How to respond to COVID-19 in the coffee sector

The global outbreak of the COVID-19 virus is having a major impact on international trade. This study presents a quick overview of what is happening in the coffee market and the supply chain. It offers practical steps for small- and medium-sized enterprises (SMEs), like farmer groups and exporters in coffee-producing countries, to deal with the immediate effects of COVID-19 on the sector. It also provides steps to take to prepare for successfully doing business in the sector after the crisis is over.

Effect on the market

The coronavirus crisis has caused sales volumes to decrease by 50% in Europe and an estimated 25% in the United States. Roasters are ordering less coffee from importers, and warehouses are pretty full. Many coffee bars and roasters in Europe are using government subsidies to pay their employees’ salaries. This increases the chances that they will stay in business and continue to order from importers. Importers will then continue to buy from speciality coffee producers like you.

Still, lockdown and social distancing measures have caused a reduction in consumption. This particularly affects small coffee roasters and roasters that mainly supply Hotels, Restaurants and Cafés (HORECA): this sector reports an 80% reduction. The micro-lot segment is the most affected. Producers and exporters have been asked for discounts of up to $0.40/lb for some very expensive types of coffee. However, roasters that sell online or through retail channels are reporting growth.

When the worst of the coronavirus crisis is over, for example,  in one year, with businesses operating and possibly still with some form of social distancing, the small coffee businesses will recover. However, they will only recover as much as restaurants and coffee bars can return to receiving their original number of customers. Virologists agree that even with a vaccine against the current COVID-19 virus, there is still the threat of new viruses or mutated forms of the current one.

Small independent businesses will suffer in particular, as they need to pay their high street rents with a reduced income due to the social distancing measures. Yet, the sector believes most will survive. Smaller roasters and coffee bars tend to be faster to adapt to changes.  Some have already started selling online, which has helped. Shipsbeans is an example of a platform for speciality coffee businesses. Larger places like Starbucks and Costa will suffer less because they own bigger premises, where some of them can offer drive-through service.

Effect on the supply chain

At the time of writing this report, May 2020, coffee supply chain operations have been affected worldwide. In Honduras, El Salvador and Peru, citizens are under a heavy lockdown from their governments. This limits available labour. In Guatemala, containers are not available. In Colombia, the lockdown is affecting the coffee flow, and there is a shortage of pickers. Besides the scarcity of available containers, forwarders are sailing less frequently or excluding some ports due to reduced demand for goods; this is called blank sailing.

Flights are more heavily affected. For example, there are big capacity problems to and from Amsterdam, Latam, Oceania and the Far East. Export to China is at a normal level, as well as import from Africa. There is some concern among importers about there possibly being fewer port workers. That might affect timely shipping. Courier services are suffering more noticeably, with documents and samples arriving later than normal.

Still, the majority of bottlenecks are further down the chain: a lot of coffee that is scheduled to ship is no longer wanted by roasters. This situation is causing working capital to become scarcer both at importers and producers, as unsold coffee is not bringing in money. Warehouses in Europe are filling up, and late shipping from producer countries will only fill up coffee storage even more.

Communication is regarded as normal. Importers rely more on local teams in countries where communication is poor, such as Ethiopia. Conference calls are working well as a substitute for personal visits. Importers are happy about the open and direct communication with their suppliers about the COVID-19 situation in their countries.

When it comes to exchange prices for producers, there are concerns about disruptions to the supply chain, making coffee more valuable. Still, there is uncertainty about the future of demand, making coffee less valuable. Since the sharp fall around the new year, we saw an increase in price for both Arabica and Brazilian naturals until mid-April. Robustas, however, continued to fall. In March 2020, global exports fell by 3.7% to 11 million bags. Shipments in the first six months of the coffee year 2019/2020 decreased by 3.9% to 62 million bags.

However, coronavirus issues, such as closed processing plants, port disruptions, or reduced availability of harvesting labour, are probably not the main cause of this decrease. These issues are happening, though. A more likely cause is the fact that farmers are discouraged due to long-term low prices, droughts and irregular climate conditions. The low prices cause many farmers to sell below the cost of production. Farmers are thus leaving the coffee industry.

In the coffee year 2019/2020, the International Coffee Organisation (ICO) revised its estimate of global coffee consumption to 166 million bags. This still represents an increase of 0.5% compared to 165.27 million bags in 2018/2019. As a result, production is expected to exceed consumption by about 2 million bags. This will probably lead to continued low world-market prices.

Prices for mild Arabica increased in April 2020. But the HORECA segment in Europe expects less demand for the short- and medium-term of at least one year due to some continued social distancing measures. Producers of speciality coffee will risk warehousing this coffee and having to discount it sooner, to accommodate other types of contracts, or later when it has become old.

Still, according to a study by Allegra in the United Kingdom, the long-term future for coffee shops remains bright. Consumer demand for quality coffee and café experiences shows no signs of disappearing. “Digital technology will play a deepening role in the coming decade as coffee shops devise new, innovative ways to serve customers and forge lasting human connectivity.”

The following 6 steps focus on immediate actions that your coffee company can take in the short-term to ensure survival in the present situation.

1. Keep your farmers and workers healthy

Health experts agree that the best way to avoid getting infected is by social distancing and maintaining proper hygiene. Implementing this in your coffee business will reduce the risk of your farmers, workers, trainers and office staff getting sick. This would affect not only their health but also your company’s productivity and ability to meet your buyers’ expectations and legal obligations.

