The World Intellectual Property Organization (Wipo) recently released its 2017 report titled “Intangible Capital in Global Value Chains.”
The report includes several case studies, including one looking at the ‘intangible capital’ of the coffee value chain.
Example Case Study: Coffee
Coffee is one of the most important traded agricultural commodities. It is the source of income for nearly 26 million farmers in more than 50 developing economies, but 70 percent of coffee demand comes from high-income countries.
Most of the value added to coffee also aligns with high-income countries. In part, this reflects the short shelf life of roasted coffee, which implies that most of the roasting is done close to where the coffee is consumed.
More importantly, it reflects the economic importance of downstream activities in the global value chain.
Intangible capital in the coffee supply chain mainly consists of downstream technological innovations and branding:
- Technology associated with coffee farming and with turning coffee into a high-quality and appealing consumer product. Patent data suggest that the most innovative value chain stages are those closer to the consumer, including the processing of beans and especially the final distribution of coffee products. The latter stage includes the modern espresso machines and coffee capsules found in many homes and offices.
- Brand reputation and image allow consumer product firms to differentiate their offering from those of their rivals. Branding plays an important role in all coffee market segments, including soluble and roasted coffee sold in grocery stores, espresso-based coffee products and retail coffeehouses.
Different waves of coffee consumption are reshaping the global coffee value chain with the third wave is opening opportunities for upgraded participation by coffee farmers.
Shifting consumer preferences have prompted three waves of coffee consumption that have progressively transformed the global value chain:
- The first wave centered on consumers who largely consume their coffee at home. The products – in the form of packaged roasted coffee beans, soluble coffee and, more recently, single-serving capsules – are standardized, with price differences reflecting variation in the quality of coffee blends.
- The second wave emerged with consumers who prefer to consume coffee in a social setting. Products in this market segment range from the typical Italian espresso to more elaborate concoctions of coffee plus foamed milk. In addition to coffee itself, most of the coffee shops in this market segment offer a distinct ambiance to attract their consumers. The quality of the coffee beans used in the second wave tends to be higher than those in the first wave. In addition, the second wave introduced voluntary sustainability standards (VSSs), informing consumers of the coffee’s origin and whether farmers receive fair wages.
- The third wave market segment targets consumers with discerning coffee tastes, willing to pay premium prices for their coffee. They are interested in knowing where their coffee beans are sourced, how they have been farmed and how best to brew the beans in order to fully appreciate the flavor, body, aroma, fragrance and mouthfeel of the coffee. The coffee beans tend to be of superior quality to those used in the other two market segments.
The first wave still accounts for 65 to 80 percent of the total quantity of coffee consumed, but only 45 percent of the global market value.
This reflects higher unit prices commanded in the second and third waves (see figure 6). The second and – more recently – third waves are reshaping the governance of the global coffee value chain. In particular, sourcing of coffee in the first wave has traditionally been market-based, with buyers blending different types of coffee from different parts of the world.
The introduction of VSSs in the second wave established more direct ties between coffee growers and downstream value chain participants. These ties are of even greater importance in the third wave and have, in fact, shortened the value chain by cutting out intermediaries in the coffee trade.
