In the early seventies, General Foods products accounted for over a third of all U.S. coffee sales. Its flagship brand, regular Maxwell House, held a 24 percent market share of roast-ground regular, while its instant coffees accounted for over half of that category’s sales. Procter & Gamble offered no serious soluble competition, but its regular Folgers, with a 20 percent share, was creeping up on Maxwell House. Hills Brothers had slipped below 8 percent, while Standard Brands’ Chase & Sanborn held only 4.3 percent, just above Coca-Cola’s coffee share with Maryland Club and Butternut. Under inept management, A & P had dropped behind Kroger’s in chain store coffee sales. None of the supermarket private label coffees fared well against the well-advertised, low-prices giants such as Maxwell House and Folgers.
With per-capita coffee consumption continuing its steady decline—from 3.1 cups a day in 1962 to 2.2 cups in 1974—the major roasters fought for ever-smaller pieces of an ever-shrinking pie. The roasters essentially had given up on the youth market, as their choice of middle-age or older celebrity endorsers indicated.
General Foods and Nestlé spent the last years of the sixties vying for the freeze-dried instant market. It took General Foods nearly four years to roll out its Maxim brand nationally. The $18 million annual research expense represented the largest single capital investment the company had ever made for a new product. Nestlé countered with Taster’s Choice. Both companies spent some $10 million a year marketing their new brands. About half of all American households received a freeze-dried sample in the mail.
According to its ads, Taster’s Choice offered “all the deep, rich flavor and hearty coffee aroma you used to have to perk up a pot for.” Of course, such boasts were more than a little exaggerated. These ads attempted to position Maxim and Taster’s Choice against regular coffee to avoid cannibalizing their old instants’ sales. Nestlé distanced Taster’s Choice from Nescafé by choosing a completely different name. In contrast, the Maxim name clearly referenced Maxwell House. As a result, Maxim cut substantially into Instant Maxwell House sales, and Taster’s Choice came out on top of the category.
Unwilling to match the huge capital expenditure required for freeze-dried coffee, Folgers and other instants responded by gluing their instant powder together in clumps, making it look more like regular coffee without changing the taste. Folgers advertised the product as “newer than freeze-dried.” Rather than improving quality, all the major roasters pursued a strategy of technological innovation, gimmickry, and market segmentation during the early 1970s. General Foods created the Max-Pax, rings of premeasured ground coffee in a filter. Coca-Cola offered a frozen coffee concentrate. Others sold coffee syrups in aerosol cans or freeze-dried coffee packaged in one-cup servings on a spoon, ready for stirring.
The real battle for U.S. coffee supremacy shaped up in the 1970s between consumer foods conglomerates Procter & Gamble and General Foods. Folgers’s strength still lay primarily in the West, but Maxwell House strategists knew that Folgers would try to invade the East. In 1971 Maxwell House executives formed a “Folgers Defense Team,” asking Ogilvy & Mather, their advertising firm, for advice.103 They came up with a two-pronged response. General Foods created Horizon, in a red can similar to Folgers. While Folgers was “mountain grown,” Horizon’s beans were “hand picked.” Heavily couponed, Horizon would act, they hoped, as a diversionary tactic, allowing Maxwell House to sail on undisturbed.
General Foods’ other tactic was the introduction of Aunt Cora, a plain-spoken country storekeeper who extolled the old-fashioned virtues of Maxwell House—a direct counter to Folgers’s Mrs. Olson. Veteran actress Margaret Hamilton seemed an odd choice for Aunt Cora, since she continued to terrify new generations of children in her 1939 role as the Wicked Witch of the West in The Wizard of Oz. As the kindly, bespectacled Aunt Cora, Hamilton proved to be a good coffee promoter. She appeared on television just in time to go head-to-head with Mrs. Olson in Cleveland, where Folgers struck in fall 1971, before continuing a methodical drive into Philadelphia and Pittsburgh in 1973, then Syracuse in 1974. The “Battle of the Old Bags,” as one analyst named it, had begun.
The Horizon brand flopped, but the Aunt Cora strategy worked just as Ogilvy & Mather executive Dave Maddox predicted. If Maxwell House could establish Cora as a familiar presence before Folgers launched locally, “Mrs. Olson could look like a second-rate imitation,” Maddox advised. In Syracuse, where Aunt Cora had been praising Maxwell House for over two years before the Folgers onslaught, Procter & Gamble was forced to offer its coffee at a loss for 87 cents a can, well below the lowest normal retail price of $1.20. As one analyst observed, Folgers was “running like the devil just to stay in place.” The real losers in the titanic battle between Folgers and Maxwell House were regional roasters, forced to match the deep discounts of the two major brands. Some were pushed into bankruptcy. As a result, the Federal Trade Commission sued General Foods (but not Procter & Gamble, inexplicably) for predatory pricing practices.104
Despite its success at stymieing the Folgers onslaught, the defense team at Maxwell House remained ill at ease. It was only a matter of time before Procter & Gamble made the big move into New York City, the coffee capital of the East. The Folgers men were preparing their battle plans when nature once more intervened in Brazil.
