone brand. So far, it is sold only by mail order, but P&G signed an agreement with activists to begin offering it in thousands of supermarkets. Says P&G spokeswoman Tonia Hyatt: "We have a goal of being a leading Fair Trade seller."

Whatever the politics of coffee, there is little dispute that a worldwide glut has had severe consequences for producing nations. Ten years ago, countries such as Mexico got about a third of every dollar spent on coffee. Now they get less than 10¢. An estimated 600,000 Central American coffee workers have lost their jobs. Congress, citing concerns that Colombian farmers are switching to coca (for cocaine) and opium poppies, passed a resolution in 2002 calling for "a global strategy to respond to the coffee crisis."

To critics, coffee is a paradigm of globalization gone amuck. For decades, supply and prices were regulated by an international agreement. Freezes, droughts and market speculation caused occasional price spikes. After the U.S. pulled out of the coffee agreement in 1989, the resulting free-for-all led to an explosion of new acreage.

Free-market advocates see the oversupply as an unavoidable effect of economic progress. The end of export quotas allowed Brazil to boost mechanized production and encouraged Vietnam to plunge into planting coffee with cheap labor and low-quality beans. The glut, says Brink Lindsey, a Cato Institute trade expert, is "a signal to high-cost producers — for example, in Central America — to supply a higher value product or exit the market." Free traders fear Fair Trade premiums could spur even more production. Their solution to the crisis: encourage more Java drinking. In Veracruz, however, and among at least some of the 674,000 farmers who belong to Fair Trade co-ops worldwide, politics and economics intersect for a better life. The Huatusco co-op is building health centers and schoolrooms. The extra money also allows it to focus on the complexities of picking, depulping, fermenting, washing, drying, husking and sorting with the meticulousness that the gourmet market demands.

Global agriculture is hardly an exercise in unfettered capitalism. Vietnam's coffee planting was funded by government loans. In the U.S., grain farmers fatten themselves on $180 billion in subsidies. And sugar in America costs nearly twice the world price because of protective quotas that mainly benefit corporate farmers.

Increasingly, politically correct labels are becoming a brand attribute no different from price, performance or advertising. Organic certification is growing exponentially as consumers seek to avoid pesticides; 85% of Fair Trade coffee in the U.S. is also organic. Most tuna fish is labeled dolphin safe — caught without netting the popular sea mammals. The Rugmark label promises carpets woven without child labor. Activists persuaded Home Depot to sell wood that is certified as sustainably harvested, avoiding the razing of endangered forests. And environmental groups label some coffee shade grown, bird friendly or Rain Forest Alliance certified if it protects wildlife.

Meanwhile, the Fair Trade seal has expanded to tea, chocolate and bananas. Mangoes, pineapples and grapes are short-listed. It won't necessarily improve the flavor of those products, but for many consumers, it will leave a better taste in their mouth when they make a purchase. And if the grocer stands to make more profit, capitalism will be served too.

From the Mar. 08, 2004 issue of TIME magazine