Specialty Coffee Brand: This is the first article of a series which will be covering all the different aspects of investing in Colombian coffee, ranging from Colombia’s macroeconomic dynamics to recommendations on how to invest and potential marketing strategies.
For the last decade, Colombia has been attracting a large amount of foreign investment and is now recognised as one of the most sustainable growing economies of Latin America. Colombian coffee is an important and internationally recognised product which, combined with European demand, high-quality coffee beans, and the new post-FARC era, is all providing a fascinating context for investment opportunities in the Colombian coffee business.
Coffee Branding – Why is a Specialty Coffee Brand so Special?
Profit gained from the land can vary greatly, even when producing the same product. This disparity can be seen by comparing the money earned by a cheap Beaujolais winemaker with the earnings of Baroness Philippine de Rothschild producing Mouton Rothschild. The coffee trade is another industry where profit varies greatly. Just like wine you can tenfold your profits by branding your product as a luxury. Yet to call your coffee “specialty” or “single origin” your production methods need to reflect the price tag attached to your product.
In order to sell your product at higher prices, you need to ensure that its price inelasticity is high or it simply won’t sell. This requires investment in a marketing strategy in order to brand it as unique. Although most might be persuaded by strong branding, quality does need to follow. This requires a meticulous production process.
As a coffee producer, you need to remember that you are competing with Nespresso and Starbucks. Therefore you should keep in mind that some of these multinationals such as Starbucks which is currently worth 84.6 Billion USD (06/07/17) aren’t worth competing with. If you can’t reach the same economies of scales as these companies you need to differentiate your product, in its marketing and pricing strategies, moving you from a crowded marketplace to a quiet and spacious niche.
How much Profit is There to be Made Producing Coffee?
Nespresso tends to sell their capsules for over $0.4USD/capsule (Cheapest price, France). A 3 coffee a day habit will end up leading to an approx cost of $438USD a year. This means that many European families will end up spending more than $500USD a year on coffee. This consumption pattern shows that there is a place in the market for specialty coffee.
Do You Want to Produce Coffee Like a Winemaker or Like a Corn Farmer?
If you are a producer offering large yields and low prices you are sure to find buyers. However, you (the farmer) will be liable to market fluctuations. Coffee is the second-most-traded commodity after petrol which means it’s market price is tied to the US Dollar. This is great for producers at the moment due to President Trump and his policies that have strengthened the dollar. Farmers are being paid more than they are used to, yet these good times depend on the price of the dollar which, in many ways is symptomatic of long-term danger. Another factor which can increase short term profit is when the Brazilian coffee cherries freeze. The decrease in supply creates a rise in prices (Brazil is the producer of approx ⅓ of the world’s coffee). On the other hand, without bad Brazilian weather or if the dollar is cheap, the farmer might struggle to cover his costs of production. As for setting a price, in order to compete with multinationals, large economies of scale are needed. This meaning that Colombian coffee producers tend to be part of cooperatives such as the Federacion Colombiana de Cafedeeros even though they tend to buy produce cheaply regardless of quality.
The way around this and towards higher profit margins is luxury marketing strategies.
It is possible to make a good profit by selling high-end strains to foreign buyers such as Nespresso or even small scale roasting facilities in Europe, Japan or the US. Still, you will remain dependent on your buyer and might find it hard to keep up with your costs of production, especially if you contract a company to export your coffee for you.
Becoming a Coffee Trader
A popular way to make money in the business is to become a coffee trader. This consists of going from farm to farm and finding the best product around. There are also many fairs which you can visit and buy coffee in function of its taste. This is a low-risk solution due to little overheads (no farms). You will need to pay for the batch (which is usually bought from small farms of no more than 2 hectares) as well as cover the costs of its export (see export section). If you find a buyer abroad it shouldn’t be too hard to cover your costs and even make a comfortable profit. However, you will have to constantly be dealing and negotiating with farmers who rarely have consistency in their product. This, therefore, involves searching for the best coffee you can find (out of thousands of producers) twice a year. If you want a minimum amount of problems you can also charter exporters which will reduce risk and bureaucratic complications but raise your costs and decrease profit. However as said above, the overheads are low which means the market has low barriers to entry. This means you can be replaced or undercut overnight.
If you are aiming for higher profit margins you need an inelastic supply. This, however, requires the producer to be 100% consistent. A Chanel bag can be sold for thousands because it has a reputation for excellence. A reputation which has been developed for over 100 years. It is clear that this reputation was not achieved by contracting Chinese factories to make their bags. The same applies to coffee; if you want to charge high prices, your product has to be what the brand says it is and the only way to guarantee this is by producing it yourself.
Luxury Marketing Strategies for Coffee
Many farmers complain about the little money they get for their product, especially when they see the price of the sale of coffee in the countries of consumption. This is because the greatest proportion of the profit (especially when producing and selling specialty coffee) is generated by the trading and sales sectors.
Choosing a Focal Market
Without a reputation, the raw product isn’t worth much, even if it’s the best in the country. Yet it needs to be noted that as soon as you put a marketing machine which proves and promotes the fact that the coffee is one of the best in the world your profit margins will multiply themselves. Obama’s 2014 State of the Union Address, media reported that the top wealthiest 1% possess 40% of the nation’s wealth. While on the other hand the bottom 80% own 7%. This essentially shows that the top 1% have a greater amount of disposable income. This means that the price of a coffee bag doesn’t have much effect on their decision to buy it. If you manage to appeal to that market the price you charge is arbitrary. Blue Mountain Coffee prices range around $70USD per 500 grammes. In all logic, the producer should focus on meeting all the demands of these high-end consumers.
This involves a lot of investment and an entire team dedicated to developing luxury branding strategies as well as a good marketing team. It is important to remember that you will be competing with large multinationals such as Starbucks and Nespresso. In order to get the upper hand, you will need to differentiate by showing consumers that you have a better cup quality or that your coffee offers something else (ex: fair trade, planted and managed by women…).
Overall there are two ways of approaching the production of coffee. The first is to produce very high quantities, maximising yields and minimising costs. This can work but large economies of scale, as well as the important initial investment, are needed to make an interesting profit. On the other hand, you can produce relatively small quantities while focusing on quality and marketing. This will enable you to sell your products for more as well as giving you the luxury of setting your own prices, rather than being bullied by the market.
The next article in this series will be: “From Coffee Plant to Cup: The Colombian Coffee Production Process”
If you want to learn more about investing in Colombian coffee, the Biz Latin Hub team can help, our group specialises in the provision of Market Entry and Back Office services. Our experienced team of lawyers, accountants and market analysts are able to carry out targeted market research. Learn more by contacting us here here.