Is Starbucks “Coffee That Cares”?

Douglas B. Holt*
26 January 2007

The Starbucks Corporation is working with its lobbying group, the National Coffee Association (NCA), to block efforts by a coalition of Ethiopian coffee producers to secure US trademarks on two of Ethiopia’s most valuable coffee brands—Sidamo and Harrar.[1] Ethiopia’s coffee coalition wants to own the trademarks in order to increase profits on these brands, which could substantially raise the incomes of the estimated 6 million Ethiopians who are dependent on the fine coffee trade. The coalition has successfully registered the trademarks for Sidamo, Harrar and Yirgacheffe in other important markets including the EU and Canada.

The coalition was able to get Yirgacheffe approved by the US Patent and Trademark Office (USPTO) before Starbucks and the NCA had time to act. Following the approval of Yirgacheffe, the NCA filed Letters of Protest—legal documents exceeding 400 pages—against the registration of both Sidamo and Harrar. On the basis of this protest, the USPTO has denied registration on Sidamo. The office’s decision on Harrar has not yet been announced.

Starbucks’ actions are not at all surprising for a big multinational company with aggressive profit targets seeking to defend its market position. However, Starbucks has recently convinced its customers around the world that the company is not your typical multinational. Rather, Starbucks is, as their ubiquitous retail brochures say, “Coffee That Cares.” Not so long ago, Starbucks was a very successful purveyor of espresso drinks, fine coffees, and snacks, but with little interest in social justice issues. In fact, in Starbucks founder Howard Shultz’ popular 1999 memoir Pour Your Heart Into It, which describes how he built Starbucks and the values he instilled in the company, coffee farmers are barely mentioned!

In response to intensive pressure from social justice NGOs to move to more progressive supply policies, Starbucks gave it a try. Lo and behold, they found that their well-educated middle-class consumers appreciated the move, enhancing their perceptions of Starbucks. So Starbucks flip-flopped. Of late, Starbucks has become a leading voice championing the economic interests of the many poor coffee farmers who produce its coffee. Starbucks presents its C.A.F.E. practices for dealing with coffee producers as the leading edge of socially-aware supplier policy, professing “our unwavering focus is on the coffee farmer.” Starbucks CEO Jim Donald visited coffee farmers on his recent trip to Ethiopia, which “..made me feel proud of what the company has already done together with farmers to improve the quality of life in these communities.” Starbucks is now selling Estima™ Fair Trade coffee, along with Ethos™ ethical water. On the Corporate Social Responsibility circuit, presentations by Starbucks managers of the company’s progressive supply chain policies are ubiquitous.

Regardless the company’s motivations, Starbucks’ new socially responsible positioning is highly commendable and quite profitable as well. The perception that Starbucks works hard to benefit its poor coffee farmers has become a valuable part of the Starbucks brand for the company’s educated middle-class customers. And Starbucks ethical positioning is meaningful not only to customers, but to its other key stakeholders as well, especially investors and employees. But when it comes to making the tough decisions, between caring and profit, does Starbucks really care?

If Starbucks were to live up to its “Coffee that Cares” values, the company would be championing the Ethiopian trademark project. It is one of the most innovative and promising initiatives in recent years to improve the livelihood of coffee farmers in less developed countries. Instead, management has decided to defend Starbucks’ market power and margins by working with its lobbyist to block registrations. When Oxfam recently called Starbucks’ bluff by launching an advocacy campaign, the company responded with a series of obfuscating statements and public relations stunts—from sending their CEO to Ethiopia to putting its Vice-President on YouTube—in an attempt to deflect attention and confuse the public.

A number of Starbucks’ competitors support the Ethiopian initiative and have already signed licensing agreements for the three Ethiopian coffee brands. It’s time for Starbucks to do so as well or face increasing skepticism about its ethical intentions. In this essay, I examine the accuracy of Starbucks’ claims to date. My analysis leads me to believe that the company is seeking to cover up its self-interested actions. Starbucks is not acting in good faith to benefit Ethiopian coffee farmers, as the company wants its stakeholders to believe.

