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"Chapter 16
1 This chapter is based on the case "Starbucks: Building a Sustainable Supply Chain," Graduate
School of Business, 2006. The authors acknowledge the help of Dub Hay of Starbucks and Eric
Poncon of Agroindustrias Unidas de Me~ico SA de CV in this study. -
392 BUIWING SUPPLY CHAIN EXCELLENCE IN EMERGING ECONOMIES
pany has continued to expand the number of retail stores worldwide, and has
Building a Sustainable Supply Chain 393
7 12,000
' 10241
6 Net Revenues 10,000 Number
5 ($ Billions) of Stores
8,000
4
6;000
3
4,000
2
1 2,000
0 0
2000 2001 2002 2003 2004 2005 ' 2000 2001 2002 2003 2004 ,2005
600 25
Return on,
500 Net Earnings 20 Equity(%)
400 ($ Millions)
15 14.3 ' 13.7
300
10
200
100 5
0 0
2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005
seen strong growth in the sales and net profits consistently(see Exhibit 16.1).
Since going public in 1992, its stock has appreciated more than 4,000% after
adjusting for stock splits.
In the 90's, the specialty coffee industry experienced gigantic growth, and
consumers in this' segment came increasingly from the educated class. How-
'ever, in the past few years a worldwide 'oversupplyof lower-grade coffee has
depressed the world's market prices, making it difficult for coffee farmers to
, earn enough revenue to cover the cost of production. Although Starbucks only
purchased the highest quality Arabica coffee and pays premium prices, all
farmers have been affected economically by the oversupply of coffee (Exhibit
16.2).
Starbucks was at a challenging point in its history. It boasted more than
10,000 stores - up from 676 a decade ago - 'and roasted 2.3% of world cof-
fee production. It opened an, average of four stores and hired 20q 'employees
each day. To support such a high growth rate, it is clear that an integral part '
ofthe company's future success would come 'from meeting increased demand
through a secure supply ofhigh-quality coffee beans. Coffee beans constituted
the bread and butter' of Starbucks' business, and the company had to ensure a
sustainable supply of this key commodity.Consequently,Starbucks partnered'
with Conservation International; an environmental nonprofit organization, to ,
develop C.A.F.E. Practices (Coffee and Parmer Equity Practicesj.to help con-
tribute to the livelihood of coffee farmers and to ensure high-quality coffee for
394 BUILDING SUPPLY CHAINEXCELLENCE IN EMERGING ECONOMIES
-450
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the long term.' This initiative was based on the notion that sustainablesupply
of high quality coffee beans depends on a stable source of coffee farms with
coffee farmers that are not exploited by their trading partners, have lands that
are fanned with environmentally sound methods, and have families that live in
healthy, secure and supportive societies. Such farmers would be more inclined
, and able to invest in productivity improvement tools and activities, and in their
communities, thereby contributing to being a source of stable and sustainable
coffee supply.
In 2005, Starbucks Corp. operated and licensed more than 10,000 coffee
shops in more than 30 countries. The shops offered coffee drinks and food
items, as well as beans, coffee accessories, teas, and CDs. Starbucks oper-
ates more than 5,200 of its shops in five countries (mostly in the US), while
licensees operated more than 2,800 units (primarily in, shopping centers and
airports). The company also owned and franchised the Seattle's Best Coffee
arid Torrefazione Italia chains in the US (more than 100 shops). In addition,
Starbucks marketed its coffee through grocery stores and licenses its brand for
other food and beverage products
Starbucks
Suppliers
Processors
Farms
Starbucks also purchased coffee through agents from individual estates, pro-
ducer associations, in addition to the suppliers or directly from the processors.
Exhibit 16.4
. C.A.F.E. Practices Self-Evaluation Checklist
Product Quality - Required
• Green Preparation - Prerequisite
• Cup Quality - Prerequisite
Social Responsibility
Hiring Practices andEmployment Policies:
_ MinimumlLiving Wage/Overtime Regulation *
• Freedom ofAssociation/Collective Bargaining
_ Vacation/Sick Leave Regulation
_ Child Labor/Discrimination/Forced Labor*
.Worker Conditions:
111Access to Housing, Water and Sanitary Facilities
It Access to Education
It Access to Medical Care
• Access to Training, Health & Safety
- - -
398 BUILDING SUPPLY CHAINEXCELLENCE IN EMERGINGECONOMIES
Conserving Biodiversity:
• Maintaining Coffee Shade Canopy and Natural Vegetation
• Protecting Wildlife
• Conservation Areas and Ecological Reserves
Water Management:
• Waste Management OperationsiBeneficial Reuse
Energy Use:
• Energy Conservation/Impacts
Dry Milling
Waste Management:
'. Waste Management Operations/Beneficial Reuse
Energy Use:
• EnergyConservation/Impacts
After the initial prerequisites had been met, suppliers were graded based on a
.set of environmental and social criteria. All suppliers were evaluated not just
ontheirperformance, but also their supply networks of farms. Farmers were
rewarded for coffee growing and processing practices that contributed -posi-
lively to the conservation of soil, water, energy, and biological-diversity, and
.had minimal impact on the environment. Alsc.workers' wages should meet
-or exceed the minimum requirements under local and national laws. Effective'
measures should be taken to ensure workers' _health -and safety, and provide
them with adequate living conditions. Based on their performance, ,as mea-
suredalong the environmental and social criteria, suppliers might earn up to-
100 percentage points in C.A.F.E. Practices.
