Climate Change Brewing Trouble for Starbucks

CONTEXT

The issue of climate change has widespread effects on many businesses and industries, many of which impacts our daily lives. Take for example, a cup of coffee that we buy at Starbucks costs us two dollars and change, and we expect this price to be fairly stable and steady. But imagine, the coffee supply drastically changes and now Starbucks is forced to increase prices drastically. Some people may not care, while others will find this disruptive to not only their daily routines but also their wallets. After all, in the most recent coffee year (Oct. 2015 to Sept. 2016) an estimated 20 billion lbs. of coffee were consumed worldwide, at a growth rate of ~1.3%.4 More interesting is that in the 2015 – 2016 coffee years, global coffee consumption outpaced production, and has done so for two consecutive years (with a deficit of 360 million lbs and 440 million lbs respectively) 4. While this deficit was addressed by historical surpluses, one cannot help but wondered how long this situation can last and if this trend will be reversed.

 

THE PROBLEM FOR STARBUCKS

A company like Starbucks has to continually think about how climate change affects their business, and the implications to their operating model. But before we dig into the different levers Starbucks can pull to navigate climate change and its corresponding impacts, we first need to unpack why climate change affects Starbucks’ business. Starbucks depends heavily on farmers to produce the coffee it needs to satisfy customer demands on a worldwide basis. However, climate change is disrupting the production process given the rise in temperatures and the impacts on arable land for coffee beans. 80% of land currently used for Arabica coffee production (one of the most widely consumed bean-types) will become unsuitable by 2050, while globally this production is expected to decline 50% over the same period. 2 A rise in average temperatures contributes to things such as leaf rust of coffee crops which destroys the crop and renders it useless. 5 Climate change can single handedly disrupt Starbuck’s supply chain, and a small change in price from a farmer who has seen their supply diminish may have a huge impact on the prices that Starbucks has to buy and sell the coffee at. In its simplest form, Starbucks is facing a market with rising demand and declining supply, the latter being largely driven by climate change.

POTENTIAL LONGER TERM IMPLICATIONS

For Starbucks, this could mean a couple of things: (1) raise prices given the decreasing the supply, a move that would likely not be popular with consumers; (2) initiate structural changes to its business model and potentially sell alternative products—a non-core activity that Starbucks may not be familiar with and potentially has to build from scratch; (3) large shift of its supply chain / sourcing to regions that are less impacted by climate change—a move that is potentially costly due to new investment in logistics and infrastructure required to make this a reality.

WHAT STARBUCKS IS DOING & WHAT ELSE

Currently, Starbucks is focused on a couple initiatives to address the impacts of climate change. One action Starbucks has taken is working closely with farmers to implement climate-smart agricultural practices as part of their Coffee and Farmer Equity Practices (C.A.F.E.), Starbucks’ ethical buying standards. 1 For example, Starbucks is encouraging farmers to use better soil management practices to curtail the negative impacts of climate change. 2 Furthermore, Starbucks has invested in helping farmers understand how to potentially grow coffee in warmer climates to increase coffee yields in areas impacted by climate change. 2 It even bought it’s own farm in Costa Rica to further test growing practices. 2 On the retail side, Starbucks has targeted LEED certifications for its building to lower its direct contribution to climate change. 1

While Starbucks has taken actions to address the climate change problem, there are two key longer term areas it should focus on: (1) develop a more robust crop innovation program through partnerships with companies leading the charge in this space and (2) consider creating a cross-competitor task force to invest funds into improving the coffee production process. The first idea, if successful directly reverses the trend of decreasing yields, and allows Starbucks to improve the health of its supply chain. Given the rise of agriculture companies like Indigo, who is leading the charge in crop yield research and technologies, I think there is a potential opportunity for Starbucks to partner with Indigo to investigate applying Indigo’s crop yield technology to coffee and pushing this upstream for the farmers. Second, since climate change is a global problem, I think collaborating with competitors will allow the coffee industry to pool resources together to solve a problem that every player has a meaningful stake in, and together leverage the scale and involvement of each company to address this problem.

 

Word Count: 794 (excludes titles in body of text)
Notes:

  1. Coffee year defined as October in particular year to September of following year.
  2. Coffee consumption figures translated to lbs. given figures found on ICO.org website.
  3. Figures are rounded to present directional view, and are therefore not exact.