Starbucks Claims

Claim #1: Starbucks was not involved in the National Coffee Association’s Actions
Starbucks has consistently denied any involvement in the efforts by the American coffee industry’s lobbying group—the National Coffee Association—to shut down Ethiopia’s trademark applications. Starbucks Vice President Dub Hay was quoted as saying that “we didn’t go to the NCA, they came to us.” Starbucks references the NCA as an independent third party that is fairly adjudicating the interests of Ethiopians.

This claim is implausible on its face since the NCA exists to advocate the interests of the big coffee marketers and a key part of the organization’s role is to lobby the government to advance the interests of its members. The NCA is beholden to the big coffee marketers that finance the organization and who fill its board and committees. Since Starbucks is far and away the most influential NCA member when it comes to specialty coffee issues, there can be no doubt that the company had the most influence in shaping the NCA’s actions. Further, the Ethiopian Embassy has compiled considerable insider evidence that Starbucks led the drive to deny the trademarks. In this case, though, we don’t have to rely on logical inferences and behind-the-scenes investigative reporting. It turns out that Starbucks’ Dub Hay, their go-to guy on coffee production, is the same Dub Hay who is the chair of the NCA’s Government Relations Committee.[2] Starbucks didn’t have to petition the NCA because their man was already in charge of the committee handling trademark issues.

Claim #2: Starbucks opposes the Ethiopian trademarks as a good faith effort to support the economic interests of the Ethiopian coffee producers.
This claim is also implausible on its face. The NCA, acting on behalf of Starbucks, has filed Letters of Protest to the Ethiopian trademark applications with the USPTO. According to the USPTO, such opposition proceedings are allowed if a party (Starbucks in this case) believes that it will be “aggrieved” (that is, economically injured) by the registration of a trademark. So the only way that Starbucks, via the NCA, could register its opposition, is to make a self-interested argument: that the Ethiopian trademarks would negatively impact the company. It is nonsensical to argue that the NCA filed its opposition to the USPTO in order to support the interests of the Ethiopian coffee farmers. Starbucks has continually hidden its corporate interests from media and public scrutiny. Implying that Starbucks’ actions are motivated by the interests of the Ethiopian farmers is simply incorrect. The NCA’s mission ensures that it cannot represent farmers’ interests.

Claim #3: Trademarks are illegal and not appropriate for Ethiopian coffee brands.
Starbucks continually argues that trademarks are not appropriate for Ethiopian coffee brands and that the conventional way to handle this sort of intellectual property is to use a certification mark. On YouTube, Dub Hay says that they are illegal.[3] However, USPTO policy clearly demonstrates that this claim is incorrect:

If consumers start to recognize [the Ethiopian coffee brand] as identifying a particular company or manufacturer or group of producers, the [brand] no longer describes only where the goods/services come from, it also describes the "source" of the goods/services. At that point, the [brand] has "secondary meaning" or "acquired distinctiveness." The primary meaning to consumers is the geographic place; the secondary meaning to consumers is the producing or manufacturing source. If a descriptive sign has "secondary meaning" to consumers, the sign has a source-identifying capacity and is protectable as a trademark. Because of this feature of U.S. trademark law, GIs can also be protected as trademarks or collective marks. There are many signs that meet the TRIPS definition of a GI that have been protected as trademarks in the United States for many years. [4]

Whether the three Ethiopian coffee brands meet this secondary meaning—“identify a particular group of producers” hurdle—is an empirical question. Prior to the NCA protests, the USPTO had already decided that Yergacheffe met the criteria. And, as a branding expert, my view is that the other two brands also meet the criteria as well (as well they should since they are not qualitatively different than Yergacheffe). In fact, Starbucks own promotion of Ethiopian coffees provides direct evidence in support of the trademarks. Starbucks does not promote Sidamo, Yirgacheffe, and Harrar as geographic regions. Rather, Starbucks uses these brands to describe coffees that are artisanal products deeply embedded in Ethiopian culture, and that are produced using unique age-old cultivation techniques. If Starbucks were acting in the interests of Ethiopian farmers, it would argue on behalf of Ethiopians that their coffee brands fit easily within existing trademark law rather than make facetious counterarguments.

