Future-proofing Companies (Part 2): Merlo and The Vulnerability of the Coffee Industry

In the previous article, we have discussed various types of global changes and their impact for companies, together with the mitigation, adaptation, and resilience strategy. Now, let's take a look at how these changes affecting the coffee industry, particularly local businesses like Australian's famous Merlo Coffee.

Merlo Coffee is one of Australia's largest independent coffee roaster. Started from an espresso bar in 1992, the business has expanded to 16 coffee stores across Queensland and Melbourne and supplies its freshly roasted coffee to more than 1500 cafes and restaurants across Australia (Merlo, 2020) Merlo also ships its range of unique coffee blends worldwide. Merlo’s coffee bean is originated from various regions, from Latin America, Africa, to locally-grown Australian (Merlo, 2020). However, Merlo is now facing an uncertain future because of climate and socio-economic change, just like the rest of the global coffee industry.

The vulnerability of Merlo and the coffee industry

Climate Change

Climate fluctuations bring significant risk to the $70-billion coffee industry, as coffee is among the crops under threat from climate change. Davis, et.al (2019) found that 60% of wild coffee species are at risk of extinction. Coffee production could significantly decline as temperatures increase under climate change, threatening the whole industry and millions of farmers. The are several climate-related issues faced by the coffee industry, as summarized in the table below.

Demographic and Social Change

The world’s Coffee Belt spans across Latin America (61%), Asia and Oceania (28%), and Africa (11%) (ICO.org, 2019), yet these regions are predicted to face major shifts like increasing population and urbanization. OECD’s 2016 Megatrend report highlights that the population of these regions will grow significantly: +109% in Africa and double-digit growth in the remaining regions (see image).

As a result, coffee plantation areas are now shrinking. In Tanzania, for instance, coffee production constantly decreased as farmers turned their coffee farms into residential areas and shifted to high-demand horticulture and fruits (Mbashiru, 2020). The other critical factor is urbanization. By 2050, 70% of the world population is predicted to live in urban areas (OECD, 2016). New opportunities offered by big cities can allure farmers – particularly the young ones – to abandon their farm as they are struggling with low income and crop insecurities. These changes can cut down the global coffee bean supply.

The implications for Merlo and the coffee industry

For Merlo and the coffee industry, climate change and demographic shifts in coffee-growing countries pose incredible challenges. Firstly, as temperatures rise and droughts intensify, coffee will become increasingly difficult to grow and more expensive to buy (Worland, 2018). Secondly, the declining cultivation area as a result of population growth and urbanization may reduce the supply. These conditions will put significant pressure on Merlo and the overall coffee industry. This issue is starting to take shape. For instance, in 2012-2013, the price of coffee bean jumped roughly 33% in Central America – where Merlo sourced most of its coffee – as a result of climate-born stem rust disease that cut the production (Worland, 2018). It means the company needs to pay a higher cost to get the coffee beans.

Secondly, studies predicted that the quality of the beans will go down and some type of premium beans will disappear as a result of climate change (Shapiro-Garza & Hoffman, 2019). It will affect Merlo’s famous barista coffee; the taste may change, the smell may not be as good, and Merlo may no longer be able to offer their premium ‘Bean of the Month’. To sustain the business, Merlo needs mitigation, adaptation, and resilience strategy.

A critical evaluation of Merlo Coffee

Merlo has begun to take proactive measures in addressing climate change through its ‘Merlo Blue Goes Green’ program, although some areas are still identified as vulnerable. Tackling the issue from both operation and farm level, Merlo’s sustainability initiatives can be classified into two parts: (1) Engage in sustainable sourcing program and (2) Reduce the environmental footprint from retail operations.

(1) Sustainable Sourcing

On its website, Merlo takes great pride in supporting the Rainforest Alliance (RFA) program. Merlo’s Alto blend, Brazilian single-origin, and Decaf are purchased from Rainforest Alliance Certified™ farms that followed rigorous environmental, social, and economic criteria. Through this mitigation strategy, Merlo is taking part to implement sustainable agricultural practices: preventing deforestation, protecting biodiversity, and ensuring the well-being of farmers in the long term. Nevertheless, only 3 out of 26 types of beans offered by Merlo are purchased from RFA, while the remaining are not disclosed (see image below). Their popular menu like Espresso and Riviera blend or Colombia single-origin are not RFA-certified.

