Understanding Differentiated Coffee - A Value Chain Perspective BE309E International Business and Marketing Espen Strand Sammendrag Formålet med denne oppgaven er å undersøke hvordan kvalitet, makroøkonomiske forhold og etiske sertifiseringer påvirker de ulike leddene i verdikjeden for differensiert kaffe. Med differensiert kaffe menes kaffe med høy grad av kvalitet, sporbarhet, og etiske aspekter, og lav grad av defekter. Guatemala er valgt som produserende og eksporterende land, og Norge er valgt som importerende og konsumerende land. Denne oppgaven har undersøkt de mest sentrale leddene i verdikjeden, bestående av erfarne aktører. Kvalitative undersøkelsesmetoder er brukt og analysen har fokusert på hvordan de ulike leddene påvirkes av ovennevnte faktorer. Oppgaven er basert på relevante teorier, deriblant Porter, og store mengder sekundære kilder, i hovedsak akademiske artikler, årsrapporter, tidligere undersøkelser og andre offisielle rapporter publisert av private og offentlige organisasjoner. Hovedfunnene viser at kvalitet er den eneste faktoren som går igjen i alle ledd i verdikjeden. Differensiert kaffe selges alltid utenom børs, og som regel over børspris. Kaffebøndene er desidert mest utsatt for prissvingninger og ustabilitet knyttet til makroøkonomiske forhold, mens brenneriene og sluttbrukeren merker dette i svært lav grad. Etiske sertifiseringer er tildels vanskelig å oppnå, og fungerer kun som en inngangsbillett til enkelte markeder. Etterspørselen etter etisk sertifisert kaffe i Norge er en av de laveste i Europa, og lavest innad i Skandinavia. Norske importører og brennerier satser i større grad på «relationship coffee», som fokuserer på åpenhet rundt kjøp, salg og sporbarhet. Det hevdes at prisene er gjennomsnittlig høyere enn alle typer etisk sertifisert kaffe tilgjengelig i markedet. i Preface This master thesis is written as a final step in the 5 year study of Master of Science in Business at Bodø Graduate School of Business, University of Nordland, Norway. The thesis is within the specialization International Business and Marketing and count for 30 ECTS credits. The purpose of this thesis is to understand the complexity of quality, ethical certifications and macro-economic factors in the value chain for differentiated coffee in an international setting, and how these affect the different parts of the value chain. Thanks goes to course responsible Professor Dominique Thon and Professor Tor Korneliussen for an interesting year in the above mentioned specialization. A special thanks to Professor Frode Nilssen for the patience and all great guidance during the work of this thesis. Thanks to Agricultural and Chemical Engineer José Antonio Hernandez for helping with the interviews in Guatemala. Thanks to Agricultural Engineer and Master Cupper Carlos Roberto Muñoz Garcia from Anacafé, Executive Coordinator of The Differentiated Coffee Committee and Engineer Sergio Mazariegos from Agexport, Director of Organization Ileana Cordon and Director and Engineer Antonio Cordon from Crecer, World Barista Champion Tim Wendelboe from the coffee bar and roastery with the same name, Coffee Roasting Master Bjørnar Hafslund from KAFFA AS, Manager and entrepreneur Siv Christensen from Babel Barista, all seven coffee farmers in Jalapa, Guatemala, for all your extended knowledge, experience reflection and interpretations related to interviews and the research of this thesis. Special thanks go to my wife, Claudia Maria Hernandez Molina, for your perseverance, support and motivation throughout the process of this research. Bodø, May 19th 2014 Espen Strand ii Abstract Coffee is the second most traded commodity in the world; while worldwide demand for coffee increases at an estimated 2%, price fluctuations keep affecting producers in countries like Guatemala, that in spite of being among the 10 first world producers, cannot compete in terms of production with countries like Brazil, Vietnam and Colombia, so the country bets for differentiating itself with high quality coffee. Norway is the second country in the world of coffee consumption per capita; most of the country’s consumption is of Arabica beans which have higher quality than Robusta beans. Coffee shops have grown satisfying the growing demand of coffee enthusiasts in the country. The following research question and secondary objectives helped shape this thesis and the study related to primary and secondary data utilized in this research: How do quality, ethical certification and macro-economic aspects influence the different actors in the value chain of differentiated coffee, in Guatemala as a producing country and Norway as a consumer country Secondary objectives Understand the characteristics of differentiated coffee in comparison with “commercial/ mainstream coffee”. Identify the most important actors of the value chain for differentiated coffee. Define how the major actors in the value chain conceptualize the term differentiated coffee. Understand and define the macro-economic frame for differentiated coffee. Understand the general attitude towards differentiated coffee and ethical certifications of consumers and importers in Norway. The interview guide was constructed based on the research question and research objectives. Nonetheless reading previous studies like academic articles helped building the interview questions that were subsequently tested. The interview subjects were as following: iii 1. Owner/manager of coffee shop in Bodø, Norway (Babel). 