Claim #4: Certification marks are more beneficial than trademarks.
Starbucks asserts that certification marks (similar to the controlled origin [AOC] marks used in Europe) would be more beneficial to Ethiopian farmers than trademarks. Certification marks require that the state (Ethiopia in this case) monitor production and “certify” that all products so marked are produced in accordance with the terms of the certification. For instance, Ethiopia would have to guarantee that all coffee marked “Sidamo” actually comes from land that has historically produced Sidamo, and that appropriate historic production methods are used. Any Western marketer, such as Starbucks, would be able to buy this certified Sidamo from any producers of certified coffee at individually negotiated terms and then could market the coffee to consumers in any way they deem appropriate.[5]

Before we address the particulars of Starbucks position, a foundational question must be raised: why should Starbucks have any say in how Ethiopian coffee brands are treated as intellectual property? Just as the Starbucks Corporation likes to make business decisions on how it should protect its intellectual property without interference from competitors or suppliers, the same should hold for the Ethiopian coffee coalition.

In the 24 months since taking this position, Starbucks has failed to provide a single shred of evidence or argument to back up the claim that certification marks would provide greater benefit to farmers. In fact, in a recent interview given to The Times, CEO Jim Donald stated that he did not understand the difference between the two kinds of marks. Meanwhile, the Ethiopian coffee sector has offered compelling arguments as to why they think certification marks would not be effective. As this claim is the most technically complicated, detailed unpacking is called for. My take on why trademarks are far superior goes as follows:

1. The purpose of the certification mark is not aligned with the goal of the Ethiopian coffee sector—getting a better price for their coffee.
The primary purpose of the certification mark is to protect traditional regional foods and beverages against counterfeits and copycats (e.g., “Basmati” rice produced in Texas, American “Burgundy”). This is not the problem on the table for Ethiopian coffee producers. They are concerned with the price they get for the coffee they grow. Ethiopian branded coffees get poor prices now because their producers have no market power. Certification marks would not give Ethiopians commercial control of their coffee brands and, so, would not enhance the producers’ power to improve their profits. With the trademarks, the Ethiopian coffee sector would be able to act as a single collective economic entity and would have complete commercial control of their coffee brands: distribution channels, communications, packaging, and pricing. Trademarking would give them desperately needed leverage in the marketplace, and hopefully allow them to garner higher prices over time. If Starbucks believes in good faith that certification marks can improve profits, the onus is on the company to make the argument how this would work. Otherwise, we should assume this is obfuscating rhetoric rather than the actions of a socially responsible company.

2. Certification marks are designed to defend valuable intellectual property, not to develop economic value.
Certification marks are of little help unless producers have direct access to consumer markets and have already established valuable brands. The Economist mentions French wines as a useful analogy. Let’s consider Bordeaux wines then: don’t wine producers do well with their certification marks? Some of them certainly do, but this has nothing to do with certification marks. The leading chateaux earn extraordinary sums because, through centuries of marketing, they have established extremely powerful luxury consumer brands (e.g., Latour, Lafite Rochschild, Haut Brion). As a result, these producers have tremendous market power and so can sustain high wholesale prices. The same cannot be said of Bordeaux producers that do not have a famous chateau brand. Bordeaux does not command a premium in the marketplace and faces slumping demand (some would say a crisis).

A better analogy is French cheeses, many of which also make use of AOC marks. Here in England, consumers have little knowledge of producer’s cheese brands, and so rarely value one producer over another. As a result, the marketing of these artisanal cheeses is controlled by the likes of Tesco supermarkets. Tesco has a high-end premium-priced range called Finest, and sells a number of the best French cheeses in this range. Because they have tremendous market power, Tesco can negotiate down the price it pays to individual cheese producers while at the same time use its dominating marketing efforts to convince consumers to pay super-premium prices. Tesco can extract favorable margins precisely because individual cheesemakers do not have established consumer brands and, so, they have little market power. The same holds true for other food and beverage categories with many small producers and dominant marketing companies in the middle of the value chain: the American beef and dairy industries for example.

