Segmentation: More infographics
Many moons ago, I suggested that microlots can help everyone in the coffee trade, even farmers who don’t produce them and roasters who don’t buy them. The argument is that by better understanding the quality of the coffee they have to offer — a skill that is developed naturally in the pursuit of microlots — farmer organizations can offer differentiated products to different buyers based on those buyers’ specific needs, and maximize their sales revenues. I wanted to develop a graphic to go with the post and illustrate the argument, but didn’t have time. The recent discussion here of assessing impact at origin has given me the push I needed to get the infographic done.
These graphs are stylized — they do NOT represent real data from CAFE Livelihoods or any of our other projects at origin — and represent a mythical Fair Trade Certified cooperative of 500 farmers that sells 1 million pounds of coffee a year. They are, however, “inspired by true events,” as they say in the movies.
In the graph above, the cooperative takes a segmented approach to marketing, offering five different products based on a combination of quality (intrinsic value) and certification (symbolic value). By separating quality-differentiated lots, the cooperative creates the possibility of achieving some high price points on its conventional coffee, even if only for a fraction of its coffee.
In the graph below, the cooperative does not segment its coffee on the basis of quality, but blends coffee from all its members without regard to terroir or quality, selling what it can on the FT market and the rest on the conventional market. Under this scenario, the value created by the 92-point lot that fetched $3.75 from a Direct Trade roaster, and the 84-point double-certified lots sold at $3.30 a pound, simply evaporates.
The average price under a segmentation scenario is $2.59 per pound, and just $2.37 per pound under the undifferentiated approach. Over a million pounds of coffee, that adds up to a difference $222,000.
DIFFERENTIATION IN PRACTICE.
These scenarios are simple. In reality, smallholder cooperatives are increasingly going beyond generic cup quality in differentiating their coffees for different segments of the market. Many, especially those with a large number of members spread over large areas that contain significant agroclimatic diversity, are creating regional profiles that combine intrinsic value traits (terroir) and symbolic ones, including ethnicity, language, etc.
Why did the recent discussions of impact at origin prompt me to finally create these graphs?
Because the original infographics I published using CAFE Livelihoods project data seemed to suggest that Direct Trade is a superior option because it delivers a higher price-per-pound. And the second set of infographics I published suggested that Direct Trade’s impact was less significant since the volumes traded — and revenues generated — under the approach were lower. But in our experience, it is not an either/or decision for cooperatives.
Successful cooperatives work strategically to migrate more of their coffee to higher-margin channels, but it is not easy. There are challenges at the field level. Differentiation can be associated with new technologies or field-level investments, and almost always involves more labor, whether from a farmer’s own family or hired hands. And there are limitations in the marketplace. Even if the quality narrartive is ascendant in the marketplace, the combined market share of the Fair Trade and quality-obsessed/Direct Trade models is still limited. As much as cooperatives might like to sell all their coffee at high prices through direct trading relationships based on Fair Trade principles, there just aren’t enough buyers in those categories to go around. Coops must sell at lots of different price points to a broad range of buyers through lots of different kinds of channels in order to find markets for all their coffee. The developmental impact of the trade is cumulative, combining what coops get from each of their buyers — income, market intelligence, new technologies, reinvestment, etc.
The key points are these:
- Differentiation for diverse segments of the coffee market is an important part of a competitive strategy for smallholder coops.
- Effective differentiation on the basis of instrinsic and symbolic sources of value can help coops maximize revenues.
- A quality focus is an important part of a differentiation strategy, but is not a stand-alone option for smallholder coops; if one trading approach seems to outperform another one in terms of income or impact, it may be an optimal strategy but can rarely be an exclusive one.
- We need to measure more effectively the return to investment in quality-based differentiation that considers both direct costs of production and opportunity costs of labor and production in the event that high-quality heirloom varietals underperform other, higher-yielding varietals.