Bolaven Farms_case_2013.pdf

Marta Dowejko prepared this case under the supervision of Dr Gilbert Wong for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes.

© 2011 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong.

Ref. 11/494C

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This case is for use in the HSBC Business Case Competition 2013 only.

MARTA DOWEJKO GILBERT WONG

THE LAO COFFEE INDUSTRY: IMPLEMENTING VERTICAL INTEGRATION FOR A SOCIAL

CAUSE AT BOLAVEN FARMS

Their hope is our joy.

-Bolaven Farms about its resident farmers Founded in early 2007 by Sam Say, a Lao refugee who lived in Canada and Hong Kong, Bolaven Farms was a coffee business with a social purpose. With an office in Hong Kong and a farming facility in Laos, the venture’s mission was to provide high-quality coffee to the worldwide public while helping to alleviate poverty among coffee farmers. To achieve this lofty goal, Say developed a business model that involved a full integration of the coffee supply chain, from planting the coffee seed to selling the final branded product to wholesale and retail customers. The model hinged on Say’s ability to raise Lao coffee production to international standards, both in its quality and quantity. Once a stable supply of coffee was achieved, Say had to find customers who were willing to pay a premium price for the coffee he produced. To achieve this, Bolaven Farms trained its own cohort of local farmers in modern production techniques on its farm. The original idea was to provide farmers who graduated from the programme with a US$5,000 loan so they could set up their own farms and start supplying high-quality coffee to Say’s venture. However, it quickly became apparent that the farmers lacked the necessary skills to properly invest their loans. On the other side of the supply chain, Bolaven Farms began to test the market while its own farmers were setting up for production. Say obtained high-quality coffee from a local cooperative run by a French non-governmental organization (“NGO”) and distributed it through his own channels. However, he had a hard time finding customers who were willing to pay a premium price for his coffee in the mature and highly competitive coffee market.

11/494C The Lao Coffee Industry: Implementing Vertical Integration for a Social Cause at Bolaven Farms

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Bolaven Farms expected its first coffee harvest by early 2011. Four years into operations, Say had personally invested US$4 million in the project. It was time to re-evaluate the business model and make the venture a success without compromising on its mission.

The Worldwide Coffee Industry

Worldwide Coffee Production and Consumption

Coffee was one of the world’s most important tropical commodities, with 6.1 million tonnes being traded worldwide in 2008. Three main types of coffee were being traded: green, unroasted coffee beans; roasted coffee beans; and soluble coffee products. Green coffee accounted for more than 80% of the worldwide coffee trade, in terms of value and volume.1 Two principal varieties of coffee beans, Arabica and Robusta, made up the majority of trade. The International Coffee Organization valued the 2007 coffee export market at US$12.7 billion, with an annual growth rate of 17%.2 Between 70 and 75% of the coffee produced each year was intended for export. The retail value of the coffee traded was estimated at US$32.1 billion in 2009, up 6% compared to 2007 and 42% compared to 2004.3 The largest coffee producers, Brazil, Vietnam and Columbia, accounted respectively for 31%, 14% and 9% of the world’s green coffee production in 2009.4 Coffee consumption had been growing at an annual rate of 2.4% since 2000.5 In 2007, Europe was the largest consumer of coffee, accounting for 31% of worldwide consumption,6 followed by the United States with the consumption of 16% of the world’s coffee, and Brazil with the consumption of 13% of the world’s coffee.7 Coffee prices were notoriously volatile, which had a very strong impact on the economy of coffee-producing countries and the living standards of coffee farmers.8 For the farmers, the lower income from crops meant limited access to education, housing, food and medical services.

The Traditional Supply Chain

The coffee industry’s traditional supply chain involved four main phases of production, according to the stages of processing the coffee bean: farming, trading, roasting and distribution [see Exhibit 1].

Coffee Farming

The coffee plant, a tropical and subtropical shrub, yielded the best results in humid and warm conditions. If well maintained, each coffee plant could provide up to two harvests per year, with the first crop harvested four years after planting the shrub.9

1 For details, see the Tropical Commodity Coalition website: http://www.teacoffeecocoa.org. 2 International Coffee Organization, http://www.ico.org (accessed 30 March 2010). 3 Euromonitor International, http://www.euromonitor.com (accessed 30 March 2010). 4 International Coffee Organization, http://www.ico.org (accessed 30 March 2010). 5 Pay, E. (2009) “The Market for Organic and Fair-trade Coffee”, Food and Agriculture Organization of the United Nations,

http://www.fao.org (accessed 30 March 2010). 6 The International Coffee Organization calculates the consumption level as disappearance of coffee in an importing country by

deducting the re-export from imports and adjusting it by the official inventory levels. 7 International Coffee Organization, http://www.ico.org (accessed 30 March 2010). 8 Pay, E. (2009) “The Market for Organic and Fair-trade Coffee”, Food and Agriculture Organization of the United Nations,

http://www.fao.org (accessed 30 March 2010). 9 Interview with Sam Say, founder of Bolaven Farms, December 2009.


