Is Starbucks “Coffee That Cares”?

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. 

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.

—–

*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.