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Trouble may be brewing in lucrative coffee industry

Thousands of independent retailers and venders will gather in Las Vegas next weekend for the annual Coffee Fest Trade Show. At a time when most businesses are fighting for their survival, coffee is hot.

"Despite the downturn in the economy, more than half the adult population is consuming coffee every day, totaling 108.9 million daily drinkers," said Robert Nelson, president of the National Coffee Association of USA. "Another 25 percent of the adult population, or 52 million people, chose to drink coffee on an occasional basis."

The coffee business has developed into two sectors: home-brewed and specialty venues. And what people pay for coffee is directly determined by where they buy it.

"One factor for the recent increase in consumption may be the steady deflation that we've seen in the supermarket aisles," said Nelson. "The government's Bureau of Labor Statistics tracked the price per pound of roast-and-ground coffee at $2.94 when we conducted the survey earlier this year. In 1998, the price per pound was more than $4."

Of course, consumers who buy their coffee by the cup at neighborhood shops know that prices are heading the other direction. Despite the fact that global coffee prices have dropped to their lowest levels in three decades, people are willing to dig deep to pay for lattes and other specialty drinks.

"The growth of gourmet coffee and out-of-home venues offer consumers experiences that take coffee well beyond a commodity," said Michelle Eichhorn of Kraft Foods (NYSE: KFT). "The key for companies will be to continue to focus on providing consumer experiences at every touch point, whether it is through marketing, the in-store environment, cafes, and of course product offerings. I am confident that, if the industry continues to deliver on this, we will no doubt enjoy this coffee renaissance for years to come."

Coffee sales have increased from $30 billion a year in 1990 to more than $65 billion today. And much of the credit for the growth of the industry has to be credited to Starbucks (Nasdaq: SBUX). The Seattle-based brewing behemoth was recently included in the top 10 of "America's Most Admired Companies" by Fortune magazine.

"This recognition is a validation of Starbucks' long-term strategic plan, which includes sustained growth and worldwide expansion of our brand, while staying true to our core values as a company," said Howard Schultz, chairman of Starbucks and the driving force behind the company's rapid growth.

"Starbucks has grown from 15 stores and 100 employees in 1987 to more than 6,200 stores in 30 countries with approximately 65,000 employees serving more than 22 million customers worldwide each week," brags Schultz.

Other publicly traded coffee companies have also been recognized for their success. Fortune magazine also ranked Green Mountain Coffee -- an independent roaster and retailer -- as one of the "Fastest-Growing Small Companies" in America.

But, all is not well in the global coffee business. According to Oxfam, an international development organization, millions of people in 45 coffee-growing countries are facing financial ruin because of the plunging prices for coffee beans and the resulting oversupply of product.

"The worldwide coffee industry is in crisis," said Adam Kanzer, director of shareholder advocacy for Domini Social Investments. "It is unsustainable for the coffee farmers, their families and their communities. Despite the enormous profitability of this business for the world's major coffee roasters, it may prove unsustainable for them as well, as they risk seeing short-term gains turn into long-term losses."

The "Coffee Rescue Plan" being proposed by Oxfam targets the world's four largest roasters: Sara Lee (NYSE: SLE), which offers the brand Hill's Brothers; Procter & Gamble (NYSE: PG), with Folgers; Kraft Foods with Maxwell House; and Nestles. Combined, these companies purchase nearly half of the world's coffee crop, produced by more than 25 million small growers in 50 developing countries.

"Over the last three years, the price that coffee farmers receive for their harvest has fallen by almost 50 percent," said Domini's Kanzer. "According to Oxfam, the price for a pack of roast and ground coffee in the United States is nearly 4,000 percent higher than the price paid to the Ugandan farmer for green coffee beans. A market that relies on such shocking inequities cannot be sustained."

The response to the coffee crisis has been a trend toward Fair Trade Certified products. To qualify for this designation, an importer must agree to pay a minimum price of $1.26 per pound, provide credit and technical assistance to framers.

Peet's Coffee & Tea (Nasdaq: PEET) recently was honored by the president of Costa Rica for entering into a long-term production contract with the country's growers to ensure that coffee pricing will cover the costs of production and generate a profit margin.

"These long-term contracts not only protect these coffee growing communities, they sustain our relationships with the top producers and maintain the quality of our raw beans," said Jim Reynolds, head coffee buyer at Peet's.

Bottom line for the consumer seems to be that they don't mind paying a bit more for a cup of coffee, as long as the quality of the product remains consistent.

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