#72 | Re:co Podcast - Vera Espindola Rafael on Markets in Producing Countries (S4, Ep. 2)

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Today, we’re very happy to present the second episode of “Growing Consumption: Letting Go of Sameness,” a session recorded at Re:co Symposium this past April. We’ve grown accustomed to specialty coffee consumption growing at a fast pace, but some signs indicate it may be slowing. This session convened experts to ask: What could we stand to gain if we became more diverse in our approaches and offerings?

If you haven’t listened to the previous episode in this series, we strongly recommend going back to listen before you continue with this episode.

As the majority of specialty coffee consumption lies in the US, EU, and East Asia, “producing” countries have solely - and strategically - focused on export, intending to increase demand in “consuming” countries. However, the main cities of Brazil, Colombia, Mexico, and Rwanda, have all seen an increase in specialty coffee shops and overall coffee culture, following the steps of the waves of the coffee industry. In some cases, with the current low coffee prices, it has become more attractive for coffee producers to sell their coffee on the national market, where the price they receive for their coffee is higher than or equal to that of exporting. Are these markets enough of an opportunity for specialty coffee growers? What is the real potential? Should producers invest their efforts in their countries, and what can the sector do to facilitate these opportunities? Vera Espindola Rafael shares the intriguing early results of a study into domestic consumption of specialty coffee.

Special Thanks to Toddy

This talk from Re:co Boston is supported by Toddy. For over 50 years, Toddy brand cold brew systems have delighted baristas, food critics, and regular folks alike. By extracting all the natural and delicious flavors of coffee and tea, Toddy Cold Brew Systems turn your favorite coffee beans and tea leaves into fresh cold brew concentrates, that are ready to serve and enjoy. Learn more about Toddy at http://www.toddycafe.com.

Full Episode Transcript

0:00 Introduction

Peter Giuliano: Hello everybody, I’m Peter Giuliano, SCA’s Chief Research Officer. You’re listening to an episode of the Re:co Podcast, a series of the SCA Podcast. The Re:co podcast is dedicated to new thinking, discussion, and leadership in Specialty Coffee, featuring talks, discussions, and interviews from Re:co Symposium, the SCA’s premier event dedicated to amplifying the voices of those who are driving specialty coffee forward. Check out the show notes for links to our YouTube channel where you can find videos of these talks.

This episode of the Re:co Podcast is supported by Toddy. For over 50 years, Toddy brand cold brew systems have delighted baristas, food critics, and regular folks alike. By extracting all the natural and delicious flavors of coffee and tea, Toddy Cold Brew Systems turn your favorite coffee beans and tea leaves into fresh cold brew concentrates that are ready to serve and enjoy. Learn more about Toddy at toddycafe.com. Toddy: Cold brewed, simply better.

Re:co Symposium and the Specialty Coffee Expo are coming to Portland in April 2020. Don’t miss the forthcoming early-bird ticket release – find us on social media or sign up for our monthly newsletter to keep up-to-date with all our announcements.

Today, we’re very happy to present the second episode of “Growing Consumption: Letting Go of Sameness,” a session recorded at Re:co Symposium this past April. We’ve all grown accustomed to specialty coffee consumption growing at a fast pace, but some signs indicate it might be slowing. This session convened experts to ask: What could we stand to gain if we became more diverse in our approaches and offerings?

If you haven’t listened to the previous episode in this series, we strongly recommend going back to listen before you continue with this episode.

As the majority of specialty coffee consumption lies in the US, EU, and East Asia, “producing” countries have solely – and strategically – focused on export, intending to increase demand in “consuming” countries. However, the main cities of Brazil, Colombia, Mexico, and Rwanda, have all seen an increase in specialty coffee shops and overall coffee culture, following in the steps of the waves of the coffee industry. In some cases, with the current low coffee prices, it has become more attractive for coffee producers to sell their coffee on the national market, where the price they receive for their coffee is higher than or equal than that of exporting.

Are these markets enough of an opportunity for specialty coffee growers? What’s the real potential? Should producers invest their efforts in their own countries, and what can the specialty coffee sector do to facilitate these opportunities? Vera Espindola Rafael shares the intriguing early results of a study into domestic consumption of specialty coffee.

Also, to help you follow along in this podcast, I will chime in occasionally to help you visualize what you can’t see.

3:00 Coffee producing countries need to grow their domestic consumption to keep more value of their coffee’s value within their countries

Vera Espindola Rafael: Good morning. Part of the story of this talk starts for me many years ago. I was a development economist and studying at this university and they invited to invited me to this research team and this research team was studying the distribution of value within the coffee supply chain. For me, at the end of this study, what most was most surprising to me was the actual value going to the producer. Fast forward to last year I was reading the coffee barometer and the following sentence actually captured me. It said, “currently the average reading coffee expert value is less than 10% of the 200 billion revenues generated in the coffee retail market,” and exactly it’s this percentage that again just left me star-struck to say, because it was again the same question I was asking myself years before.