To future-proofing their business and mitigate the impact of climate change, Merlo should source more – if not all – of its beans from sustainable sources like RFA. RFA farms practice climate-smart agriculture techniques that sequester carbon and safeguarding water and soil (Rainforest Alliance, 2016). It also trains farmers with new methods to boost yields and improves farmer’s livelihoods (Rainforest Alliance, 2016). By purchasing coffee beans from sustainable suppliers, Merlo is taking part in (1) reducing climate change and the devastating issues it brings to the coffee industry and (2) supporting farmers to have a better living, preventing them to abandon or sell their plantations. Both are crucial factors that can protect the long-term availability of coffee.

(2) Reducing environmental footprint and greenhouse gas emissions

Merlo has introduced several mitigation strategies to reduce environmental footprint and emissions from its supply chain and retail operation. Merlo’s website showcases that, firstly, the company has installed 521 solar panels in their headquarter and Bowen Hills Roastery to reduce carbon emissions. Secondly, Merlo is moving to eco-friendly Biopak packaging to keep more than 3 million cups and lids out of landfill. This fully-compostable Biopak packaging waste is then combined with Merlo’s coffee grounds and food scraps to make organic compost. Lastly, Merlo promotes reusable packaging by incentivizes customers who bring their own cup, coffee tin, or bag.

Merlo is showing a good start through these measures, but the company can take it to the next level. A cup of Merlo’s coffee is derived from a long, carbon-intensive supply chain process. While Merlo’s current area of focus is limited to roasting and disposal, it only constitutes 7% of the total emission. As seen in the figure below, nearly half (46%) of the carbon emission is generated from the consumption process in their café, attributed to electricity usage for grinding/brewing coffee, heating foods, store appliances like refrigerators and cash-registers, lights, and air conditioning (Killian, et.al., 2013). Therefore, Merlo should expand its initiative to the in-store level, for instance by using solar energy to run its stores or moving to energy-efficient appliances.

Areas that remain vulnerable

Merlo’s current sustainability program has not addressed the risk of global coffee shortage that attributable to climate change and demographic shift. Most of Merlo’s coffee is sourced from Latin America and Africa, just like Starbucks, Nestle, and other giant coffee manufacturers. When coffee bean becomes scarce, there is no guarantee that Merlo will be able to secure its supply. Big companies have more bargaining power to purchase coffee and may control the supply. Mitigation action like partnering with Rainforest Alliance will not guarantee supply is secured, as big companies are partnering with them, too.

Adaptation and resilience actions are needed to future-proofing Merlo’s business. On adaptation, Merlo should build a long-term relationship with selected suppliers that the company can rely on in the future. On top of Latin American and African suppliers, Merlo may consider partnering with the overlooked Australian coffee farmers. Merlo only offers one Australian-grown coffee, while there are 50 coffee plantations around Queensland and NSW that produce up to 600 tonnes of beans annually (Pepperell, 2012). Although the price of Australian coffee is higher, Merlo has a bigger bargaining power in local market and thus can steer them to be the key supplier. Merlo then can support farmer’s innovation project such as developing climate-resistant varieties.

On resilience, Merlo can diversify its products to reduce dependency on coffee beans. For instance, offering mocha or frappes (that use significantly less coffee), chocolate, and trendy ingredients like matcha or chai. Through adaptation and resilience strategies, Merlo will be able to widen the coping range and be better prepared to face the volatility of the global coffee industry.

Implications to competitive advantage

Overall, Merlo’s current sustainability programs under ‘Merlo Blue Goes Green’ give a competitive advantage only on a surface level. Rainforest Alliance, eco-friendly packaging, and solar energy can improve Merlo’s brand image as a responsible and ethical brand, thus giving a competitive advantage as customers may prefer Merlo over other brands. Nielsen (2018) indicates that coffee brands with sustainability attributes gain higher sales growth compared to the category. Thus, Merlo can still gain a competitive advantage by winning the customer’s heart.

However, these programs are not enough to address long-term challenges. Merlo’s current initiatives are limited to mitigation strategies. It can help to reduce GHG emissions and minimize environmental degradation, but not preparing the company to address the future challenges of global coffee bean shortage. For now, the company is still lacking adaptation and resilience strategies that are critical for the long-term viability of the business. As discussed in the earlier section, there are some potential actions that Merlo can do, for instance, partnering with local Australian farmers or diversifying their products. By completing their current mitigation strategy with adaptation and resilience programs, Merlo can improve its competitive advantage and there will be a higher chance for Merlo to sustain their business amidst the uncertainties of the coffee industry.

#Merlo #coffee #localbusiness #sustainability #climatechange