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    The World's First Internet Coffee Auction a Success - Some "Lessons Learned"

     

     
     
    © International Trade Centre, International Trade Forum - Issue 3/2000

    Behind every success is hard work, substantial risks, sleepless nights and - not least - the bit of luck that can make the whole difference. This article looks at elements that made the world's first Internet coffee auction (December 1999) a success. Lessons are described here for others to learn - but also to avoid false expectations among the coffee growers who have started to say: "Getting my coffee on the Internet would change everything - for the better."

    The world's first Internet coffee auction, which took place in December 1999, was a success. This is well known in the coffee trade. Coffee people still talk about the Brazilian coffees that were offered simultaneously on four continents. It was a success in at least two ways:

    • The technology worked.
    • Coffees were sold at prices considerably above expectations.


    Why sell coffee via the Internet?

    The idea of selling coffee at an Internet auction developed from two independent rationales:

    • A wish to introduce the spirit of competition that exists among coffee growers to the subsequent links in the chain from field to cup - obviously in the hope of selling at high prices.
    • A wish to bypass intermediaries who don't add value in the distribution system and create a closer link between growers and roasters, who could access excellent coffees otherwise difficult to find.


    Business as usual

    Whereas the first rationale turned out to be right, the second was only partially correct.

    Distribution is key

    Auctions of this kind make it possible to trace rare, quality coffees directly among farmers (by conducting a competition) and inform roasters directly. In reality, however, the Brazilian auction could not have happened had the present distribution system not been solidly in place - and left in place for the transactions! Farmers and roasters are seldom equipped to handle intermediary export functions such as transportation, letters of credit, payments, documentation, shipping and so forth.

    For this reason, as part of the coffee auction process, a well-respected exporter was nominated to handle all ten coffees - with risks and potential gains from the transactions. Thus the idea that coffee could be sold from a small farmer, directly to a small roaster, was not tested. Skipping the traditional export-import portion of the chain would not have been possible. So in the case of the auction, the coffee moved as it usually does for ordinary sales: Farmer (small) - Exporter (big) - Importer (big) - Roaster (small).

    Size matters

    To make a profit with coffee, one cannot deal with small lots; a certain volume is necessary. This challenge becomes doubly difficult when looking for high-quality, gourmet coffee.

    In the case of this coffee auction, the lot size of the coffees posed a problem from the beginning. Coffees are typically sold by the container (250-300 bags). The lots were on average just below 100 bags. This meant that an importer would either have to piggyback his lot with another Brazilian coffee or have to pay the shipping on less than a container. Several importers decided not to participate for this very reason.

    At present, coffees sold via the Internet need to be unique in order to attract attention and justify a premium. Internet coffee auctions now are for exemplary-quality coffees only, which are offered in small quantities.

    It is obvious that future auctions will have to address this problem and find cooperative shipping solutions that are fair to companies of all sizes. The best coffee should not be overlooked simply because the logistics of getting it to port are difficult.

    Risks

    In the coffee auction, all parties took financial risks, in particular the farmers. Without putting pressure on the farmers and calling them every day, there would not have been enough coffee for an auction of this kind. The project was asking farmers to take a chance, to hold back selling their coffees in the hope that it would fetch better prices. Shortly before the auction, the farmers sold the coffee to the nominated exporter and a formula to split the expected premium was worked out. The opening prices were agreed and fixed two weeks before the auction. This was not an easy task, as the benchmark prices on the world market were heading up at that point in time.

    Rigorous planning behind the dream

    Prior to the auction, a long list (a very long list, in fact) was made stating all the things that could go wrong. In addition to traditional issues like disputes over the quality of the coffee, conditions for delivery, etc., there were new areas that had to be considered. Are bidding procedures clear enough? What do we do if a computer breaks down or if the online connections are interrupted? How do we secure full discretion for the bidders? Should closing with last bids be at night in the United States, Europe or Japan? And many more questions of this type.

    Is the coffee auction a viable model?

    The Internet coffee auction was an experiment. It was made possible only on the basis of great efforts and contributions by many parties in the form of risk-taking, man-hours and flat-out sponsorship. These contributions were obviously made in the hope that auctions of this kind could in the long run become viable in their own right. The turnover at the specific auction was around US$ 200,000 for 900 bags - a drop in the coffee ocean. But the auction was small on purpose: if things had not worked out, the cost of remedy and compensation would not have been too high.

