Starbucks Execs' Responses to Shareholders' Questions

Starbucks Coffee Company hosted its 2007 Annual Meeting of Shareholders on Wednesday, March 21, 2007 in Seattle, Washington at the Marion Oliver McCaw Hall at the Seattle Center. Following is an unedited script (prepared by myself) of a portion of the Q&A session that is directly related to the coffee trademark dispute between Starbucks and Ethiopia.

Another investor, Bruce Herbat, President of Newground Social Investment, also expressed his concerns over Starbucks’ influence of the National Coffee Association to oppose Ethiopia’s trademark application. Herbat mentioned this in relation to his question about Starbucks’ transparency with respect to spending company finances for political contribution but it was not addressed by the executives.

According to Starbucks' website, the audio webcast will be in archive until April 25th at: http://investor.starbucks.com/phoenix.zhtml?p=irol-eventDetails&c=99518&eventID=1403060
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Q. Thank you, my name is Wondwossen, an Ethiopian, living here in Seattle. I have been following the controversy over the trademark issue between Starbucks and my country, Ethiopia, for the past several weeks. Well, the intent of Ethiopia - Ethiopia's intent - was for Starbucks to acknowledge Ethiopia's coffee marks and to sign the licensing agreement. Today, I learned that "the intent of Starbucks was misunderstood" and I understand that. But [only] last week, Ethiopia's [farmers and] farmers' organizations asked Starbucks to come to the table and sign the licensing agreement. Will you be signing the licensing agreement?

After publicly discrediting Ethiopia’s effort as illegal, you then acknowledged that your information about the legality was simply not accurate. My questions will be [then], don't you have a moral obligation to sign the licensing agreement as a step forward to reconciliation?

A. [Jim Donald] Thank you. I appreciate that question very much. I wanna first say that for decades, Starbucks has engaged in developing positive relationship with farmers and heads of states. We are engaging now with talks with Ethiopian government to reach the same goal. What we both agreed to and what we have to make sure is that goal, that agreement guarantees that region, that Yirgacheffe certification is from that area; number two is that the premiums get to the farmer. And we currently had two meetings with the Ethiopian government and we are in fruitful discussions now with them.

We recognize that it's not necessarily the legal issue and I believe we had a partner in Ethiopia say that; this is an issue that we want to make sure we, with the Ethiopia government, share that same goal & vision of providing income to the farmers and recognition for the cert hmmm regions that the coffee is grown in.

Q. Hi I am Larry Dohrs of Newground Social Investment here in Seattle and a Starbucks shareholder. Our company Starbucks is perhaps unique among large corporations in facing reputation and brand risk providing us a dozen experiences whose appeal goes far beyond the actual contents of the coffee cup. Mr. Schultz acknowledges as much in his recent not-so-internal memo. It’s particularly dismaying to see stories in the Wall Street Journal, Fortune Magazine, Us News, and World Report among many others that depict our company in a negative way in its dispute with the Ethiopian coffee growers. Starbucks has been reactive, not pro-active; trailing, not leading and this issue is still dragging on and it’s very unfortunate. We have highly credible social justice groups from Oxfam to Coop America, and Lutheran World Relief joining with a mushrooming movement in University campuses to support our Ethiopian suppliers and one wonders, where would it end. As a long-term investor it is pretty easy to see the business downside of Starbucks position on this issue. Is there business upside? Can you help us understand the business rationale for persisting in a public dispute with impoverished growers in a historic birthplace of coffee itself? Can you give us insight into the cost-benefit analysis you’ve been doing?

A. [Jim Donald] I think Larry, thank you very much for the question. I think the business rationale, as I mentioned, as I tried to mention, what I didn’t get a chance to mention is, as you mentioned Ethiopian...our business Ethiopian farmers – East Africa for that matter – is up close to 400% over the last two to three, to four years as the price we have paid is up about 50%. Getting ahead of media today is really an art and it is a science too. We have YouTubes breaking left and right and we have people basically giving their opinions. What we are working on is being proactive in that area through the due diligence of all media [umm] venues 24 and 7 but the fact with the matter is the business model is still strong. And the business relationship with farmers all over the world is as strong as it has ever been as is the price and the premium that we are paying to the coffee. So that piece of it, what we are looking at improving how we, how we, how we, appear we are still continuing to our best efforts in driving as we mentioned today doubling the size of the company over the coming four-five years.

