Struggling Ugandan coffee sector welcomes Starbucks with caution

by Joseph Olanyo and Fredrick Masiga

Most indigenous Ugandan coffee entrepreneurs gave in to pressure in the 1990s to sell their plants to cash-rich foreign investors who, unknown to local businesspeople, had discovered a new niche in the international coffee market. With coffee prices plummeting on the international market, both farmers and semi-processors have seen their fortunes dwindle, forcing the majority of Ugandan coffee middlemen to sell off their businesses to foreign investors.

Kyagalanyi Coffee, one of the leading coffee exporters in the country, is now owned by Volcafe, a Swiss company. "I owned Kyagalanyi 100 per cent. But I had to make a commercial decision to sell my shares. I sold 75 per cent in 1992 and I subsequently sold the rest of the shares in 2000," says former owner Sempa-Mugambwa. "They made me an offer that made commercial sense."

"It's true. Foreign firms export the bulk of the coffee. They control 80 per cent of the crop," Uganda Coffee Development Authority (UCDA) managing director Henry Ngabirano admits.

Some of the companies that closed shop include : Busiro, Kaliro, Samba and Zigoti coffee companies. Top on the list of coffee exporters most of which are foreign owned today are; Kyagalanyi Coffee Ltd, Kawacom (U) Ltd, Ugacof Ltd, Olam (U) Ltd and Great Lakes Ltd., Pan Afric Impex Ltd, IBEROR (U) Ltd., and MTL Main Traders.

Indigenous coffee firms include; Job Coffee, Kampala Domestic Store, Nakana Coffee factory, Union Export Services, Mbale Importers and Exporters, Wabulungi M-Purpose Estate, Simba Café, Bugisu Corp Union, Lake Lands Holding Ltd, Savannah Commodities Ltd, Sitanda Agencies Ltd, Bakwanye Trading Company, Victoria Coffee Ltd Ziwango Coffee and Gumutindo Coffee Coop - a farmers' group owned company.

Even though UCDA promotes the development of the entire coffee industry in Uganda, most local processors have failed to break even in the competition, forcing many to either remain or slide into the periphery of the business - coffee farming.Part of the problem is the huge capital demanded of the business.

" When you become an exporter, you require much more money, millions of dollars. So I opted out," Sempa-Mugambwa says. He says the processing and export of coffee is capital-consuming, making it less competitive for those with meagre financial resources, the reality of most Ugandan entrepreneurs. Credit to the agricultural sector is considered risky by most financial institutions because of the unpredictable nature of the sector, including fluctuations in the price level, weather conditions, coffee diseases and others.

Also, the advent of liberalisation of the coffee industry in the 90s did expose most of these locally owned firms to unprecedented, tougher conditions of business. The liberalisation of the sector meant that the smallholder farmers had to take over the roles of coffee marketing, whose monopoly was previously commanded by the government through the now defunct Uganda Coffee Marketing Board.

With that came competition from local coffee processors, traders and exporters as well as experienced, hard-nosed foreign owned firms. The difference, however, is that many of the newly formed, locally owned firms eventually collapsed under the yoke of costly credit and poor management. "Coffee trade, in my view, is not like buying bananas and potatoes, it is much more sophisticated than that," Mugambwa said. "If you are going to buy coffee, you need to know the tricks. You should know protective skills in coffee trading. If you buy 90 kilogrammes, part of it is dust and stones."

UCDA has 24 registered coffee exporting companies and 104 hullers, factories that receive dry coffee cherries and extract the coffee beans at a small fee before traders take it to exporters. The change of guard has created, according to market sources, more jobs and improved coffee quality, even as volumes have declined in recent times. The cumulative export volumes for 2004/05 season were 2.5 million bags of 60 kg each, worth $162 million, representing a 0.7 per cent volume drop and 41 per cent rise in value compared to the previous year. The 2005/06 season exported 2 million bags worth $170 million, representing a 0.5 per cent drop in volume and 20 per cent rise in value. In the first seven months of the October 2006 to April 2007 season, total exports reached 1.6 million bags worth $144.2 million.

A UCDA report says that the decline in volumes is because of a smaller crop due to drought that resulted in defoliation of coffee trees. It said the situation has been made worse by the interruptions in electricity supply that has adversely affected coffee processing, both at primary and export levels.

For all these reasons, the recent visit by officials of one of the largest global suppliers of specialty coffee, Starbucks Coffee Company, has some hoping that it presents an opportunity to break the jinx that has seen the coffee industry fail to effectively transform itself into a highly industrialised value-adding sector. The company has more than 13,000 coffee shops in 40 countries.

Starbucks is not without blemish. It was involved in a controversy with the Ethiopian government over trade mark issues and unfair pricing, although the two parties have just reached an agreement. In a March 2007 issue, Fortune magazine reported that Ethiopia's two million coffee farmers receive less than a dollar for approximately half a kilo of coffee and yet the same coffee fetches $26 in the US market. Linked to that is the fact that Starbucks trades these coffees using Ethiopia's specialty coffee names; Sidamo, Harar and Yirgacheffe.

The Ethiopian government wants to trademark its famous coffee bean names. This would earn it higher prices for its specialty coffee and also attract a premium of $88 million on trademarks per year according to the UK-based charity organisation, Oxfam.

Ethiopia demanded that Starbucks sign a licensing agreement so that Ethiopian farmers can gain higher prices for their products and ultimately obtain a larger share of the sales. Trade marking would give Ethiopia an exclusive right to use the name in branding, thus whoever uses the brand would have to pay. Starbucks protested, arguing that instead of seeking trademark rights, Ethiopia should have sought geographical certification, which although guaranteeing that the product comes from the stated region, allows distributors to use the name in their branding.

Ethiopia's case should be treated as an eye opener for Uganda that intends to do business with Starbucks, or any multinational for that matter. The arrival of Starbucks, however, could offer a brighter future for the industry in Uganda. In 2006, the company paid an average of $3.12 per kilogramme for premium coffee beans, 36 per cent more than the industry average.

In February, it announced it planned to double its imports of coffee from East Africa over the next two years. It also plans to build a farmer support centre staffed by a team of experts in soil management and field crop production to help farmers increase their capacity to produce high value coffee. In addition, it wants to provide the region's coffee farmers with increased access to affordable credit. Starbucks buys coffee from 24 countries, including Burundi, Ethiopia, Kenya, Rwanda, Tanzania and Zambia. Multinational coffee houses have been accused by the British-based Oxfam and the World Bank of unfairly treating coffee farmers located mainly in developing countries.

According to the World Bank, key beneficiaries have been international coffee houses, involved in 80 per cent of production and trade, while smaller traders and farmers have been squeezed out of the market. For the new breed of local coffee entrepreneurs, the task is to create more branded value to compete effectively.

"I think there is a huge potential. The world is developing more quality coffee every year and there is opportunity to improve on the quality and quantity, and create a category that can be known to customers," Chairman and Chief Executive Officer of Good African Coffee, Andrew Rugasira, says. He said Good African coffee has 14,000 certified farmers in Kasese district, all in cooperatives of 50 each.

Monitor