The international coffee trade: developing an export strategy.

• Author: Hilten, Jan van

Successful international marketing of coffee requires careful planning based on the strategic objectives set by a country or organization. If these objectives are not well defined, marketing decisions risk becoming haphazard and may at times run counter to an industry's strategic interests.

Depending on the particular situation, coffee may be exported by a country's central marketing board or individual exporters. Although the objectives of the two may not necessarily be identical, the process of developing a marketing strategy is similar in each case. The organization's export manager must first give careful consideration to the various risk factors involved in the marketing operation and then analyze the marketing objectives in the light of those. This assessment serves as the basis for defining the export strategy.

Marketing boards

Marketing boards should consider a number of different risk factors involved in international coffee sales when drawing up their export marketing strategies, as discussed below.

Risk factors:

Marketing boards and similar bodies are more often than not required to purchase, process, finance, store and sell the entire coffee crop. Even if some activities are carried out by agents, the boards remain in overall charge. This is a great responsibility as their strategy affects the country's economy and all those growing coffee.

The first element of a successful strategy is to define long-term objectives. This cannot be done without a clear appreciation of important macroeconomic issues, especially in smaller producing countries that are heavily dependent on coffee earnings.

In such countries changes in the value and regularity of foreign exchange earnings from coffee exports directly affect the economy as a whole. Marketing strategy must take this into account. Its prime objective should be, therefore, never to interrupt or reduce exports without compelling reasons. As coffee stocks require large amounts of seasonal finance, certain questions must be asked. For how long can or should such borrowings be sustained? Are interest rates real or are they subsidized? If subsidized, what is the opportunity or real cost of such borrowings to the economy if maintained for longer than absolutely necessary?

Marketing strategy should not ignore the considerable speculative element that accompanies coffee production. Any speculative marketing action must therefore be not only quantifiable but also subject to strict limits and unbiased supervision. Purchasing an entire harvest means engaging in considerable long speculation, whether for the board's own account, that of the grower or that of the government. For example, if a board has sold only half of its current 50,000-ton crop, and next year's crop, which it also has to buy, is already on the trees, it has a theoretical long position of 75,000 tons, partly in stock and partly to be delivered. This is quite substantial as far as long speculation is concerned, but is it recognized as such? It is true that the very nature of marketing monopolies forces them into this situation, but this does not alter the enormity of their exposure. Marketing decisions to limit or halt the sale and flow of coffee increase this exposure. As with any risk, exposure should be managed and where possible limited.

The importance and complexities of the international coffee trade make it imperative that only marketing personnel with the necessary product knowledge and trade experience are employed.

In most smaller producing countries some or all of the above issues play a role. Because of their constant need for foreign exchange, the lack and cost of finance, and the risks attached to speculation, their only realistic marketing strategy is:

* To ensure as far as possible that coffee is exported when it becomes available for shipment; and

* Not to withhold coffee from the market unnecessarily and not to speculate, other than perhaps by selling forward when prices look reasonable.

In short, the market should be followed and not anticipated.

Any decision to deviate from these fundamental principles must take into account all consequences and costs, a number of which are not immediately obvious, such as loss of quality. As buyers know the usual crop and shipment pattern, later shipment, necessarily of older coffee of different quality, often results in a correspondingly lower price. If financing, storage and opportunity costs are added, the real carrying cost can reach 3 to 4 cents per pound per month, before the macroeconomic issues are even considered. If after a two-month withdrawal from the market 8 or 10 cents per pound more are realized, the exercise may hardly have been worth it. In the meantime a number of regular buyers may have been upset and may have turned to competing suppliers. Worst of all, overall risk exposure has been increased to unacceptably high levels.

Regular sales and exports ensure that the average seasonal price is obtained, regular foreign exchange receipts are maintained and overall exposure is limited. This policy also teaches buyers that although their partner may be small, that partner is dependable.

Marketing strategy needs to be defined at government and industry levels and its implementation should be supervised on a regular basis, for example by a national marketing committee. In addition to formulating and monitoring policy, such a committee should also guide marketing executives when necessary. Marketing decisions of great significance should not be left to just one or two individuals. Shared responsibility is important.

Marketing:

Successful implementation of a marketing strategy depends on respect for a number of basic objectives.

The marketing board's strategy is greatly influenced by the need to keep the coffee flowing out and the funds coming in. To achieve this, a reliable and regular export processing programme is required to ensure that the crop is processed in time to allow the execution of a proper sales programme. Coffee mills should not be switched on and off at will -- they are industrial undertakings and must be run as such. The milling schedule forms the basis of the sales activity. If 5,000 tons are produced each month, this is the approximate monthly tonnage to be exported and sales must be programmed accordingly.

The first objective is to identify sufficient markets and buyers who will regularly purchase the quality and the quantity of coffee produced. If the mills produce standard bulk qualities, the quest for buyers must take this into account. The buyer of bulk coffees has more generalized quality demands than small roasters or importers. Buyers are happy to accept a standard quality within certain limits of liquor quality, bean size and consistency. To ensure that their product is acceptable, marketing personnel have to know and understand buyers' requirements. As buyers' ideas about quality may change, marketing personnel should continually study these ideas and assess competitors' responses to them. Maintaining quality is not always easy, especially if quality controls are ineffective. Marketing is directly affected by the efficiency of agricultural extension services, processing, milling and research. Marketing personnel should therefore understand how these services are run and have some say in the formulation of their objectives.

Product knowledge in the marketing department and understanding of market requirements in other departments are therefore prerequisites for effective marketing. An annual visit by marketing personnel to overseas importers and roasters is not a luxury but a necessity. Senior staff of other departments should also visit overseas markets occasionally for updates.

The second objective is to ensure that contracts are efficiently executed. This requires good communications and an effective shipping and documentation department. Many excellent marketing efforts will be nullified if the execution of contracts is sloppy, if shipping periods are not respected or if shipping documents arrive after vessels have docked overseas. Failure to keep buyers informed on the progress of their shipments is often highly embarrassing. The after-sales service is as important as the selling process itself.

The third objective is to provide individual service by respecting buyers' requirements. Although it is difficult for bulk producers to tailor quality to individual specifications, they must at least provide an impeccable service to avoid having to compete on price alone. If buyers want to see advance samples of each shipment, they must be given them. If they want different lot sizes, markings and documentation, they must get them. Most important, they should be kept informed on production, processing and quality.

How are these objectives translated into regular business at reasonable prices? Although exporters may choose to obtain the highest price possible on every deal, they must bear in mind that if they expect a buyer to work with them on long term, they must also show some goodwill. While the stated objective is to sell at acceptable prices, in reality the crop must be sold no matter what.

The fourth objective is therefore to develop sensible, efficient pricing and decision-making arrangements.

If the aim is to dispose of approximately 5,000 tons per month, one cannot insist on the same price for all consignments. The regular buyer of 500 tons at a time should not be compared with an occasional buyer of 15 tons. Flexibility is of the utmost importance -- endless discussions are often held over minute price differences. If sellers always counter offer 1 ct/lb more and settle at "splitting the difference," buyers will take that 1 cent into account when they make the first bid. If sellers refuse to give price indications or to make firm offers, they are in fact saying either that they do not know the value of their products or that they have none available for sale.

Such attitudes may cause...