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Ripe coffee cherries were harvested manually and processed on the farm before being sent for further processing or exports. The primary processing included extracting coffee beans from the cherry, drying and fermenting. There was a general misconception among the public that all you needed to get a good cup of coffee was to plant high-quality shrubs. However, the processing was equally important. After the ripe cherries were harvested, the processing needed to follow without delay, as oxygen would start to attack sugars in the cherry and begin the fermentation process. The control over the length and conditions of the fermentation process would determine the potential quality of the coffee. There were two principal methods of processing, wet and dry. In the wet method, the cherries were fermented, washed, dried and peeled. In the dry method, also referred to as the “natural method”, the cherries were dried and peeled. The end products of both methods were green coffee beans. These could be traded as green coffee, further roasted, or processed into soluble coffee.

Coffee Trading

Green coffee was made available to buyers either directly from farms or via the trading markets based in Europe and the United States. Most buyers were looking for uniform and consistent quality of green coffee. The vendors were expected to provide information on the country of origin and type of coffee, whether it underwent wet or dry processing, and the official grade standard of the coffee beans.10 The farmers earned only between 2.5 and 6.5% of the final retail value of the coffee.11 The largest share of profits from the coffee exports went to the intermediaries and large roasters.

Coffee Roasting

The coffee traders and exporters were responsible for ensuring the quality control of the green coffee before proceeding with its sorting according to grade. The grading was helpful in establishing the final use for the coffee batch, i.e., whether it was for whole roasted beans, ground coffee, instant coffee or coffee capsules. At this stage, the coffee was cleaned and checked for any defects before being sold to roasters or brokers.12 Roasters, in turn, were responsible for creating coffee blends and roasting and grinding sorted and graded coffee beans. The roasting profiles of green beans were used to determine the end-product type. The profiles consisted of the coffee's origin, grade, variety and primary processing method. Six main coffee roasters served the worldwide retail markets, buying up to 45% of the green coffee imports worldwide and holding 45% of the branded coffee market share: Philip Morris/Kraft, Tchibo, J.M. Smucker Company, Starbucks, Sara Lee/Douwe Egberts and Nestlé.13 Roasters were the main source of innovation in the market, developing new products and blends and creating coffee brands for the end consumer. Innovation in product development and marketing added value to the final product, which allowed roasters to set high prices. Consequently, roasters earned the highest profit margins in the coffee supply chain.

10 For details, see the Tropical Commodity Coalition website: http://www.teacoffeecocoa.org. 11 Gresser, C. and Tickell, S. (2002) “Mugged: Poverty in Your Coffee Cup”, Oxfam, http://www.oxfamamerica.org (accessed

30 March 2010). 12 For details, see the Tropical Commodity Coalition website: http://www.teacoffeecocoa.org. 13 Ibid.


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Coffee Distribution

The most common distribution channels for coffee products in the United States and Europe were through supermarkets and traditional retail chains, specialty stores, and cafes. The price of the coffee varied to a great extent between different outlets. The lowest priced coffee was offered by supermarkets and retail chains, while cafes charged the highest prices for a 0.25 kilogram bag of coffee.14

Certified Coffees

Certified coffee was defined as coffee produced with respect for the three pillars of sustainable development: economic development for farmers, environmental conservation and social improvements. It was certified by independent third parties.15 Four main certification systems were offered for coffee: Rainforest Alliance, Fairtrade Labeling Organization, UTZ Certified and Organic.16 Two main types of certified coffee were recognized worldwide: organic and fair trade. Organic coffee was produced using processes that adhered to organic farming standards. Organic coffee agriculture relied on ecological processes adapted to local conditions, rather than on the use of synthetic fertilizers, antibiotics or genetically modified organisms. However, it was estimated that in 2007 around 25% of organic coffee produced worldwide did not bear any certification and was sold as a conventional coffee.17 Fair-trade coffee was purchased directly from the farmers at a higher rate than conventional coffee. The growers were offered a minimum price for their certified coffee, and a premium was added for farmers implementing organic farming techniques. Within the fair-trade scheme, coffee farmers received US$1.30 per pound of natural, conventional Arabica coffee compared to the worldwide average growers’ price of US$1.07 per pound in 2008 [see Exhibit 2].18 In 2008, 52% of certified fair-trade coffee sold worldwide received the organic certification as well.19 The certified coffees had a small market share in coffee imports worldwide, accounting for less than 1% of the coffee imports to European countries, the United States and Japan in 2008.20 This market share varied considerably from country to country, with market shares of 5% in Germany, 25% in the Netherlands and below 1% in Italy.21 However, the import volume of organic coffee to these countries grew by 564% from 2004 to 2008, with an average yearly growth of 90%.22

