Fabiola Campbell Competition with Latin America for

control in instant coffee market

Fabiola Campbell Competition with Latin America for
control in instant coffee market

The fight to be the leader in a global economy is a battle never easy

especially within the same chain.

Coffee is one of those tropical commodities that have been major component

in the economic growth in Latin America. There are a small number of food

processing transnational Corporations (TNCs) which include Nestle, Philip

Morris, Sara Lee and Proctor and Gamble. However, the modern day spray-

drying method to produce instant coffee was invented by Nestle technicians

in 1930.

For the manufacturing of instant coffee, the green coffee is roasted, ground

and brewed in a commercialized system design to remove the most amount

of soluble coffee solids for the roasted coffee. The extra-strength coffee that

remains in liquid form undergoes a spray or freeze drying to obtain instant

coffee. Green coffee can be stored for many years without losing too much of

its coffee flavor if kept in ideal conditions it is also much less bulky and

lighter which makes it most favorable form for trading long distance between

the markets and the producing countries.

After WWII U.S., there was a dramatic increase of instant coffee consumption.

The three major companies that were major producers during the war were

Nestle, Borden and General Foods were now competing for shares for this

vastly increasing market. Ten medium sized roasters serving regional

markets mainly in the eastern U.S. combined their assets to form a

manufacturing company named Tenco in the early 1950s. Tenco rose to be

the third largest manufacturing company tailing behind Nestle who was in
Fabiola Campbell Competition with Latin America for
control in instant coffee market

the lead and General Foods followed. The development of technology to

mass-produce instant coffee and the increasingly fast paced spread during

the 1950s -1960s resulted in the creation of a new commodity chain.

Fabiola Campbell Competition with Latin America for
control in instant coffee market

Nestle (from Switzerland) which had always been a transnational corporation

expanded in the instant coffee market by using the same strategy it had

been using which was to set up production facilities in the markets that it

entered. Nestle set up subsidiaries by the mid 1960s in Brazil, Columbia,

Mexico and the Ivory Coast including a joint enterprise in India, all except for

Ivory Coast produced instant coffee for local market.

Tenco, which was not a transnational in its early years it undertook the most

ingenious and forceful strategy it collaborated with the International Basic

Economy Corporation (IBEC), a Rockefeller company investing in food-

processing industries in a vast number of third world countries. With this

strategic move, it aim to create an international network to manufacture and

distribute instant coffee. Other producers imported green coffee beans from

multiple companies then blended them to produce instant coffee. Tenco-

IBEC s goal was to have it manufactured in several coffee-growing countries

in which they would export it in bulk to the major consuming markets, then it

could be labeled and packaged for private label, which then could be sold for

a more competitive price than the transnational corporations. To implement

this plan Tenco-IBEC built factories in El Salvador, Mexico, and Guatemala in

forming joint ventures with the local investors and large coffee-roasting

firms. The strategy was to gain a competitive edge by lowering the cost of

raw materials.

The coffee-producing countries did not gain any significant benefit from the

forward integration strategy, the TNCs not only control these subsidiary
Fabiola Campbell Competition with Latin America for
control in instant coffee market

markets with their brand names they also impose political restrictions on

them. Although the existence of an instant coffee industry controlled by a

local capitalist has opened the possibility for those coffee-growing countries

to compete directly with the TNCs, those countries remain at a disadvantage

because the TNCs have diversified global firms which have already

established their brand names and distribution networks in those countries

for other products.

Instant coffee production is capital, so therefore if becomes state incentive

and technology intensive to stimulate domestic production. Since state

action was most aggressive in Brazil, Columbia and Ecuador, those countries

established predominately domestic owned industries. Ecuador and Brazils

instant coffee industry were built in similar fashion whereby the state

provided incentive that gave local capitalists a competitive edge. But the

state action was most aggressive in Columbia where the quasi-state agency

the Federacion Nacional de Cafeteros (FNC) built the first instant coffee

factory in 1973.
Fabiola Campbell Competition with Latin America for
control in instant coffee market

The largest coffee producing state in Latin America is Brazil, this state was

the first to make the first to make the attempt with instant coffee. Being that

the country was the largest producer of coffee, expanding, the capacity to

produce instant coffee for export seem like a well-reasoned step in evolving

its development strategy. in the next Their industry for instant coffee began

in the 1960s by local capitalists functioning under a number of state

incentives among those were the waiver of the export tax charged on green

coffee.

Brazil had been far in the lead of the production cycle of instant coffee by

mid- 1960, production technology was not changing rapidly so there was not

a great need in research and development. Brazil was leading in the

development of an instant coffee export industry and Columbia and Ecuador

was not far behind. The volatile growth of Brazil exports led to disagreement
Fabiola Campbell Competition with Latin America for
control in instant coffee market

with Nestle- transnational corporations (TNCs) that had control of them up

until that point. Brazil was settling into the secondary import-substitution

phase of its development strategy, and the country had begun analyzing

ways to diversify its exports. In the early 1960s the Instituto Brasileiro do

Caf (IBC-the state coffee) declared a series of measures to encourage local

capitalists to establish instant-coffee factories including sales of green coffee

beans from the IBCs massive stocks and assured to purchase 80% of the

output in the first year and decreasing percentages thereafter. The most

valuable measure was an exemption from the export tax that was applied to

all green coffee exporters.

