Managing Uncertainty: The Value of Intermediaries | 25, Issue 19
VAUGHN TAN highlights where uncertainty (which is not the same thing as risk) exists within specialty coffee’s supply chain, and questions whether the industry’s previous emphasis on the “direct” in “direct trade,” combined with a drive to rebuild leaner coffee supply chains, has had unintended side effects.
I was first alerted to Vaughn Tan’s work at the height of the COVID-19 pandemic: as we all entered a prolonged phase of “PIVOT!”, a former colleague introduced me to a resource aimed at the food and beverage industry trying to figure out a way to survive amid sparse safety information and impending lockdowns. Written by an academic working at the intersection of innovation, technology, and organizational sociology with a keen interest in restaurant kitchen research and development practices, the guide was as practical as it was insightful, completely open-source, and thorough. We immediately added it to the list of resources we were compiling for specialty coffee businesses.
As Vaughn has continued to articulate and share his ideas—first, a book on innovation, quickly followed by a game designed to facilitate “productive discomfort”—I have followed his work closely, finding so many intersections between his work and ours. His articulation of how unspoken knowledge of a restaurant’s house style is transferred to newcomers through iterative tasting and feedback sessions reminded me of cupping, competition judging, and our inter-subjective methods of calibration. His stance that, actually, it is useful to deliberately put yourself in an uncomfortable position from time to time so that you can learn how to tolerate it when you don’t have a choice reminded me of how useful it is, sometimes, to deliberately walk away from what you think you know in favor of reviewing the answers to basic questions. (In fact, you may already be familiar with these ideas if you saw Vaughn’s virtual presentation at Re:co in 2021[1] or Kim Elena Ionescu’s welcome at Re:co last year.[2])
Now, Vaughn is undertaking another project, and practicing what he preaches: he’s writing a book on navigating different kinds of not-knowing, and he’s doing it out in the open, where people are welcome to comment on his chapter drafts and provide real-time feedback in discussion sessions.[3] Beyond this (very brave) approach, the core element of this new project which caught my eye was his distinction between “risk” and “uncertainty,” particularly as the former is a term that often appears in specialty coffee in relation to green coffee trading, contracts, and insurance. I’m sure it’s no surprise—given the number of features we’ve published during my tenure as editor, diving into words like “resilience,” “empowerment,” “sustainability,” and the abbreviation “ESG”—that there’s nothing I love more than getting into the nitty-gritty of the words we use and how they shape our perception of what’s happening around us. While some of these ideas may not be new to those of us who have worked in coffee for many years, Vaughn's perspective—as a specialty coffee consumer who studies food systems and innovation—is a testament to the power of simple phrases (like "direct trade") to shape consumer perception.
Jenn Rugolo
Editor, 25
For well over a decade, marketing and end- consumer education in specialty coffee has focused on how desirable direct trade is, often underplaying or ignoring valuable work done by intermediaries—service providers operating somewhere in the supply chain connecting coffee growers and end-consumers—to improve agricultural and processing techniques, worker conditions, and pay.
While the industry may understand what and how much value these intermediaries provide, this understanding often seems to be missing from the story specialty coffee tells end-consumers through marketing.
Good sourcing and provenance depend on having deep knowledge and trust on the ground in-country. Eliminating good intermediaries—who have spent years building trusted networks and developing infrastructure and often un-codifiable know- how for buffering against uncertainty— can perversely make it harder to find and support producers, especially in emerging coffee-growing regions.
Specialty coffee businesses can both communicate better with end-consumers and be more efficient and effective by being strategic about when they don’t go “direct.” It is possible to align the value that good intermediaries can provide with what end- consumers already care about in the specialty coffee value narrative. But first, it helps to understand how and when intermediaries add value in uncertain environments.
What is Uncertain in Specialty Coffee?
Specialty coffee is much more uncertain than it is risky. The difference is subtle but important.
In a risky situation, a lot has to be known about the unknowns. With risk, the exact future outcome is unknown, but all possible outcomes and their respective probabilities must be known very precisely. This is why risk can be managed away. Risk-management (such as by hedging a bet or buying insurance) lets you believe that you'll be no worse off if the actual future outcome is undesirable. Risk in real life only truly exists in carefully controlled games like flipping fair coins or tossing fair dice.
Most of the unknowns of the coffee business aren’t risky. The coffee business is filled with uncertain situations in which possible outcomes, their respective probabilities, and even whether those outcomes are desirable, are all unknown or only partly known. Uncertainty can be managed or buffered but, unlike risk, it can’t be managed away.
Coffee—especially specialty coffee—is particularly affected by three types of uncertainty: agricultural uncertainty, geographical uncertainty, and demand uncertainty. Both agricultural and geographical uncertainty are well understood in the coffee business. Coffee is an agricultural crop, so the quality and quantity of the harvest is subject to unpredictable weather from an increasingly unstable global climate. It is mostly grown in regions without the reliable logistics infrastructure the coffee-consuming world takes for granted. The variability in a coffee’s qualities and yield (agricultural uncertainty) as well as the unpredictability of its travel conditions (geographical uncertainty from potential contamination or degradation, unanticipated logistics failures, and shifting geopolitical situations) results in a significant amount of uncertainty in coffee.
