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Coffee companies get closer to farmers


Programs Aims to Secure Premium Beans to Appeal to Discerning Consumers

By John Revill

July 15, 2013

LAUSANNE, Switzerland—Coffee companies are increasingly lending support to farmers in Asia and Africa, part of efforts to secure premium beans as they compete for discerning customers.

On Monday, Nestlé SA NESN.VX +0.31% said it was expanding a program in Africa that provides seedlings to Latin American farmers producing coffee for the food giant. Nestlé, the world's largest coffee seller, will also provide training and replanting programs to help farmers in Ethiopia, Kenya and South Sudan.

"We always need more coffee," Jean-Marc Duvoisin, who runs the company's Nespresso business, said at an event for the program. "We always need more good quality coffee."

Nestlé isn't alone in investing in coffee farmers. Earlier this month, Mondelez International Inc., MDLZ -0.59% the world's No. 2 coffee maker, opened a training facility for Vietnamese farmers, while D.E. Master Blenders 1753, DE.AE +0.12% the third-largest coffee company, has offered Honduran farmers credit and fertilizers to boost their productivity.

Behind the rush: A scramble for the premium beans needed to sell increasingly popular single-serve coffee systems, such as Nespresso and Mondelez's Tassimo, which generally cost more per serving than filtered or instant coffee. Although coffee prices have dropped in recent months, coffee companies have had difficulty acquiring high-quality beans for their systems because farmers in Latin America and Asia—among the world's prime growing regions—are leaving rural areas for cities.

"There is a struggle for resources," said Frank Mechielsen, an agriculture policy adviser at Oxfam. "Companies are afraid they won't have enough supply in the future."

Shortages of high-grade beans have been magnified by a rush of companies trying to jump into the high-end single-serve coffee market. By 2015, sales in that segment of the market are expected to grow more than 50% to $12.58 billion from $8.03 billion in 2012, according to market-research company Euromonitor International.

Coffee companies have also become aware of growing consumer sensitivity to the origin of food products, a trend that intensified after horse meat was found in European products that were labeled as containing beef. Companies are also eager to sidestep concerns they could be exploiting workers, particularly after roughly 1,000 were killed when a Bangladesh garment factory collapsed earlier this year.

More than one-third of U.K. shoppers said they bought products certified Fair Trade in preference to ordinary products, according to a July survey by consumer-goods research company IGD, up from 6% in 2006. To win certification for their goods from the Fair Trade Foundation, companies must meet economic, environmental and social development targets.

Smaller coffee companies have already started securing their supplies from smaller farmers, a move that is being copied by bigger players, such as Nestlé and Mondelez.

"Quality beans come from small holders, not the big plantations," said Wolfgang Weinmann, who runs sustainability projects at London-based Cafedirect PLC, a specialty roaster. "Consumers want more quality."

Deerfield, Ill.-based Mondelez, which sells the Carte Noire and Jacobs brands, will train roughly 1,500 farmers at its Vietnamese center. The company hopes to help farmers boost productivity, as well as the quality of their beans.

Amsterdam-based D.E. Master Blenders 1753 is also increasing its investment in sustainability. The company hopes to get 25% of its coffee from sustainable sources by 2015, up from 15% to 20% at present, even though that would reduce its profit margins.

Mondelez is spending an average of $25 million a year over eight years; it brings in an estimated $8.3 billion in coffee-related revenue a year. Nestlé spends 70 million Swiss francs ($74 million) a year on its coffee sustainability projects for its Nescafe brand, and takes in an estimated $17 billion in revenue on coffee products.

"It's good, but companies make big profits from coffee and spend much more on marketing," Mr. Mechielsen, the Oxfam adviser, said of the assistance effort.

Lianne van den Bos, an analyst at Euromonitor, said the programs can be beneficial in marketing terms. "It is a good way to justify higher prices for coffee," the analyst said. "Especially as people feel better about drinking a cup of coffee that has been brewed in a sustainable way."

At the event, Nespresso said consumers increasingly want to know what companies are doing and whether they are acting in a responsible way.

Mr. Duvoisin, the Nespresso executive, said his company's program, which has run for 10 years in Latin America, would help it boost sales in the future because it gives Nestlé access to a wider variety of beans.

"We can offer more tastes," said Mr. Duvoisin. "We can offer more interesting coffees to consumers." ------
Write to John Revill at john.revill@dowjones.com


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