Starbucks Ready to Brew Ugandan Coffee

When Paul Sempa-Mugambwa, former proprietor of Kyagalanyi Coffee Ltd, received an offer for his firm way back in 1992 from a foreign investor, it did not look like an impending end to a whole generation of local coffee processing entrepreneurs.

It was however only a matter of time before most of the indigenous coffee entrepreneurs gave in to pressure to sell their plants to cash draped foreign investors who, unknown to local entrepreneurs, had discovered a new niche in the international coffee market.

Thus the unprecedented visit recently by officials from one of the largest global suppliers of specialty coffee - Starbucks Coffee Co. could hardly be a coincidence, according to analysts.

"They want to start buying coffee from this region and they are looking at Uganda as part of a good quality coffee source," a coffee entrepreneur who attended a meeting with Starbucks officials but preferred to remain anonymous, said.

With more than 13,000 coffee shops in 40 countries, Starbucks presents a rare opportunity to break the jinx that has seen the coffee industry fail to effectively transform itself into a highly industrialised value adding sector.

Instead, with coffee prices plummeting on the international market, both farmers and semi-processors have seen their fortunes dwindle forcing majority of Ugandan coffee middlemen to sell off their businesses to foreign investors.

"I owned Kyagalanyi 100 per cent. But I had to make a commercial decision to sell my shares. I sold 75 per cent in 1992 and I subsequently sold the rest of the shares in 2000," Mr Sempa-Mugambwa, says summing up the despair of those who sold out.

"It's true. Foreign firms export the bulk of the coffee. They control 80 per cent of the crop," Uganda Coffee Development Authority (UCDA) Managing Director Henry Ngabirano admits.

Says Mr Sempa-Mugambwa: "They gave me an interesting offer. It made commercial sense"

Kyagalanyi Coffee, one of the leading coffee exporters in the country, is now owned by Volcafe, a Swiss company.

Players

Some of the companies that closed shop include: Busiro, Kaliro, Samba and Zigoti coffee companies. Top on the list of coffee exporters most of which are foreign owned today are; Kyagalanyi Coffee Ltd, Kawacom (U) Ltd, Ugacof Ltd, Olam (U) Ltd and Great Lakes Ltd., Pan Afric Impex Ltd, IBEROR (U) Ltd., and MTL Main Traders.

Indigenous coffee firms include; Job Coffee, Kampala Domestic Store, Nakana Coffee factory, Union Export Services, Mbale Importers and Exporters, Wabulungi M-Purpose Estate, Simba Café, Bugisu Corp Union, Lake Lands Holding Ltd, Savannah Commodities Ltd, Sitanda Agencies Ltd, Bakwanye Trading Company, Victoria Coffee Ltd Ziwango Coffee and Gumutindo Coffee Coop - a farmers' group owned company.

Even though UCDA promotes the development of the entire coffee industry in Uganda, most local processors have failed to break even in the competition forcing many to either remain or slide into the periphery of the business - coffee farming.Part of the problem is the huge capital demanded of the business.

"When I started exporting, the magnitude was high. The amount of money required to export was different. When you become an exporter, you require much more money in millions of dollars. So I opted for the decision," Mr Sempa-Mugambwa says.

He says the processing and export of coffee is capital consuming making it less competitive for those with meagre financial resources - a case of most Ugandan entrepreneurs.

A case for capital credit has also not been in favour of the coffee industry. Credit to the agricultural sector is considered riskier by most financial institutions because of the unpredictable nature of the sector including fluctuations in the price level, weather conditions, coffee diseases and others.

"Agricultural sector especially that of coffee processing has risks in that it can be affected by weather and pests," the Head of Retail Banking Dfcu Group, Mr Wilbrod Owor, says.

"Otherwise, banks still do extend credit to the sector but consider merits and demerits of any credit application separately. Much as we lend, this area is weighted," he adds.

Also, the advent of liberalisation of the coffee industry in the 90s did expose most of these locally owned firms to unprecedented tougher conditions of business. The liberalisation of the sector meant that the smallholder farmers had to take over the roles of coffee marketing, whose monopoly was previously commanded by the government through the defunct Uganda Coffee Marketing Board.

With that came competition from local coffee processors, traders and exporters as well as experienced hard nosed foreign owned firms. The difference, however, is that many of the newly formed locally owned firms eventually collapsed under the yoke of costly credit, debts and poor management.

"Coffee trade, in my view, is not about buying bananas and potatoes. It is much more sophisticated than that," Mr Mugambwa said.

"If you are going to buy coffee, you need to know tricks. You should know protective skills in coffee trading. If you buy 90 kilogrammes, part of it is dust and stones".

