Coffee in Colombia: Waking Up to an OpportunityPublished: January 02, 2013 in Knowledge@Wharton
Every day, more than 500,000 coffee growers throughout Colombia fulfill a family tradition, one that has been passed down from generation to generation. Growing premium-quality coffee beans across nearly 2.2 million acres of Colombian highlands is an important part of their heritage. For Colombians, coffee is not merely a bean, but a part of their national identity. In fact, coffee growing is the largest source of rural employment in the country. The centrality of coffee to Colombian society and to its international image is exemplified by the nation's president, Juan Manuel Santos, who spent much of his career representing the Colombian Coffee Growers Federation (FNC) at the International Coffee Organization.
Colombians pride themselves on their reputation for high-quality coffee beans, which result from rich volcanic soil and predominantly shade-grown cultivation. In addition, the alternation of wet and dry seasons supports two harvests, one running from September to December and the other running from April to June. Coffee is grown in the highlands of the Sierra Nevada of Santa Marta as well as on the slopes of the three sections of the Andes mountains that traverse the country. It can be planted at altitudes of up to 6,400 feet, where the climate creates superior beans by favoring increased acidity. Because the terrain precludes the possibility of significant mechanization, Colombian coffee is harvested by hand at its optimal ripeness and cleaned to prevent mucilage from permeating the beans. This process differs from that of other major coffee-growing countries, such as Brazil, where coffee is produced on a massive scale at altitudes below 3,200 feet and is often not cleaned immediately. In addition, Brazilian coffee is harvested mechanically, yielding what many believe to be a lower-quality product.
Harvesting coffee by hand in Colombia results in not only a higher-quality product, but also the broader involvement of coffee growers in the industry, which, by necessity, employs a large number of small-scale farmers. Some 95% of Colombian coffee-growing families operate on small plots of land, averaging five acres each. This characteristic distinguishes Colombian coffee production as essentially a family-run operation, in which all of the harvesting and post-harvest processing is carried out by the growers themselves.
In 2010, Colombia produced 8.9 million 60-kilo bags of green coffee, which represents the first stage of coffee production. This crop was valued at US$2.3 billion. In economic terms, this means that coffee production represents 16% of the national agricultural GDP. Green coffee beans are then shipped throughout the world to different companies that roast, package and distribute the finished product under a variety of brand names. According to the FNC, in the past five years, at least 37% of Colombian coffee exports were shipped to the U.S., while Germany received more than 10%.
The FNC: A Unique Model
The FNC is the largest rural non-profit organization in the world and was created in 1927 to represent and defend the coffee growers' interests. Its members, elected by the growers, communicate with their constituents and meet annually to carry out important duties, including budget creation. They also design and implement the various social programs requested by coffee-producing families. According to Alejandra Londoño, vice president of international business at Juan Valdez, one of the FNC's current priorities is developing strategies for adapting to global climate change. This phenomenon has resulted in more intense periods of rain, which have a significant impact on coffee production.
Distributing profits in a manner that promotes a minimum standard of living for growers is difficult because most of Colombian coffee's added value is achieved at the retail level. To address this challenge, the FNC established a National Coffee Fund in the early 1940s. This fund supports the Purchase Guarantee Policy, which offers farmers a transparent minimum price for their product based on a formula that accounts for the current international market price and the exchange rate, among other factors. However, coffee growers may achieve higher prices for products with special characteristics, such as organic coffee.
The growers have the option, but not the obligation, to sell as much of their output as they choose at the established minimum price, and may do so at any time at one of more than 500 locations around the country. Thus, each grower is able to obtain, on average, approximately 95% of the value of the coffee he produces. According to Marcela Jaramillo Asmar, marketing and advertising coordinator for the FNC, "what this structure guarantees ... is that the coffee grower will always have the best option -- either he receives the price assured by the FNC or he receives more. In many [countries], the producer receives much less because he is subject to the market." Through the FNC, growers are aware of the price at the time of planting, enabling them to more effectively plan their production and better manage their cash flow.
The FNC exports approximately 30% of Colombian coffee, making it the largest exporter of coffee in the nation. The National Coffee Fund is financed through a contribution of US$0.06 per pound of green exported coffee. Jaramillo Asmar noted that "the work of the FNC, among many other tasks, is to administer these resources to assure the well-being of the coffee growers." Through the fund, the FNC provides technical assistance to coffee producers, scientific research, quality-control programs, living-condition improvements and international advertising for Colombian coffee. The fund invested a total of US$365 million in these endeavors in 2011 alone.
Responding to a Changing Coffee Market
In an ongoing effort to significantly increase value for Colombian coffee growers, the FNC works to distinguish the Colombian product based on its superior quality. According to Jaramillo Asmar, it became necessary to develop marketing strategies to ensure that consumers would "recognize and specifically seek out Colombian coffee." To this end, the FNC began an international marketing campaign in 1959, creating the legendary Juan Valdez character. In addition, the familiar triangular logo representing Colombian coffee was introduced in 1982 and used in marketing efforts to signify coffee of 100% Colombian origin. As a result of both endeavors, consumers began to select coffee based on its geographic origin rather than simply by brand.
According to Londoño, the Starbucks phenomenon of the 1990s led to rapid and significant changes in the retail coffee market. Previously, most consumers purchased coffee in grocery stores, where the process of differentiating Colombian coffee was relatively straightforward. However, with the emergence of Starbucks, coffee originating in countries around the world, including Costa Rica, Nicaragua, Honduras and Ethiopia, became well known to consumers. Jaramillo Asmar added that "the consumer began to see many more options, not only in terms of origin, but also in the coffee experience." As premium beverages, including cappuccinos and espressos, became more popular, consumers began to value coffee differently. Colombia's existing brand positioning became a liability because it was closely associated with Folgers, Maxwell House and other mainstream brands found in supermarkets -- brands Jaramillo Asmar referred to as the "safe choice."
