by Rona Fried
People have been drinking coffee for 500 years – it’s the most popular beverage on earth next to water. Only oil has a larger market. Within this huge, but stagnant $80 billion worldwide commodity market, there is an upstart niche growing 18-20 percent a year – socially and environmentally responsible coffee. Beantrees is one of the few companies in this niche that sells only organic coffee and is positioned to rapidly expand the company as well as the organic coffee market.
In late October, Peabodys Coffee Inc. (OTCBB:PBDY) announced its commitment to acquire its 100% certified organic “friendly competitor,” Beantrees. Peabodys also announced the merged companies would operate under the Beantrees brand and exclusively sell Beantrees 100% certified organic coffees. With that, the social and environmentally responsible business community added another publicly traded company to its universe.
The Business Model
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Both are California companies with similar business models: build and operate premium, full service stand alone espresso bars in institutional settings such as corporate and university campuses, business complexes, and hospitals. They own and manage the espresso bar (at no cost to the host), and pay a percentage of sales as rent, either to the institution or to the campus caterer. Some of the largest U.S. foodservice companies – Aramark, Bon Appetit, and Sodexho, work with Peabodys/Beantrees to supply specialty coffee.
You can find them at corporate sites like Hewlett- Packard and Yahoo’s! corporate headquarters and at many University of California locations. With over 40 kiosks and espresso bars, all in California, the two companies clearly dominate the institutional kiosk marketplace there.
The investment required to build a kiosk is small ($30-$50,000) and is low risk – if a location doesn’t work out it can be moved somewhere else. All the kiosks are turning a profit. Barry Gibbons, former Burger King CEO, and best selling business author named “Turnaround Champ” by Fortune Magazine in 1991, can pick and choose the board of directors he serves on. He joined Peabodys’s Board because “the economic model is robust – small flexible capital investments, fast cash payback, strong product margins.” A small number of key clients with multiple locations can be the basis for prolific growth.
Wholesale distribution and office coffee service is another major sales venue. Beantrees’s relationship with Diaoh’s First Choice Services and Alliant Foodservice enables California businesses of any size – restaurants, hotels and offices – to order organic coffee. Alliant Foodservice & Daioh’s service over 15,000 accounts in California.
Beantrees unique position is that it offers only certified organic coffee at its espresso bars. Peabodys sells ‘specialty coffee’; the kind Starbucks made famous. It’s known for its high quality and great taste – a far cry from commercial brands like Folgers or Maxwell House. Specialty coffee, with a wide variety of flavors depending on its country of origin, has been leading the growth in the coffee market for years (8-10 percent a year) while conventional coffee sales have been flat. The U.S. specialty coffee industry imports only about 17 percent of total U.S. green beans, but generates about 40 percent of total U.S. sales – $7.8 billion in 2000.
But now, the specialty market is becoming cluttered and the tiny “sustainable coffee” segment, currently at five percent of the U.S. specialty coffee market, is experiencing rapid growth (about $180 million a year in U.S. retail sales, $565 million globally). “We’ll have over 40 sites that serve purely organic coffee. We’re not aware of anyone in this country who’s doing that,” says Barrie Gromala, Beantrees CEO and founder. “We’ve been on this path for nine years, way before organic coffee was popular. Now, it’s on the cusp of mainstream consumer recognition. It’s very exciting for us to contribute to this evolution!”
Before the merger discussions began, Peabodys was doing fine selling specialty coffee and had begun to add some lines of “sustainable coffee.” Explains Todd Tkachuk, Peabodys Chairman and CFO, “We wanted to see the farmers paid a reasonable amount of money. The coffee market’s been so depressed recently – it’s really sad.”
His decision to convert completely to certified organic coffee came when he learned about its social and environmental impact. “When we found out that coffee is the largest agricultural polluter in the world it was a real eye-opener for us. We just didn’t know the level of negative impact that non-organic coffees have on the environment and on the 20 million workers’ lives that depend on it. During our merger discussions with Beantrees we came to understand the importance of certified organic coffee and we became immensely attracted to it.”
And why not? Would any coffee drinker knowingly choose coffee that contributes to over 20,000 deaths a year and clears thousands of acres of precious rainforest if, for the same price, they could drink an organic brand of coffee that tastes much better?!
