1) Why might coffee businesses be described as multinational companies?
According to Wikipedia, a multinational company or corporation is defined as “a corporation or enterprise that manages production or delivers services in more than one country”[1]. Many coffee businesses fit this description perfectly. An example used in this case study is Nestlé. Nestlé purchases its coffee beans from a wide variety of countries: Singapore, Mexico, Poland, Turkey[2], and so on. Their suppliers can easily be considered a part of the production process, therefore making Nestlé (and many other coffee businesses) a multinational company following the above definition.
Similarly, Nestlé also sells or delivers its products in many countries. One would be able to find Nestlé products in just about any supermarket, be it in Canada, Qatar, or the UK. The same goes for what are listed as the other four dominating businesses in this market: Kraft, Procter & Gamble, Sara Lee, and Tchibo. This again shows that these coffee businesses can be considered multinational companies, relating it to the above definition.
Finally, most coffee businesses can be described as multinational companies rather than transnational companies as they have a head office in one single country (e.g. Nestlé in Switzerland) rather than regional offices in various nations.
2) Explain reasons why multinational companies in the coffee business operate on a global basis.
It’s un-debatable that the majority, if not all, of coffee businesses operate on a global scale and have become multinational companies, but it may not be as clear as to why this is. There are many reasons.
Although this case study claims that “Nestlé states that it does not favor low coffee prices”, it can almost be certain that they do favor low coffee production prices. This is a common reason for any business to become a multinational. An example used specifically in the case study is the country of Uganda. A coffee business would easily be able to benefit from cheaper production costs within this country: a coffee producer in Uganda is paid 10 pence (0.10 pounds) per kilo, while a coffee producer in the UK would be paid around 1.18 pounds [3]. Because the company is paying less money when it comes to production, yet selling for the same ultimate price (usually averaging around 19 pounds a kilo), it is bound to make a greater profit.
Multinational companies would also benefit from a wider customer base, which is almost certain within the coffee business as coffee is a widely used product all across the world. Nestlé’s instant coffee brand, Nescafé, has factories in almost every country in the world and is therefore able to sell its coffee in all these nations.[4] An aiding factor to this is the product itself: coffee is known to be highly addictive, and so customers will just keep coming back for more. This is sure to increase their sales turnover and increase their international brand recognition.
Becoming a multinational also opens the business to wider economies of scale, both internal and external. The internal ones are obvious: lower interest rates, technical economies, commercial economies, and so on. An example of this within the coffee business could be the commercial economies. A coffee producing company set up in various English speaking countries could very easily use the same television, radio, or print advertisements on a much wider scale. This means that they don't have to spend as much money developing several different kinds of advertisements, and can spend a low amount of money to reach a large amount of people. External economies of scale also include infrastructure and land benefits. For example, it would be more beneficial for Nestlé to buy land in order to build a manufacturing plant in Mexico rather than in Switzerland, because it is typically cheaper. Without expanding and becoming a multinational company, the business would have never been able to benefit from such an important external economies of scale.
The business would also be able to benefit from the avoidance of any existing protectionist policies between regions and nations. For example, if one country has unfair trade practices, or high tariffs and difficult-to-follow quotas, building a factory in that country would help avoid such problems. If Nestlé was to build a factory in Mexico, as an example, they would be able to evade the quotas and tariffs that would have otherwise existed with trade between the Mexico and Switzerland (where the company has it's home base). This may also allow the business to benefit from this with other countries in the immediate area (due to possible regional free trade agreements, like the European Union).
Finally, multinational companies can avoid complications with much more ease than non-multinational companies; risks like national/regional economic recessions, or natural disasters. For example, if Nestlé had stuck to operating in Switzerland and there happened to be a huge snowstorm that destroyed all of their coffee crops, the company would have suffered tremendously. However, by having suppliers in countries like Turkey, where there are some cities that have no snow at all year-round, this kind of complication can be avoided. This becomes extremely important to companies that rely on cash crops.
3) Examine the factors which have affected the globalisation of this market.
Globalisation is slowly but surely turning our world into a smaller place. The same can be said within a market – it is getting smaller and smaller and easier to work in due to globalisation. Several factors have helped this occur in the coffee market.
Simply enough, the market began to globalize because big coffee producing companies decided that they wanted to become multinational companies and start selling and producing in various countries across the world. This was for all the reasons stated in number 2; to benefit from cheaper labour, economies of scale, etc. Because the multinational companies are now operating all across the globe, globalisation has occurred. The countries that operate within the market are now more able to communicate and share ideas amongst themselves, due to the fact that they are linked through these multinational companies.The fact that all these countries and companies are linked makes communication and business operations faster and easier. This is the ultimate core of globalisation: increasing speed and efficiency.
Freer trade also opens doors to globalisation within the coffee market. As stated in number 2, one of the leading reasons for coffee businesses to become multinationals is so that they can avoid protectionist policies. If a coffee company that is based in Qatar opens a coffee plant in Brazil, trade within the two company bases and/or plants is bound to be easier, therefore increasing the simplicity of trade between Qatar and Brazil as a whole. The increased efficiency of trade between these two countries illuminates borders, and therefore increases the amount of globalisation within the world as a whole, and the market.
The case study mentions that in the 1990s (and surely in other decades) pressure was out on countries like Vietnam to grow cash crops like coffee. This is one of the factors that eventually lead to the globalisation of the coffee market. Once the idea was given to Vietnam by powerful influences like the World Bank, the offer would have looked too good to refuse. Now that the country is producing so much coffee, it has to go somewhere. Either Vietnam could set up their own coffee selling businesses, or they could simply team up with pre-existing multinational companies like Kraft and Nestlé. By taking up on this offer, Vietnam would begin trading with other countries. This just goes to show that economic opportunity was therefore one of the leading influences that caused the globalisation of the coffee market.
