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Coffee house industry: Starbucks’ sustainability strategic report

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Introduction

The coffeehouse is a global industry that is growing and expanding rapidly over the past few decades. There are multiple varieties of organisations that categorize themselves as coffeehouse businesses (over 20,000 firms). Their core business generally involves selling prepared coffee and other hot/cold beverages with other consumables such as sandwiches, salad, snacks, and baked goods (Pokorna & Smutka, 2010). The industry contributes to the high consumption of coffee globally. For instance, between 2016 and 2017, the coffee production was about 162 million 60 kilogram bags of coffee worldwide at an average price of about $1.50 and $1.30 per pound for the mild Colombian Arabica and Brazilian Arabica. In 2019/2020, the production was at 165 million 60-kilogram bags. The production constitutes a significant part of the $782 billion markets in the global food and drink markets. Lock (2017) suggests that major companies such as Dunkin Donuts, Peet’s Coffee, Starbucks, Keurig Green Mountain, McDonald's, Caribou Coffee, Coffee Bean & Tea Leaf are among the top 50 key players that dominate the industry and generate over 70% of the total annual industry’s revenues.

Coffee beans are a paramount raw material for every coffeehouse company in these industries. With this in mind, most of these companies source their coffee beans from different parts of the world. For instance, Starbucks typically sources its coffee beans from agricultural regions such as Africa, Asia-Pacific, and Latin America. The company procures its coffee beans from Mexico, Guatemala, Columbia, Rwanda, Tanzania, Ethiopia, China, Indonesia, and Costa Rica. Fernandez (2021) suggest that Starbucks owns a 240-hectare farm in Costa Rica where it grows in own coffee and source other from the other countries stated above. Other companies such as Dunkin's Donuts source also procure theirs from Latin America, India, and Africa. On the other hand, Green Mountain Coffee, Inc. sources from Indonesia, Africa, and Latin American. Therefore, Africa, Asia-Pacific, and Latin America remain the main regions where farmers grow and supply their coffee beans to different companies in the coffeehouse industry.

During the procurement process from the farmer, the coffee beans undergo several consecutive processes. The first and the longest process is to grow the coffee and usually involves small growers/farmers that operate on 1 or 2 hectares farms each, in most cases (Hutson, 2020). The growers cultivate, harvest, and do most preliminary processes such as drying or hulling the beans based on appropriate techniques. Additionally, the growers are also, in most cases, the processors, and sometimes they work in corporation with cooperation, other processors/growers to establish the required equipment to process/mill coffee beans. After this, the farmer may engage with intermediaries for other buying, transporting, and selling processes (Hutson, 2020). Sometimes the supply chain may involve more than one intermediate before the product can get to the exporter, supplier, or roasters/retailers. In some countries such as Ethiopia, government agents are also a crucial part of the supply chain for coffee. They engage in controlling coffee trades or buying from the processor and selling to the exporter through auction. When the coffee beans are at the hands of the exporter, they then sell them to the suppliers/brokers (Hutson, 2020). Before selling to suppliers, the exporter's responsibility is to pick out the best quality based on their knowledge of growing location/local vendors. The suppliers or broker then sell the coffee beans to the roasters at an agreed-upon price and then the roaster the green beans and sell the coffee right from their store, cafes, shops, restaurant, catering, or retail organisation, that are generally categorized as coffeehouses, to the final consumers.

Starbucks is one of the largest coffeehouses in this industry, with more than 27,000 Starbucks locations and 32,660 Starbucks stores globally. Due to its extensive supply chain worldwide, the company generated over $22 billion in 2017, with the highest consumption from the USA. Lock (2017) states that the company has about 70% (estimating to about 183 million) consumers in the USA that drinks two or more cups of coffee daily. This high consumption of coffee in the USA contribute to about 32% of adults who spend around $5 per week and about 45% of American who visited the company for a cup of coffee annually.

On the other hand, Keurig Green Mountain, although a major player in this industry, generates revenue of about $1.15 billion, Dunkin Donuts about $1.37 billion, Peet's Coffee over $500 million, Caribou Coffee generates $600 million, and Coffee Bean & Tea Leaf over 500 million annually. Lock (2017) adds that other countries such as Japan, Canada, and Australia also have a high consumption of coffee besides the United States. About 48% of total coffee orders make from Japan, 45% from the United States, 43% from Canada, and 23% from Australia. Other countries such as Germany, France, Russia, and United Kingdom order about 17% of total coffee orders respectively, and the lowest orders come from countries such as Brazil (13%), China (10%), Italy (3%), and Spain (3%). Lock (2017) suggests that among these countries, most consumers are well-educated individuals between 25 to 45 years old in colleges, workplaces, and a significant percentage from home. This reveals that most of the consumers that constitute the market are young adults and the generation X population.

Ethical, sustainability, and social responsibility issues that may impact Starbucks and the entire coffeehouse industry

Nonetheless, there are multiple actual and potentially ethical, sustainability, and social responsibility issues that any coffeehouse such as Starbucks should address before getting coffee from a coffee tree to the cup of coffee as Starbucks operates in its extensive supply chain in different stages of industrial value chain some of the ethical issues that can or potentially affect the industry can broadly be categorized into business ethics, labor & welfare, environmental concerns, and health & safety.

