November 29, 2003
Move Over Starbucks, Juan Valdez Is
Coming
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The Colombian Coffee Federation, which represents more than 500,000
Colombian coffee growers, is planning to open its first coffee shops - all
bearing the name Juan Valdez, after the federation's signature character - in
the United States by early 2004. Gabriel Silva, the president of the
federation, which is based in Bogotá, says the coffee growers have been
"too passive" in claiming a larger piece of the $8.4 billion
specialty coffee industry.
"In a cup of coffee that you get at a coffee shop, between 1 and 2
cents goes back to the farmer," Mr. Silva said, referring to Colombian
growers. "We need to build our own solutions and take the destiny in our
hands and really fight for our share of the industry."
Coffee growers are facing a difficult market. Per-capita consumption has
been in decline since 1963 with the only growth area the specialty coffee
shops, led by Starbucks,
according to the International Coffee Organization in London. The price of
coffee beans has also declined significantly from a high of about $1.20 a pound
five years ago because of a global oversupply of coffee beans from countries like
Vietnam and Brazil. In Colombia today, the average coffee grower gets only
about 68 cents for a pound of coffee, Mr. Silva said.
Industry trade groups have tried to stem coffee farmers' losses by
encouraging coffee producers to destroy oversupply and raise prices. They have
also encouraged food companies to buy so-called fair trade coffee, which aims
to guarantee what its advocates say is a living wage to poor coffee farmers in
developing countries.
But even with Starbucks buying fair-trade coffee at an average of $1.20 a
pound, Colombian coffee growers make only about a penny from each cup of coffee
sold, Mr. Silva said. The average Starbucks' latte costs $2.25 to $3 a cup; a
mocha costs $2.45 to $3.25.
By selling its own coffee at its own coffee shops, the federation, which
represents both small and large coffee growers, plans to return 4 to 5 cents
for each cup of coffee sold. Each of the federation's 560,000 farmers will also
have an ownership stake in the shops, Mr. Silva said. The profits from the
retail operation will go back to the federation, which said it would put
marketing dollars behind the Juan Valdez brand and work to improve Colombia's
coffee-growing regions by building roads, schools, health centers and housing.
"It's certainly interesting," John Glass, a restaurant analyst at
CIBC World Markets, said of the coffee growers' plan. "I'm sure they can
capture, to some degree, some more integrated profit if they vertically
integrate it. The example would be Exxon
Mobil. They own gas stations. They take it out of the ground, and they sell
it."
The first Juan Valdez coffee shop is scheduled to open in New York, where
the federation owns property on 57th Street and Lexington Avenue. The
federation also plans to open three more flagship stores in Boston, Washington
and Seattle.
The Juan Valdez trademark, which was created by DDB Worldwide Marketing in
1960's, is probably most familiar from a series of television commercials
featuring the character standing in American supermarket aisles. The character
was suspended in 2001, after coffee bean prices dropped significantly and the
federation could no longer bankroll the ad budget for Juan Valdez.
But last summer, Juan Valdez made a comeback. The federation paid $1.5
million to buy him a cameo appearance in the Jim Carrey movie "Bruce
Almighty." The federation plans to spend about $20 million on its coffee
shops, but did not say how much of that would go for advertising and marketing.
It will spend another $9 million this year and next to promote its marketing
program for 100 percent Colombian coffee. The Sawyer Miller unit of the IPG
Group is spearheading the federation's marketing campaign. Future Brands,
another IPG unit, will work with the company on branding.
The stores will largely be modeled after five coffee shops that the
federation operates in Colombia. There, they are testing product mix, pricing
and the intricacies of running a retail operation. The stores, which are
relatively spartan, serve nine different blends of coffee and are decorated in
neutral browns and beiges, accented with wooden chairs that do not encourage
patrons to linger. Although prices of the Colombian coffee have yet to be set
for stores in the United States, Mr. Silva said he expected them to be lower
than Starbucks'.
"Starbucks sells an experience," Mr. Silva said. "It's almost
like a social place where you go there and meet your friends and read the paper
and have some milk with coffee. They are not maximizing the potential of the
pure coffee experience. Our stores are going to be much more down to earth - less
opportunities for social interaction. It's not going to be a gathering place;
it's going to be a place to get superior coffee, the best coffee in the
world."
The federation's plan promises to be a delicate balancing act, as the group
will be directly competing with its primary consumers, packaged-goods companies
that market 100 percent Colombian coffee as an ingredient in brands like
Folgers and coffee shops, especially Starbucks, which controls 38 percent of
the domestic specialty coffee shop market.
Officials at Starbucks, which has recorded 12 consecutive years of
same-store sales growth despite the slumping economy, said they supported the
Colombian coffee growers' efforts and would continue to buy coffee beans from
them. Starbucks officials said the company was a "significant buyer"
of Colombian coffee, but they declined to say how much coffee they purchased
from Colombia, which is the second-largest coffee-producing nation in the
world, after Brazil.
"We're not worried," said Dub Hay, Starbucks' senior vice
president for coffee. "We're well aware of what they're going to do; we
think there's room for everyone."
A representative of Dunkin' Donuts, which says it sells more cups of coffee
a day than any other retailer, expressed support for the growers' efforts,
along with a little confusion about the identity of the coffee shops' namesake.
"Is that the guy with the horse?" asked Jon Luther, the chief
executive of the restaurant division of Allied
Domecq, which owns Dunkin' Donuts.
The federation has enlisted McKinsey & Company, a management consulting
firm, to help develop its retail plan for its United States stores. McKinsey
has been advising the federation on the creation of its coffee shop business
model and the rollout of the stores.
But the federation's learning curve will be steep as the group will have to
figure out how to transfer its skills as coffee growers to retail sales,
analysts said.
"There's so much more to it," said Mitchell J. Speiser, a
restaurant and food service analyst at Lehman
Brothers, about the federation's plans. "It's site location; it's
branding. It's the right management team. It's hiring the right people. Just on
paper, having real Colombian coffee and creating a retail shop around it, they
do win the authenticity factor, but it takes a lot more than that to create a
successful brand and a successful retail chain."