The French cheese analogy holds for Ethiopian coffee except for one crucial difference: the French cheesemakers live in a rich country that provides price supports for its farmers and provides for the basic welfare of all its citizens. Ethiopian farmers live in a desperately poor and far more precarious Hobbesian world, and so they suffer greatly as a result.

3. Certification marks would be extremely costly to govern.
Ethiopian specialty coffees are grown in hard-to-reach areas by hundreds of thousands of farmers on tiny parcels of land. It is very difficult to certify all of this production. If the government had to do so, they would be forced to impose a significant tax on coffee production to pay for the certification, with no obvious benefit to the farmers. Rather than improving the livelihood of coffee farmers, certification would put them in a worse position.
4. Certification marks are unnecessary.
Certification make sense when counterfeiting is a significant problem. In this case, the super-premium coffee purveyors like Starbucks manage their supply chains with extreme care, often working directly with producers. Specialty coffee purveyors like Starbucks, Peets, and Green Mountain, and major distributors like Volcafe, are already informally certifying their coffee supplies. So there is no need for an independent certification program. By arguing for certification marks, Starbucks is supporting more financial burdens on the Ethiopian farmers, rather than helping them earn more money.

Claim #5: Trademarks will Price Ethiopian Coffee out of the Market
Starbucks has come out publicly in opposition to the trademark registrations, claiming that its opposition is driven by paternal concern for Ethiopian farmers’ interests. Starbucks first claimed that the trademarks would price Ethiopia out of the coffee market. But there was a basic flaw in this argument. The Ethiopian coffee sector coalition has been offering licensing agreements to all marketers of their coffees, including Starbucks, at no charge. Ethiopians want control of their brands so they can market them more effectively. If they do it well, ultimately they will make more money. But they will do so by collaborating with marketing partners, not by trying to jack up the price and hoping that someone will pay. The coffee coalition has already signed up a number of coffee marketers who have signed the licensing agreement, and are more than happy to work with Ethiopian coffee farmers on this basis.

Claim #6: Trademarks are Too Cumbersome
Starbucks seems to have dropped this argument and moved on to an even more implausible claim: trademarks are too cumbersome, leading to unnecessary transaction costs. This is a particularly odd argument for a company like Starbucks to make. One might wonder how it is that Starbucks is able to eke out a profit with the many dozens of registered marks that it holds. In particular Starbucks management apparently thinks it’s worthwhile to register its coffees whenever possible, including:

Komodo Dragon Blend - Gold Coast Blend
Light Note Blend - Café Verona
Café Estima Blend - Africa Kitamu
Yukon Blend

The Ethiopian coffee producers simply want to mimic Starbucks’ own preferred policy for dealing with intellectual property concerning coffee brands. For Starbucks to insist that Ethiopian coffee producers should not pursue the policies that have made Starbucks so successful is hypocritical.

Claim #7: Progress has been made with Ethiopia to protect Ethiopian intellectual property.
Starbucks sent CEO Jim Donald to Ethiopia in an effort to do public relations damage control. Donald met with Prime Minister Meles Zenawi, but the discussion yielded no progress on the trademark issue. The European press got the story right. The BBC, The Guardian and others reported that no progress was made. Starbucks has tried to counter these accurate reports in an attempt to create the perception that great progress was made. In a letter to the editor of The Guardian, Donald writes that the talks

“..were extremely constructive. We both want to see farmer communities benefit from the fantastic coffee they produce, and I was pleased that Mr Zenawi [sic] recognised the work we are doing through our integrated approach to coffee sourcing, our promotion of Ethiopian coffees around the world, and our commitment to paying a premium price for all of our coffee.”

While such vague niceties are standard for international diplomacy, they have nothing to do with the issue at stake—registering American trademarks on Sidamo and Harrar. The Ethiopians have been clear on their position: they want trademarks, not some “negotiated” alternative imposed by Starbucks.[6] And they are also clear on the outcome of the meeting: Starbucks continues to oppose trademarks.

