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Management in Practice

Can coffee help juice economic development?

A nonprofit is teaching business skills to East African farmers in order to let them enter the high-profit global market for specialty coffee. The project showed enough promise to get $50 million in underwriting from the Gates Foundation, and now aims to reach 180,000 growers. David Browning ’99 of Technoserve describes how to educate small-hold farmers to plug into the global market.

Q: What does Technoserve do?

Technoserve is a nonprofit organization that focuses on solving rural poverty in the developing world. It's based on the premise that an effective way to take people out of poverty is to increase economic growth, to create jobs and wealth. We provide business training. That could include the basic business-school toolkit. It also could be more technical training in agronomy or operations management, manufacturing or processing skills.

Q: Could you explain Technoserve’s work with the Gates Foundation.

The Gates Foundation has very aspirational goals. They would like to take 150 million people out of poverty over the next 15 years. About two years ago we sat down to have a conversation with the foundation regarding how we could help them achieve that goal. Out of that conversation, ultimately, came the coffee initiative. It's currently a $50 million, four-year initiative to double the incomes of 180,000 coffee farmers in East Africa.

Q: What is the coffee initiative?

One way to frame it would be to explain the nature of the business opportunity and why we got excited about it. The coffee industry is a relatively stable industry overall. It's been growing about 1.5 percent annually for several decades. For the last 20 or 30 years, the low-cost players have been Brazil and Vietnam. Brazil particularly has had very significant advantages in terms of productivity and labor by having very mechanized means of harvesting and irrigation. However, in the 1990s, a new niche started being recognized, and that was the specialty high-quality segment.

That segment has grown at a much faster rate than the rest of the industry in the past couple of decades, certainly in double digits. That is significant because high-quality coffee can only grow at high altitudes. So the specialty industry was looking for coffees from the equatorial zone and above 1400 meters. That narrowed the real estate to the East African highlands, the mountainous area through Central America and down into Colombia, as well as some highland regions of Indonesia and New Guinea.

East Africa had an opportunity for a very sustainable, locked-in competitive advantage. The challenge was that although a lot of this real estate was in the hands of small-holder coffee farmers, who have traditionally produced their coffee for the commercial market, they didn't have the business skills necessary to produce quality coffee in a consistent manner.

That's where we stepped in. We have been involved in the coffee sector for 40 years, and the magnitude and the attractiveness of this opportunity became increasingly clear throughout the 1990s. So we decided to provide training for farmers to understand the opportunity, to understand how they could process their coffee to attract higher premiums, and to provide the business framework that would let them do that on a consistent basis.

We're currently working with over 60,000 farmers and with the funding from the Gates Foundation plan to be working with 180,000 farmers by 2012.

Q: What are the skills that the farmers need?

The fast-growing part of the market is predominantly what are called "washed" coffees. A typical commodity coffee will be processed in one of two ways—either the bean is picked and allowed to dry in the sun, or the skin and the pulp are removed in a fairly rudimentary, manual process, perhaps with a rock or manual pulper. Washed coffees use a process where quality controls are more assured. It involves machinery which is calibrated and precise. There are processes for removing unripe or damaged beans. And, after the pulp and the skin are removed, the coffee is actually washed with water; hence the term "washed" coffee.

To produce this kind of coffee requires a processing plant, so one of the first steps is helping rural communities write a business plan and be able to access financing to secure the capital financing to construct a mill. After this set of financial skills, there's the skills needed to operate the mill, operations management. There is a lot of training around governance.

There is a need to understand quality control and how to ensure quality of the product. We also teach agronomy and, to a lesser extent, some marketing skills. So perhaps you could summarize it by saying we take a random walk through the entire SOM curriculum to provide farmers with a broad range of the skills they will need to move their coffee from a commodity to a highly differentiated product to capture the premiums that come with that. Washed coffee can earn premiums 30% higher than commodity products.

Q: What are the governance issues?

The introduction of the mill involves large, concentrated amounts of money. So democratic leadership and auditing become very important for the ongoing sustainability of the project. We help to create audit committees that oversee management. A lot of the same caveats that apply with the separation between management and ownership in the West apply here—trust but verify.

Q: How are you choosing who exactly to work with?