“What excites us is if it’s easy for us to understand, it’s easy for the consumer to understand. They’re buying coffee anyway. It’s our job to educate them and we are ready and committed to do it, Todd says.”
Barry Gibbons wholeheartedly supports the focus on organic. “I would NOT have supported the complete change unless the prime product was competitive on price and, above all, quality. Given that it does compete – magnificently – then it becomes a no-brainer. It gives a chance for REAL distinction in an increasingly cluttered and competitive market, and the environmental dimension offers the chance for faster growth in an already fast growing market.”
The Social & Environmental Connection
Coffee, with its huge market, can either do a lot of good or harm. Americans consume about a quarter of the world’s coffee – about 2.5 billion pounds, worth $18.5 billion annually. Right now, coffee production does a lot of harm. It contributes substantially to rainforest destruction, the massive loss of wildlife habitat, soil, and water pollution. Over the past 20 years, the number of birds migrating to Latin America has been cut in half, according to the Smithsonian Migratory Bird Center. And industrial coffee workers receive astoundingly low pay for their backbreaking work in the full sun – in some countries like Guatemala, just a dollar or two a day.
Shaded Coffee Farm |
Until the last few decades, the world’s coffee was grown by indigenous small farmers and their families on plots of less than 10 acres. Native to Ethiopia, it grows naturally under a canopy of tall trees on tropical mountainsides that receive plenty of rainfall (rainforests). Grown this way, coffee is a sustainable crop; the density and diversity of wildlife and plant populations in traditional coffee farms vary little from virgin forests.
Clearcutting rainforests for coffee
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In the 1970s, USAID (US Agency for International Development) spent $80 million to “modernize” Latin America coffee plantations by creating monoculture farms. The trees were cut and up to 50 pesticides and fertilizers (about 15 are so toxic they are banned in the U.S.) encouraged the growth of the new “sun-grown” industrial coffee.
Coffee Industry Facts |
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Coffee
Fair Trade and Certified Organic are the two main certifications for specialty coffees that have emerged to reverse this trend. “Fair Trade Certified” coffee means that coffee farmers receive fair payments for their beans. Certified Organic means that farmers earn a premium for growing coffee without chemicals. Organic growers are also rewarded with farms that remain fertile for decades, clean water, and good health. All Beantrees coffee is certified Organic; some are both Organic and Fair Trade.
Before he entered the coffee business, Barrie Gromala spent a month in Costa Rica and Guatemala. “I sat with the farmers and ate at their houses. They stored their drinking water in a 55- gallon drum with huge letters on the front – DDT. Why? It was a sturdy, free container that never leaked. This was in the middle of a forest.”
Gromala views organic certification as the only certification that guarantees socially and environmentally sound coffee production. “In the long term, what good does it really do for a farmer to get an extra 10 cents a pound if he’s dumping hundreds of gallons of paraquat and DDT on the land?” he asks. “Bottom line – if its not organic, it is not sustainable!”
Drivers Pushing the Certified Coffee Market
A typical coffee-drinker doesn’t know coffee beans grow on a shrub or even that they are roasted, much less realize the living conditions of the people who grow it or how it is grown. The key to people choosing certified organic coffee – after taste – is education and availability. Organic coffees consistently meet taste criteria. Price isn’t an issue – organic costs about the same at the retail level as do other specialty coffees.
Many of the leading environmental and socially concerned nonprofits, such as Conservation International, Rainforest Alliance, the Smithsonian Migratory Bird Center and Fair Trade International are collaborating to build markets for sustainable coffee production worldwide.
The potential customer base for organic coffee is very large. The profile of an organic coffee drinker – affluent, educated, and concerned about the environment and social causes – runs into the tens of millions in the U.S. for bird watchers, organic gardeners, and environmental group members. The European market is much larger, and markets are developing in Japan, Mexico, Jamaica, and Brazil, among others.
In the July 2001 “Sustainable Coffee Survey,” a whopping 98.7 percent of respondents (people in the specialty coffee industry) say they are aware of organic coffee; 83 percent are aware of Fair Trade coffee. And over two-thirds of respondents believe coffee certification will be important to their business in the future.