Building a Sustainable Supply Chain . 399
For years, the Santa Teresa farm did well, enough by producing regular
extra-prime coffee rather than higher quality specialty grade. But that changed
when worldcoffee prices hit rock bottom several years ago. Ervin Pohlenz
3 On average, Starbucks pays about $1.20 per pound of coffee. (FY04 CSR Report)
4 This section is taken from Starbucks FY04 CSR Report Coffee Section.
400 .BUIWING SUPPLY CHAIN EXCELLENCE IN EMERGING ECONOMIES
Cordova, the son of the farm's owner, wasn't earning enough for his crops to
cover the farm's expenses. The farm nearly went bankrupt.
Cordova was introduced to Starbucks through his exporter and discovered
he could earn more by producing higher-quality coffee. Santa Teresa is lo-
cated in Chiapas, Mexico, an area known for its optimal altitude, fertile soil
and shade trees - perfect coffee-growing conditions. Some investments were
needed to improve quality and implement sustainable farming practices, a
commitment Cordova was willing to make, despite initial resistance from his
elderly father.
It took three years before the coffee.grown on Santa Teresa reached Star-
bucks quality. standards. Along the way, the exporter worked with Cordova on
implementing' quality improvements. In 2003, Starbucks signed a three-year
contract to buy all of Santa Teresa's high-quality coffee at premium prices and
added a provision that earmarks funds for social improvement and environ-
mental protection projects to benefit the farm, Cordova's accomplishment is
now the pride of his' father. . "
The Starbucks contract gives Cordova security in knowing he has a.buyer
for his future' crops and one that contributes to the quality of life on Santa
Teresa. "Now I feel that I will work my entire life as a coffee producer because
my farm is sustainable," he said. Clearly, Cordova's investment is paying off..
And for Starbucks, we gain a wonderful source of high quality coffee grown
under sustainable conditions. Cordova is a firm believer in C.A.F.E. Practices,
and his goal is to become a Starbucks preferred supplier in 2005.
The large pool of high quality suppliers would also smooth supply fluctuati~ns
by providing a basesupply of high quality growers. Sinte Starbucks' long pur-
chase cycle included signing purchase agreements before the crop had even
been harvested, any reduction in supply uncertainties and fluctuations could
lead to better planning of future supply in the form of faster procurement. The
benefits of the C.A.F.E. Practices initiative could also improve Starbucks' rep-
. -
utation among suppliers, which would make it easier to expand into purchasing
in different countries or locations.
In the long run, the C.A.F.E. Practices initiative also sought to buffer against
a form of Bullwhip effect that existed in the coffee industry supply chain. As
coffee sales increased during the 1990's with the growth of Starbucks and the
specialty coffee industry, suppliers and farmers began to respond with a huge
increase in the amount of land dedicated to coffee farming. This glut of cof-
fee beans on the market led to decreased prices and ashortage of high quality
coffee. This type of fluctuations and swings in price and supply was common
in commodity products that faced very.long supply response times. In order to
combat this price and supply volatility, the C.A.F.E. Practices initiative induced
longer-term supply relationships "with a consistent set of suppliers. Starbucks
wished that this program would reduce its susceptibility to such price and sup-
ply volatility in the global coffee market.
16.6.2 Marketing
On the marketing side; the C.A.F.E. Practices initiative supported Star-
bucks' goal to be a socially responsible company. While C.A.F.E. Practices
were not yet widespread and were not directly marketed to customers, an in-
creased awareness of Starbucks corporate social responsibility (CSR) practices
could help justify the premium prices that. Starbucks charged. The C.A.F.E.
Practices initiative would allow Starbucks to market its coffee as procured
through a highly selective process that ensured only the highest quality bean.
Awareness of this program might encourage other coffee roasters to join in
the C.A.F.E. Practices program; however, Starbucks would be known as the
inventor of the program. They might also be able to brand their practices and
sell the know-how to other roasters that were looking to implement similar ini-
tiatives. Such wider-spread expansion of the program would simply serve to
expand the benefits of the program towards creating a base of high quality cof-
fee beans. With each improvement in the supply of beans, Starbucks achieved
more flexibility in being able to charge premium prices at its stores. It also
improved employee morale by creating an atmospher~ of working at a socially
.. responsible corporation.
402 BUIWING SUPPLY CHAIN EXCEUENCE IN EMERGING ECONOMIES