[Howard Schultz] Let me add something to that. You know, I think that what you have just brought up in terms of the media issue is - and perhaps the downside and the shadow over the company - I think that is accurate. By the same token, just past month, Starbucks is voted and named by Fortune Magazine the second most admired company in the United States of America – after GE. [Applause] However, our success in any measures is not an entitlement. This is, perhaps of all the things we’ve dealt with recently over a fragile issue and difficult issues to explain and are also things that aren’t for public domain in terms of can we, as you said, can we be assured that any premium or licensing fee of any kind will go to the farmer? Can we be assured that if in fact a country or government did control a mark, it won’t be sold something at some point to some other entity and how can we be assured that a coffee is coming from that specific region.

One thing that I think is little confusing here is, that I just want to say is, that there are many coffee companies, some of our contenders, that don’t use these marks at all. If you think about what we’ve done for 25, 35 years is we have helped tell a story of Ethiopian coffee in a way that perhaps they can’t on their own to help elevate the image of the country and do it in a respectful way. We have contenders for example that don’t use the Sidamo name or the Yirgacheffe name because they don’t want to be bothered with anything like this. Also it is important to note that Starbucks only buys 2 percent of our coffees from Ethiopia and we buy 2 percent of Ethiopian coffee in total. We have a competitor that has signed the licensing agreement. Well, when you examine that, they buy one container a year so it is no big deal; we buy 400 and at the end of the day what we are trying to do is to build a long term sustainable and enduring relationship with the Ethiopian government with regards to this issue that is specifically pro-farmer. It is very difficult to hear the voices of the farmers in this dialogue who are benefiting from practices we had in that country for two decades. It is very difficult when they are being drowned out by government voices and an NGO, and by the way, we learned that perhaps one of the reasons the NGO is involved in this is that this is their membership drive and perhaps Starbucks is being used as a foil. So you don’t really know, I mean, there are a lot of issues that are difficult to get at. I can only tell you that as we stand here before you, we are highly conscious and sensitive of the issues, and we will do the right thing that most importantly, at the end of the day, that will be pro-farmer. [Applause]

Q. Hi I am Matthew, I am in Boston and I am also very interested in the welfare of African farmers. I have been following closely the stories in Ethiopia and my question is that it is very difficult to understand why they have chosen the direction they have for me first in terms of trademark over certification and one of the arguments that was apparently raised was that it is unfeasible, they believe it is unfeasible to actually apply a certification regime in a developing country like Ethiopia. And that leads to the question about traceability … just about three little points about that, could you comment about the connection between traceability and improvement of quality in a country like that; secondly, to what extent are you able to achieve traceability of the origins; and thirdly, what your goals in that area, how do you see that improving in the future?

A. [Jim Donald] That is a great question, Dub are you, could you get [this question]…
[Howard Schultz] This is Dub Hay our senior VP, coffee buyer ...over 30 years…

[Dub Hay] Thanks for the questions. To site by way of examples that worked well, we know that certifications work well in the areas of Guatemala Antigua, Kona Coffee, we can use many other examples, Café De Colombia, and what it does is it focuses back to the farmer level as opposed to some trademark owner. So that is why we’ve chosen that is the best approach. We know it works in East Africa because it worked in Kenya. Kenya had an auction system which did not provide us traceability down to the farm level; it stopped at the auction level. Many countries in East Africa have that. I think Rwanda has been the best example of free trade where we know the money gets down to the farmer level.

So we’ve been holding Rwanda up and we thank you Mr. President [applause]…we’ve been holding him up as an example for the rest of the East African region and I hope that they will follow that lead. Thank you.