I would say it is a dynamic process whereby we enter into a dialog with farmers, trying to understand their requirements for success from a business point of view, while assessing the management team. It's perhaps much the way that a venture capitalist might approach it.

Q: Do the farmers consider themselves entrepreneurs?

I think certainly if you go to the most isolated area of Africa, you will find entrepreneurial activity occurring. It might not look quite the same as Silicon Valley, but entrepreneurialism is probably present wherever humans gather. So part of our role is to work side by side with farmers helping them tap that entrepreneurial passion, providing them with the tools such that they can leverage that spirit into better livelihoods for their families and their community.

In general I would say that these communities have a very clear sense of where they'd like to get to, and they have the drive to get there. We find that with a relatively small amount of assistance in terms of providing the skills, they are able to truly harness their energy and profoundly change the trajectory that their community is on.

Q: How much of this is an ongoing process, and how much do you provide a set of skills and move on?

It's a little like doing an MBA, there's a set of skills that once learned are not forgotten. Our role is to provide a catalytic effect, a systemic shift in their business competence to enable them to understand opportunity and undertake a set of activities to harness that opportunity, and then we prefer to step out and let the dynamics of a globalized economy take effect. In that way they will be punished and rewarded based on their actions and the degree to which they can satisfy their customers and differentiate themselves. We see that as a healthy ongoing process.

Our role is relatively short—provide some skills and then get out of the way and let communities get on with their lives. Typically, to be able to develop a business plan, invest in and construct a mill, and go through a couple of cycles of operating until it is producing very high-quality coffee, takes in the region of three to four years. The first year is set-up. Then two or three annual harvests get the operation to the point where people are producing quality at truly world-class standards.

Q: How do you measure impacts?

We measure impacts by a very simple metrics of price (a proxy for the quality of the coffee), cost, and volume. Ultimately we are being judged by the market. Is the global economy interested in this coffee and the quality of it?

We're two years into our project and happily we are ahead of target on both price and volume at this point.

Q: How has globalization impacted these farmers?

Globalization is often a very contentious issue, where there seem to be winners and losers. But, in this case, happily, this is very much a win-win scenario, for the Western world and, increasingly, the new emerging economies, such as China, that wish to purchase high-quality coffee of the sort that can best be found in Africa. So it really is a positive story of how globalization can be to the benefit of all parties. China has a competitive advantage in, say, textiles. With that competitive advantage they are able to earn incomes, and then using that income they are able to purchase coffee, where an African small-hold farmer has the competitive advantage.

Q: To what degree is sustainability built into the growing this sort of coffee?

There are probably a couple of different dimensions to sustainability. One is economic sustainability. The important part of economic sustainability, we believe, is to provide skills such that there is an economic feedback system that is sustainable, meaning that they have something that the world economy wants.

From an environmental sustainability point of view, happily, coffee is a tree crop and high-quality coffee is most successful if it is part of an ecosystem with other shade trees. Often in the world economy, the environment and the economy are in conflict, but in the case of high-quality coffee, producing beans means providing a farm environment which tends to enhance biodiversity rather than compete with it. It means more shade trees, more species of flora and fauna, et cetera. And the nature of this tree crop is that, relative to other economic imperatives such as, say, cattle farming, it is a far preferable environmental choice. The tree crops are able to hold soil together. They are able to prevent erosion, which leads to better watershed management. So from an environmental sustainability point of view, coffee really offers a great choice for small-holder farmers.

Certainly climate change has the potential to alter the coffee industry, as it does with many forms of agriculture. It's probably a little unclear, yet, how this will play out. It's possible that optimal coffee growing will slowly migrate to different areas. It could mean higher altitudes in the current places where coffee is grown or it could mean that regions right now which are cooler and more temperate may be able to begin growing coffee. So I think for now the outcomes and the consequences of climate change are a little less clear. It's certainly something that we will be watching over time.

Q: Is there anything else you want to mention?

Peet's Coffee and Tea, one of the roasters that purchases our coffee, has launched a brand which exclusively uses the project's coffee, named the Uzuri Blend which is a Swahili word meaning "something good." And I believe that that blend is available in grocery stores on the East Coast. I encourage you to try it out, see if you enjoy it.

Interview conducted and edited by Ted O'Callahan