 

References:

  1. Starbucks Coffee Company. 2016. Tackling Climate Change | Starbucks Coffee Company. [ONLINE] Available at: http://www.starbucks.com/responsibility/environment/climate-change. [Accessed 03 November 2016].
  2. Nanette Byrnes. 2016. Starbucks Responds to Climate Change, with Mixed Results. [ONLINE] Available at: https://www.technologyreview.com/s/601404/starbucks-responds-to-climate-change-with-mixed-results/. [Accessed 03 November 2016]
  3. JODIE THORPE, SHELLY FENNELL . 2012. CLIMATE CHANGE RISKS AND SUPPLY CHAIN RESPONSIBILITY. [ONLINE] Available at: https://www.oxfam.org/sites/www.oxfam.org/files/dp-climate-change-risks-supply-chain-responsibility-27062012-en.pdf. [Accessed 3 November 2016].
  4. . 2016. International Coffee Organization – The Current State of the Global Coffee Trade | #CoffeeTradeStats. [ONLINE] Available at: http://www.ico.org/monthly_coffee_trade_stats.asp. [Accessed 03 November 2016].
  5. The Guardian. 2016. Latin America: how climate change will wipe out coffee crops – and farmers | Environment | The Guardian. [ONLINE] Available at: https://www.theguardian.com/environment/2014/mar/30/latin-america-climate-change-coffee-crops-rust-fungus-threat-hemileaia-vastatrix. [Accessed 03 November 2016].
  6. CIAT Blog. 2016. Climate change: Arabica coffee faces a roasting – CIAT Blog. [ONLINE] Available at: http://www.ciatnews.cgiar.org/2015/10/27/climate-change-scientists-pinpoint-the-worlds-most-vulnerable-coffee-zones/. [Accessed 03 November 2016].
  7. Nature World News. 2016. Coffee Shortage Predicted Due to Climate Change; Starbucks, Agriculture Industry Worried : News : Nature World News. [ONLINE] Available at: http://www.natureworldnews.com/articles/22059/20160512/coffee-shortage-predicted-due-to-climate-change-worries-starbucks-and-the-agriculture-industry.htm. [Accessed 03 November 2016].

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2 thoughts on “Climate Change Brewing Trouble for Starbucks

  1. If the current coffee production area will become non-productive by 2050, couldn’t the coffee farms just move north? Or could Starbucks work with a provider of GMOs to engineer a coffee tree that could thrive in a wider range of temperatures? Has starbucks considered the climate effects of their stores? It would seem that a Starbucks store would use a lot of electricity to heat water further contributing to global warming, higher coffee prices, and higher net margins. Maybe they have modeled this and decided they can actually be more profitable as a climate change supporter?

  2. Great post, thanks a lot for sharing. I had no idea the extent to which Starbucks has been involved with sustainability, nor how affected the company is on a unit-economics basis.

    A few questions raised: I’d love to know a little more about how exactly Starbucks interacts with the farmers that it depends heavily upon to produce the coffee: what sort of contracts or arrangements have they in place to allocate their global supply? As you mention, climate change is disrupting production (given the rise in temperatures/impact on arable land for coffee beans): have they shifted their gepgraphical focus overtime therefore? Are they looking to move their farming to different locations? This would I presume, have huge implications upon Starbuck’s’ supply chain.

    One interesting short introductory piece I found relating to this was published by the University of San Fransisco: http://www.usanfranonline.com/resources/supply-chain-management/starbucks-supply-chain-balances-efficiency-with-sustainability/#.WCFQW5MrJsM. It mentions that the company is streamlined logistically across six continents which seems a colossal amount, with materials housed in regional distribution centers ranging from 200,000 to 300,000 square feet: how do you think this will be impacted overtime from climate change?

    Lastly: some of my further reading after your post led me to learn of their issuance of a U.S. Corporate Sustainability Bond in May this year: what is your view on this? How would an initiative like this be compared in effectiveness vs. creating the existing partnerships you mention (i.g. to develop a more robust crop innovation program), and creating a cross-competitor task force?

    Thanks for raising such an interesting topic! My coffee won’t taste the same anymore..

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