The MARKETS and MARKETING ISSUES of the KONA COFFEE INDUSTRY
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July 1989 INFORMATION TEXT SERIES 034 FINAL REPORT The MARKETS and MARKETING ISSUES of the KONA COFFEE INDUSTRY Prepared for the State of Hawaii Department ofAgriculture Prepared by Stuart T. Nakamoto and John M. Halloran Dept. ofAgricultural and Resource Economics College ofTropical Agriculture and Human Resources University of Hawaii HITAHR · COLLEGE OF TROPICAL AGRICULTURE AND HUMAN RESOURCES · UNIVERSITY OF HAWAII ACKNOWLEDGMENTS This study was funded by the Hawaii State Legislature, under the administration of the Hawaii State Deparment of Agriculture. The study team wishes to acknowledge the many individuals and firms within the industry, whose knowledge and cooperation contributed significantly to this report. Special thanks to Dr. John Yanagida for his review and comments of an earlier draft. The tables and figures were prepared by Jill Lani Stone. THE AUTHORS Stuart T. Nakamoto is an assistant specialist in the Department ofAgricultural and Resource Economics, College of Tropical Agriculture and Human Resources, University of Hawaii at Manoa. John M. Halloran is an assistant specialist in the same department. FINAL REPORT The MARKETS and MARKETING ISSUES of the KONA COFFEE INDUSTRY Prepared for the State of Hawaii Department ofAgriculture Prepared by Stuart T. Nakamoto and John M. Halloran Dept. ofAgricultural and Resource Economics College ofTropical Agriculture and Human Resources University of Hawaii HITAHR · COLLEGE OF TROPICAL AGRICULTURE AND HUMAN RESOURCES · UNIVERSITY OF HAWAII EXECUTIVE SUMMARY The Markets and Marketing Issues ofthe Kona Coffee Industry Findings: notably Jamaica Blue Mountain and Colombia coffees, and Florida orange juice. However, especially the coffee 1. The Kona Coffee industry is not dealing with a single, examples serve as only models because of the different homogeneous market. Instead, several market segments structure, organization, and operating conditions of these are identified based on product form, channel of distribu foreign industries. tion, and fmal consumer. These are: The underlying concept behind certification for (1) Institutions (hotels and restaurants) Kona coffee is as follows. Although the program is (2) Local residents (specialty outlets and supermarkets) voluntary, non-participation implies that something is wrong (3) Tourists (from US vs. from Japan) with the uncertified product. Certified processors issue (4) Exports (out-of-state sales, including mail order) dated certificates of authenticity with each bag of green coffee sold. This assures buyers that a product is pure Kona These segments are in different stages of coffee of established quality. Buyers in turn are licensed to development, and have different marketing needs use a seal of approval on final products. Processors and (promotion and advertising are treated as only part of buyers must demonstrate compliance in order to remain marketing.) These market segments are perhaps the major certified, reinforced by other means of monitoring. A fee reason for the lack of industry cohesion. schedule can also be included so the program is self 2. Universal concerns to the industry are or should be funding. product quality, reputation, and image. These are essential An essential complement to certification is to maintaining markets, expanding markets, and meeting education/information directed first at the trade, then to competition posed by specialty coffees and other products. retailers, and eventually the consuming public. This The biggest external threat is "Kona-style" or counterfeit includes using trade magazines (e.g., an explanation of coffee. Quality, reputation, and image can establish Kona certification with a list of certified processors), and a coffee as distinct from but complementary to other Hawaii newsletter on Kona coffee. Such efforts would also be a coffees. powerful negative incentive to cheating or not participating. 3. Fluctuating prices resulting from fluctuating production If successful, the program could expand to include have a negative influence on the price/value perceptions of Kona blends, perhaps via truth in labelling. Again, the especially roasters, and are a major cause of instability in implication of non-participation would be that something is markets. This aggravates the high carrying cost by wrong with the product. purchasers of Kona coffee. In terms of many production problems, recent history has demonstrated that higher 2. Inventory/stock control is one approach to easing supply prices are attracting resources to the industry. Price fluctuations and thus to stabilizing inter- and intra-year stability will further enhance the position of Kona coffee in price fluctuations. Possible actions include a centralized markets and hence, of producing Kona coffee. warehousing and/or distribution scheme; public subsidy (construction and low cost operating loans); the use of 4. This study cannot support or refute minimum content speculators to carry inventory costs and assume market