The Grounds for Sharing: A Comprehensive Analysis of Value Distribution in the Coffee Industry | 25, Issue 22
Senior Program Manager for Coffee at IDH, the Sustainable Trade Initiative, METTE-MARIE HANSEN shares key insights from the recently published report, The Grounds for Sharing. The report was commissioned by the Global Coffee Platform, IDH, and Solidaridad and traces how value for coffees sold in the German retail sector is created and distributed along supply chains.
“In other news,” reads the caption of one internet meme, “water is wet.” Although perhaps not the most expressive idiom of its kind—implying that whatever was said beforehand was incredibly obvious—it commonly appears whenever the results of academic work confirm something already “known.” I saw much of the same sentiment ripple throughout social media upon the release of the study The Grounds for Sharing: A Study of Value Distribution in the Coffee Industry, which Mette-Marie Hansen explains in this feature. However, “water is wet” is a less straightforward statement than its short construction implies. Whether or not water is, in fact, wet depends on how you define “wet,” your understanding of physics, and your perspective.[1] There is a similar complexity underpinning the statement that “coffee’s value is distributed inequitably.”
One of the many reasons study results can feel obvious is because they move anecdotal perception, or a sense of what feels reasonably “true,” into empirical form (something that has been observed and documented). While I remember lots of discussion about price when I first started working in coffee in the early 2000s—and perhaps a good deal of consensus that producers were not rewarded enough for their efforts—I don’t recall having easy access to reports on the breadth of scale of The Grounds for Sharing. (Studies outlining the cost of production for certain regions and several companies that shared a look at their own specific chains, yes—but nothing that came close to the 40 products and four countries covered in the report.)
While it may feel tempting to focus on one of the report’s key findings that confirms what we think we already know—the undervaluation of family labor on small farms, or that profits are concentrated in the retail sector—it’s also important to highlight where it contradicts expectations. Although still being prepared
for publication at the time, this collaborative report commissioned by the Global Coffee Platform, IDH, and Solidaridad was one of the external sources the SCA used to cross-reference its survey findings when compiling its own report to understand industry perception of “equitable value distribution.”[2] The SCA’s survey found that respondents expressed confidence in their understanding of value distribution in coffee as well as in their perception of the value received by different supply chain actors. In particular, respondents to the SCA’s survey reported believing that importers receive “comparatively large rewards” (i.e., they capture more value than they create)—but this perception directly contrasts with this investigation's finding that importer margins are low.
In some ways, I’m grateful that the idea of equitable value distribution is becoming so embedded within our industry that a groundbreaking study like The Grounds for Sharing was met with a sense of “yes, of course!” In other ways, I hope that closer examination of its findings prompts readers to move beyond simple agreement and towards “yes, and what if...?” Perhaps this study can act as a reminder that identifying a problem is not solving the problem—action is required.
JENN RUGOLO
Curatorial Director
With a global consumption of over 2.25 billion cups of coffee daily, the international coffee sector continues to thrive, generating substantial value. However, a significant knowledge gap exists regarding the distribution of this value within the supply chain.
Understanding how value is distributed along this chain is crucial for ensuring that all stakeholders, especially those at the beginning of the supply chain, receive fair compensation for their contributions.
The complex nature of the coffee market poses risks for all stakeholders involved in the supply chain. Coffee farmers often face price volatility, the impacts of climate change, and limited access to resources. Exporters and importers must navigate complex logistics and trade regulations. Roasters and retailers are tasked with meeting consumer demands for quality and sustainability. These factors have pushed value away from producers and towards coffee buyers and brands. This shift, combined with rising labor and input costs, has disproportionately impacted vulnerable coffee producers, placing them at a significant disadvantage. This scenario not only jeopardizes the livelihoods of farmers but also poses long-term risks for the entire sector.
In response to these challenges, the Global Coffee Platform (GCP), IDH, and Solidaridad commissioned the economic research firm BASIC (Bureau d’Analyse Sociétale d’Intérêt Collectif) to develop a model that assesses the distribution of value, costs, taxes, and net profit margins along coffee value chains. By examining the journey of coffee from farmers in Brazil, Colombia, Ethiopia, and Vietnam to retail consumers in Germany, the aim is to shed light on the value creation process and identify opportunities to improve farmer prosperity by reevaluating value and risk distribution within the sector.
How to Measure Value Creation and Distribution?
BASIC conducted this research using a three-part approach. Desk research served as a crucial starting point and was supplemented by data collection from publicly available reports. Later, stakeholders across the value chain validated the results through multiple feedback rounds. This process ensured that the findings of the reports resonated with real-life participants in the supply chain.
The study investigated over 40 retail products in the German market, including ground coffee (see figure 1), whole beans, soft pods, and capsules. The researchers studied single origin coffees and blends produced by national brands and private labels. Germany was selected for the study because of its status as the largest coffee consumer in Europe and the third largest globally. The country has a significant coffee roasting sector, and its coffee retail landscape is highly competitive. The chosen producing countries in the study (Brazil, Colombia, Ethiopia, and Vietnam) represent diverse production systems, farm sizes, and a mix of robusta and arabica cultivation. The study examined the production of conventional and Rainforest Alliance and Fairtrade certified coffees.
The result of the investigation was a published report and an online tool[1] into which users can input data in order to simulate how the value and costs of a certain coffee might be distributed throughout the value chain.
Key Players in the Supply Chain
Intermediaries such as exporters and importers serve as important connectors between producing and consuming countries. These key players facilitate the seamless movement of coffee, ensuring that it reaches its destination efficiently and in optimal condition, and thus, add value through logistics, quality control, and market access.
Roasters are another key player in the value distribution process. They add value by transforming raw coffee beans into the roasted product that consumers enjoy. This process involves not only roasting but also branding, marketing, and distribution. Roasters are often able to charge premium prices for branded and specialty coffees.
