Custom Brewed Lifestyle The Booming Coffee Industry and Those It's Left Behind

Joshua Trujillo

Part 2: The Unfairness of Fair Trade


A lot of money is at stake. Nespresso is estimated to have an annual turnover of 4 billion euros. Despite the new competition, its profit margin is still around 25 percent; in Germany alone, it sells 2 billion pods a year.

Nespresso and Starbucks have awoken the sleeping coffee industry - and made it greedy.

Suddenly, the small profits from the mass-produced, 500-gram, vacuum-packed blends were no longer enough. Asia discovered coffee. Starbucks expanded, even into China, a tea-drinking country. And suddenly, a whole new group of people became attracted to a once staid industry.

IV: The Business

Peter Harf is like a German version of John Malkovich: Not much hair and lots of charisma, though he is a bit more jovial. The 71-year-old Rhinelander is currently the most powerful investor in the business. He is sitting in the gilded elegance of the five-star Excelsior Hotel near the Cologne Cathedral, where coffee is served in fine porcelain. Harf, though, seems to have little interest in the beverage. It wasn't passion but common sense that drove him into the coffee business.

Coffee is a raw material, a stable business with high returns. "Coffee will always be drunk," he says, "regardless of what else is happening in the world."

Harf runs the investment firm JAB Holding Company, which is worth billions. Within just a few years, it rose to become the third biggest coffee company in the world after Nestlé and Starbucks. One in five cups of coffee is brewed using beans from the JAB empire.

The flow of money into Harf's business never seems to dry up. His biggest investor is the Reimann family, one of the richest clans in Germany, which has already built an empire with consumer goods like Calgon, Finish and Clearasil. Now it wants to conquer the next multi-billion-euro market.

In 2012, Harf started to buy up coffee brands like Jacobs, Douwe Eberts, Senseo and Tassimo. The JAB portfolio now covers almost all sectors of the coffee industry, from producers of filtered coffee to pod suppliers to café chains and bagel bars, worth around 30 billion euros in total.

The regional companies that remain must now consider whether they want to compete with a company that is active across the globe, or simply give up and sell.

Harf's campaign of conquest is having a greater impact on the coffee world than the pod revolution did. It is becoming more concentrated, more global and more industrialized. JAB has merged several regional brands into a conglomerate that it is now imposing cuts to improve efficiency and profitability. He and his colleagues have "completely changed the industry," Harf says, "by taking on a leading global position." Harf likes to refer to things like "economies of scale." In less academic terms, it means that JAB is particularly skilled at capitalizing on its market power.

If a coffee company is acquired by JAB, that means that its suppliers face tougher conditions. Suppliers to JAB firms report that they are often only paid for green coffee after 180 days instead of 30 days. Those who don't agree to the new conditions are rejected.

The benefit for JAB is that while their suppliers are waiting months to be paid, they can already sell the coffee and invest the profits elsewhere - for example in further acquisitions. In this way, the suppliers are financing JAB's growth.

"The traders are basically paying an interest-free loan," says Sara Morrocchi, founder of Vuna Origin Consulting, which advises coffee producers. "In the worst cases, these costs are then passed on to the small farmers."

Harf disputes this. The companies in JAB Holding are committed to "sustainable and lasting relations with our more important supply partners." He says that "all sides profit" from the negotiated contracts. Indisputable, though, is the fact that JAB has thinned out its network of green coffee suppliers. Those deemed insufficiently competitive to the new owners have been weeded out.

The blueprint for Harf's activity is the beer market, which has been dramatically changed in recent years by a single global company. The Belgian firm AB InBev purchased brands in 150 countries, from the American brand Budweiser to Beck's and Franziskaner in Germany, reducing costs and increasing profits.

Harf was the chairman of the board at AB InBev for many years and he is even friends with the owners. What has worked so well with beer should also work with coffee, he believes.