risk. legislation for Kona blends. Besides issues of logistics, enforceability, jurisdiction, etc., the available information 3. There are innumerable activities for promotion and does not conclusively show that Kona blend either helps or advertising, especially on the firm level. These would hurts the growers. Further, it would be very costly to collect ideally be tied in to the certification program. However, the information needed for a definite conclusion, and firms promotion and advertising can quickly deplete limited are unlikely to willingly part with the required information. resources without the desired results. For the industry in general, in-state markets have not been sufficiently tapped. This report instead recommends an approach that In particular, tourists are a captive audience that need to be allows the market mechanism to dictate the proper blend better utilized, with a "free" carryover to residents. Stronger percentage. The desired results attributed to minimum efforts in activities focusing on the Kona area could be content standards can be obtained using truth in labelling fruitful. Events include the Kona Coffee Festival, Ironman together with a certification program and Triathalon, Hawaii and International billfish tournaments. education/promotion as outlined below. If successful, such efforts could be extended to other events. Recommendations: 4. The recommendations outlined, especially on an industry-wide basis, will be best implemented by an 1. Certification program. The individual market segments industry-wide organization such as the Kona Coffee and overall Kona coffee industry will be best served by a Council. Program success and longevity is enhanced with certification program for pure Kona coffee. This program greater self-sufficiency in financing. is patterned after similar endeavors in other products, iii TABLE OF CONTENTS List ofTables vi List ofFigures VI CHAPTER I: OBJECTIVES AND BACKGROUND IA Introduction 1 I.B World Coffee Trade 1 I.C Specialty Coffee 5 CHAPTER II: THE KONA COFFEE INDUSTRY IIA Structure 6 II.B Product Characteristics II.B.l Grades 8 II.B.2 Prices 8 II.B.3 Product Differentiation 9 CHAPTER III: MARKETS FOR KONA COFFEE IlIA Classifications of "Markets" for Kona Coffee 10 III.B Product Form 13 III.C Market Channels or Outlets III.C.l The Institutional Market 13 III.C.2 Specialty Market 14 III.C.3 Hawaii Supermarkets 15 III.D Final Consumers III.D.l The Export Market - U.S. Mainland 19 III.D.2 The Export Market - Japan 20 Japan in the world market 20 Green coffee 20 Other coffee products 22 Channels of distribution 22 Consumption trends 23 Outlook 27 III.D.3 Oahu Residents 28 Focus groups 28 Telephone surveys 28 III.D.4 The Visitor Market 32 III.D.4.a Visitor Demographics 32 III.D.4.b Tourists' Perceptions 33 III.D.4.c Important Factors Affecting Purchase 35 III.D.4.d Factors Affecting Kona Coffee Purchase 35 III.D.4.e Place of Consumption 38 iv TABLE OF CONTENTS (continued) IV. ISSUES AFFECTING THE KONA COFFEE INDUSTRY 39 IVA Unreliable Supply 40 IV.B Competition 40 Specialty coffees as luxury goods 40 Specialty coffees as quality products 41 Flavored coffees 41 Kona-style coffee 41 Other Hawaii coffee 41 IV.C Image 42 IV.D Reputation 43 IV.E Quality 43 IV.F Blends and Labelling IV.F.1 Recommendation 44 IV.F.2 Analysis 44 IV.F.3 Conclusions 47 V. CONCLUSIONS & RECOMMENDATIONS VA Conclusions 48 V.B Jamaica and Colombia's Programs 49 Jamaica 49 Colombia 49 V.C Information, Education, and Promotional Activities 51 V.C.1 Promotional Opportunities 51 V.C.2 Promotional Activities 52 V.D Certification Program 54 V.E Inventory or Stock Control Programs 55 V.F Industry Organization 55 v List ofTables 1-1. Coffee Consumption Trends in the United States 3 11-1. Kona Coffee Production Statistics 7 11-2. Conversion Rates between Coffee Products 7 11-3. Typical Kona Coffee Yield, by Grade 7 111-1. Green Coffee Imports to Japan, by Major Suppliers, 1982-1986 20 111-2. Price of Green Coffee Imports to Japan, by Supplier 22 111-3. Domestic Supplies of Regular & Instant Coffee in Japan 23 111-4. Consumption of Coffee Products Over Time in Japan 26 111-5. 1985 Consumption of Coffee Products in Japan by Location 26 111-6. Comparative Visitor and Trip Profiles 32 111-7. Visitors' Comparative Identification ofAgricultural Products with Hawaii 33 IV-1. Perceived Issues in Kona Coffee 39 IV-2. Perceived Percentage of Pure Kona Coffee in Blend, by Respondent Type 45 V-1. Prices Received for Green Coffee 50 V-2. Possible Promotional Activities for Kona Coffee Industry 52 List of Figures 1-1. Coffee Marketing Systems 2 111-1. Segmentation of Kona Coffee Markets 11 111-2. Kona Coffee Market Segment Matrix 12 111-3. Sales of Coffee in Selected Hawaii Supermarkets, 1986-1987 16 111-4. Supermarket Sales of Regular Coffee by Type 17 111-5. 1986 Coffee Imports to Japan by Type 21 111-6. Coffee Imports to Japan, 1959 to 1986 21 III-7. Distribution Channels of Regular Coffee in Japan 24 111-8. Consumer Image of Selected Beverages in Japan 25 111-9. Resident Purchase Habits of Kona Coffee, All Respondents 29 111-10.