Under the labor and welfare, the company may face severe issue concern farmers’ fair paid that is sufficient for their survival. For instance, countries like Vietnam are well known as the largest exporter of Coffee beans to the EU and United States but most of the farmers’ livelihood can be defined as living below the international poverty line (Nguyen & Sarker, 2018). Suppose Starbucks sources/procures coffee that originates from this country or other similar countries where farmers live below the poverty line. In that case, there is a high possibility to face ethical issues concerning farmers' fair pay. Already the company is among some of the coffeehouses that that source coffee from underdeveloped countries such as Ethiopia, Rwanda, Tanzania, Guatemala and Indonesia Therefore, there is a high possibility of facing actual ethical issues concerning farmers’ fair pay if those do not live a decent livelihood.

Consumers are becoming more aware of the different ethical issues as more people become more literal in ten years to come. Some even make their purchasing decisions based on an organisation with the most sustainable economic value for farmers or the entire supply chain system (Pokorna & Smutka, 2010). The consumers and the public require to see evidence-based statistics and business conduct on farmers’ fair pay and not just promotes that do not reflect on the industrial value chain. In such as situation, the company may need to focus on redesigning its procurement processes to ensure that it sources coffee directly from the farmers at a fair price and without intermediaries. The company may need to eliminate intermediary parties typically because even with a fair price, the supply process may extort the farmers and leave them in the same vulnerable situation of poor coffee beans.

Additionally, the issue of the sustainable agricultural product remains one of the biggest challenges in this industry. Staff (2020) suggests that most farmers, especially in underdeveloped countries, still use a high percentage of unsustainable farming methods such as burning crop residue, monoculture, tillage, and poor fertility management. The conventional methods have severely impacted the environment, and continuous application of these methods increases soil degradation, deforestation, and unfavorable climate changes. Nguyen & Sarker (2018) add that using the above conventional methods can significantly lead to decreased yields and increase crop pests and diseases on the coffee trees. This would increase the cost of producing coffee as farmers would use more pesticides, chemicals to control crop diseases, and artificial fertilizers to increase yields. In the process, they would increase increasing air, soil, and water pollution and negatively affecting their health and consumers' health (Letizia, 2016). The conventional farming method would also severely destroy the environment leading to unfavorable environmental conditions for the future generation farmer and coffeehouse industries.

They, therefore, distort the entire meaning of sustainable production in the current coffeehouse value chain, given sustainability involves meeting the needs of the current population without compromising future generations (Garder et al., 2019). Different parts of the world are experiencing severe climate changes such as extending draughts, extinction of animals/plants, increasing temperature and increasing the desert region, and changing patterns in rainy and dry seasons. Therefore, if the farmers from where Starbucks and other coffeehouse companies source/procure their coffee continue to use unsustainable coffee growing methods, they may severely impact the environment and make it impossible to get a favorable climate (cool to warm tropical climate) to grow coffee. This may disrupt the production of coffee in the future due to scarcity of resources, coffee beans. With this in mind, Starbucks and other players in this industry should support and encourage the farmer to use other more effective and sustainable methods such as organic farming based on a fair-trade supply chain system (Garder et al., 2019).

Currently and over decades, the company has marketed its brand as an organisation that positively influences the community. The slogan for social responsibility, one person, one cup, and one neighborhood at a time, directs the company towards transplant social responsibility that creates positive changes for the entire community (Starbucks, 2021). The company also has a strong principle for ethical sourcing known as Coffee and Farmer Equity (CAFE) Practices. It is a member of Conservation International that helps establish special responsibility in its industrial supply chain. Starbucks (2019) suggests that the CAFÉ practice is specifically a guideline that helps the company ensure that its farmers grow coffee through sustainable methods that support good health for the public and environmental protection. For instance, the CAFÉ practice directs the company to focus on measurable standards that ensure the supply chain system meets product quality, economic accountability, social responsibility, and environmental leadership.

Nonetheless, it may face several issue within its supply chain system for coffee. The company faces increasing pressure for an evidence-based approach to minimize environmental impact, reduce poverty among coffee farmers, and increase the need to support development in underdeveloped countries where it sources coffee beans. Fernandez (2021) suggests that the company has made some decisions that make people question its integrity and reliability to meet ethical corporate social responsibility within the course of its operation. Its local image is significantly different from its global action in the coffee supply chain and procurement activities. The local enterprises are well integrated with advertising and branding efforts that promote its brand as an organisation that source and procure coffee ethically with transparent corporate citizenship policies.