How can we capture more value within these producing countries? So many of the producers are always looking for different market opportunities and it’s within these market opportunities that they’re trying to obtain a certain price which enables them to give that return of investments with a specific profit margin. Many of these exporting countries are focused on exporting their product because the majority of the consumption lies within the US, Asia, and Europe. Many of these exporting countries have strategically invested in specifically positioning their coffee in those consuming countries and those can be from different sort of angles. You have environmental condition of environmental characteristics, for example as Costa Rica, or attributing a certain value to their specific coffee, for example, good quality coffee in Colombia all with the specific intention to create a larger demand for the coffees, for these buyers and consumers. Now within the following study of PROMECAFE, which is a coffee program in Mesoamerica, part of the IICA, which is the Institute of Inter-American for Cooperation on Agriculture. Within the study, the following was shown: Costa Rica exports 51% of their country to one particular country followed by El Salvador which exports 41% after coffee to one particular country. This actually shows that the countries are highly dependent on consumer habits of that particular country. Honduras in this matter showed that we’re more diverse. Only 27% off the coffee went to that particular country. So that’s much more different market outlets for the rest of their coffees. So, the question was for me what about the consumer habits within these countries. How was specialty coffee evolving? Could specialty coffee actually be for producers a viable option would in these countries? Let me show you the following.

Peter Giuliano: Vera has just started a video titled, “Consumption in Producing Cities.” While the music plays, we’re seeing images of some of the specialty coffee cafés she visited while conducting research. From Mexico City, there’s Almanegra and Cucurucho. In Guadalajara, there’s Pareal El Terrible Juan Café, and 66 Cold Brew. From Bogotá, Colombia, we see Azahar and Varietale. And in Brazil, we see Baden Torrefacao Cafés Especiais in Porto Alegre, UM Coffee in Sao Paolo, and Como Em Casa in Manuas City, Amazonas. All of these cafés have the visual signifiers we’ve come to expect of specialty coffee cafés: precision equipment, striking design, and professional baristas.

While we see these images, Jesús Salazar, a coffee entrepreneur from Mexico, speaks:

“Over the last ten years, we’ve seen a growing interest of professionals and consumers in differentiated coffees. This curiosity is directed or has very diverse expressions, every time more manual filter coffees are consumed versus automatic filtrations. As always, the espresso or the drinks with milk are appreciated, although every time with more stringent requirements and, on the part of the consumer, they demand more when it comes to the presentation, the quality of both the coffee and the milk itself.”

8:20 Brazilians, Mexicans, and Colombians are consuming a lot more of their own coffee

Vera Espindola Rafael: So, these cases have been largely based in Brazil, Colombia, and Mexico. Now, what is most remarkable of these types of cafes, it’s called specialty coffee cafes, that they’re not only located within these capital cities, not even only metropolitan areas, which are off their often actually also now developed outside these areas. Let’s take a closer look within these countries itself. When it comes to Brazil coffee consumption Brazil is a mature market.

Peter Giuliano: Vera is showing a chart of green and roasted coffee consumed per capita in Brazil.

Vera Espindola Rafael: Coffee has been hugely popular over the last few years of the last more than a decade actually and according to the latest numbers of ABIC which is the Association of the Coffee Industry within Brazil, coffee has been increasing in consumption around 3 to 4%. Within the period of 2003 and 2009 Brazil had actually its largest increase and this is due to a certain economic stability within the country itself as well as higher wages. It was these higher wages that actually allocated this lower social class which were around 20,000,000 Brazilians to a new middle social class, and this new middle social class attributed actually to around 95,000,000 Brazilians. What did it actually mean for coffee consumption? Well, this specific middle social class grew in 2003 which was around 37% to the share of consumption value all to 42% and its exact same period. The out of home market grew tremendously and very rapidly, and it grew more than 170%. Consumers nowadays in Brazil are consuming 21,000,000 bags which is around six kg per capita. And not only this, they’re actually having much more young people consuming very frequently during the day coffee. It’s this age group between 16 and 20 years old which has contributed to this. Now consumers are often, the ones that are drinking coffee outside their homes are looking for that quality coffee. But it’s not only these consumers that are looking for quality coffee. In general, what they were looking for is quality, practicality and diversity within their coffees and it’s exactly in that practicality angle which in Brazil they’re creating a huge value for their markets because practicality comes in with capsules, and it’s estimated by 2019 that this capsule market has a value of more than US$715,000,000.