What may feel slightly more unintuitive is the idea of uncertainty in demand.
What the end-consumer demands in specialty coffee is itself uncertain, and this is because of the nature of specialty coffee as an industry. Coffee is one of the largest-volume agricultural crops in the world, and specialty coffee makes up only a high-quality, premium-priced slice of it. Specialty coffee businesses, whether they are roasters or coffee shops, achieve this higher pricing by sourcing, processing, and marketing it carefully as a special product— distinguishing it from most commodity coffee. Specialty coffee businesses create value by figuring out how to set themselves apart from each other, and from mass-market coffee.
To do this, specialty coffee businesses need to continually seek out new things to do with and around coffee. This can take the form of creating new service models for coffee (e.g., what Starbucks did decades ago), developing new brew methods (e.g., the manual methods revolution), finding new or newly rediscovered cultivars (e.g., a new Ethiopian landrace), new processing methods (e.g., anaerobic fermentation), new roast profiles, new regions, or other forms of newness that haven’t been imagined yet.
To become successful, specialty coffee businesses don’t just have to find new stuff to do in coffee. They also have to build narratives around why the newness they’ve discovered is good—they have to tell a good story about the newness they’ve found. It’s only by telling this story to end-consumers that they can set themselves apart, create value, and justify premium pricing. Specialty coffee has a diverse and constantly changing set of narratives of what quality means (and what creates value) in coffee. This ultimately means that the specialty coffee industry is able to shape not only how much but what consumers demand. This is why specialty coffee has always been, and maybe always will be, an industry that evolves unpredictably.
In combination, specialty coffee businesses face unavoidable agricultural and geographic uncertainty (which is “bad,” because it’s beyond the control of a business), but also demand uncertainty of their own creation (which is “good,” because a business can control it and use it strategically).
How Intermediaries Help Manage Uncertainty
Good intermediaries are the ones who add value, and they can do this in several ways in the context of uncertainty.
Providing early warning. Though coffee is mostly grown in the global South, the businesses and end-consumers that buy specialty coffee are mostly located far away, in the wealthier so-called global North. Intermediaries that are located in-country and who have extensive networks there can provide early warning or at least prompt notification of unexpected events that might affect coffee quality, quantity, or the buyer’s ability to receive it in time. This allows buyers to respond better to uncertainty by making alternative plans to compensate or by taking action to alleviate the impact on future harvests.
Facilitating investments in training and infrastructure. Changing traditional practices can be difficult, especially given the economic and other power imbalances between coffee farmers and specialty coffee buyers. Intermediaries that have built up trusted relationships with farmers can be better positioned to help introduce such changes. This can happen in the form of implementing training and adding infrastructure to improve coffee farming, processing, and commercialization practices. There are many examples of these, ranging from agronomy workshops to upgrading packaging equipment at washing stations to quality-oriented green coffee competitions. Such investments have the potential to reduce uncertainty from coffee farming and processing by raising the quality and predictability of processed beans. In turn, these investments contribute to improving the economic welfare of coffee farmers, leading to better conditions for coffee farmers, their families, and their communities.
Enabling small-scale farming by smoothing cashflow. Much specialty coffee is grown by small-scale farmers, who are often in a cashflow catch-22 situation: they need cash to grow coffee, but can’t make enough cash until they’ve sold the coffee. When farms fail as a result of cashflow problems, supply gets disrupted. Intermediaries with scale and on-the- ground knowledge can help break the catch-22 difficulty by, for instance, paying conscientious, trusted producers for processed green bean before they confirm final buyers or even paying for harvests in advance (as a guaranteed contract). By doing so, these intermediaries take on some of the production and market uncertainty that would otherwise have to be borne by coffee farmers who lack the resources to do it.
Adding degrees of freedom to make supply chains less fragile. The leaner and more efficient a supply chain is, the more unavoidably fragile it is. This is because lean supply chains are highly optimized for specific conditions. When those conditions change, the supply chains fall apart—which creates its own uncertainty for coffee buyers. As both climate and geopolitics become more unpredictable, ultra-lean supply chains will probably become more and more of a liability. I’m not advocating here for intentionally building wasteful supply chains; instead, what I’m highlighting is that we need to take a broader view of what it means to be efficient. Specifically, there are parts of the supply chain where it might actually be more wasteful to try to be lean by cutting out intermediaries.
Over-water transport is a good illustration of this. A transport agent managing shipments for many producers and buyers would probably have a wide range of over-water freight slots reserved between different origin and destination ports. A direct sourcer arranging their own end-to-end transport would probably have one over-water slot booked. If there is a delay in delivering the lot to the exit port because of (for example) land transport disruption, the direct sourcer would be stuck with an unusable empty freight slot and a shipment of coffee that can’t get where it needs to go. The transport agent, on the other hand, is more likely to be able to adjust to the disruption by using its range of freight slots—it has more degrees of freedom to respond to the disruption. For services like transportation, it can often be more broadly efficient to use intermediaries because they can operate at a scale that allows them to be more robust to uncertainty caused by unpredictable events. In turn, this allows them to buffer coffee buyers from this uncertainty.