16
The Black Frost
The world’s coffee trade . . . may have been permanently altered by the frost.
Few of the Paraná coffee bushes will recover, and many will not be replaced.
The farmers have been frost-bitten too often in the past. They are planning to grow wheat and particularly soya beans.
—The Economist, July 26, 1975
Brazilian coffee farmers thought they had suffered through every kind of drought or frost, but 1975 brought snow to Paraná for the first time, and the ripples from this freak weather system would affect the global coffee industry for years. Hitting on July 17 and 18, it was by far the worst frost of the century, virtually destroying the Paraná coffee lands, while it inflicted terrible damage in São Paulo and elsewhere.
Viewed from the air, the area looked burned over; thus the event was named the Black Frost.105 One and a half billion trees, well over half of Brazil’s total growth, were killed. Most of the harvest was already complete, but world production had lagged consumption in eight of the previous ten years, with Brazil’s surplus making up the difference. Since new coffee plants required four years to come into production, it was likely that there would be a tight market for several years. In the frost’s wake, coffee futures soared, and all producing countries halted exports in anticipation of ever-higher prices. Brazil too held on to its 24 million-bag surplus. Coffee roasters, who had expected a surplus to bring down prices, were caught with low inventories. Within two weeks, the retail price of ground coffee rose by 20 cents a pound.
Several other factors combined to limit coffee production in 1975 and 1976. In Angola, tribal, regional, and political rivalries broke out in a violent civil war. In disarray itself after the fall of its military dictatorship, Portugal declared Angola independent in November 1975. The quarter million European settlers—many of them coffee farmers—fled the country, while the equivalent of 3 million bags of coffee rotted on the trees. When Cuban troops arrived to help the Movement for the Popular Liberation of Angola, the U.S. government rushed arms to the opposition, the Front for the National Liberation of Angola. For another two decades, the cold war would be played out in Angola, and its once-thriving coffee industry died. Jungle creepers climbed the coffee trees, and swimming pools once used by the Portuguese coffee elite lay empty and cracked.
Elsewhere, civil war raged in Ethiopia, interfering with the harvest, while dictator Idi Amin’s activities in Uganda were beginning to affect that country’s coffee crop. A dock workers’ strike stalled Kenyan exports. In Guatemala, a devastating earthquake early in 1976 missed the coffee regions but destroyed bridges and caused landslides that would delay shipments. Floods swept Colombia. Coffee l
eaf rust surfaced in Nicaragua. Speculators took advantage of the situation, contributing to the size of the price hike.
The United States agreed to join another International Coffee Agreement (the previous one expired in 1973) in hopes that it would help to stabilize prices. A quota system would kick in when prices lowered substantially. The 1976 ICA therefore was a formality, although it did encourage producers to export their coffees, because when quotas were set, they would be based largely on the amount each country had exported in recent years.
In March 1976 green coffee prices reached $1 a pound, a 100 percent hike in less than a year. Prices continued to rise. Consumers and retail chains began to hoard coffee in anticipation of even higher prices, driving up the price faster.
As coffee sales declined and market-share battles intensified, Hills Brothers, the only remaining major family-owned roaster, sold out to a Brazilian agricultural conglomerate. Billionaire Jorge Wolney Atalla arranged for the $38.5 million purchase of the ailing American roaster. Atalla and his brothers, the largest coffee growers in the world, owned their own freeze-dried soluble plant, an exporting agency, two Brazilian coffee roasting firms, and Copersucar, a huge sugar cooperative that also produced alcohol for use as a fuel. Atalla announced his intention to produce an all-Brazilian blend (primarily using his own beans) and to double Hills Brothers’ U.S. market share by 1980.
Machiavellian Market Manipulations
As 1977 brought $3-plus a pound, boycott movements sprang up around the country. Supermarket chains joined the campaign, urging consumers not to buy coffee. The MacNeil/Lehrer Report devoted a show to the crisis. “It’s a bit ironic,” observed Jim Lehrer, “that a nation that started on its road to independence with a tea boycott should be kicking off its third century with a coffee boycott.” Conservative writer William Safire penned “Brazil’s Coffee Rip-Off” in the New York Times, asserting that “the doubling of coffee prices has little to do with market forces”—Brazil’s military junta knew that “dopey Americans will pay anything for their coffee fix.”
Disturbed by the storm he saw brewing, Jorge Wolney Atalla took out a full-page ad in the Wall Street Journal so that Hills Brothers could explain the price hike as a result of the frost and other natural and political disasters. Atalla invited three dozen U.S. consumer advocates and supermarket managers to come to Brazil as guests of Hills Brothers, to see the frost destruction. They also visited the four largest government storehouses to see that they were nearly empty. His efforts could not stem the tide of righteous indignation.