V: The Consumer

Marisa Benvenuto and her sister Nadia took over the running of the family business from their father. Gian-Carlo was a pioneer of good taste when he emigrated from La Spezia in Italy to Hamburg back in 1959. He was just one guest worker among many, but in addition to working in the port, he began to supply espresso beans to Italian restaurants and ice-cream parlors. There was no competition back then and no one saw much opportunity in the business. Back then, German coffee culture consisted of filter machines and condensed milk.

In their store in Hamburg, the Benvenuto family sells expensive and extremely expensive espresso machines alongside their coffee beans, top brands like La Pavoni and Elektra that were originally intended for cafés and restaurants, but which slowly found their way into the kitchens of the upper-middle class.

Here too one can draw a parallel between the worlds of coffee and beer. As a reaction to the standardized flavors offered by the industry, a scene has arisen which not only values individuality, quality and taste but is also willing to pay higher prices: as much as 30 euros a kilogram for the right espresso mix and several thousand euros for the perfect espresso machine.

"The Germans," Marisa Benvenuto says, "take this incredibly seriously." They treat the purchase of an espresso machine like that of new car. Unfortunately, they also expect it to function like a car. "You can't just set up an espresso machine and coffee grinder and expect them to work the same way all the time," she explains. The way espresso must be ground and brewed depends on the weather, the temperature, the humidity, the mix and quality of the beans. Without a certain passion and knowledge, even the most expensive espresso machine can end up being a wasted investment.

Since the machines are only a side business for her, she sometimes advises customers against the purchase. "If you only want to drink an espresso now and then, a simple stove-top pot is a perfectly good way to make an espresso."

Although she's profiting from the boom, she's also critical of it. "The market lacks a middle ground," she says. At the top end, customers are being ripped off with huge espresso machines, overpriced pods, and questionable premium roasts. In the mass market, meanwhile, people are being sold cheap blends that have little to do with proper coffee.

For Benvenuto, the nice thing about a good coffee is that it combines indulgence and the everyday, a mix of class and mass. "A good espresso is a drink free of class distinction. A daily luxury for everyone."

VI: The Seal

Why is it that hardly any consumers are prepared to pay a little extra for fair-trade coffee, but so many are happy to pay multiple times the usual price for fancy pods?

It's the same when it comes to bananas, T-shirts or gold jewelry. Yet the injustice is particularly obvious with regard to coffee. And consumers have known about it for decades.

"Maybe that's also a problem," says Stephan Lessenich, the sociologist from Munich. Fair-trade coffee is "perhaps too politicized," reminiscent, for many consumers, of Nicaraguan coffee, left-wing or even communist projects.

Lessenich has little faith in the ability of thoughtful consumerism to help change the world. "Most people don't give any thought to consumer politics," he says. Indeed, despite all of their professed commitment to sustainability and justice, he says, most Germans aren't particularly bothered by all the misery in the world.

"At the end of the day, we couldn't care less about what effects our coffee consumption has on other people's lives," he says. "And if we do ever consume ethically, it's just to make us feel better about ourselves." Yet most Germans think they are model consumers, he says, at least in international comparison, simply because they separate their trash and think about buying an electric car.

But how fair is fair trade exactly?

Fernando Morales-de la Cruz, a Guatemalan living in Strasbourg, grows enraged when speaking about the fairness of fair trade. The fair-trade seal, one of the most famous certification logos in the world, often appears on brands like Darboven, Tchibo or Lidl. Morales-de la Cruz thinks it's all just an expensive placebo to soothe the consciences of Western consumers. In the end, he says, all it does is help industrialized countries secure more cheap sources of raw materials. It does little to address fundamental problems of fairness, such as the way Germany protects its roasting industry.

"Fair trade actually contributes to preserving poverty and child labor in the supply chain," Morales-de la Cruz says. "The fair trade premium is around a third of a cent per cup of coffee. How can such a meaningless amount be called fair?"

He suggests a transparent wage system, whereby workers on coffee plantations receive a minimum of 10 cents per cup of coffee. This is the only way to reduce poverty in the coffee-producing countries, he says.