14 Ibid. 15 Tropical Commodity Coalition for Sustainable Tea Coffee Cocoa (2009) “Coffee barometer 2009”,

http://www.teacoffeecocoa.org (accessed 3 May 2010). 16 Giovannucci, D., Liu, P., and Byers, A. (2008) “Adding Value: Certified Coffee Trade in North America”, in P. Liu (ed.)

Value Adding Standards in the North American Food Market – Trade Opportunities in Certified Products for Developing Countries, Food and Agriculture Organization of the United Nations: Rome, pp. 33-–49.

17 Pay, E. (2009) “The Market for Organic and Fair-trade Coffee”, Food and Agriculture Organization of the United Nations, http://www.fao.org (accessed 30 March 2010).

18 International Coffee Organization, http://www.ico.org (accessed 30 March 2010). 19 Pay, E. (2009) “The Market for Organic and Fair-trade Coffee”, Food and Agriculture Organization of the United Nations,

http://www.fao.org (accessed 30 March 2010). 20 The European countries include Austria, Belgium, Denmark, Finland, France, Germany, Norway, Switzerland, Ireland, Italy,

Luxembourg, Netherlands, Poland, Portugal, Slovenia, Spain, Sweden and United Kingdom. 21 Tropical Commodity Coalition for Sustainable Tea Coffee Cocoa (2009), “Coffee barometer 2009”,

http://www.teacoffeecocoa.org (accessed 3 May 2010). 22 International Coffee Organization, http://www.ico.org (accessed 30 March 2010).


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Agribusiness Conditions in Laos

People in Laos

According to the United Nations (“UN”), 76.8% of the Lao population lived under the poverty line of US$2 per day in 2007.23 The literacy rate for the adult population was at 73% in 2008. Roughly 40% of primary school students continued their education in secondary schools.24 In 2008, Laotians had on average less than nine years of education, and very few graduated from vocational schools and universities.25 The combined primary, secondary and tertiary education gross enrolment ratio in 2007 was 59.6%.26 The adult life of Lao citizens started at age 15, and individuals attaining this age were expected to work full time. 27 According to UN statistics for the years 2000–2008, over 75% of the economically active population worked in agriculture.28

Low Productivity in Agriculture

The World Bank estimated that the GDP per capita (in current US$) in Laos in 2008 was US$858. Agribusiness in Laos, representing one third of the country’s GDP and covering 8.5% of the country’s land area, mainly relied on traditional farming techniques.29 Poor levels of general education and a subsequently limited access to knowledge hindered the farmers’ understanding of advanced farming technologies and contributed to a reliance on local seed varieties and a scarce use of soil fertilizers or pesticides. The lack of advisory services on farming, management and hygiene issues also contributed to the inferior quality and yield of farmers’ harvests. Consequently, the local crops were often substandard and very much dependent on the weather conditions and seasonal infestations.

Legal Constraints for Agribusiness

A 1997 Laotian law allowed for the transfer of land inheritance in terms of land use but did not envisage the transfer of the title to the land.30 In addition, in many areas the land was treated as community property and was distributed by the state according to local needs, in small parcels of land defined by state guidelines. This impeded the use of land by a large number of farmers who were unable to acquire larger plots of land or unwilling to invest in land that was not theirs. In addition, business registration and licensing procedures provided limited legal options and were discretionary and lengthy, taking as long as 195 days in 2005 and up to 100 days in 2008.31 Taxes were applied by provincial governments on an arbitrary basis and were required to be settled in advance.32 A similar non-transparency policy was applied to exportation regulations due to government officials’ lack of understanding of international trade procedures.

