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Brazil
Internet
Auction

(continued)


And so it was with enormous expectation that the auction plans got underway. Marcelo Vieira, the project manager in Brazil kicked into action immediately. He had just spent hundreds of hours putting together the competition and now, unexpectedly, it was imperative to convince the winners that they should take a risk and sell their coffee through an unproven method. During this same time period the C contract was climbing dramatically as news of the low rainfall amounts in Brazil had everyone anxious. The auction was not planned for another two months and, as could be expected, the farmers wanted to capitalize on a rising futures contract.

The first of anything creates uncertainty, but the hope that the auction could have a long-term positive effect overcame the farmer’s trepidation and the coffees were sold for auction to the exporter at the fair market value plus the award premium. For clarification purposes the profits realized by the auction have been allocated as follows: the Gourmet Project (ITC) will be reimbursed for the premium reward money which it was willing to risk and which will be reallocated for other project expenses; the farmer will receive an additional 40% of the proceeds from the sale of his individual lot; the Brazil Specialty Coffee Association will receive 40% to continue the quality work started by the project; and finally, the exporter will receive the extra 20% to compensate him for his effort.

The exporter for this auction was Cooperativa Regional De Cafeicultures en Guaxupe-Cooxupe; a large well-established company. That such a well-respected exporter would be excited about handling these small lots of coffee provided some considerable comfort to the auction team. Many of the bidders had had a previous relationship with Cooxupe and trusted that the coffees would be handled properly and efficiently. This level of comfort was an instrumental element for higher prices to be bid for the lots. Such a relationship built on trust between the exporter and the importer is always crucial for creating value with or without an auction.

The Brazil Specialty Coffee Association (BSCA) meanwhile asked for and received final approval from the Specialty Coffee Association of America (SCAA) that the requisite auction technology be created and managed through the SCAA web site. Don Holly, administrative director for SCAA, took on the pivotal role of managing the technological development of the site. He was also to act as the head of central communication once the passwords had been issued and the auction had started. Any problems sat squarely on his shoulders - except for a few minor clock glitches, the auction site functioned admirably. However, what looked on its face to be a fairly simple online procedure, in reality was highly complex and had occurred only after many hours of hard work and multi-party discussions about every miniscule detail.

The next step was to sign up the potential bidders. Those importers who expressed an interest in the auction were sent samples and farm information for all 10 of the winning lots along with an application form and a rules and procedures document. Importers from Europe, Japan, and the U.S. signed up to bid. Once approved by the exporter they were issued confidential passwords. There were a few importers that Cooxupe was unfamiliar with and these companies were asked to submit a letter of credit. (Since these documents are costly, the request may have dampened the enthusiasm for bidding from these companies, is an issue that needs to be addressed in future auctions.)

Lots opened for bidding, individually and five minutes apart, on December 15, 1999 at 11:00am Eastern Standard Time. The tenth place coffee opened first, the first place opened last. The bidding would last exactly 48 hours, with the closing time also staggered at 5 minutes apart for each lot. The closing followed the same order as the opening, tenth place, the ninth place, and so on. The staggered time, the opening and closing time, and the length of open bidding were three of the components that were given the most serious consideration and will most likely be debated in the future. The hottest debate will be whether coffee lots should have remained open for bidding until there were no more bids or if they should have been closed at a certain time - regardless of whether or not there were bids still in the pipeline.

Some bidders missed out purchasing the coffee by seconds and would have paid more. However, in other cases the timed close created a heightened sense of urgency - thus, leading to higher incremental bids. David Griswold, owner of Sustainable Harvest, explained that even though his company lost in the last few minutes, the timed close was crucial. “The timing structure allows the ‘little guy’ to be a ‘Goliath’ and swoop in at the last minute, catching everyone off guard with a much higher bid.” For those bidders who lost to the clock there was tangible frustration.

Since the auction was international, the time zones also created difficulties. As Hidetaka Hayashi, Japanese Gourmet Project coordinator explained, “Japanese importers had some complaints, as the closing calls were starting from 1:00am in the morning.” He goes on to explain that “the Japanese did not purchase any of the lots because they were not well-trained in this technique of bidding which is so different from open outcry. The internet auction was also very difficult technically in the last 10 seconds.” They plan to be better prepared next time!

The coffees were sold at record prices despite any difficulties with the top price at twice that of the current C. The average price for all of the coffees was $1.73. The C was hovering between $1.32 and $1.34. The majority of the coffee lots were sold to European companies. Trygve Klingenberg of Solberg & Hansen, bought five of the 10 lots, Stephen Hurst from Mercanta, a relative new importer based in London, bought one and Giovanni Lokar from Cogeca S.p.A., a green coffee import/export dealer from Italy, bought two. Steve Colten of Atlantic Specialty Coffee purchased the other lots for two U.S. roasters. Randy Layton of Boyd Coffee Co. and Martin Diedrich of Diedrich Coffee will market the “Cup of Excellence” coffee in the U.S.

While the competitive bidding on most of the lots was fierce, nothing compared to the frenzy in the last seconds of bidding for the first place coffee from the competition. Martin Diedrich had been a juror at the competition and knew then that he wanted to own the Ottoni coffee. He was willing to bid as high as it took. Martin later remarked, “It is an incredible coffee with an incredible story. With my family heritage, Diedrich Coffee is uniquely poised to take full advantage of it.” Martin plans a full marketing blitz to support the coffee when it is presented later this spring.

In reality, how well this newly auctioned coffee is marketed may determine the future success of Brazil higher quality coffees. The consumer is ultimately the judge and jury and will either support or reject the value set by the industry on any coffee.

Randy Layton, while not commenting on the auction itself, bought the coffee because it met all of his company requirements. “These Brazil coffees were all exceptional. We were provided with in-depth information about the farms and the mill and we were very comfortable with both the importer and the exporter.” He goes on to explain that a competition and auction such as this helps specialty companies more easily access small farmers with high quality coffee, which has often proven to be difficult.

Europe has a long history with Brazil coffee and, in hindsight, it was not surprising that many of the lots will be delivered there. Barbara Lokar of Cogeca S.p.A. initially got involved out of curiosity. “However, once we tested the samples, we were very impressed with the coffee and decided the auction was an occasion to buy something special for our clients.”

Stephen Hurst believes that the U.K. is poised for a specialty coffee growth explosion and believes that quality coffee will lead to higher consumption. He adds: “For a relatively modest investment, one could claim to own the 10 best coffee lots from Brazil. This originally was my concern, as one large importer could afford to purchase all 10 lots.”

Trygve Klingenberg, who at one point did consider buying all of the lots, explains that Norway has a long history with quality Brazil coffees but that they all vanish into some blend. “We want to change that.” Trygve, known for his passion about quality, announced, “The cyber journey was indeed fun - even better: we were able to secure a few lots of extraordinary coffee, the best coffee from Brazil. What a story this will make! If you want the best - go for it. But be prepared to pay!”

Trygve has commented several times that what he perceived as a lack of bidders indicates the general state of the specialty industry. There were fewer active bidders than originally signed up, but behind the scenes there were a lot importers and roasters who actively participated and who have now indicated that they will bid harder the next time around even with a time difference and a discomfort with the technology. For many, this auction and the resulting prices were a wake-up call.


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