Claim #8: Starbucks pays a significant premium over market price for Ethiopian coffees.
Another Starbucks media strategy is to frame their conventional coffee buying practices as Good Samaritan acts verging on philanthropy. The company continually proclaims that it is already paying “premium” prices for Ethiopian coffees. The company paid an average of $1.28/pound last year for its coffees, which Starbucks says is a “premium price” of 23% higher than the “New York C” commodity price. The company’s rhetoric leads unsuspecting readers to believe that the company pays a voluntary 23% premium for coffee. Rather, Starbucks paid $1.28 because that was the market price of the superior grades of coffee it buys. Starbucks had to pay slightly more than the average commodity price—perhaps 2-3% of the retail price—simply because this was the market price. Starbucks and its intermediary distributors bid against other companies. If Starbucks didn’t pay this price, then other specialty coffee purveyors would do so. What Starbucks doesn’t tell us is that this so-called “premium” price remains extremely low by historical standards, and barely allows coffee farmers to break-even on their costs, much less provide a sustainable income that can support families and communities. Starbucks is profiting handsomely by paying rock-bottom prices for some of the best coffees in the world, while at the same time bragging that they are going above-and-beyond to provide economic support for coffee farmers.

Claim#9. The Economist: Ethiopian government corruption means supporting trademarks is naïve.
The Economist has recently weighed in on this issue, but as a mouthpiece for Starbucks public relations rather than through a well-researched analysis of the type that the magazine is known for.[7] In an essay that appeared in their digital edition, the magazine parroted Starbucks position on certification marks, telling readers that they should accept Starbucks views because it is a large and successful business, while mocking Ethiopians’ ability to run their own businesses.

In a longer follow-up article that ran in the December 6, 2006 print edition, the Economist added a more considered argument, challenging the initiative due to the documented incompetence and corruption of the Ethiopian government. The magazine argues that it is naïve to support Ethiopian farmers with trademarks when the government is so corrupt and has failed to build the institutions necessary to support economic development. This is a “guilt-by-association” argument that would not hold up if only the magazine had investigated the details of the Ethiopian efforts.

The trademarks will be governed and managed by a coalition of Ethiopian coffee producers—coffee cooperatives, exporters, and producers. In other words, the trademark scheme is primarily a commercial venture, not a government boondoggle. The government’s only role will be to sit on the stakeholder committee in order to represent those smallholder farmers who are not directly affiliated with the larger organizations and, so, would otherwise have no representation. The coalition will be managed by veteran managers from Ethiopia’s coffee industry with assistance from Ethiopia’s Intellectual Property office. Since the coalition includes a number of large farmer cooperatives, the interests of the farmers should be well protected.

Ethiopia’s coffee businesspeople and cooperative managers are working creatively and industriously to grow the value of Ethiopian coffee in what is clearly an extremely challenging economic environment. Why should the policies of the government, good or bad, be used to justify an action by a US company to disrupt this important private sector initiative? While the Economist rarely confuses American businesses with George Bush, in this case, the magazine’s slippery rhetoric conflates Ethiopia’s small business owners and struggling farmers with the government. To deny Ethiopian coffee producers the opportunity to compete effectively in international markets because they have an inept government is the worst kind of defeatist self-fulfilling prophesy.

It is also advice that directly conflicts with the Economist’s longstanding position on development. The magazine has championed trade-not-aid as a development strategy in Africa, and has also been an articulate champion of brands (as in its famous Pro Logo issue some years back). Yet, in this case—in which a trade-driven development based upon enhancing indigenous brands comes into conflict with the profits and market power of multinational companies—the Economist falls back to a default position as champion of big business. If the magazine were truly concerned about economic development in Africa, it would be encouraging the trademarking initiative rather than condemning it with flippant and unresearched remarks.

What is Starbucks Really Up To?

Using Market Power to Shut Out Competition
Starbucks claim to champion the economic interests of Ethiopian coffee producers is disingenuous, an attempt to obfuscate the company’s true motivations. Starbucks is carefully guarding its economic interests and doing its best to muddy the issue so that the media and its stakeholders won’t pay attention. Starbucks opposes Ethiopia’s efforts in order to shore up its market position, not out of paternal concern for the plight of the African people.