23 UNICEF, http://www.unicef.org (accessed 27 April 2010). 24 Ibid. 25 United Nations Statistics Division, http://unstats.un.org (accessed 27 April 2010). 26 United Nations Development Programme (2009) “Human Development Reports”, http://hdr.undp.org (accessed 3 May 2010). 27 Interview with Sam Say, founder of Bolaven Farms, December 2009. 28 Food and Agriculture Organization Statistics Division of the United Nations, http://faostat.fao.org (accessed 27 April 2010). 29 United Nations Statistics Division, http://unstats.un.org (accessed 27 April 2010). 30 Zola A. (2009) “Scoping Study on Cross-border Agribusiness in Lao PDR: Focus on Champasak Province”, Trade

Development Facility of World Bank, http://www.worldbank.org (accessed 30 March 2010). 31 World Bank, http://data.un.org (accessed 27 April 2010). 32 Zola A. (2009) “Scoping Study on Cross-border Agribusiness in Lao PDR: Focus on Champasak Province”, Trade

Development Facility of World Bank, http://www.worldbank.org (accessed 30 March 2010).


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The Coffee Industry in Laos

In 2008, Laos produced 31,125 tonnes of green coffee, accounting for less than 0.5% of worldwide production, with an average yield of 538 kilograms per hectare [see Exhibit 3]. In comparison, Vietnam’s average yield in the same period was 1,989 kilograms per hectare and Brazil’s was 1,260 kilograms per hectare:33

Most of the local [Lao] farmers are “natural farmers”. They leave the coffee trees as is, with no intervention, and harvest beans at the end. Surprisingly, they get the harvest, but it is not enough in terms of quantity and quality to move them away from poverty. Within their method, on average, a hectare of land produces up to 500 kilos of green beans, before roasting. It is much less after roasting. And their beans are smaller, so the price is even cheaper than for big beans. The lack of proven farming skills has kept Lao farming community in poverty.

- Sam Say, Founder of Bolaven Farms

Bolaven Farms

Bolaven Farms desires to act justly, show kindness, love, and walk humbly alongside the farming poor. By managing the entire supply chain of fine Bolaven coffees from farm-to-table, we commit to poverty eradication.

- Sam Say, Founder of Bolaven Farms

The Beginning

In 2006, Say was on one of many trips to his homeland, Laos. He felt a deep need to come back to the country from which he had to flee a long time ago. Coming a long way from being a refugee in a UN camp at the Lao border, he had become a successful steel trader from Hong Kong, and all he wanted was to forget the traumatic events of his adolescence. Yet, after learning about the deeply rooted social and economical problems of Laos, he had developed a strong need to contribute to the improvement of his compatriots’ living conditions:

Before I had no interest in Laos because I had too many bad memories related to the war, being a refugee, and my family’s financial losses. I put Laos in the freezer. It was natural for me to try to forget these painful memories. In 2006, I felt the urge of going to Laos more often and ask myself why I was there, because I had no love for these people. I now believe my God has given me the capacity to love Lao people and to become an advocate for the economic justice.

- Sam Say, Founder of Bolaven Farms During his visits to Laos, Say learned about the many challenges that local coffee farmers faced. They lacked basic farming knowledge, and their crops were insufficient to feed and support entire families. They also lacked access to markets and were often not able to sell their produce outside of their provinces. Their development prospects were also very limited, as local banks would not lend money to farmers, most of whom did not even have bank accounts. Say grew convinced that the only way to help local farmers was not through providing financial or material support, but through building an infrastructure for them to learn how to farm and how to monetize the fruits of their labour. In his mind, linking the

33 Food and Agriculture Organization Statistics Division of the United Nations, http://faostat.fao.org (accessed 27 April 2010).


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entire coffee supply and distribution chain, from planting the seed to pouring the last drop from the coffee pot, was a way to give farmers more exposure and better development prospects. The idea of Bolaven Farms was born with the main purpose of alleviating coffee farmers’ poverty in rural Laos, specifically by: • providing farmers with access to coffee consumption markets and ensuring higher profit

margins for their produce

• improving the quality of Lao coffee by disseminating practical and affordable organic farming systems free of charge

• ensuring farmers’ growth prospects by providing them with land and the know-how to develop their own operations

• educating young agri-managers by providing them with hands-on experience.

