Term 2 Project: What Price Coffee?

1)   Why might coffee businesses be described as multinational companies?

A multinational company (MNC) is a business organization that operates in two or more countries. The rise of MNC’s and the growing importance of international trade have intensified globalization. Coffee businesses may be described as multinational companies because they operate in more than one country in the sense that they are farmed in one country and then exported to many others. For example, the production of coffee beans usually takes place in developing countries such as Uganda, Guatemala, Vietnam, and Columbia and then it is exported to more developed countries at higher prices and then sold at even higher prices to the public. Since the coffee industry is an oligopoly with only 5 firms dominating it, they are price setters for the rest of the world; they’re decisions affect the whole world, especially the developing countries where the coffee bean production takes place.

 

2)   Explain reasons why multinational companies in the coffee business operate on a global basis.

Multinational companies in the coffee business operate on a global basis to get the highest or maximum profit they can obtain by producing and processing in developing countries where land and labor is cheaper and then exporting them to different parts of the world and selling them at a higher price. MNC’s in the coffee business operate on a global scale also to widen their customer base as international brand recognition can increase their profits by a considerable amount. By catering for a larger customer base, they are also likely to benefit from economies of scale. By expanding overseas, there are external economies of scale to be exploited. MNCs may want to locate overseas so that they can benefit from the host country’s infrastructure. It may also have better quantity and quality of land in terms of the amount of space and/or the cost of land. The business may also benefit from cheaper production costs, like inexpensive labor. “The production of coffee beans take place mainly in developing countries” this is mainly due to the fact that the costs are cheaper than other places. There may also be financial incentives from the host country’s government, which helps to reduce costs of production while still allowing the business to expand. Also, by producing in a particular country, a firm can usually avoid protectionist policies like tariffs, quotas, or unfair trade practices that a country may impose. The companies produce in countries that have trade liberalization so they have relatively low protectionist policies. This will be an advantage to the coffee businesses as the reduction of such barriers will give them an opportunity to import coffee beans. Multinational companies are also able to spread risks; if one region falls into a recession, it wouldn’t affect them as much as they would have spread their income from many different places. A good example of how a multinational company became very successful because of the reasons mentioned previously is Nestle as it “has a 57 per cent global share of the solube (instant) coffee business.”

 

3)   Examine the factors which have affected the globalization of this market.

Globalization is the growing interdependence and integration of the world’s economies. Many factors affected the globalization of the coffee market. One is the liberalization of international trade, which is the removal of global trade barriers. For example, this came to Vietnam in the 1990’s and it had allowed them to easily export their coffee production to other businesses and has encouraged more trade in imports and exports. Another factor that affected the globalization of the coffee industry is technological progress. It has reduced the cost of information interchange, communication, and transportation. This could be because of the deregulation of business activity. For example, they now have more efficient and less costly means of transportation of their goods such as airplanes, buses, trucks, trains with quicker routes. This allows the business to send out and distribute their goods more efficiently and in a cheaper method. This would consequently cause them to have a larger customer vase since they would be able to serve more people, places, and regions and therefore receive higher profits. For example, Nestle advertised and promoted their products as the “commercial equivalent of Luther’s spiritual meditation”, they were able to do that because of the technological progress that went on and that caused people to become more aware of it. Also, because of the growth in cultural awareness and recognition, consumers around the world have similar tastes so that is beneficial for the companies as they wouldn’t have to produce many different products for each region.

 

4)   Analyze the effects of globalization on multinational coffee businesses.

Globalization has many effects on multinational coffee businesses. One of the major ones is competition; it considerably increases the level of competition among rivals. For example, in this specific case study, there are five competitors: Kraft, Nestle, Proctor & Gamble, Sara Lee, and Tchibo. They are the only businesses that are distributing their coffee products to places all around the world so that makes them very competitive. They are the ones dominating the industry as it is an oligopoly. Competition between companies requires a firm to find unique strategies in promoting, introducing their coffee, and having reasonable competitive prices.

Meeting the expectations and needs of their customers is another effect of globalization on multinational coffee businesses as it increasingly becomes more demanding and they have to meet them in order to have a competitive advantage.

Another effect that globalization has on multinational coffee businesses is that they are able to build a global presence and are likely to enjoy benefits from economies of scale. They also have a greater choice of location for their production facilities. In this case study, it says that, “the production of coffee beans takes place mainly in developing countries such as Uganda, Guatemala, Vietnam, and Columbia” because of the relatively low cost of labor and rent.

Mergers, acquisitions, and joint ventures allow businesses to grow at a faster pace than if they were to grow organically. With globalization, they have more choice in their expansion plans. Nestle is one of the biggest coffee selling companies and this could possibly be due to the mergers it has undertaken.

Multinational coffee businesses can also benefit from the increased customer base that globalization allows. Because of globalization, coffee is demanded almost everywhere in the world and in every café or restaurant. Because of this, coffee can be considered an essential product where people will demand it no matter where. Since coffee is segmented globally, it increases the chances of a greater customer base even more.

 

5)   Evaluate the impact of the global coffee business on coffee farmers in developing countries.

Global coffee businesses have a huge impact on coffee farmers in developing countries. However, this impact is mostly negative because only five companies control the rest of the developing countries where they produce in. Their decisions on the cost can affect millions of people. For example, Figure 109.4 shows a typical farmer’s income compared with the final selling price to customers. The farmer only receives 10 pence for one kilogram of coffee beans while the multinational companies then continue to sell the same amount for 19 pounds. There is a huge difference between the two prices and that shows the unfair treatment of the farmers that provide the basis for these multinational businesses; without them, these businesses wouldn’t even exist. Because of their low incomes, the farmers struggle in their daily lives as they can’t provide food or basic healthcare for their families. In John Kafuluzisik’s case, he says that he only received 200 Ugandan shillings a kilo for his coffee this year while the price of a cup of coffee in London is 5,000 Ugandan shillings. Because of his very low income, he can’t afford medicine for his sick children. Global coffee businesses are taking advantage of these coffee farmers. There are 25 million coffee farmers around the world which shows that there is high competition between them; if they don’t accept these very low incomes then they won’t be getting any income at all because the coffee businesses will just go to other farmers that accept their terms for supply. This causes the farmers to have a very low standard of living as they can’t afford the basic necessities for their everyday lives. Another impact the global coffee business has on coffee farmers in developing countries is their social responsibility. These multinational companies are exploiting the coffee farmers in order to expand and become more successful and have a wider customer base. As there are only five major global coffee companies in the world, only a few men decide the fate of 25 million farmers in developing countries as they determine the price of coffee. These multinationals are so powerful that they control the farmers’ standard of living by choosing to give them very low incomes and exploiting their efforts.