Brazil captured what seemed to be in an instant 14% of the US market by the

early 1970s, but this development was met with opposition from the US

based TNCs which was led by General Foods who pressured the US state for

restrictions to prevent Brazilian firms from triumphantly succeeding over

them in their home market in having a cost based advantage.

Although TNCs had established some factories in Brazil and underwent joint

ventures with Brazilian firms, the instant coffee industry was still mostly

under Brazilian control. Brazil succeeded in creating a viable instant coffee

industry and was the leading exporter by the early 1990s. The Brazilian

firms method of exporting instant coffee was in bulk form, which could be

used for blending and packaging under TNC labels

Fabiola Campbell Competition with Latin America for
control in instant coffee market

Brazil had many great advantages over the instant coffee manufactured in

US and the most significant one was cost. The tremendous growth of

Brazilian exports caused a division within the US coffee industry, because

Brazil powder as it was called by the US industry could be sold directly to

instant coffee manufacturers and by-passing the traders in green coffee over

the instant coffee manufacturer.

Brazilian manufactures had the option of buying coffee beans below export

quality known as grinders from the IBC for drastically less than export quality

coffee, and when coupled with the tax exempt, the savings were very

favorable. Those manufacturers could then deliver instant coffee to the US

market at a cost about 50 or 60 cents per pound les that US producers, that

made a significant difference especially at the time coffee was retailing for

roughly two dollars and fifty cents per pound. Another advantage of buying

the Brazilian powder was that it was of better quality than that of the US

manufacturer because it was made from Brazilian arabicas as oppose to the

coffee blends used by the transnationals corporations which had a stronger

tasting robustas.

Controversy began to erupt when some importers decided that they could

deal in instant coffee as well as green coffee and started purchasing from

producers in Brazil and resale to US manufacturers of other small entities

that wanted to package their own private label. There were also two other

large U.S. producers who closed their instant coffee factories and began to

import Brazil powder and package it under their own labels. General Foods
Fabiola Campbell Competition with Latin America for
control in instant coffee market

seem to be the only opposer to Brazilian imports, as Nestle having plants in

Brazil pretty much stayed neutral Tenco was in favor of the Brazilian policy

The peak of this controversy corresponded with the renegotiation of the

International Coffee Agreement in 1968. The state department in the US

insisted on including a mechanism in the agreement to address the problem

of unfair competition, which resulted in the prohibition of discriminatory

treatment in favor of processed coffee as oppose to green coffee by the

exporting countries. Once this agreement was signed and was effective, US

compelled Brazil to impose an export tax of thirteen cents per pound on

instant coffee destined for the US market, but that did little to ease those

who had opposed the Brazilian policy, complaining that it did nothing to

offset the cost advantage that the benefitted the Brazilian manufacturers.

Columbia is the second-largest coffee grower after Brazil, it depended on

coffee for more than sixty percent of its export earnings. In Columbia, a

group of coffee investors had already gained a strong control over all aspect

of state coffee policy through the FNC (Federacion Nacional de Cafeteros)-

Fabiola Campbell Competition with Latin America for
control in instant coffee market

who were the ones who created the instant coffee industry. The FNC at first

oppose the export of instant coffee believing that minimized state standards

for coffee and that high quality was the major selling point of Columbian

coffee. It became clear by the late 1960s that instant coffee had begun to be

an important product in many major markets, and they noticed the success

that Brazil had when they delved into the market of export instant coffee,

that gave the FNC the incentive to begin manufacturing Columbian instant

coffee, for exporting. The largest importer of Columbian instant coffee is

Japan as oppose to Germany and the US being the largest importers of

Columbian green coffee beans.

The strategy used by the FNC in Columbia was to leave established markets,

particularly the United States to the private exporters, while focusing on

finding and expanding new market.

Fabiola Campbell Competition with Latin America for
control in instant coffee market

Ecuador has been much less dependent on coffee than their neighboring

state (Brazil and Columbia) obtaining most of their earnings from bananas.

Similar to Columbia, Ecuador wanted to also delve into the instant-coffee

industry so they began with production for the local market at first. Then in

1957 the country enacted an industrial development law to encourage

import substitution, this new law put in place protective tariffs against

importing instant coffee and made credit available for importing the

machinery needed to manufacture. A group of local investors (who were in

the food processing business for the local market) formed SiCafe and started

to manufacture instant coffee in 1962 which was intended for the local

consumers, but when the exporting of instant coffee was flourishing they too

wanted to get a piece of the action. SiCafe began to find export markets, this

move brought them so much success it gave other investors incentive to

invest in the building of another factory to produce instant coffee for

exporting.

Incidentally, the coffee-growing states could not afford the advertising

expenses needed to introduce their own brand into the market, so they sold

the instant coffee in bulk to the transnational corporations or to smaller firms

that packaged and sold under their own brand names, this gave the TNCs

leverage in which they could integrate the product into their global

production and marketing strategies all while maintaining a tight control of

the leading markets.

Fabiola Campbell Competition with Latin America for
control in instant coffee market