To realize his vision, Say teamed up with experienced people willing to contribute their time and energy to developing a business model and farming processes for Bolaven Farms. He found support among his friends, who advised him on managerial issues and helped to develop the business model and marketing strategy for Bolaven Farms. Portia Tam, a graphic designer; Becky Leung, a brand manager; Doug Miller, a public relations consultant; and Dennis Ng, an IT specialist, were the core team of Say’s venture. They were all highly motivated volunteers who shared Say’s concerns about Lao poverty issues and were willing to give their time to Bolaven Farms on weekends or during holidays. Through his connections, Say recruited Gilbert Suico, an agriculturalist from the Philippines. Suico’s NGO, Asian Rural Life Development Foundation (“ARLDF”), was already actively contributing to the development of farming techniques in the Philippines and supporting local communities in improving their social conditions. The ARLDF was a perfect match to Say’s vision of reviving coffee farming in Laos, so Suico decided to take this opportunity to share his agribusiness knowledge outside of the Philippines. He committed to Say’s cause for 10 years, starting in 2007. In 2006, the founding team travelled to Laos to negotiate a land lease with the local government. They got access to government officials though Lao contacts. They were aware that the negotiations might be lengthy and difficult. After all, their main preconception was that there was rampant corruption in Laos, but the Bolaven Farms team was not willing to compromise on its values. Full of hope, they presented themselves as a small business from Hong Kong, willing to share openly and freely its knowledge on farming and resources with others. A few months later, the government granted them a lease of 67 hectares in the Bolaven Plateau, an ideal place to grow high-quality coffee. With land to farm, Bolaven Farms was officially launched in April 2007 as a Hong Kong-based limited company with a 100% subsidiary in Laos. The Bolaven Farms vision was “to invest and empower the farming poor to break the cycle of poverty and build a stronger nation”. Its mission statement was, “Growing the finest coffee is our passion. Restoring land ownership to the joy of the farming poor is our desire.”

Bolaven Farms’ Approach

Say’s path through life was not easy. A UN refugee in 1977, he was sent with his family to Calgary, Canada, as a part of the UN programme of refugee relocation. Before leaving Laos, his family was entrepreneurial and prosperous, but the revolution took away all the fruits of their hard work. His father, a proud owner of a brick-making company, taught him a sense of righteousness in doing business. Equipped with strong personal values, people-oriented and with an eager personality, Say built his career as a steel trader in Hong Kong. His success in


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trading helped him put aside enough money to launch Bolaven Farms with no bank loan. He decided that US$4 million was more than enough to launch operations and put his ambitious business model in place. This sum was intended to sustain operations for the first four years or until the first coffee harvest. After that, he expected his business model to be operational, the supply chain to be linked, and the venture to break even. Once earned back, 80% of the future profit would be reinvested in the community development. Say thought that entering the coffee industry would not pose any major problems for a person with his experience. With a professional background in steel trading and almost 20 years of a successful career in commodities, he was convinced that trading yet another commodity, such as coffee, would not raise any unexpected challenges. At the initial stage of development, the venture was supposed to be run mainly with the help of Hong Kong-based volunteers who were willing to invest their time in working for a social cause. Say, an experienced networker, was counting on his interpersonal skills in securing eager cooperation to develop marketing and operations, and on the appealing mission of his business to generate sales and external support. Soon, several other volunteers joined Say, Suico, and Say’s brother, Thomas, an experienced business manager, on their quest of rebuilding the reputation of Lao coffee.

Business with a Cause

Bolaven Farms had two main lines of business: (1) coffee farming and distribution, and (2) farmer education and management training for young Laotians. The coffee-farming system was implemented in 2007 in cooperation with Suico, a founding member of the ARLDF. He provided the farm with his expertise in organic farming techniques. Of the 67 hectares that Bolaven Farms leased in the Bolaven Plateau, 40 hectares were allocated for a coffee plantation and the remaining 27 hectares were reserved for housing, animal stock and other plantations. The farm replicated the ARLDF’s farming system and integrated legumes as a source of nutrient-rich vermicompost (worm-produced compost) for the coffee plants. Livestock was integrated into the system to provide the farm with an additional income and a source of provisions for the farmers. The main reason for founding a farm was to use it as a demonstration and training centre for Lao farmers and future agri-managers. In the first round, Bolaven Farms invited a group of 130 farmers, together with their families, to come and live at the farm for two years. The package for each family included three meals a day, on-site housing, a wage for the adults for the work they provided, basic schooling for the children below age 14 and a 30% reimbursement of medical bills. The initial two-year learning period was necessary to start the farm and make it grow. In May 2009, five families graduated from the programme, and there were another 72 adults and 29 children gaining organic farming skills. The business plan envisaged six-month training for the subsequent farmers, with a training capacity of 30 families per year. It cost approximately US$1,000 per year to train of a single farmer. A second group of Lao citizens receiving an education at the farm consisted of management trainees. According to Say, the most qualified Lao university graduates brought into the programme were at best on the same level as Hong Kong’s secondary-education graduates. The hands-on learning opportunities provided by the farm were therefore very helpful in developing and educating the local community. In the initial group, there were eight trainees enrolled for a three-year training course. In 2009, the group was further extended to 14 trainees. They took care of different segments of the farm, such as coffee-farming management, wet-mill processing, livestock management, fertilizer production and building