Consumers play a crucial role in the coffee supply chain, as their preferences and purchasing decisions drive demand. Factors such as price, quality, and sustainability influence consumer choices and, in turn, impact value distribution. Price is a significant consideration for many consumers, but as sustainability becomes an increasingly important factor for them, they are also showing a willingness to pay a premium for high-quality and ethically sourced coffee.[2] Companies have begun to adopt more sustainable practices in response to an increasing demand for specialty coffees and coffee sourced through sustainable certification schemes that provide assurances that the coffee has been produced in a manner that is socially and environmentally responsible.[3]
Figure 1. This infographic depicts the average profit margin in different parts of the value chain for ground coffee sold under a national brand in German retail outlets. The average sales price to consumers was €8.06/kg. The retail sector makes the largest margin per kilogram (€1.39/kg on average), compared to €0.89/kg for roasters, €0.26/kg for traders, €0.29/kg for exporters, and €0.41/kg for farmers (with family labor not accounted for). Please note that a coffee tax of €2.19/kg is levied on all roasted coffee sold within Germany.
Key Insights: Increased Value Creation in Roasting and Retail Stages
Perhaps not entirely surprisingly, the study uncovered a notable concentration of value shifting away from the farm level and towards importers, roasters, and especially retailers. This transition is partly due to the added value linked with branding, marketing, and premium product formats like single-serve capsules, which command higher prices without proportionally benefiting the farmers.
Net profit margins are low but stable for the international transport, collection, and export stages. These parts of the value chain can remain profitable thanks to economies of scale— the high volumes these players often deal with secure their profitability. Overall, the retail and roasting stages capture a large portion of the value in the coffee supply chain, and the coffee cultivation stage receives a much smaller share.
Figure 2. This graph displays the net profit margins made at various points of the value chain(collection and export, international transport and trade, roasting and product manufacturing, and retail) on four coffee products: ground coffee, whole bean, soft pods, and capsules. Notably, all supply chain actors receive less than €0.08/kg net profit for ground coffee. Single-use products such as soft pods, and especially capsules, significantly increase the net profit made in the roasting and retail sectors.
Key Insights: Undervaluation of Family Labor
Another critical observation from the report is the undervaluation of family labor on small farms. Many smallholder farmers overlook the labor contributions of family members, leading to a skewed perception of profitability. Accurately valuing this essential input is crucial for adequately compensating these farmers to mitigate economic instability and poverty within the sector.
Actors involved in the collection and export stages, as well as coffee farmers, often lack control over the final form and destination of the coffee they produce and export. This lack of control extends to the countries and markets where the coffee is sold and to the types of finished goods sold to consumers. Unless operating in the specialty coffee niche, coffee farmers have limited ability to leverage the specific qualities of their coffee and the effort they put into their work for greater profit. Factors such as global coffee prices and differential trading, as well as shifts in consumer demand, are largely beyond the control of growers. Many coffee farmers, particularly those with small plots and low yields, face challenges such as lack of collective organization and dependence on a few buyers. This is especially prevalent in countries like Colombia, Ethiopia, and Vietnam, where a significant portion of farmers cultivate small plots and rely heavily on coffee as a key income source. Farmers’ reliance on coffee as a primary livelihood means that any fluctuations in the market can have profound impacts on their economic stability.
The coffee value chain often generates uneven income distribution within producing countries themselves. In Brazil, larger farms cultivating more than five hectares managed to make a good living from coffee in 2021, while smaller farms struggled. This disparity arises from uneven production costs and relatively uniform farmgate prices for conventional coffee. Market dynamics mean that larger farms tend to be more efficient and therefore profitable. Smallholder farmers often have few choices; among them, to continue growing coffee and remain in poverty, or to emigrate.
By identifying these vulnerable farmers and connecting them with value chains and end products, this analysis provides a basis for risk assessment in supply chains. It enables roasters and retailers to identify products linked to farmers who cannot secure a decent livelihood and to explore solutions to address this issue, considering value distribution, costs, taxes, and net profit margins throughout the chain.
What Practical Steps Can Be Taken to Improve Value Distribution?
By highlighting the disparities in value distribution and the obstacles faced by farmers, the report sets the stage for important conversations that will lead to a set of standardized sourcing principles that includes value distribution. Guaranteeing fair compensation for all involved, with transparent pricing mechanisms that account for production costs, including family labor, is essential to ensuring the economic viability and sustainability of coffee farming and is crucial for the long-term health of our industry. Achieving a sustainable industry necessitates a thorough reassessment and restructuring of coffee’s economic model to guarantee fair compensation for all stakeholders, especially those involved in production. The coffee industry must now collectively work towards these goals, fostering a value chain that is not only economically viable but also fair and sustainable.
METTE-MARIE HANSEN is the Senior Program Manager for Coffee within the Agri-Commodities Business Unit at IDH, the Sustainable Trade Initiative.
References
[1] This tool can be found at https://value-chain-observatory.basic.coop.
[2] Alexa Romana, “From Passive to Active: Expanding Our Understanding of Specialty Coffee Consumerism,” 25, no. 21 (2024), https://sca.coffee/sca-news/25/issue-21/from-passive-to-active-expanding-our-understanding-of-specialty-coffee-consumerism; Katherine Fuller and Carola Grebitus, “Consumers’ Preferences and Willingness to Pay for Coffee Sustainability Labels,” Agribusiness: An International Journal, 39, no. 4 (Fall 2023), https:// doi.org/10.1002/agr.21810.
[3] Elizabeth Sturges, “How Are Certifications Used to Market Coffee?” Perfect Daily Grind, September 6, 2023, https://perfectdailygrind.com/2023/09/certifications-used-to-market-coffee/.
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