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Meaningful innovation

Case Study: MTC Group

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This post is part of a series outlining my learnings from interviews with a number of small and medium businesses exploring how they have benefited from a shared value approach. These case studies support a paper I wrote exploring strategic CSR (PDF 1.3MB).

The MTC Group is an Australian-based specialty coffee importer and roaster that has grown out of the Mountain Top Coffee Estate, an Australian coffee plantation. MTC supplies coffee to local and overseas markets, sourced from Brazil, Indonesia, Ethiopia and Papua New Guinea in addition to that sourced from the local plantation.

The business has demonstrated strong returns during its three years of operation, with revenue more than doubling year-on-year over that period and volume increasing 300% according to Andrew Ford, MTC Group’s CEO and President. During this time the business has grown from two to six full-time staff and has established successful joint ventures with partners in Indonesia and Papua New Guinea. The group is continuing its expansion with the recent appointment of an Australia-based group manager and the opening of its first international office in Hong Kong to better service customers in the Asia Pacific region.

The Australian specialty coffee market—which Andrew estimates is roughly 10% of the total local coffee market—is highly competitive, with pressures impacting importers from both directions in the supply chain. Upstream pressure is caused by the significant rise in coffee prices in recent years. Additionally, downstream pressure has been applied by retailers and distributors, who are themselves facing tough trading conditions, for roasters and importers to maintain, if not reduce, prices. Lastly, importers are facing increased competition not only from competitor importers, but from their own customers. Andrew explains:

…the retailers that were the core business of these specialty coffee roasters, and they were the core business because they were good at what they did, they owned one or three or five stores at high- volume … those same guys now are saying well, “why am I buying coffee from the wholesale roaster? Why don’t I set up my own roaster and become my own roaster/retailer?”

MTC’s vision is to develop the Asia Pacific market, both as a sales target but also for sourcing. Regions play an important role in the marketing and positioning of produce within the international coffee market, with highly-regarded regions commanding premium prices. MTC is an early mover in the Asia Pacific region, seeking to gain a deeper understanding of this new market and stronger relationships within it, which Kanter1 highlights is a key to successful corporate social innovation. This has resulted in MTC supporting the development of key infrastructure to support traceability and market transparency in Indonesia and Papua New Guinea, where the coffee trade is less established. Andrew explains:

Kenya [is] highly regulated, highly structured, government intervention, everything runs from an auction so just by us being there and participating we’re providing the same sort of presence if you like, traceability and vision to our client base just by being there, participating at auction level. Indonesia [is different, it’s]: deregulated, no government intervention, dysfunctional…

Such active engagement with the community to develop the capacity of these local, emerging markets, is an investment in cluster development. The impact of such infrastructure on business competitiveness is noted in the context of both shared value2 and cluster development in general.3

A key differentiator of MTC’s business is its close direct relationships with producers throughout the coffee production stages, from red cherries through parchment, green bean and roasting processes. This is part of an overall strategy to differentiate MTC Group from competitor importers. Andrew explains: “as a business we want the market to perceive us not only in quality but in terms of innovation and in terms of … being an origin-based seller not [just] an importer.” MTC Group has developed a multi-tiered approach to its origin-based offerings, with brands being developed at a variety of regional levels. An example of this is the Tairora Project in Papua New Guinea, where MTC source coffee from a variety of villages and suppliers in the region, but have also developed sub-brands for beans sourced from Bonta (village) and Baroida (farm).

MTC values these relationships highly and invests significant resources in their development, providing support in the form of training (e.g. to evaluate bean quality) and market intelligence (e.g. sharing MTC’s experience of coffee market dynamics and buyer expectations). Andrew characterises this support as building “the capacity within the supply chain of our business, our exporters and even at the farmer level, to ensure we meet the market’s demand”, illustrating with an example:

What we’re doing is supporting Baroida farm to put in place quality initiatives … in terms of processing, drying, batching, garden collection, cupping and review matching the garden to the cuppings … giving guidance, … saying ‘the market’s asking for this’… ‘this involves steps A, B, C, D,’ … they’ve got the skills and the ability to do it on their own but we’re providing that feedback. … [we support them in] the evaluation process … in terms of building the database and the management of data or data collection so the comparison between activity ‘A’ and what your result is in the cup.