    The Internet auction attracted great attention in coffee circles, and the Brazilian parties are preparing another Internet auction of their coffees this year. The volume will be increased and the bidding procedures adapted. Hopefully, if a third auction is held in 2001, it will be self-sustaining for all parties involved.

    For others who might consider organizing an Internet coffee auction, it is of great value to know that it can be done. But the following should be borne in mind:

    • There will be a lot of tailor-made preparatory work.
    • Several parties will face risks over and above those in known, day-to-day business, at least for the first auction.
    • The first auction will probably not be economically viable on its own, and may require external financial support.
    • The coffees to be offered need to be unique (quality, specialty or organic) in order to create attention and justify a premium.


    Internet auctions for other commodities

    Would Internet auctions of this kind be relevant for other commodities? The brief answer is: Yes - as long as everyone involved accepts that the process must be tailor-made, a great deal of planning is needed and the first few events may be "costly experiments". ITC is in contact with parties who are establishing e-commerce hubs for other commodities, including tea, cocoa, flowers and spices. The objective of such hubs is to eliminate those intermediary layers, which do not add value to the products in the flow from the producers to the end users. Internet auctions of the kind described here are expected to be one of the tools in these new trading systems.




    The Internet auction of Brazilian coffees

    In October 1999, 315 coffees from different regions in Brazil participated in the "Best of Brazil" coffee-quality contest. In the final round with 24 coffees, a group of internationally recognized coffee experts, at a "cupping" (coffee tasting) session, selected the ten best coffees, which were then offered at the auction. A total of 900 bags of 60 kg each were available for the auction.

    One Brazilian exporter was appointed to represent all ten farms. The auction was announced on a web site well known within the coffee trade, that of the Specialty Coffee Association of America (SCAA). SCAA's staff and their webmaster helped prepare the live web site that was to be used for the auction. Twenty-three applicants qualified as bidders. They received samples of all the coffees, detailed instructions on the event and a password for online participation. In the days before the auction, the bidders - sitting at their screens in the United States, Brazil, Europe or Japan - were given the opportunity to participate in a trial bidding just to get familiar with the system.

    The auction started on the morning (in the United States) of 15 December 1999 and lasted for 48 hours. The ten coffees were introduced one by one, every five minutes. The auction also closed one by one every five minutes, 48 hours later. To no one's surprise, the real "fight" for each of the coffees took place during the last hour of the auction.

    Brazilian coffees are often sold at prices below the New York C-price, a common benchmark in the coffee sector. The auction coffees were sold at an average price of US$ 1.73 per pound at a point in time when the New York C-price was approximately US$ 1.00 per pound. Two coffees were sold at prices above US$ 2.00 per pound.




    Organizers behind the first Internet coffee auction

    • The Gourmet Coffee Project: ITC, the International Coffee Organization (ICO) and the Common Fund for Commodities (CFC). Funding and advice. (ITC was the executing agency, ICO the supervisory body, and CFC the main sponsor of the project.)
    • Brazilian Specialty Coffee Association. Liaison with farmers and the exporter; organization of the competition to select the coffees.
    • Cooperativa Regional de Cageicultores em Guaxupe Ltda. - Cooxupe. Exporter of all ten coffees.
    • The Specialty Coffee Association of America. Promotion via its web site; technical organization of the auction; contractual arrangements between all parties.

      About the Gourmet Coffee Project

      The three-year Gourmet Coffee Project was completed by mid-2000. Five very different coffee-producing countries participated: Brazil, Burundi, Ethiopia, Papua New Guinea and Uganda. The project tested a range of activities from production methods to marketing tools. The objective was to try new methods of adding value to green coffee, enabling coffee producers to generate premiums. The Internet auction of Brazilian coffees was one of the many activities of the project. The lessons learned were made available to all ICO member countries, and received coverage in several coffee trade magazines. The project was also presented to governments worldwide in an ITC presentation during its annual Joint Advisory Group Meeting, and elicited press coverage from journalists who attended the presentation.

      Morten Scholer is ITC Senior Market Development Adviser.