Starbucks' Coffee Conundrum

Starbucks (Nasdaq: SBUX  ) has found itself in the midst of a quandary about its dealings with Ethiopia. After a high-profile trademark dispute, the coffee giant appears to be making concessions regarding a complex issue, one it had little choice but to address.

Ethiopia, which produces high-quality coffee beans, has claimed that Starbucks has been seeking to block its attempts to trademark its coffee; it believes trademarks could get it better prices. Some claim that approximately $90 million in potential income to poor farmers has been lost because of the lack of trademarks, and that the prices Ethiopian farmers get for premium beans still leave them impoverished. Following that idea to its logical conclusion, critics point out Starbucks' robust profits, and the lofty prices it commands for selling brew made with premium beans.

Speaking of critics, last year saw the release of a scathing documentary, Black Gold: Wake Up and Smell the Coffee, describing troubling elements of the international coffee industry. The movie also delves into Fair Trade, a movement to pay better-than-market prices for commodities like coffee -- a price hike many consumers are willing to bear. Starbucks wasn't the only target of criticism -- the documentary also implicated large corporations such as Kraft (NYSE: KFT  ) , Nestle, Procter & Gamble (NYSE: PG  ) , and Sara Lee (NYSE: SLE  ) .

Starbucks seems to be softening its stance in the wake of the criticism. It plans to double its purchases of East African coffee from 6% to 12% by 2009, and increase purchases from Ethiopia specifically. It will also provide $1 million in microfinancing loans to poor farmers in the region, while funding farmer support centers as well. Starbucks already provides $4.2 million in social development projects in East Africa. Bear in mind, though, that Starbucks previously defended its Ethiopian stance in a December letter to the Seattle Post-Intelligencer, pointing out that it exceeded the New York commodity price for coffee by 23% in 2005. The company also pointed out that it already has its C.A.F.E. (Coffee and Farmer Equity) Practices in place to ensure socially responsible coffee buying.

Despite those efforts, it's hard to ignore the deal Starbucks rival Green Mountain Coffee Roasters (Nasdaq: GMCR  ) recently made with Ethiopia, in which it pledged to recognize the country's coffee brands. (Gee, I wonder what the Ethiopian spokesman was implying in his comment to Reuters when he said that he hoped other coffee companies would follow the precedent?)

On the face of it, the pricing issues here seem to turn traditional economics on its head. Then again, farm subsidies in America and Europe, which critics charge with keeping coffee prices artificially low, don't exactly strike me as the free market at work, either.

Starbucks had little choice but to address this thorny, high-profile issue. The company has built its brand around being a different, more socially responsible kind of company, and it seems to me that any implications to the contrary are risky for the java giant. As increasing numbers of socially aware consumers vote with their wallets these days, and Starbucks continues to court them, the coffee company has an ongoing challenge to live up to its branding. Over the long term, that commitment to fair practices should serve it well. Given Starbucks' continued growth, however, staying socially responsible probably won't get any easier from here.

Pour yourself some related Foolishness:

Starbucks is a Motley Fool Stock Advisor recommendation. To find out what other companies David and Tom Gardner have recommended to subscribers, click here for a 30-day free trial.

Kraft and Sara Lee are Income Investor selections.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.


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