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maintenance. The training of a single management trainee cost US$2,400 per year and the programme was taking up to 50% of the farm manager’s time. In late 2009, there were 150 people involved in the farm’s operations. These included 18 full-time staff members in Laos, working directly from the farm under Suico’s direct supervision. At that time, only one person in the management team was a full-time employee. In early 2010, the organizational structure of Bolaven Farms grew further, and there were seven full-time employees to support the venture’s operations [see Exhibit 8].

A Future for Farmers

Once farmers graduated from the programme, they needed an assurance of employment and additional land to cultivate. In late 2009, there were already five families who had graduated from the programme and who required further assistance with acquiring land for farming. At that time, Bolaven Farms considered two solutions. The original idea was to give a loan of US$5,000 to each of its graduates to establish their own three-hectare farms. However, according to the management trainees, this was not a very good solution. They feared that Bolaven Farms would never retrieve the money it invested in farmers who were uneducated in business. Instead, they opted for contract farming, where Bolaven Farms would own the land and hire farmers to each maintain and manage three hectares of land: one for coffee farming, one for housing and livestock, and one for an alternative crop to counterbalance the risk from coffee. The initial income from each three-hectare farm would cover its establishment costs. Once the cost was recouped, 60% of the farm’s output would belong to the farmers. This meant that to implement the training programme, Bolaven Farms needed to acquire 90 hectares of land per year to accommodate all graduating families. This required not only an advanced level of cooperation with local authorities, but also further financing to purchase new land. To this end, in early 2010 Say began talks with Lao and Hong Kong banks and searched for individual investors. His idea was to find 30 of his friends who were willing to invest US$20,000 each with 5% return and who would be fine if the money was never returned to them.

Linking the Supply Chain

The principal idea behind the business was to remodel the traditional supply chain for coffee products [see Exhibits 1 and 4]. Bolaven Farms intended to remove at least four intermediaries from the chain and to increase the profit margins paid to farmers [see Exhibits 5 and 6]. By doing this, the farm took the responsibility for selling the green and roasted coffee to wholesalers and retail customers alike. As the first coffee harvest was expected in early 2011, Bolaven Farms temporarily engaged in reselling coffee from other suppliers to sustain its operations. Its first cooperation project was initiated in 2008 with the Bolaven Plateau Coffee Producers Group Association (“AGPC”) 34, a cooperative of coffee producers founded by the French government and consisting of 53 villages and 700 coffee-growing families. The contact with the cooperative had been established through the personal ties of Say’s brother, Thomas. Under the agreement, Bolaven Farms was to purchase AGPC’s crops and initiate business contacts with distributors in order for AGPC to build its own brand. The cooperative followed internal protocols of coffee producing and post-harvest treatment to ensure the quality and organic certification of the

34 The acronym “AGPC” comes from the French name of the organization, Association des Groupements de Producteurs de Café

du Plateaux des Bolovens.


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final product. The role of Bolaven Farms was to ensure the high quality of the roasting process and the worldwide product distribution. The solution was temporary, and its objective was to ensure the sustainability of Bolaven Farms’ operations until its first harvest was ready for sale. In the first year of cooperation, Bolaven Farms purchased 140 tonnes of green coffee from AGPC at US$2,400 per tonne, which was 35% above the regular coffee price, with the intention of selling it in the US market. Say spent the entire year travelling throughout the United States and meeting with people who might be interested in buying his high-quality stock, but with little luck. The US buyers were not interested in buying an expensive product from an unknown producer, and Say was not willing to lower the price. After all, he said, the higher price was intended to provide an incentive to farmers to invest more time and effort in farming a high-grade coffee. Say strongly believed in another sales lead, Hong Kong’s five-star hotels. Say believed that their cooperation would give the hotels positive media exposure. However, he quickly learned that most of the hotels were providing their coffee free of charge at breakfast, so the fair-trade organic coffee would seriously increase their costs. These hotels simply did not have room in their budgets to buy coffee that was more expensive. As people were not complaining about the quality of the hotel coffee, or worse, were not even drinking it once it was served, the hotels did not see a reason for changing their coffee supplier. This market proved to be more difficult to enter than Bolaven Farms had initially anticipated. After two years in the market, Bolaven Farms had learned some hard lessons. Its first sales were far below expectations [see Exhibit 7]. The coffee market was a mature one, with powerful coffee roasters taking up a large proportion of the market share. Most coffee contracts were set up for two years or more, and people were reluctant to change their coffee suppliers or to pay a higher price. Bolaven Farms decided to play on the main advantage of its coffee compared to its competitors: its social dimension.