That’s half the battle. The
other half is educating customers and making it convenient for them to purchase. Supermarkets across the country are beginning to stock these coffees, further expanding awareness and accessibility, and thus opening the market.
Big Players Getting Involved
Where there are big markets, there are big players. Three multinational companies dominate the North American coffee market – Folgers (owned by Procter & Gamble), Maxwell House (Philip Morris), and Sara Lee Coffee and Tea, a division of Sara Lee Corp. Because of stagnant growth in the commercial market and the high margins specialty coffees enjoy, they are testing the waters. Sara Lee’s rainforest blend, Prebica, is certified Fair Trade, organic and shade grown. It’s available at the University of California, Los Angeles campus and in Stop & Shop Supermarkets nationally. Walmart, Target and other very large retailers are actively exploring this market, as are major supermarket chains, including Safeway, Kroger’s, and Albertson’s.
Starbucks Coffee Co. and Green Mountain Coffee Roasters sell lines of Fair Trade and organic coffees. In addition to selling the coffee online and in its North American cafes, Starbucks sells Shade Grown Mexico coffee in international locations such as the Philippines, Hong Kong, South Korea, and Kuwait. Green Mountain recently acquired the Frontier Organic Coffee brand to expand its presence in natural foods supermarkets.
Beantrees Strategy
“We know there are lots of people getting on the bandwagon now but as tiny as we are, we’re one of the recognized leaders in the industry,” states Gromala. “The big guys may dabble with one or two product lines, but we specialize in all organic. Although our business has grown significantly every year for almost nine years, we are still small. Nevertheless we’re in the top 20 coffee companies by chain in America – that’s how fragmented it is. When the predatory big guns come in and spend hundreds of thousands of dollars to open a new location and force out competition, we can go in and help the mom and pops compete through Beantrees licensing – they will have a full branded concept and better quality coffee.”
Yahoo! is the first corporate campus in the U.S. that serves only organic coffee on its entire million square foot campus. The four espresso bars and site-wide brewed coffee programs help to eliminate 7-8000 pounds of toxic chemicals per year from being dumped on the earth. Yahoo’s employees asked for it.
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Todd Tkachuk believes that progressive corporations understand the importance of a product’s impact on the environment and social equity. In the short term, because of the general ignorance in the marketplace, “we risk losing customers by going 100% certified organic. In the long run though, I think this will turn out to be a very shrewd business strategy. I think we can spread the good word and organic coffee is becoming more popular every year.” Beantrees plans to launch a thorough, sustained education program on the benefits of organic coffee.
Opportunities abound for expansion. Rather than go head to head with the industry giants in supermarkets where there is intense competition and razor thin margins, the company is pursuing partnerships with some of the largest U.S. retailers. The company plans to roll out its espresso bar and wholesale distribution business nationwide. And Beantrees is actively negotiating with partners to help them expand into Europe, South Korea and Japan. In a land of tea drinkers, specialty coffee shops are popping up on every corner, notes Todd.
Barry Gibbons believes Beantrees’s biggest challenge may be to retain focus in the face of so much opportunity. “We must avoid trying to be jack-of- all-trades,” he points out. “Overall, I believe the gourmet/specialty coffee business will continue to flourish. The celebration of the ‘small self indulgence’ will remain a powerful market force and I expect organic coffee to be the fastest growing sector. Indeed, we can help make that view happen by developing our brand effectively and efficiently.”
All business should move in the direction of environmental and social responsibility notes Barrie. “I believe that most people in their hearts want to do the right thing, but we’re not willing to pay any more or do anything different. One of the things I love about organic coffee is that people don’t have to change their habits to make a measurable positive impact – they simply switch brands. They don’t have to separate their trash, or lift a finger – so why not?”
The organic coffee market may just be on the cusp of mainstream acceptance – possibly a 60 Minutes story away.
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Learn More:
Learn More:
Beantrees.com
Conservation Agriculture Network
Drinking Certified Coffee: A
Way Out Of the Global Coffee Crisis, The Canopy, Fall 2001
Organic Coffee Association
TransFair USA
Sustainable Coffee Survey
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