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INTANGIBLES: NEW KEYS TO ECONOMIC SUSTAINABILITY

INTANGIBLES: NEW KEYS TO ECONOMIC SUSTAINABILITY



Can the global coffee and chocolate industries address their single biggest challenge with a new business model and achieve sustainable production systems that provide growers with a decent livelihood?

In the following article, two experts remind us that commoditization of coffee and cocoa dims the ability of many to see the potential ‘blue ocean’ strategies¹ that are already blossoming in certain origins.

Daniele Giovannucci* and Luis Fernando Samper,** both leading authorities in the field, propose that change is already happening and that it is likely to be scalable. Their recent paper, co-authored with Brazilian scholar Luciana Marques Vieira, was first featured by the World Intellectual Property Organization² in its 2017 publication.

The use of intellectual property (IP) that is both tangible and intangible has unquestionably proven to be valuable for the industry as a differentiating characteristic that has value.

Unique varietals, diverse approaches to primary processing, unique microclimates, and geographical indications of origin all provide consumer value and narratives that benefit every member of the supply chain. It even creates value for mass-market conventional commodities by improving the overall perception of the product. Most of the early lessons have been best developed in coffee (and also wine and other beverages that are not covered yet by C&CI) so the focus here is on coffee.

Much will depend on how well market-oriented brands can see the value of investing in the origins as a clear way to escalate the potential benefits for everyone in the industry, from farmers to consumers.

Lessons from the past

To consider where we can go in the future, it is worth understanding the lessons of the past. It can be easy to forget how different the industry was just 30 years ago when few predicted today’s increasingly differentiated coffee world. So, what led to such a significant growth both in volume and value since then?

The first wave of conventional coffees was challenged by a second wave or ‘differentiated’ segment in the 1980s consisting of new players that leveraged beverage quality attributes in out-of-home venues such as specialty coffee shops, and focused on selling blends or preparations to consumers.

The intangibles that generated the most value were associated with economies of scale related to know-how and access to large distribution outlets and mass advertising, in the case of conventional brands. They were associated with brand experience and beverage preparation techniques in out-of-home venues selling at higher price-points for second wave brands.

Coffee producer intangibles were mostly irrelevant for consumers in blend-focused segments that highlighted the expertise of coffee roasters in designing their own Arabica blends from the ‘lush growing areas of Central and South America.’

Not even the arrival of voluntary sustainability standards (VSS) significantly changed the market driven governance of the value chain, as these new actors focused on developing consumer loyalty to their seals rather than to the farmers or regions of provenance. As a result, farmer equity and ability to develop specific demand for their coffees was obscured and exacerbated the imbalance of income distribution among value chain actors.

Quality revolution

The so called ‘quality revolution’ and the accompanying ‘latte revolution’ that took off in the early 1990s helped to popularize a new set of global brands and made the beverage newly appealing to younger generation and to a global audience. As a result of coffee’s new image in global media and American movies, younger generations in emerging markets such as Eastern Europe and in coffee producing countries saw coffee as an easy way to enhance status.

This positive high-end image has also strongly attracted the millennial generation with new and more complex service offerings. The so-called third wave (or experiential segment) is now playing the key role of providing new trends, innovation, and interest that helps pull the overall industry’s growth. These brands, focusing on direct trade and single origin coffees, have taken on the role of providing industry visibility and new levels of attraction to younger generations and to more sophisticated segments.

It is difficult to avoid the comparison with the wine industry that, in the 1980s, began evolving from mostly commodity grape providers to highly differentiated and much more lucrative market segments based on varietals and more specific origins. Microbreweries are now recreating the beer industry in creatively differentiated ways and the same is happening in many other products including specialty coffee and chocolate products.

There are fundamentally two reasons for this evolution in possibilities:

  • Consumers are able (and willing) to take on a lot more information that distinguishes products by their own specific preferences (ranging from ethical to aromatic).
  • Technology and logistics now cost-effectively permit a considerably greater range of remarkable differentiation plus traceability and the capacity to selectively market each product in diverse segments, even within mass markets.

Second wave brands (a differentiated segment) that focused on high quality blends and sustainability distinctions such as standards or certifications are also diversifying their product portfolio to the point that even Starbucks’ version of a third wave offering, Starbucks Reserve, is now a main source of news and developments for this successful global brand.

Even first wave or conventional coffee brands primarily sold in grocery stores are adapting to the challenge of origin specific coffees and an expanded product portfolio that complements their more generic ‘breakfast or house blends.’■ C&CI Read more

This article first appeared in the March’18 issue of C&CI, click on subscribe now if you wish to read the full story and other informative articles in the March and future issues of C&CI or log in here if you are already a subscriber. 

 

1. Refers to the theory of INSEAD’s bestselling business Professors Kim and Mauborgne who, after studying more than 150 creations in over 30 industries, proposed how rather than competing in the same grind, creative managers can see entirely new business models that “Create Uncontested Market Space and Make Competition Irrelevant”.

2. The UN body that coordinates at a supranational level the global issues related to IP.

*Daniele Giovannucci serves as President of the Committee on Sustainability Assessment (The COSA)

**Luis Fernando is President of 4.0 Brands and a former Director of Intellectual Property and Marketing for the Colombian Growers Federation.

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