The premium that fair trade pays coffee producers on top of the global market price is currently 20 U.S. cents per 454 grams of coffee. There's also a minimum price guarantee of $1.40 per pound of coffee, which currently is superfluous since the global price, which fluctuates wildly, is a bit higher than that benchmark. There are additional premiums for particularly high quality or organic products. It's rare for a coffee farmer to make more than 2 euros per pound, even with fair trade.

Last year a study showed that in the Brazilian coffee region of Minas Gerais, even workers on farms certified by various organizations earned around 300 euros a month, which is around 25 percent below a living wage.

Dieter Overath, head of Fairtrade Deutschland, Germany's fair-trade organization, thinks this approach is short-sighted. He doesn't want to boil down the benefit of the fair-trade seal to money. "By exclusively working with cooperatives in the coffee sector, we are giving back small farmers their right to self-determination," he said.

Many farms and cooperatives get multiple certifications so that they can meet, for example, both the AAA standard of Nespresso and fair-trade criteria. However, that doesn't mean the quality or taste is always good enough for the buyers. As a result, there is an absurd level of over-certification. In the period 2014-2015 around 560,000 tons of green coffee was certified as meeting fair-trade standards, but only 157,000 tons were sold with the fair trade seal.

"Fair trade always means that the added value moves from the north to the south," says Ndongo Sylla, who used to work as an adviser to Fairtrade Deutschland.

Sylla, who is originally from Senegal, is now one of the organization's biggest critics. "When surplus fair-trade products have to be sold as conventional products, then it's the rich consumers in the north who avail of the added value: they get fair trade products without having to pay a cent more."

VII: The Project

At the end of the day fair trade is simply tinkering with the symptoms of the injustice that will always prevail as long as one party only exports the green coffee and the other makes the profit from roasting and selling it. There is probably only one way to end this coffee colonialism: with coffee-producing countries roasting, milling, packing and exporting the finished product.

Felix Ahlers is trying to do just that in Ethiopia. The 51-year-old roasts coffee and espresso beans in Addis Ababa, which he then sells to supermarkets in Germany under the brand name Solino.

Ahlers' main job is running FRoSTA, a producer of frozen ready-to-eat meals that doesn't use any food additives. Ahlers is regarded as an unconventional thinker in an industry not known for its willingness to change.

"Ethiopia is the biggest green coffee producer in Africa," Ahlers says. "But the real money in coffee is only made when it's processed - and they don't do that in Ethiopia." That was what had to change, he thought.

By controlling the supply chain up to the final product, it should be possible to see 60 percent more in turnover. That will profit not just the coffee farmers, but everyone involved in production, from the women sorting the coffee beans, to the men who roast them, to the printer in Addis Ababa who prints the labels for Solino's bags of coffee.

"If you want to take development aid seriously, you need to do more than just pump money into a country," Ahlers says. It's about anchoring the supply chain there in the long term. And that means, above all, training Ethiopian workers such that their products meet the demands of the German market.

"The printer has to learn that the label will only work if the EAN code can be read by the scanners in Karstadt and Edeka. The roaster has to know that the quality of the beans has to always be the same. And there has to be someone in Ethiopia who knows how German customers tick and what they want."

Ahlers has been pushing ahead with the project for almost 10 years. He has secured start-up funding and machines, employed and trained roasters, got permits from the authorities and has constantly monitored the quality at every stage of the process. Officially he is just a middle man who imports the finished coffee into Germany and sells it on to Edeka and Karstadt.

For Ahlers, the calculations are simple. If all the coffee that Ethiopia exported was processed in the country, over 280,000 jobs could be created in the country. "That would achieve a lot more than a classic development project," he says.

But Solino is just one small project. Ahlers only imported and sold around 30 tons of coffee from Ethiopia last year. That's compared to the 200,000 tons of unprocessed green coffee that Ethiopia exports each year. Despite his efforts, coffee remains a colonial product in the country.

By Susanne Amann, Markus Brauck, Simon Hage, Nils Klawitter and Christoph Pauly

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