Let’s look at Colombia. So, coffee in Colombia is a very important crop. In 2018 according to the numbers of FNC, they have been producing 13.8 million bags and they’re exporting 12.6 million bags. What’s very interesting in Colombia is that they started in 2010 with a consumption campaign which is called Toma Cafe and the particular angle of this program was to focus on diverse recipes of coffee but also creating a pattern where you could always drink coffee on any time of day on any time of occasion and this was an important contribution towards that consumption habit of drinking coffee. The reach from in 2009 when they were drinking around 1.2 million bags of coffee to 2017, 2015 sorry to 1.7 million bags. Nowadays, Colombians are drinking 1.8 million bags and because of this increase of consumption, they actually had to now import more coffee from other countries in order simply to supply that consumption. In 2018 they imported now 700,000 bags which was a tremendous increase from the year before.

So, what about Mexico. So, Mexico has been grown in the last three years within consumption’s itself, but the production numbers are far more interesting. Unfortunately, in 2015 we had a huge dive within the production numbers. Nowadays, the production has grown to almost 3.8 million bags according to the numbers of ANICAFE. In 2015 is was around 2.2 million bags. According to the latest study of Euromonitor for Mexico which was performed in 2017 consumption at the time was 2.8 million bags which was around 1.4 kilos per capita in Mexico. In 2018 we did an exercise with ANICAFE and it showed Mexican consumers were drinking now around two million bags.

13:20 Specialty cafe owners in Brazil, Colombia, and Mexico are motivated by offering their customers the best coffee their countries have to offer and pay sustainable prices to their producers. The producers find business is easier selling to cafes in their own country.

Vera Espindola Rafael: So, what does this mean actually for specialty coffee and what does it mean for these producers? So, I interviewed within the months of March and Feb cafe owners as well as producers. They were selling their coffee as specialty coffee. These were different types of producers from small to medium. Some of them are selling their coffee around 30% as specialty, including both national and export. Others were selling all the way up to 80% or 90% solely as specialty coffee. Just as a reference point I mention here the ICL composite price for 2019 which in Feb was US$1.01 a pound and the one in March was US$0.97 a pound. Let’s have a look at Brazil. So again, these are producers that have specialty coffee and sell their coffee on the national market. On average, from the case cities that I interviewed it was an internal price of US$1.25 a pound in comparison to the export price which they were selling around US$2.55 a pound. Within the calculation of the export price for Brazil which I also took into consideration was now the recent Transparent Trade Coffee Guide. So, it’s very interesting to see that the specifically internal market price has being well-calibrated so to say.

Let’s look at Colombia. Colombia at that time had an internal price of US$1.86 a pound among the case studies that I took into account. The export price for this particular coffee was around US$2.52 a pound. Let’s take a look at Mexico. Again, these are producers that have specialty coffee and sell it on the internal market. In Mexico, we had an average price of US$3.87 a pound and the export was US$3.08 a pound. For them, it’s very profitable to just sell on the internal markets. So, what does this actually mean for the future of these producers? When interviewing these cafe owners, they’ve often explained to me they have a certain vision when it comes to these coffees on the national market. It’s simply for them being able to buy the specific coffees and wanting them to sell these coffees on the national market the best quality coffees of their countries to their consumers within their environment. Often, for these producers, it’s also much more easier to do business with their fellow citizens, with their fellow colleagues of the industry. Business becomes easier as you talk the same language, you share the same culture. So, the majority of these cafe owners believe that they can actually continue sourcing, confirming this direct trade model of these producers and it’s also certain vision that these convey owners carry with them because they see what kind of challenges these producers have within the environments they are in within these producing regions. One of the cafe owners, for example, even said to me the following, he said I paid this price so that the farmer can pay the workers fairly because when talking to the farmer he actually understood that in order to comply with the specialty coffee requirements he needed to pay a bit more in order to pay the workers as well and so this interaction directly of understanding very quickly what’s going on has led to these assumptions from cafe owner saying I want to contribute actively too in order to get these coffees in. Another comment that was made was the amount of dedication and time the farmer spent on this farm is worth this price.

17:50 Even though Brazilians, Colombians and Mexico’s have a GDP per capita of less than US$10,000 per annum, many are willing to spend their money on specialty coffee

Vera Espindola Rafael: So, what does it mean on a larger scale? How is this really a potential within these countries? For this, we need to look a bit closer to the country itself. In Brazil, we have a population around 200 million people. The majority of the people, around 85% live in these urban areas. 60% off this population is within the age category of 15 and 54 and they have a GDP of around US$9800. Colombia. Colombia’s 49 million people again also 80% of these people live in urban areas and also for them they have an age group of around 60% between 15 and 54 and the majority within 25 and 54 years old. GDP Here is more than US$6000. Let’s look at Mexico. Mexico has a population of over 29 million people Also here the majority live in urban areas, around 80% and around almost 60% is in the age group between 50 and 54 and the GDP is around US$9000. So, it was interesting to see is that actually again coffee to produce a pretty inelastic product as if people with their salaries and with their income they’re able to pay for these coffees.