If You Cannot Push, Then Pull

With the market saturated with many experienced suppliers, Bolaven Farms decided to take another approach to building its market share. It continued to send brochures and letters to prospective clients, but this time its objective was to become a voice for the social cause and to raise awareness about the origin and quality of the coffee being served. The corporate social responsibility of companies distributing coffee became the main issue. It was thought that positive media exposure related to their work with Bolaven Farms could generate more customers for cooperating companies. Bolaven Farms set up a website in 2008 and a Facebook page with a related cause in early 2009.35 The first article about Bolaven Farms, inspired by Say’s close friend, Drew Spike, appeared in the South China Morning Post, the largest Asian English-language newspaper, in June 2009. When the South China Morning Post article was published, the chief editor did not limit himself to interviewing Say and writing the story up. He had spent four days at the farm with a photographer and invested his time in understanding the Bolaven Farms concept. Eventually, this journalist became a good friend and a strong supporter of the cause. He continued to educate the general public about the importance of organically grown coffee and introduced new people to Bolaven Farms’ managers.

35 A cause is a Facebook-based campaign for collective action. The purpose of a cause could be to increase awareness over an

issue or to raise money to support related actions.


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As a result of these introductions, Bolaven Farms collaborated with Impact Asia, a public relations firm from Hong Kong. Impact Asia’s CEO, moved by the idea behind the venture, offered pro bono help in developing a professional public relations strategy for Bolaven Farms. Bolaven Farms did not have to wait long for its first sales results either. After the publication of the first article, Say’s phone rang with good news. One of the largest catering companies servicing large banks and corporations, Sodexo, expressed an interest in distributing Bolaven Farms coffee in the Hong Kong market. At that time, Say was pitching directly to one of its customers. The article triggered a response to an e-mail sent earlier to Sodexo headquarters with an offer of cooperation. In a very short time, Sodexo’s corporate social responsibility vice president, residing in Singapore, connected Say with the Hong Kong branch involved in developing Sodexo’s new private label. Say could not ask for more. Sodexo was looking to increase its coffee sales by setting up its own brand and all it was missing in the plan was a coffee supplier. It was looking for a supplier that would have extensive knowledge about and full control over the quality and origin of the final product. They were a perfect match. The initial agreement was to distribute 10 tonnes of Bolaven Farms’ roasted coffee per year in automated coffee distributors, pantries and corporate cafeterias. In addition, Sodexo pledged to provide help in raising awareness about the social cause behind the Bolaven Farms coffee. The first Sodexo client to switch entirely to Bolaven Farms coffee was the 10-floor and 3,200-employee Hong Kong headquarters of one of the major international investment banks.

Beyond the Start-up

Four years into operations and the company had already invested US$4 million in the project. With this money, it had purchased land, applied for certifications, and trained 250 farmers and 7 management trainees. However, it was still educating the public and finding international customers willing to pay premium prices for the coffee. Say had to admit to himself that, contrary to his initial understanding of the market, producing organic coffee was actually the easiest part of his business. Selling coffee and providing development prospects to graduating framers were more difficult than he expected. He considered his business successful in fulfilling social objectives, but he was also well aware of the weakness of its business component. The original plan was to increase the business production capacity by granting loans to farmers while expanding the sales network worldwide. In reality, Bolaven Farms had to reconsider the loans to farmers, as they turned out to be impractical and created difficulties in building its sales. Both ends of the supply chain needed further refinement and investment. With the first coffee crop becoming available in early 2011, Say had to face the reality that the business model that he had been implementing for the past four years might not be the most effective one for a business start-up. The vision of his business might have been very inspiring to many people, but in reality, it was difficult to find followers for his noble cause on the demand end of the value chain. Say had to admit to himself that, contrary to his initial evaluation, building his business and a coffee brand from scratch was no easy task. It was time to re-evaluate the business model and make the venture a success without compromising on its mission.


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Online Resources 1. Bolaven Farms website: http://www.bolavenfarms.com.

