Economic Conditions of Peru Dealing With Starbucks

Peru Sbux

Economic Conditions of Peru

The Peruvian economy is of modest size, with a GDP of $332 million that equates to a GDP per capita of $10,900. The GDP growth rate is 6.3% and this rate of growth has been slowing for the past couple of years. The country's unemployment rate is relatively low but over a quarter of the country lives below the poverty line. Agricultural accounts for 6.4% of the total economy of Peru (CIA World Factbook, 2013). Coffee is among the country's leading agricultural exports.

The Economics of Coffee in Peru

The coffee industry in Peru remains relatively unorganized, with most production coming from small landowners. The main growing areas are removed from markets and the transportation infrastructure is poor, with many farmers taking their goods to market by donkey. Such markets are often not sophisticated either, with only one or two buyers, meaning that coffee farmers often receive poor prices for their crops (EE, 2013). The market process is repeated later at the larger regional towns, before the coffee is blended with other coffees in warehouses and packed for shipping to the coast. There is a high level of disconnect between the farmers and the end product, and these middlemen also mean that there is a significant difference between the price that they receive and the ingredient cost for a cup in the city or especially in foreign markets (EE, 2013).

The Peruvian coffee industry has struggled in recent years. Disease outbreaks have depleted the coffee supply by 25%, as leaf rust is having an outbreak. Peru's problems actually affect the price of coffee on the world market, since the country is the 9th-largest exporter. There is some government assistance for the farmers to help prop up the industry but since most farmers live below the poverty line on slim margins it is debatable how much good this assistance will do for the industry (Brown, 2013). Government support for coffee is strong because it is a substitute crop for coca, the production of which Peru is trying to reduce, with the support of both the U.S. And the European Union (Chase, 2013).

Despite the supply shortages, Peru is facing declining demand which has actually reduced exports. A main competitor, Brazil, has a weak currency at the moment and that is making Brazilian coffee more attractive on world markets. This is to the detriment of Peruvian producers (Perez, 2013). Thus, there are major challenges in the Peruvian coffee industry right now.

Starbucks has been a strong customer for Peruvian coffee, having increased its purchases from the country in 2010 in recognition of quality improvements (Allison, 2010). The company has at times offered single estate product from Peru as well, a reflection of the strength of its connections within the Peruvian coffee supply chain.