So, what does it actually mean when they are consuming and are spending on coffee? On average what we have seen is that for a beverage like espresso in Brazil, you pay US$2 and in Colombia US$1.5, and Mexico US$1.9. A cappuccino goes for US$2.5 in Brazil, US$1.8 in Colombia, and in Mexico for two and these are prices that I got from the specialty coffee cafes over part of the case studies itself. On the filter beverage, we see for Brazil US$3.5, for Colombia US$1.8, and from Mexico US$2.2. So, as we can see, people with these incomes are able to spend and are willing to spend for their coffees this particular price. So, let’s hear more about the habits of these consumers particularly from Mexico.

Peter Giuliano: Vera’s new video starts with the question, “What are the consumer habits in Mexico?”, before focusing on two men sitting on a bench near some lush tropical plants outside of a coffee roastery. You can see a colorful mural on the wall behind the coffee roastery. They are Fabrizio Sención Ramirez and Jorge Sotomayor, co-owners of Sublime specialty coffee roasters in Mexico.

As Fabrizio speaks, we see some images of Sublime’s coffee packaging on a shelf. It’s whimsical, featuring animals wearing different styles of hats. Later, we’ll see images of specialty milk drinks being made in Sublime’s café.

“In Mexico, we have witnessed how consumer habits have changed. Locally, we have gone from serving coffee to people who came to visit us just to be in a quiet place, to people who visit us specifically to try something new or to understand specialty coffee a little better. The most consumed beverage in our coffee bars is coffee – black coffee or coffee with a little water. In second place would be coffee with milk and additives. People definitely value the product more and more; they realize what is done in Mexico is of quality and that it has a lot of potential. I think that has also been one of the stellar brand values that tries to highlight what is produced well in Mexico and we in our bar give that message to our customers.”

22:00 Despite these strengths, coffee is still a niche segment with low volume. But Vera believes there is scope to develop these specialty coffee industries further.

Vera Espindola Rafael: So, can this willingness and can these consumer habits actually be that potential and be of skill because that’s the question. So, let me recap on what I’ve just mentioned. So, the producer obviously very motivated. They have seen this uptake within their countries, and they have seen actually a different type of income that they’re generating. Also, what they’ve seen that’s actually less paperwork, less admin. It’s for them easier to sell this coffee on that national market and what we also see within these countries that there’s this large potential consumer group and what we’re seeing as well that there’s also certain willingness to pay for it but also the flip side. At the end of the day, it’s still in these segments, low volume and what we are also hearing from these interviews is that they’re also inconsistent coffee orders. So, there’s no frequent coffee orders throughout the year and sometimes it’s even in the cases that they say I would like to have a certain coffee but then buy six months later and an important one as well that for these countries, citizens are also worried about the certain conditions which a certain country has, and that instability leads to that sort of uncertainty.

What also, as mentioned by specifically the small/medium entrepreneurs, that the credit schemes they have, they don’t have that much access to it. So, setting up a business, starting up a business is quite difficult, even expanding it. However, can then with these circumstances, can this specialty coffee grow much more within these countries and is there that potential and is there that skill? I actually think so. So, from what we have seen for mature markets as Brazil and campaigns in Colombia that have been focusing on creating much more coffee consumption. We can see that it actually pays off with these campaigns and with the support you can see that coffee consumption have increased and this can actually be that motivator that special coffee needs because it can benefit from these campaigns when these campaigns will focus specifically on specialty coffee and specifically on explaining to consumers what specialty coffee is and what it entails in terms of production. At the end of the day, what we’re seeing is that and all of this these cafe owners with their staff are creating a certain change and a certain change in consumption pattern of these consumers to explain to them what specialty coffee is and what specialty coffee production looks like. These café owners with their staff they’re becoming those influencers within the equation of adding that added value to the consumer, to the producers and it’s this particular added value which producers are receiving which are able for them to secure the livelihoods of their families and their communities. So, they’re willing and these countries have a huge potential. The question is, can we continue to build on this?

Thank you.

25:30 Outro

Peter Giuliano: That was Vera Espindola Rafael at Re:co Symposium this past April.

Remember to check out our show notes to find a link to the YouTube video of this talk, a full episode transcript, and a link to speaker bios on the Re:co website.

This has been an episode of the Re:co Podcast, brought to you by the members of the Specialty Coffee Association, and supported by Toddy.

Re:co Podcast, ListenSCA StaffSeptember 30, 2019Re:co Symposium, Re:co 2019, Farm Profitability and Economics, Price Crisis

#72 | Re:co Podcast - Vera Espindola Rafael on Markets in Producing Countries (S4, Ep. 2)

Special Thanks to Toddy

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