For anyone with an MBA, Starbucks’ actions are easy to decipher. In every strategy course, students learn Michael Porter’s “five forces” model, which demonstrates the importance of controlling the value chain in order to extract maximum profits. Starbucks is acting as any rational profit-maximizing company would do. The Ethiopian brands are valuable economic assets that Starbucks is now able to use to enhance the value of its products at rock-bottom prices due to its dominant market position. Starbucks is using its clout to maintain this highly profitable situation, rather than let Ethiopian producers have a bigger piece of the pie. If Starbucks allowed the trademarks to be approved, the Ethiopian coffee sector could gain market power and ultimately whittle away at Starbucks’ margins. We don’t typically expect companies to voluntarily give up market power. Microsoft doesn’t usually lobby for laws that would benefit small software companies. This is business strategy orthodoxy. I’ve seen it taught at all the schools I’ve been associated with—including University of Chicago Graduate School of Business, Northwestern’s Kellogg School of Management, the Harvard Business School, the Said Business School at Oxford. We should assume that Starbucks behaves like all other companies in maximizing profits unless we have strong reason to believe that it is not beholden to the financial pressures of contemporary capitalism. Is there some reason to expect that Starbucks would operate differently?

CSRwash: Playing Russian Roulette with the Starbucks Brand
While Starbucks is behaving in orthodox fashion, in this case, it’s the wrong business move. Starbucks management made a bet on the Starbucks brand some years back: judging that repositioning the company as one of the leading socially responsible companies with a proactive commitment to economic justice for its poor coffee farmers would win accolades and enhance brand equity. They were right. In this case, doing good has been good for business. But this strategy comes with significant entailments. Starbucks now must walk the walk, even if it means occasionally making economic sacrifices. If they don’t, they subject the company to a much greater risk—that its millions of customers, employees, and shareholders will perceive that Starbucks is a hypocrite, willing to milk their stakeholders’ values and good intentions in order to make a buck. If that happens, people will desert the brand in droves. CEO Jim Donald and his top management have ignored this tremendous threat to the Starbucks brand, betting that they can use their PR muscle to keep their stakeholders from truly understanding the issue on the table. In so doing, they are playing Russian roulette with the Starbucks brand. Ironically, Starbucks’ anti-development stance may well lead to a much greater impact on profits than any increase in commodity prices the company might encounter were they to support Ethiopia’s cause. And there is a positive flipside that management is also ignoring: supporting Ethiopia in good faith would win Starbucks many fans, the quickly expanding group of ethical consumers and investors who are now fence-sitting, waiting to see if Starbucks is as holy as it claims to be in its promotions.

The Ethiopian coffee trademarking initiative is a promising and innovative private sector strategy to increase the value of one of Africa’s most important exports. Many of Starbucks’ retail competitors understand the importance of this initiative and are signing licensing agreements for the three Ethiopian brands. It’s time for Starbucks to sign on as well, or it will soon be the ethical laggard in its category.

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*Douglas B. Holt is the L’Oreal Professor of Marketing at the Said Business School, University of Oxford. He previously taught at the Harvard Business School. He has published widely on branding, including How Brands Become Icons: The Principles of Cultural Branding (Harvard Business School Press, 2004), and several articles in the Harvard Business Review.

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[1] See my essay analyzing Starbucks’ actions and their consequences at www.sbs.ox.ac.uk/starbucks.
[2] http://www.ncausa.org/i4a/pages/Index.cfm?pageID=371
[3] http://www.youtube.com/watch?v=dteTrEM7mlM
[4] http://www.uspto.gov/web/offices/dcom/olia/globalip/pdf/gi_system.pdf
[5] see http://www.uspto.gov/web/offices/dcom/olia/globalip/pdf/gi_system.pdf
[6]http://www.ethiopianembassy.org/TradeMarkCampaign/PressRelease_Ethiopias_PM_Meets_With_Starbucks_CEO.pdf
[7] See “Starbucks v Ethiopia: Storm in a Coffee Cup” November 30, 2006.