Holding stocks to buffer demand uncertainty. Intermediaries in the supply chain can also help smooth out unexpected mismatches between supply and demand. A direct buyer may have underpredicted demand for a particular profile and run out of green coffee (or received a lot that was damaged in transit)—buying spot coffee lots from an importer may be the only way to get enough supply to meet demand in the short term. Intermediaries who see broader sections of the specialty coffee market may be better positioned than direct traders to understand when trends in demand are emerging or gaining popularity.
Good Intermediaries
This list of ways intermediaries add value by buffering against or mitigating uncertainty makes it clear that we should think of a wide range of service providers as intermediaries, not just the conventional list that often includes green coffee brokers, transport agents, and importers/exporters. Non- governmental organizations, co-operatives, not-for-profits, and white-label roasters— to list only a few possibilities—can also be intermediaries that help the specialty coffee industry create and capture value.
It’s also the case that not every intermediary that provides a useful service is a good one. There will always be unfair pricing even for useful services. A co-operative that manages coffee sales for its members provides a useful service, but it isn’t a good intermediary if it charges its members an unfairly high price for that service. A transport agent that consolidates lots and arranges over-water transport provides a useful service, and it is a good intermediary if it can provide this service reliably and at a fair price (lower than what it would cost a direct trader to arrange its own reliable transport).
Direct traders could also add value in the same way as intermediaries do— but probably only at the expense of an investment of time and effort that would make no sense. The crucial insight here is that intermediaries can be better positioned to add value to the supply chain than direct traders, and they can be good in that they charge a fair price for the useful services they provide. In these situations, it makes sense to use good intermediaries instead of insisting on going direct.
Strategically Using Intermediaries
One of the main reasons for using intermediaries is that they can often be better positioned to do things that reduce uncertainty or minimize its impact further down the supply chain. Being strategic means using intermediaries in ways that improve both how specialty coffee businesses operate and how well they are able to communicate value (that justifies premium pricing) to end-consumers.
There are two main principles for how to approach this.
First, use the right tool for the job. Ask whether the intermediary is better positioned to mitigate risk and manage uncertainty, and whether they charge a fair price for doing it.
Second, make the right tool for the job a part of the consumer-facing narrative. If intermediaries are adding value, include that in the story end-consumers hear. By now, it’s clear that consumers are willing to pay more for coffee that is grown more sustainably and equitably. Where supply chain intermediaries like agricultural NGOs or co-operatives are helping to achieve this, they can and should become part of the story that justifies better value to the consumer.
This more nuanced approach to educating the end-consumer is not yet very common, but there are scattered examples of this outside specialty coffee, in industries ranging from textiles to furniture. One place where this is happening in the food and beverage space is low- intervention wine, where the philosophy of viticulture and vinification is often part of the narrative that retailers and service staff present to end-consumers. This narrative is slowly beginning to highlight producers’ memberships in voluntary associations whose members share similar ethics and production practices, such as Les Vins SAINS[4] in France, whose members commit to adding no sulphites to any of their wines, or Schmecke das Leben[5] in South Styria in Austria, whose five members commit to sustainable management of soil, vines, and wines that are permitted to evolve freely in the cellar and bottle.
As an industry, specialty coffee is well placed to do something similar because it invests an enormous amount of time, effort, and money in education. Thinking clearly about the role of good intermediaries can highlight directions for future coffee education. Teaching consumers to understand other aspects of the coffee supply chain may create future opportunities to include intermediaries in the specialty coffee story as well.
In the end, figuring out which tool is right for the job and telling a compelling story about it requires clearly understanding— and communicating—the valuable actions of intermediaries who are best placed to do what they do: one path the specialty coffee industry can take toward both creating and capturing more of coffee’s value. ◇
VAUGHN TAN is a strategy consultant, Assistant Professor of Strategy and Entrepreneurship at University College London’s School of Management, and the author of The Uncertainty Mindset: Innovation Insights from the Frontiers of Food. www.vaughntan.org
References
[1] “Designing for Innovation: The Role of Uncertainty,” https://sca.coffee/sca-news/watch/designing-for-innovation-the-role-of-uncertainty-vaughn-tan-reco-2021.
[2] “Welcome to Re:co Symposium 2023,” https://sca.coffee/sca-news/watch/video/welcome-to-reco.
[3] “Not Knowing: A Book and Discussion Series,” https://vaughntan.org/notknowing.
[4] Les Vins “Sans Aucun Intrant Ni Sulfite” (SAINS), which translates to: Wines “without any input or sulphite added,” https://vins-sains.org/.
[5] Schmecke Das Leben, or “Taste Life,” based in the Austrian state of Styria, https://www.schmecke-das-leben.at/.
We hope you are as excited as we are about the release of 25, Issue 19. This issue of 25 is made possible with the contributions of specialty coffee businesses who support the activities of the Specialty Coffee Association through its underwriting and sponsorship programs. Learn more about our underwriters here.