2. Bolaven Farms Facebook page: http://www.facebook.com/pages/Bolaven-Farms/52597831587.

3. BBC World, Earth Report: Gambling on Laos, aired on 2 July 2010. The excerpt is available here: http://www.youtube.com/watch?v=6PrGOZOmR-w.


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EXHIBIT 1: THE TRADITIONAL COFFEE SUPPLY CHAIN

Coffee cherry

Green coffee

Roasted or soluble coffee

Individual farmers

Cooperatives

Curing plants Association of farmers

Traders

Exporters

Roasters

Consumers

Retailers Catering


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EXHIBIT 2: FAIR-TRADE COFFEE PRICES IN 2008

VARIETY QUALITY PROCESSING FAIR-TRADE

MINIMUM

PRICE

FAIR-TRADE

PREMIUM

FAIR-TRADE

PRICE

ARABICA CONVENTIONAL WET 1.25 0.10 1.35 DRY 1.20 0.10 1.30

ORGANIC WET 1.45 0.10 1.55 DRY 1.40 0.10 1.50

ROBUSTA CONVENTIONAL WET 1.05 0.10 1.15 DRY 1.01 0.10 1.11

ORGANIC WET 1.25 0.10 1.35 DRY 1.21 0.10 1.31

NON-FAIR-TRADE ARABICA 1.07 NON-FAIR-TRADE ROBUSTA 0.72

FLO Fairtrade Minimum Price and Fairtrade Premium for coffee, per pound (FOB, in US$) compared to the average price paid to growers in 2008.

Sources: Fairtrade minimum prices and premiums, http://www.fairtrade.net/list.html?&no_cache=1 (accessed 10 May 2010); International Coffee Organization, http://www.ico.org (accessed 30 March 2010).


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EXHIBIT 3: COUNTRY-LEVEL PRODUCTIVITY IN COFFEE FARMING

The comparison of coffee yield in kg/Ha in Brazil, Laos, Vietnam and worldwide.

Source: Food and Agriculture Organization Statistics Division of the United Nations, http://faostat.fao.org (accessed 3 May 2010).


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EXHIBIT 4: BOLAVEN FARMS’ SUPPLY CHAIN

Coffee cherry

Green coffee

Roasted or soluble coffee

Graduating farmers Cooperative

Bolaven Farms

Current farming apprentices

Roasters

Consumers Retailers Catering


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EXHIBIT 5: BOLAVEN FARMS’ GROSS MARGINS FOR 2009

COFFEE TYPE GROSS MARGIN

(IN %) NOTE

PREMIUM GREENS 40–66 EXPECTED

REGULAR GREENS 10–20BEFORE SALES

COMMISSION

PREMIUM ROASTS (RETAIL) 85BEFORE SALES

COMMISSION

REGULAR ROASTS (RETAIL) 75BEFORE SALES

COMMISSION PREMIUM ROASTS

(WHOLESALE) 70

BEFORE SALES

COMMISSION REGULAR ROASTS

(WHOLESALE) 60

BEFORE SALES

COMMISSION

EXHIBIT 6: BOLAVEN FARMS’ SALES COMMISSIONS FOR 2009

TYPE OF ORDER SALES COMMISSION (IN %)

RETAIL 0

WHOLESALE 12

HIGH VOLUME WHOLESALE UP TO 30

EXHIBIT 7: BOLAVEN FARMS’ COSTS AND REVENUES FOR 2007–2010

YEAR OPERATING COST

(IN US$) REVENUE (IN US$)

2007 1,000,000 0

2008 1,000,000 0

2009 1,000,000 38,460

2010 (ESTIMATE) 230,770 192,310


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EXHIBIT 8: ORGANIZATIONAL CHART FOR BOLAVEN FARMS AS OF JANUARY 2010

Sam Say

Founder and CEO

Laos Branch

Somsay Boaukhasith

General Manager

Gilbert Suico

Head Agriculturalist

Farm Staff

Resident Farmers

Leo Nevado

English Teacher and Translator

Management Trainees

Hong Kong HQ

Chapman Lee

Commercial Director

Pat Chan

Administration

Dennis Ng

Operations Director

Charles Schmitt

Corporate Relations

Bikash Pun

Local Logistics

Volunteers


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EXHIBIT 9: THE EVOLUTION OF THE COMPOSITION OF SOCIAL NETWORK TIES FOR BOLAVEN FARMS FROM 2007 TO 2010

Bolaven Farms_case_2013.pdf

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