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 many who 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, and
- Coffees were sold at prices substantially above expectations.

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, so-called "cuppers", selected ten coffees to be offered at the auction. A total of 900 bags of 60 kg each were available for the auction.

A 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) (www.scaa.org). 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 on-line participation. In the days up to the auction, the bidders were given the opportunity to participate in a trial bidding just to get familiar with the system – sitting at their screens in the US, Brazil, Europe or Japan.

The auction started on 15 December 1999 in the morning (in the US) 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 surprise, the real "fight" for each of the coffees took place during the last hour of the auction.

Brazilian coffees are normally 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 USD 1.73 per lb. at a point in time where the New York C-price was approximately USD 1.00 per lb. Two coffees were sold at prices above USD 2.00 per lb.

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

- A wish to see the spirit of competition among the coffee growers brought on to the subsequent links in the chain from field to cup – obviously in the hope of selling at high prices, and

- A wish to by-pass the existing distribution system and create a closer link between growers and roasters, who could get access to excellent coffees otherwise difficult to find.

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

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 does for ordinary sales: Farmer – Exporter - Importer – Roaster.

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, which is 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 would have to pay the shipping on less than a container. Several importers decided not to participate for this very reason.

Internet auctions in coffee are for exemplary quality only at the moment and that sometimes comes in very small packages. It is obvious that future auctions will have to address this problem and find cooperative shipping solutions that will be fair to companies of all sizes. The best coffee should not be overlooked simply because the logistics to get it to port are difficult.

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 premium was worked out. The opening prices were agreed upon 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.

Prior to the auction, the organizers worked out a long list (a very long list, in fact) of all the things that could go wrong. In addition to traditional issues like disputes over the quality of the coffee, conditions for delivery, and so forth, 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 on-line connections are interrupted? How do we secure full discretion for the bidders? Shall closing with last bids be at night time in the US, Europe or Japan? and many more questions of this type.

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 with the hope that auctions of this kind could become viable in their own right in the long run. The turnover at the specific auction was around USD 200,000 for 900 bags only - a drop in the coffee ocean. But this was on purpose. If things had not worked out, the cost of remedy and compensation would not have been of an alarming magnitude.

The Internet coffee auction attracted great attention in coffee circles, and the Brazilian parties are preparing a new Internet auction of their coffees from year 2000. The volume will be increased, the bidding procedures adapted etc. It is assumed that when a third auction be held in 2001, it could 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 the 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 would need to be unique (quality, specialty or organic) in order to create attention and justify a premium;

- Lot sizes would probably need to be large enough to justify separate shipment.

Brazilian Specialty Coffee Association. Liaison to farmers and the exporter; organization of the competition for selection of coffees.
Cooperativa Regional de Cageicultores em Guaxupe Ltda. – Cooxupe. Exporter of all ten coffees.
The Gourmet Coffee Project*. Funding and advice.
The Specialty Coffee Association of America. Promotion via its web site; technical organization of the auction; contractual arrangements between all parties.

This screen shot printed out during the auction captures the bidding process one point in time: 17 December, at 17.30 Central European Time. The screen shows that the auction had 4 minutes, 18 seconds left for bidding on Item BGP 105 and 24 minutes, 18 seconds left on the last Item BGP 101. It was morning on the West Coast of the US and in the middle of the night in Japan. 

Using a password, bidders around the world opened a screen picture with the following information:

Column 1, Item: A code for each of the ten coffees for sale.

Column 2, Bags: Number of 60-kg bags for sale.

Column 3, Bid: The highest bid per pound (lb.) expressed in USD at any point in time. The opening prices were different and had been agreed upon between the individual farmers and the exporter.

Column 4, Value: The system automatically calculated the total sales price at any point in time, i.e. bags x bid (e.g. 49 bags at current bid of USD 1.55 cost USD 10,046.28)

Column 5, High Bidder: The secret code of the bidder having made the highest bid at any point in time. The bidders had been guaranteed full discretion during and after the auction. However, all bidders who purchased one or several coffees made it publicly known afterwards.

Column 6, Description: Names of farms. By a "click" on the name, the bidder could obtain information on the farm and the coffee (of which he had received a sample already).

Column 7, Time: The auction opened with only one coffee (BGP 110) open for bidding. Every five minutes, a new coffee was added until the screen was full.  The auction closed 48 hours later – also at five-minute intervals.

Column 8, Status: This column stayed Open for 48 hours. Thereafter it changed to Closed and the closing price to be paid by the "winner" could be seen in columns 3 and 4.

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*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 countries that are members of the International Coffee Organization (ICO). The project was also presented to governments worldwide in an ITC presentation during its annual Joint Advisory Group Meeting. The main sponsor of the project was the Common Fund for Commodities. ITC was the executing agency for the project.