To access the higher-value premium segment, the FNC in 2002 created the company Procafecol, which operates Juan Valdez retail outlets, paying approximately 5% of its sales in royalties to the FNC. Procafecol sought to position itself at the high end of the value chain by marketing Colombian coffee and selling it through Juan Valdez-branded retail stores. Jaramillo Asmar explained that, unlike coffee sold through other outlets, the FNC controls the entire chain of production for coffee sold at its stores, thereby ensuring that the highest-quality standards are maintained "from farm to cup." Procafecol's stores are intended to be viewed as personally endorsed by the Juan Valdez character.
The FNC owns 83% of Procafecol, small independent coffee growers own 4% and the International Finance Corporation (IFC) owns the remainder. The fact that 18,000 coffee growers currently own shares in Procafecol reflects their confidence in it and the ownership they feel toward the company. Colombia also continues to sell coffee in other segments of the value chain because the large volume of its production requires that it extend beyond the premium segment to access a sufficiently large market for its output. As a result, and despite recent changes in the coffee industry, Colombia is still the nation that consumers associate most closely with coffee production.
Currently, both in Colombia and internationally, Juan Valdez is prominently positioned in the highly competitive market of retail coffee sales. In Colombia, Oma and Dunkin Donuts are its principal competitors, although more niche brands are beginning to emerge. Juan Valdez focuses on competing not only by delivering a high-quality product, but also by investing in extensive training for sales associates. These associates must be able to represent the brand effectively to consumers, explaining the value proposition of a company that enables small growers to reap the rewards of access to the retail coffee market. Juan Valdez envisions its customers as modern and socially conscious individuals who are willing to purchase high-quality products from companies whose brands align with their personal values.
By leveraging the popularity of the internationally recognized Juan Valdez character, the coffee shops managed by Procafecol have expanded into eight countries. A number of new products and innovation models are tested under the Juan Valdez brand, while the connection to the product's origin and its high quality are consistentlyemphasized to consumers. The overall objective of each marketing campaign is to remind consumers that behind the coffee they buy, there are more than half a million producers operating small family businesses. Procafecol expects to break even by the end of fiscal year 2012, at which point dividend distribution will be considered.
Using Coffee to Build a Better Tomorrow
Colombia's system of coffee production and sales is oriented not only toward profit generation, but also toward the creation of a positive social impact. Through research and training, community and personal development, and environmental protection, the FNC creates a healthy, continuous cycle of sustainability among all involved. The strategy for improving the quality of Colombian coffee is driven by the idea that if families are able to obtain higher prices for their coffee, they will also improve their quality of life. To achieve this goal, the FNC in 1938 founded Cenicafé, its coffee research center for the development and innovation of competitive and sustainable technologies. With 66 researchers, Cenicafé focuses on projects ranging from quality optimization to environmental protection practices to agricultural disease control.
However, the research findings would not be as valuable without a system that shares the knowledge gained at Cenicafé and offers a training method that reaches small business owners in the remote coffee regions of Colombia. To meet this challenge, the FNC founded the Extension Service, its communication and training arm. Comprising over 1,500 technicians, this agency communicates with the more than 500,000 Colombian coffee producers on a regular basis. Contact is facilitated through a plethora of methods, including face-to-face individual or group meetings, mass media and the Internet.
The FNC offers a wide range of programs that support its goal of improving the well-being and social development of coffee producers. These programs vary in focus from education to health care to infrastructure. Over the past five years, the FNC has invested more than US$38 million in education for Colombian coffee growers. For example, the School and Coffee program was launched in 1996 to incorporate coffee-related topics into the curriculum of primary and secondary schools, with the aim of educating the next generation of coffee growers. The FNC also invests in education through training programs that focus on coffee-production analysis and business-administration topics aimed at increasing profit margins.
To combat the lack of health care available to these small coffee-growing families, the FNC teamed up with other entities to create the Social Security Through Health Care program, under which families receive health care through a government-subsidized system. Since 2004, this program has aided over 110,000 individuals. In addition, infrastructure is an important challenge in Colombia due to the country's mountainous terrain and its historic lack of investment. Improvements in infrastructure help connect rural families to the societal network and also facilitate the transport of harvested coffee. The FNC continues to promote projects in diverse sectors, including electricity, roads and housing.
Finally, environmental protection and sustainability are vital to the success of the coffee-growing industry. As a result, much of the work of the FNC, Cenicafé and the Extension Service is dedicated to understanding the relationship between coffee growing and the environment and finding techniques to minimize the environmental impact at each stage of coffee production. This includes active participation in the conservation of water, soil and forests, in addition to biodiversity projects and waste-management practices.
Future Challenges and Opportunities
As the international coffee market evolves, the FNC will play an ever-increasing role in securing a positive future for Colombian coffee growers and their families. Because of the emergence of the premium-coffee culture, as well as developing consumer tastes, coffee has become a highly competitive industry, one with increased potential rewards and added value. In order for Colombian coffee to remain prized by consumers, thereby improving the quality of life for its more than 500,000 growers, the FNC must continue to reinvent and strengthen the Juan Valdez brand.
This article was written by Rafaela Andrade, Dawn Overby, Jessica Rice and Samantha Weisz, members of the Lauder Class of 2014.