Finally, the technological progress of the entire world contributed greatly to the globalisation of the coffee business. An example of this, of course, is the internet. Now that the internet exists, a coffee producing company based in the UK can find out the average prices for coffee on worldwide stockmarkets, how much coffee their plants in Brazil are producing this week, and how much of their products are selling with the mere click of a button. All sorts of information that is essential to the market is immediately available. The coffee businesses have developed an online presence, meaning that consumers can also find details about the company from which they are buying coffee at their leisure. This brings the all aspects of the company together (the stakeholders, the owners, the customers, the suppliers, etc.), bringing the coffee market closer and more globalised at the exact same time.
Globalisation is not only affected by the businesses, but the businesses are also affected by the globalisation. This can include both positive and negative effects.
The first of these effects is competition. Globalisation affects an entire market, not merely a single business. This means that not only Kraft, for example, is benefiting from the globalisation of the coffee market, but also Nestlé and Tchibo. This leads to increasing competition amongst each other: everyone wants to benefit from globalisation as much as they possibly can, more so then the other companies within the market. They will all be competing for deals with the best countries, the best suppliers, the most devoted and highest-spending customers worldwide. This competition can be considered a severe threat (therefore negative effect) for the coffee business es in question.
Globalisation can benefit the multinational coffee businesseses in the sense that it gives them more choice. This includes choice of location, both for their plants where the coffee beans will be grown, the factories where the coffee beans can be turned into the products wanted, and even the areas in which the final product is to be sold. The business also gets to chose who they want to employ, and what labour prices they are willing to pay. All of these choices ultimately benefit the business as they are able to choose what opportunities will give them the best possible outcome and profit.
Businesses will also have more choices for expansion when it comes to globalisation. Because globalisation will make the market smaller, it will be easier for the large multinational companies to expand through mergers, acquisitions, or joint ventures. Expansion helps the company to also benefit from economies of scale, and any other benefits that come along with the growing of a business. Therefore, because the market is shrinking it’s easier for the company to grow.
Globalisation also gives the company more ability to be successful. The case study focuses on Nestlé as a prime example of this. Nestlé now “has a 575 share of the soluble coffee business”. This surely wouldn’t have been achieved without the globalisation of the coffee market. The company became so successful through gaining profit margins that are 26%, something else that surely wouldn’t have been possible without globalisation. Nestlé was able to take advantage of cheap labour and land costs, high selling prices, economies of scale, and so on in order to achieve its greatness. If the market had not been as globalised as it is, Nestlé would have never been able to use foreign (often developing) countries to help its economic expansion.
Finally, just as the idea of a wider customer base is a prompt for a company to become multinational, it is also a benefit of globalisation on the businesses. A multinational company aims to become widely recognized in the growing world, and globalisation helps prompt this. China and India together make up approximately 35% of the entire world's population, which is a huge amount of people that could easily become reliant on the addictive substance that already dominates the lives of many others; coffee. Globalisation makes access to these customers much easier for multinational companies.
5) Evaluate the impact of the global coffee business on coffee farmers in developing countries.
John Kafuluzisik’s story, found in the case study, is a prime example of what is happening to coffee farmers in developing countries all across the world. Because multinational coffee businesses are taking advantage of cheap land and labour (among other things) in developing countries, the people within these countries are suffering.
Coffee farmers may not have as many rights in developing countries as they would in developed countries. A clear example of this is minimum wage. The minimum wage in the UK is 5 pounds 80 pence per hour (for those ages 22 and older) while Singapore, one of Nestlé’s leading supplying countries, has none at all. Countries like Mexico and Vietnam have extremely low minimum wages. However, these famers are being paid for the coffee that they are selling to big-name companies, and to them low amounts of money are better than no money at all, and so they settle for less then they deserve. Issues like this cause further poverty in already struggling nations.
Multinational companies also exploit resources in the countries that they are buying from. Sometimes the coffee farmers are being pushed to produce as much coffee as they can. This can sometimes wear-out and destroy the soil that they are using, and it also promotes the demolition of land to make way for more coffee bean plantations[5]. The coffee is also therefore being shipped to faraway countries, instead of being used for the farmers and their families themselves. Finally, the use of pesticides and fertilisers (which were said to have been used in Vietnam in the case study) promotes pollution within the country. This affects the coffee producers directly; their land will eventually be no longer useable for cultivation, and other things like their water resources can also potentially become contaminated. All of this work on behalf of the multinationals exploits the land and crops that originally belonged to the farmers.
At the same time, multinational companies are taking away the fundamental rights of these coffee farmers. The farmers have no say in how much money they are making, what the set price for buying coffee is, or how the coffee is distributed. William Naggaga said it perfectly; “Just think of it – five men sitting in a room deciding the fate of 25 million coffee farmers around the world”. Because these multinational companies hold so much power in the coffee market, the farmers are bound to feel intimidated and not have their voices heard. Even though it’s a 5,000,000 to 1 ratio, the rights simply are not there.
However, not all impacts are negative ones. For example, the employment itself is there. The coffee farmers may not be receiving the money they deserve, and they may still be living in poverty or not be able to afford medicine like John Kafuluzisik, however this is considerably better than being unemployed altogether. In the long run, the 200 shillings that Kafuluzisik is earning can go a lot further than the 0 shillings he would be earning otherwise.
Finally, it is not only the countries but the farmers themselves that have the potential to benefit from technology transfer. A coffee farmer living in rural China may not be aware of some of the tools that are available to him that would make coffee cultivation easier and faster, however this information can be brought to them by representatives from the multinational companies that are buying the coffee. This is likely as the companies will want to buy the coffee as quickly as possible, and will therefore be more eager to promote a means to achieve this speed.
