How to expand a coffee distribution network

Expanding a Distribution Network

Executive Summary

The south American economy provides a unique opportunity to take advantage of a growing middle class, a developing capitalistic society, improved purchasing power, and a healthy respect for capital investment. Here, these elements coalesce to form an ideal situation in which operations can be improved and expanded profitably. This can be accomplished by opening another distribution center inside Mexico. By opening a distribution center inside Mexico, the company can lower its overall overhead through lower cost labor, improve efficiencies, and achieve economies of scale. Through these benefits the organization can ultimately improve the profitability of the coffee franchise

Introduction

Globalization has now become a much more prominent element with the overall business environment. Here, global trade has expanded markets for small and large businesses alike. Trade agreement have also improved the ease in which goods and services can cross borders and territories. These elements have ultimately improved the lives of millions of people around the world who now have access to better goods, services, and products. Likewise, society overall has improved as nations around the world continue to generate wealth and prosperity for their respective citizens. Countries should as India and China have lifted millions of people out of poverty, in part due to globalizations. Research conducted by Jeffrey Wasserstrom, found that China’s adoption of capitalistic principles has created overall 300 billion dollars’ worth of value to the world in the form of products and labor (Wasserstrom). Here, Wasserstrom revised the overall transition of China, and how globalization how propel the country into a global economic power.

Mexico is no different in this regard, much like China and India before it, Mexico continues to adopt principles of globalization. Here, the country has adopted a health respect for capital, a good rule of law, and encouragement of entrepreneurship. The country over many decades has continues to adopt and apply these principles to improve the quality of life for all of its residents. These improvements were documented by research conducted by Jon Shefner in the Interdisciplinary Journal. Here, Shefner, outlines Mexico’s tumultuous transition into democracy and how it would ultimately impact the overall improve of millions of Mexican lives in the process (Sherner, 2004). In his research Shefner also provides insights into the future of the Mexican economy and how it is projected to grow at its fastest rate in decades. His predictions appear to be coming true as Mexico continues to improve economically after the pandemic. In 2021, GDP grew by 5.9%, much faster than the United States and other developed countries. Likewise, GDP growth in 2022 is likewise expected to be robust, providing further proof that the policies of governments continue to bode well for economic development within the country.

Research

As a result of the above elements, selecting Mexico as the next distribution hub for the company is ideal considering the potential economic benefits that can be generated. Here, the first benefit is economies of scale. By having two distribution centers the company lower the per unit cost of coffee production, thus increasing margins and overall profitability. The primary reason for this is that coffee production is highly capital intensive. According to research conducted by Patricia Moguel and Victor Toledo, certain business allocates up to 30% of their revenues used for fixed cost investment (Moguel, 1999). These investments include machinery need to harvest the raw materials needed to manufacture coffee, the fixed assets needed to package and mix ingredients, the fixed investments needed to distribute the coffee to regions and retailers around the world. Here, the emphasis will be placed in south America which has a very close geographic proximity to Mexico thus enhancing the benefits of the economies of scale. Thus having multiple distribution networks allows the company to better lower fixed cost investment, improve the amount of coffee produced, while also lower the per unit cost of production.

Economies of scale is particularly valuable considering that coffee itself is a commodity. Here, there is very little differentiation between the various grades of coffee throughout the world. This, ultimately creates pricing pressure on producers as there is often an inability to raise prices on coffee products that do not have a brand attached to them. Coffee brands such as Starbucks for example, can charge higher prices as they occupy a share of the consumers mind through marketing and distribution. This competitive advantage is very difficult to replicate as other coffee brands must first dislodge Starbucks from consumers’ minds and then provide a compelling value position to replace competitors. This in turn will require large investments in capital, marketing, distribution networks and so forth. Compounding this issue is that coffee prices themselves are very volatile, which could cause adverse financial circumstances for those who are well capitalized. By having economies of scale and the ability to lower the per unit cost of production, the business can better withstand fluctuation in coffee prices along with unforeseen economic situations. Chart 1 below depicts the prices of coffee over the last 45 years. As can be seen the price has varied from 50 cents upwards to $3.20. These prices fluctuations, like many other commodities is a result of supply and demand dynamics that impact coffee bean and other raw material prices.

Chart 1 – Coffee Bean Prices Ove the Last 45 Years

These fluctuations can have adverse financial and economic consequences for businesses that rely on coffee products as their primary source of revenue. Here, a very low prices which occurred in 1975, 1992, and 2001 can place very large amounts of pressure of businesses. Here, large amounts of coffee manufacturers went bankrupt. Research conducted by Roberto Lopez found that countries around the world experienced similar economic circumstances during the down period of coffee prices. Here, countries from Haiti to the United States all saw large increases in bankruptcies and debt defaults (Lopez, 1990). Through economies of scale the company can lower its per unit cost of production, thus lowering the break-even amount required to remain profitable. Through this activity the company can better insulate itself from world wide reductions in coffee prices.

In addition to economies of scale, the company also increases its ability to more seamless address risking coffee demand in Latin American regions. South America in particular is experiencing rapid coffee adoption, in large part due to the rising wealth and middle class of the region. Chart 1 below indicates the coffee consumption of Latin American countries over the last three years. Here, consumption has increases in most of the countries with the largest increases coming from Brazil, Mexico and Columbia. From an economic perspective, these are the countries that are the most developed within Latin America. The only exception is Venezuela who is undergoing an economic contraction due to a much more totalitarian regime, severe economic contraction, and serve social upheaval. Overall however, coffee consumption throughout Latin America, continues to increase which presents a great opportunity for those prepared to make capital investments in distribution and other services. Here, by establishing a second distribution network, the company can continue to take advantage of rising coffee demand in high growth areas throughout Latin America. In addition, the company can continue to take market share as it products are more readily available and accessible for those who demand coffee products (Topik, 2010).