However, the company already has a record that shows potential involves in unethical activities such as pushing prices down in developing countries at the global level. Fernandez (2021) suggests that Starbucks uses its vast financial resources and block legal and patent rights for small companies trying to establish themselves in most of the local regions where it sources its coffee. The failed attempt to trademark companies such as Harar and Sidamo in Ethiopia is an example of the companies undertaking that the public may view as evaluate against its strong promotion as a socially responsible organisation. According to Fernandez (2021), the Ethiopian government estimated that trademarking this corporation would allow the nation to generate extra annual revenue of about $88 million. The company is also facing accusations of blocking trademarks for other organisations, such as Addis Abbaba's trademark. As the company continues to use this approach in ten years, the public may become more aware of the controversy between the advertising and the companies actual action/practices. They may highly view this and the company as unethical for eliminate competition and ensure that it protects purchasing prices at a low level for coffee. The evidence such as using the name Sumatra without trademarks for the farmers gives a good example that may expose the company to ethical and corporate social responsibility issues despite marketing its brand as an organisation that maintains a high ethical supply chain.

Additionally, although marketing its brand, the company emphasizes its pride in sourcing ethically and sustainably. The evaluation of average earning for farmers in different regions where it sources its coffee contradicts the picture. For instance, about 15 million growers in Ethiopia depend on this cash crop, but unfortunately, most of them barely survive with $1 per day (Fernandez, 2021). Based on these statistics, the public will have no choice but to question its integrity and honesty on what it claims to do to ensure an ethical and sustainable supply chain/production system. Does it ensure ethical sourcing? Does it ensure sustainability? Does it strengthen the community, or does it extort money from farmers to generate more profits? Does it even care about minimizing its environmental footprints?

The failure to get corresponding reports/evidence to its advertisement as an organisation based on ethical, sustainable, and strong social responsibility supply chain system increases public concern. The public may view the company as deceptive, and in the process, it may experience a gradually increasing negative image about its brand within the next ten years (Duff, 2017). It fails to ensure that it is campaigning for what it has managed to achieve in conducting ethical business activities, maintaining sustainability, and improving social responsibility. Furthermore, responding to this issue through the wrong/inefficient ways such as advertising without taking real action on the ground also exposes the company to risky branding, which may backfire within the next ten years (Duff, 2017). The consumers who are currently willing to pay an extra coin may lose their increase on the product. As a result, the company may suffer a severe decline in profitability and share as consumers shift to other brands to trust for ethical and social production/business activities.

Recommendation

If Starbucks has to maintain its branding strategy as an ethically and socially responsible organisation, there is only one solution to its current and future potential issues. It has to implement evidence-based approaches where third parties such as farmers and the community provide evidence-based testimonies for fair trade, sustainable production, and benefits for social responsibility project experience through Starbucks efforts and support. The company must take real and proactive action to advertise its brand and establish an evidence-based industrial value chain in its supply chain system. The farmer has to prioritize by ensuring that they get fair pay in exchange for their coffee beans. For instance, the company may integrate learning free learning programs to develop their skills and knowledge on sustainable agriculture, such as organic farming (Rueda et al., 2017). It can also establish a direct procurement system that buys directly from the farmer to eliminating intermediaries and ensure the farmer gets true and higher value for money to their coffee beans per bag or kilo.

References

Duff V. (2017). Recommendations on corporate social responsibility. Bizfluent. https://bizfluent.com/info-8503616-recommendations-corporate-social-responsibility.html

Fernandez, I. (2021, May 6). Starbucks: Ethics and social responsibility. Medium. https://medium.com/coast-to-coast-notes/starbucks-ethics-and-social-responsibility-83610148a20f

Gardner, T. A., Benzie, M., Börner, J., Dawkins, E., Fick, S., Garrett, R., ... & Wolvekamp, P. (2019). Transparency and sustainability in global commodity supply chains. World Development121, 163-177.

Hutson C. (2020, June 21). From bean to cup: How the coffee supply chain works. Atlas Coffee Club Blog | Club Culture. https://club.atlascoffeeclub.com/coffee-supply-chain/

Letizia, P. (2016). The Impact of Supply Chain Structures on Corporate Social Responsibility. An Environmentally Responsible Supply Chains (pp. 87-107). Springer, Cham.

Lock S. (2017, May 10). Topic: Coffeehouse industry. Statista. https://www.statista.com/topics/1670/coffeehouse-chain-market/#topicHeader__wrapper

Nguyen, G. N., & Sarker, T. (2018). Sustainable coffee supply chain management: a case study in Buon Me Thuot City, Daklak, Vietnam. International Journal of Corporate Social Responsibility3(1), 1-17.

Pokorna, I., & Smutka, L. (2010). What is the structure of the coffee market: Can the real poor benefit from the coffee trade?. AGRIS on-line Papers in Economics and Informatics2.

Rueda, X., Garrett, R. D., & Lambin, E. F. (2017). Corporate investments in supply chain sustainability: Selecting instruments in the agro-food industry. Journal of cleaner production142, 2480-2492.

Staff E. (2020, April 27). Where does Starbucks get its coffee beans? BeansToBarista.com. https://beanstobarista.com/where-does-starbucks-get-their-coffee-beans/

Starbucks (2019). Coffee sourcing. Starbucks Coffee Company. https://www.starbucks.com.my/responsibility/ethical-sourcing/coffee-sourcing

Starbucks (2021). Corporate social impact. Starbucks Coffee Company. https://www.starbucks.com/responsibility