2. 3 individual interviews with private and government institutions in Guatemala City (Agexport, Crecer and Anacafé). 3. 7 coffee farmers in Jalapa, Guatemala. 4. 2 Individual interviews with importers/roaster in Oslo, Norway (KAFFA AS and Tim Wendelboe). 5. 40 short interviews with consumers. The data was collected, analyzed and interpreted using qualitative research methods. Interviews were open and flexible and most of them were face to face, in some of them the use of an interpreter was necessary. Competitive advantage is the lead gained over competitors in the market by offering lower prices, greater value or additional benefits. Competitive advantage could be natural resources that some countries have to produce specific products like “coffee” or technology that is gain through time. Guatemala ‘s competitive advantage is its natural resources like altitude, volcanic soil and micro-climates, to produce coffee, however the country lacks of technology for production, the harvest is handcraft and traditional. There are three ways a company can gain competitive advantage: Cost leadership, differentiation and focus on a market segment. Differentiation can be defined as “being unique by something valuable for consumers”. Premium price is related to differentiation and it is the objective of companies that use this strategy. Differentiated coffee’s objective is to be sold out of the stock market for a premium price achieving a differentiated strategy. Differentiation can be achieved through: Price, Product and quality, offers other than product, company and branding differentiation and finally market and customization. Product and quality is the most common strategy used to differentiate coffee, and according to all the subjects interviewed, it is the most important factor of differentiated coffee. Niche is defined as a small, narrow and homogenous part of the market, smaller than segments and with higher degree of protection. Niche markets required differentiation strategies and demand for a premium price for products and services offered to it. Even iv though demand for differentiated coffee is growing, as a result from this research, it is still considered a niche. Niche markets are susceptible to economic downturns, “product cannibalization”, niche decrease and even though it uses protection barriers, niches are still susceptible to competitors. Countries like Brazil, Vietnam and Colombia influence the world prices of coffee; however they have increased quality and are competing with quality as well in the differentiated coffee niche market. There is not a common definition of differentiated coffee, mostly scholars and research institutions recognize the term. Specialty and gourmet coffee are related terms; however specialty term has been misused while the gourmet term is vague. There are three ways a coffee can differentiate itself: quality, ethical certifications and denomination of origin, the last one is closely related to high quality and specific characteristics. Ethical certifications are official sustainable coffees that guarantee ethical performance in the following areas: economic, social and environmental. The main macro-economic factors that influence coffee are: supply, demand, new and existing competitors but the most important of all is price fluctuations. Value chain is a method to study the value that is created in a product from raw material to the end product used by consumers. There are different value chain models for coffee, and most of them are associated with international trade theory, since this value chain model includes producers in one country and buyers, retailers and consumers in another. The factors studied in this thesis: Quality, ethical certifications and macro-economic factors like price, and all these affect differently to different actors in the value chain. Quality has great influence in all actors, but it is more important to the roasters since they determine what quality is and educate consumers. Ethical certifications are more important to the farmers since it is a