This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
3/13/2007
Starbucks vs. Ethiopia
In a recent article entitled “Starbucks vs. Ethiopia” Stephan Faris explains that for a $26 bag of premium coffee sold in the United States, Starbucks only pays the growers in Ethiopia $1.43. The debate lies in the words Starbucks uses to ensure the coffee’s premium status. The words Starbucks uses are the names of the places where the beans are grown in Ethiopia. This means Starbucks can charge a premium and not pay a premium on a name they don’t own. This does not sound fair and according to the article Ethiopia is taking the issue to the United States Patent and Trademark Office in order to trademark the names of the regions where the beans are grown. Starbucks argues that this is unconventional for a region to use a trademarked and is pushing for Ethiopia to protect its products by using geographic certification instead. I support Ethiopia in its decision to go after the trademark and if it fails, they should push for a geographic certification because in my opinion something should be done.
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Ethiopia is pursuing a novel proposal created by Lightyears IP (http://www.lightyearsip.net/ethiopiacoffee.shtml ) in which the government of Ethiopia would trademark geographic names. These being the Sidamo, Harar, and Yirgacheffe coffee growing regions. After doing so, the government of Ethiopia would set up a global network of licensed distributors. The licensed distributors working with the government would then help determine the retail price of Ethiopian coffee and direct some portion of their proceeds to advertise and market the superiority of Ethiopian coffee versus say Colombian coffee. The goal of all of this being higher prices for coffee and happier, healthier coffee farmers.
I believe this novel approach, which is strongly supported by OxFam, is unworkable and that it will have the unintended consequence of harming the Ethiopian coffee industry, reducing demand for Ethiopian coffee, and thus hurt already poor coffee farmers and their families. The road to hell is paved with good intentions.
Geographic names are not trademarked. In fact it is not typically even possible to do so. We squeeze Florida oranges not Florida™ oranges and drink Burgundy not Burgundy™. NYC Mayor Bloomberg should move quickly to trademark “Brooklyn” to prevent Domino’s from further disparaging its fine history with their horrid new pizza. But, he won’t because the idea is absurd. Alas, the whole world is free to make New York cheesecake.
The government of Ethiopia has not succeeded at providing running water in more than 50% of its villages nor at paving many roads nor at much of anything actually. The country is a basket case, a disaster. It is laughable to suggest that this government is now ready to take on the task of setting up and managing a worldwide network of anything. In any event, it has more pressing issues that it should be focused on.
The government of Ethiopia is good at buying weapons including tanks and fighter jets.
http://en.wikipedia.org/wiki/Military_of_Ethiopia
It is also good at jailing, torturing and killing its opponents. It is corrupt and perhaps very, very corrupt.
http://www.amnestyusa.org/countries/ethiopia/document.do?id=ENGUSA20061116001
http://news.independent.co.uk/world/africa/article2251351.ece
http://en.wikipedia.org/wiki/Ethiopian_police_massacre
This corrupt government will now be managing coffee export and distribution. It is not hard to imagine that some of these coffee earnings could then be converted into more tanks, bullets, and bombs. Given the long history of corruption and theft in Ethiopia and most of Africa (see Nigeria), it is much harder to imagine any of the additional coffee earnings actually making their way to poor farmers. It would be extremely naïve to believe this.
OxFam and LightyearsIP must have this all figured out? Well, call me a pessimist but I don’t see a bunch of well armed military guys taking orders from some grad students at OxFam, 5,000 miles away. Does OxFam have a Mig or tanks?
The Lightyears/Oxfam scheme also injects another layer of cost and overhead into Ethiopia’s coffee sales. Costs that will need to be recouped before farmers even have the potential to benefit.
From a coffee buyer’s perspective, the plan makes Ethiopian coffee more difficult to purchase and sell than other coffees. Buyers are asked to sign a lengthy, onerous trademark licensing agreement. This makes buying other coffee easier and more attractive. This places Ethiopia at a disadvantage in the marketplace which is likely to lead to lower demand and lower prices. Not a good outcome for farmers.