UCDA has 24 registered coffee exporting companies and 104 hullers - factories that receive dry coffee cherries and extract the coffee beans at a small fee before traders take it to exporters.

Impact of change

The change of guard has created, according to market sources, more jobs and improved coffee quality even as volumes have declined in recent times.

The cumulative export volumes for 2004/05 season was 2.5 million bags of 60 kg worth $162 million (Shs275.4 billion) representing a 0.7 per cent volume drop and 41 per cent rise in value compared to the pervious year. The 2005/06 season exported 2 million bags worth $170 million (Shs289 billion), representing a 0.5 per cent drop in volume and 20 per cent rise in value.

In the first seven months of the current season October 2006to April 2007, total exports have hit 1.6 million bags worth $144.2 million (Shs245 billion).

A UCDA report says that the decline in volumes is because of a small crop due to drought that resulted in defoliation of coffee trees. It said the situation has been made worse by the intermittent load shedding that has adversely affected coffee processing both at primary and export levels.

Controversies

Starbucks is not without blemish. It is involved in a controversy with the Ethiopian government over trade mark issues and unfair pricing.

In a March 2007 issue, Fortune magazine reported that Ethiopia's two million coffee farmers receive less than a dollar for approximately half a kilo of coffee and yet the same coffee fetches $26 in the US market. Linked to that is the fact that Starbucks trades these coffees using Ethiopia's specialty coffee names; Sidamo, Harar and Yirgacheffe.

The Ethiopian government wants to trademark its famous coffee bean names. This would earn it higher prices for its specialty coffee and also attract a premium of $88 million on trademarks per year according to the UK-based charity organisation - Oxfam.

Ethiopia demands that Starbucks should sign a licensing agreement so that Ethiopian farmers can gain higher prices for their products and ultimately obtain a larger share of the sales. Trade marking would give Ethiopia an exclusive right to use the name in branding thus whoever uses it would have to pay.

Starbucks has protested arguing that instead of seeking trademark rights, Ethiopia should seek geographical certification, which although guarantees that the product comes from the stated region, allows distributors to use the name in their branding.

Ethiopia's case should be treated as an eye opener for Uganda that intends to do business with Starbucks or any multinational for that matter. Not many Ugandan coffee farmers and interested stakeholders might understand the intricacies of trademark law and the benefits that could accrue from owning a brand name of a worldwide product but for a country which has over 38 per cent of its population surviving on under one dollar per day, the government must harness all channels of generating more funds to fight poverty including establishing national trademark brands.

Notwithstanding the controversy, Starbucks has spent $2.4 million (Shs4 billion) in investments and loans in Ethiopia since 2002. It buys over 2 per cent of its bean from Ethiopia providing market for 2 per cent of the country's total crop.

Hope

The arrival of Starbucks however could offer a brighter future for the industry in Uganda. In 2006, the company paid an average of $3.12 (Shs5, 313) per kilogramme for premium coffee beans, 36 per cent more than the industry average commodity market price for coffee.

In February, it announced it planned to double its imports of coffee from East Africa over the next two years. It also plans to build a farmer support centre staffed by a team of experts in soil management and field crop production to help farmers increase their capacity to produce high value coffee. In addition, it wants to provide the region's coffee farmers with increased access to affordable credit.

The Starbuck opportunity however comes at a time when many local entrepreneurs who sold off their core coffee businesses to foreigners are unlikely to seriously be part of the new market opportunities.

Starbucks buys coffee from 24 countries, including Burundi, Ethiopia, Kenya, Rwanda, Tanzania and Zambia. Multinational coffee houses have been accused by the British-based Oxfam and the World Bank of unfairly treating coffee farmers located mainly in developing countries.

According to the World Bank, key beneficiaries have been international coffee houses, involved in 80 per cent of production and trade, while smaller traders and farmers have been squeezed out of the market. For the new breed of local coffee entrepreneurs, the task is to create more branded value to compete effectively.

"I think there is a huge potential. The world is developing more quality coffee [every year] and there is opportunity to improve on the quality and quantity, and create a category that can be known to customers," Chairman and Chief Executive Officer Good African Coffee Andrew Rugasira says. He said Good African coffee has 14,000 certified farmers in Kasese district, all in cooperatives of 50 each.

According to him, the coffee game plan has changed. It is about better quality, strong brands and consistent government assistance to enable domestic processors compete sustainably in the global market. "We need people to be supported to develop strong brands and opportunities to develop markets. We need to get our act together, produce quality coffee and process it," Mr Rugasira says.

Additional reporting by Fredrick Masiga