Starbucks Corporation (NASDAQ:SBUX) has decided to continue their foray into the farming business. The company purchased a 593 acre farm in Costa Rica to expand its farmer support center program, which also features centers in Rwanda, Tanzania, Colombia, and China. The centers provide local farmers with the expertise and resources to improve coffee quality, to help lower the cost of the production of beans, and to increase the yield of coffee beans, particularly premium coffee beans.
Similarly, coffee competitor McDonald’s Corporation (NYSE:MCD) will be investing $6.5 million over the next five years to support 13,000 Guatemalan coffee growers create sustainable coffee production environments to produce higher quality coffee beans.
Farmer support programs establish good will among coffee producing communities as well as ensure high quality coffee beans and efficient coffee production processes. The Costa Rican farm will also be used to conduct research on the Leaf Rust fungus, which is currently hurting coffee crops in Central America. However, Starbuck’s (NASDAQ:SBUX) main reason for purchasing the Costa Rican farm is not good will, but a management control strategy called vertical integration.
Its the supply chain, stupid
In his interview on CNBC, Starbucks CEO Howard Schultz emphasized that the purchase of this farm will combine technology and best practices to cross varieties and create micro-lots of very special, rare, and very high quality coffee. This is an innovative way to differentiate Starbucks and its competitors. The Starbucks CEO also mentioned that this is a continuation of the vertical integration strategy, which could lead to more vertical integration acquisitions.
In 2010, Starbucks bought a coffee farm in China, a rapidly growing coffee drinking market where competition is fierce with McDonald’s Corporation (NYSE:MCD)’s and Britain’s Costa Coffee. With a limited supply of high quality beans among all China coffee market competitors, Starbucks ensured that it will have always have a supply of high quality beans while also controlling the cost with the purchase.
Technology companies have mostly abandoned the vertical integration strategy, except one little company called Apple Inc. (NASDAQ:AAPL). Since the late Steve Jobs was a control freak, Apple has championed the vertical model. For example, the iPhone and iPad have their software and hardware designed by Apple. Additionally, they have also designed its own processors for these products. Apple is able to make rapid quality improvements such as enhancements to power consumption, as well as rolling out new features faster due to its control of the software, intellectual property of the system design, parts, and semiconductors.
Premium blends for premium profits
The one disadvantage of the Costa Rican farm is the cost to sustain and maintain its unique features, but the advantages in distribution, supply, and the overall process justify the investment. Starbucks will use the Costa Rican farm to experiment with different high quality blends and more importantly, create rare coffee that is uniquely crafted only at this farm. Since the strategy is to only distribute micro-lots of these rare coffee blends, Starbucks can sell this coffee at a premium to consumers, which could lead to higher margins in the future. Will this lead to an $8 cup of coffee? We will see.
The article Starbucks Goes Farming for Premium Profits originally appeared on Fool.com and is written by Sergio Balatan.
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