Instead of the complex, unworkable and potentially lethal Oxfam/Lightyears scheme, I think Ethiopia should follow the tested and traditional approach of geographic certification. Florida oranges, Burgundy wines, Napa Valley wines, and Colombian coffee all have producers’ co-operatives that insure these products actually are grown and produced in their stated geographies. The co-operatives then pool some of their resources to promote their products to try and increase demand and thus prices. Juan Valdez, the Colombian coffee dude, and his burro are the creation of one of these co-operatives. Oxfam is essentially saying that all of these large, well established, proven co-operatives are wrong. I say their sales and the demand for these products prove they are right. The livelihood of Ethiopian farmers will hang on the outcome of this bet.
Creating new customers for Ethiopian coffee rather than attacking existing customers is likely to generate incremental demand and higher prices. Neither McDonald’s, Proctor and Gamble, Dunkin Donuts nor Kraft purchase any coffee from Ethiopia. They could. However, if you are the CEO of McDonald’s and you see the no win situation that Starbucks now has with Ethiopia are you really going to want to leap into the fray? This dispute is repelling demand. That is not good for farmers.
But hey Bush and Cheney are lovin’ it. OxFam is promoting a scheme that will in effect funnel money to a Bush ally in the horn of Africa with the funds coming from well intentioned liberal do-gooders while simultaneously attacking one of the most liberal companies in America and harming a major contributor to the Democrats.
I was directed to this site from the Ethiopian Portal website,
http://www.EthioPortal.com
You are comparing apples and oranges here. Ethiopian farmers are not Ethiopian government! The farmers are crying out loud for fair trade.
Ethiopian farmer gets 1 Cent for every $4.00 Capuchino. Do you think that this is fair? On the other hand, please look at the share options' proceeds of Starbucks executives (excluding salaries):
http://finance.yahoo.com/q/it?s=SBUX
Now you be the judge!
The Hamster dude is clearly advocating for and worried about starbucks using the farmers' cause as an excuse. Nice try.
The silly Oxfam example that you site certainly shouldn't be persuasive to anyone that is smart enough to be on this site.
Starbucks is a quick service restaurant--a service business. You don't buy green coffee there. You actually don't buy coffee for the most part. You are paying someone to stand behind the counter and make you a good cup of coffee everytime you walk in the door. Thus, you are buying labor. Starbucks job is to lease the building, furnish and equip it, and train the guy to make you a good cup of coffee. Buying, shipping and roasting green coffee is important but well down the list of Starbucks' or any other coffee companies' value added activities.
This service company's largest cost is labor, not surprisingly, followed by rent. A latte or cappucino has very little coffee content to begin with--both are primarily steamed milk.
When you buy that $4 latte, a farmer in Ethiopia may only get $0.01 (i have no idea if that is accurate) but a green coffee bean in Ethiopia represents an incalcuably small part of the value equation that puts that $4 latte in your hand.
The guys behind the counter get $1.20 though. Labor is 30% of revenues at Starbucks.
For the record, I believe that the OxFam/Lightyears plan will hurt not help farmers.
The trademark scheme will put Ethiopian coffee at a significant disadvantage to other coffees resulting in lower demand and prices.
Greater involvement by a corrupt,murderous governement is likely to have unexpected and significant negative consequences for both Ethiopian farmers and the citizens of Ethiopia at large.
You attack me but not my argument thus I have won.
I think the result of trademark would be dterimental to the farmers. Starbucks will just change and get its beans from somewhere where there is no trademark. Then the farmers won't get any money for their beans. There is so much of the vertical supply chain that is left out here and helps explain the cost of the coffee cup at the counter in comparison to the price of the bean in Ethiopia.
-1 on Eric for grammatical errors in the post.
Nice to see a whole bunch of outside action on this post. This is one of the reasons we do this in this class.
This is an interesting argument, and I'm not sure it has a "right" answer. What I do know is that there certainly is an incentive on both sides to take these positions.
For the curious, this is getting to be a common thing in Europe. Many foods there have traditionally been marketed on the basis of regional names: Parmagian cheese from Parma, Bologni from Bologna, and so on. In the EU they are taking a very strong position that such geographical identification can be trademarked.
Dr. Tufte,
It seems to me from a personal stance that Starbucks should have to pay something to Ethiopia to use their names. However from a business perspective Starbucks should get as much as they can in order to make a higher profit. Although if Starbucks gets bad press about this issue it can end up hurting them and cause them to be worse off. Starbucks being the type of green friendly company they are should have some social responsibility with this issue. At least that's what I think.
Agreed.
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