Some buyers are reserving funds to address the immediate needs of farmers. For example, Starbucks has set up a Global Partner Emergency Relief Program for its partners. Other buyers are creating funds for immediate needs in their own region, such as Lavazza’s emergency fund for Piedmont, Italy, or supporting international efforts, such as Nestlé’s support for the Red Cross.

2. Manage your risk on receivables and inventory

Make sure that your clients will pay 100% of your coffee. Speciality importers and traders have been hugely affected., This may mean that they cannot comply with their payment obligations. Regarding inventory, a cooperative may feel the moral obligation to buy all the coffee from its members. But if few contracts come in, due to slower rotation in Europe of particularly speciality coffee, you may be stuck with unsold inventory. This will affect your cash position, and the coffee may become old.

3. Offer various preparations and finalise certifications

If your speciality coffee contracts are in danger of being cancelled, look into offering commercial quality. The successful roasters at the moment are those that sell retail quality coffee, which generally ranges in cupping score from 78 to 82.

Certification will reduce the risk of contracts being cancelled. With certification, it is much easier to quickly sell the coffee to other clients.

4. Make sure you have sufficient working capital

Buyers may be slower in making payments, shipping, or even sending you the contract for the coffee you have bought from farmers. Also, their own inventory is growing as roasters’ demand is down, which puts pressure on their working capital. Making sure you have sufficient credit lines in place will thus be important. Working capital will become increasingly scarcer if there is a continued recession in Europe/the world, so the sooner you act, the better.

5. Increase your quality control

Given the slowdown of shipments, a lot of coffee will be warehoused for longer than normal in producing countries. After shipping, a lot of coffee will need to be warehoused for longer than normal in destination countries as well. As coffee tends to deteriorate in quality over time, it will lose value very rapidly. This is bad for your economic situation and that of your client. Make sure your coffee still cups highly after longer periods of warehousing. This will help you keep your good reputation.

6. Be even more client-oriented

Try to understand what your client is going through, so you can anticipate their demands. Even if your buyer’s request is the opposite of your wishes, for example, on price or shipments, try to accommodate them as much as possible. They will appreciate you for this, solidifying your position as a valued supplier in the long term.

After these immediate actions, we now look at the short- to medium-term actions you can take. Health experts are increasingly predicting that humanity will have to live with recurrences of the same, mutated or entirely new coronaviruses for the foreseeable future, despite vaccines and medicines such as virus inhibitors.

The first way to respond to this is on a personal level: increasing your immune system through a healthy lifestyle. Second, the governmental response will be important: investing in health care and helping companies economically to survive this new situation. Third, companies also have to take action. The following recommendations are sector-specific steps to prepare your company for doing business successfully after the worst of the crisis is over.

7. Innovate your trade offer

In a post-coronavirus world, the crisis will have caused unemployment or a reduction of income among Europeans. The recession may force many people to choose lower-priced coffee than they were used to. Also, lingering virus conditions may continue to limit the activities of HORECA, the channel where speciality coffee is served most.

Many Europeans may have also become more environmentally conscious. They are becoming aware that virus contamination risks will increase due to the cutting down of forests and trafficking of exotic animals. Avoiding a climate crisis is becoming more urgent too. Such a crisis will be many times worse than the coronavirus crisis. This may result in a change in behaviour, from less flying to eating less meat, and from installing solar panels to choosing a more sustainably produced cup of coffee.

8. Increase the spread of your clients

Limit your exposure to disasters in single sales-channels, such as the speciality coffee sector, or single regions like Southern Europe by diversifying your clients in terms of the channels they serve and the regions they are active in.

9. Improve your digital marketing

A lockdown situation means more computer-related activities. Take advantage of buyers spending more time looking at websites, reading your blogs and updates or scheduling video calls. Buyers also have more time now to evaluate samples.

10. Send samples

Samples are a great way of showing the quality you can offer. Send many samples to new clients to increase your network of potential buyers. Gaining market share is very difficult to achieve. Many roasters/traders already have well-established supply chains. Make sure buyers know you and what you can offer as soon as they need an alternative supplier. Patience and perseverance are required. If you keep sending new samples to stay in contact with the buyer, sooner or later they may order a container.

11. Diversify the income of your company and farmers

The World Bank warns that COVID-19 will push Sub-Saharan Africa into a recession, “increasing pressure on government budgets, and their spending on essential services and social protection. At a household level, farmer illness, higher food prices, lack of access to school meals for children, and possible disruptions to the supply of fertilisers and pesticides would all place increasing pressure on farmer incomes.”

Diversification of your farm, to create multiple streams of income or food sources, reduces these risks. Diversification into both cash crops, as well as subsistence crops, is recommended.

12. Improve your country’s or region’s marketing

Your country or region will be more likely to hold on to its buyers if it establishes online/trade fair visibility, works on common standard-setting and thus differentiates itself from its competitors. While the Specialty Coffee Expo is moved from April 2020 in Portland to April 2021 in New Orleans, the European World of Coffee in Warsaw, Poland, is postponed to October 2020. Expectations are that trade fairs can be held by that time. However, it is not clear how international travel will be possible.

This study was carried out on behalf of CBI by Jeroen Kruft of Amigos International Consultancy.

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