These skills not only support MTC’s business through increased quality of supply, but they also build the skills and feedback to growers about market trends and expectations, ultimately enabling them to command higher prices for their produce. This depth of relationship with suppliers helps provide MTC with competitive advantage that new entrants (including MTC’s customers) will find more difficult to copy. This re$ects Scott-Kemmis’s contention that a business model that is “deeply embedded in the specialised capabilities and collaborative links that a firm possesses”4 is a key component of innovation in the Australian market. It is also a key dimension of sustainable business practice, where “[r]elationships with suppliers and buyers are based on greater trust through which long- term contracts and relationships are emphasized, providing greater traceability of both products and their impacts.”5

This advantage may deepen into the future, if the market continues to shift towards what Andrew calls the “relationship business model” in the coffee market:

…the way I view our industry is that right now at trade/retail level to the consumer, the big buzz is relationships, in other words it’s all about the coffees… I guess the ‘90s was all about fresh and local and they do roast it locally, “we’re round the corner, we pack it fresh” … the 2000 decade was all about baristas, it was you know, “my barista’s the best barista, barista champion”, … and this decade is all about relationship properties in the market. And in this decade where it has never been more important than knowing where your coffee’s come from and having the integrity…

A key challenge with this shift within the broader market is that customers who see appeal in this model have not adjusted structurally to adequately the longer-term view that is required to support it. Andrew explains:

…we’ve built the relationship model with our Sumatran supplier, great relationships, you know, we refer to each other as our “brothers”, it’s that genuine, good honest, partner of mine, brother of mine. We’ve built the relationship; [our customer,] they buy two or three containers a year—we bring it in. They turned down an offer from us because they got a price discount effectively from another suppler of 5% … I rang the owner of [our customer] and said, “guys you can’t ask me for a relationship-based business model and then go to tender on every contract that we discuss.”

MTC’s experience demonstrates a reconceiving of products and services where relationships and the origin of produce are valued and act as a heuristic for quality. MTC has built a strong reputation for quality and transparency, developing a premium product in a commodity market. Transparency across the supply chain—an approach championed by leaders in other industries such as Patagonia (clothing & textiles) and Investa Property Group (see other case study)—is also emerging as an important aspect of the coffee commodity business. Certification schemes such as Fairtrade and Rainforest Alliance are one way the industry is adjusting to this shift. MTC’s approach signifies that redefining value in the value chain—developing direct, supportive, trusting, long-term relationships with suppliers—is another. Strengthening clusters through education and infrastructure also provide MTC with a competitive advantage in building the Asia-Pacific region’s profile in the international market, commanding corresponding premiums to the benefit of both MTC and its supplier communities.


Notes

  1. Kanter, RM 1999, ‘From spare change to real change: The social sector as beta site for business innovation’, Harvard Business Review, no. May 1999, pp. 122–32.
  2. Porter, ME & Kramer, MR 2011, ‘Creating Shared Value’, Harvard Business Review, no. January–February 2011, pp. 1–17. [http://hbr.org/2011/01/the-big-idea-creating-shared-value]
  3. Porter, ME 2000, ‘Location, Competition, and Economic Development: Local Clusters in a Global Economy’, Economic Development Quarterly, vol. 14, no. 15, pp. 15–34.
  4. Scott-Kemmis, D 2012, ‘Responding to change and pursuing growth: Exploring the potential of business model innovation in Australia’, Australian Business Foundation. [http://books.google.com.au/books/about/Responding_to_Change_and_Pursuing_Growth.html?id=kxuqMwEACAAJ]
  5. Hutter, L, Capozucca, P & Nayyar, S 2010, ‘A Roadmap for Sustainable Consumption’, Deloitte Review, vol. 2010, no. 7, pp. 46–59.

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