Once again, as in 1912 and 1950, a shrill political crusader led the charge of price manipulation. This time it was New York’s Fred Richmond, the chair of the Domestic Marketing, Consumer Relations, and Nutrition Subcommittee of the Committee on Agriculture. Richmond expressed outrage when Brazil and Colombia repeatedly raised their export tax levies to take advantage of rising prices.
In February 1977 Richmond co-chaired joint hearings. “Coffee consumers in the United States and other nations are in the grip of one of the most Machiavellian market manipulations in modern memory,” Richmond thundered in his opening remarks. He accused Brazil of conducting “a deliberate, pervasive campaign to inflate and artificially maintain coffee prices at record levels.”
Elinor Guggenheimer, New York City’s Commissioner of Consumer Affairs, presented some of the 3,000 letters she had received from consumers.
“This is the first time I’ve ever written to protest anything,” one housewife wrote regarding “all the greedy coffee growers, companies, and dealers.” A veteran recalled “during World War II when a cup of coffee was the difference between misery and pleasure.” He couldn’t bring himself to abstain entirely, but he promised to cut his consumption.
Jane Byrne, Chicago commissioner of consumer affairs (and future mayor), lamented the plight of the Brazilian laborers she had met on Wolney Atalla’s plantation. “They work for $2 a day; they are allowed to plant a little bit of corn in their backyards. Everything else which they make out of their $2 a day goes right back into the company store and goes for rent on the house.” Michael Jacobson, the head of the Center for Science in the Public Interest, testified in favor of a permanent boycott, or at least a severe cut in consumption, since he believed coffee could be harmful to health.
Following this parade of critics, the State Department’s Julius Katz asserted that the Brazilian and Colombian export taxes had no effect on coffee’s cost to consumers. Rather, the export tax took a bite out of the price the farmer received. As prices rose, it was natural for the governments to increase their share in order to fund new plantings and the use of fertilizers and pesticides. Even so, the return to the Brazilian farmer had tripled. Katz ignored the plight of the laborers, however, since their wages remained minimal. Katz admitted that there was no coffee shortage, but “markets operate on the basis of anticipation.” With Brazil gradually depleting its surplus stocks, another frost or unforeseen disaster could easily cause a real shortage.
Even at higher prices, coffee cost about 6 cents a cup when brewed at home. Soft drinks, which pushed past coffee in 1976 to become America’s most widely consumed beverage, cost much more. What was it about coffee prices that invariably aroused U.S. citizens? It is difficult not to conclude that a xenophobic distrust of Latin Americans and Africans lay behind the uproar. The hearings ended without lowering coffee prices or accomplishing anything. Prices continued to climb, exceeding $4 a pound by May 1977.
Riding the Bull Market to Millions
Though speculators may not have caused the price hike, some of them certainly profited from it. One veteran who preferred to remain anonymous— call him Mike—began trading in 1973, when the coffee market had just become viable again. As a “local,” he traded for whatever brokerage firm hired him, but he also bought and sold futures on his own account. “I don’t know anything about coffee,” he confessed. “I just know how to trade it. It wouldn’t matter if I was trading lettuce. I can listen to the tone of the voices in the ring and tell what’s going on.”Il
In 1975 Mike took advantage of the frost, then rode the price rises and shortfalls over the next few years. He jumped nimbly in and out of the market, sometimes taking a position only for a few minutes or even seconds. “I would just try to catch a move.” During the late 1970s, Mike made over $1 million a year.
“Every day before the opening bell, I would get butterflies. Then once it started, I would just automatically go. If my mother were standing next to me and I had to step on her to get an order off, I’d do it.” The intense competition, the gesturing to bid or sell, and the screaming to be heard, made it an exhausting occupation. “It’s a young man’s job, and it’s not an occupation for a deep thinker. A Phi Beta Kappa would study it too hard and not perform in time.” The street-smart kid who could keep a level head under stress thrived.
“I used to put pebbles in my mouth, like that Greek guy, and practice shouting quotes and bids. The loudest guy does the most business.” No one left the floor, even to go to the bathroom, during the 10:00 A.M. to 3:00 P.M. trading hours. With a group of men—women were a rarity—screaming and sweating in close proximity, viruses thrived.
At night, Mike would drink with buyers and brokers. “We talked coffee all night.” Every three months, he rubbed shoulders at conventions—in Boca Raton, Florida, for the National Coffee Association, Bermuda with the Green Coffee Association, Pebble Beach, California, at the Pacific Coast Coffee Association, London for the European Coffee Association. “All these guys did very well, indeed. It was the high life.”
Hot Coffee (Stolen) and High Yield (Awful)
As coffee prices spiraled in 1977, beans turned to gold for coffee thieves around the world. In San Francisco, a truck with $50,000 worth of coffee disappeared. Four men were arrested for stealing seventeen tons in Miami. A rash of coffee hijackings off the New York City streets accounted for well over $1 million.
In Brazil, coffee export earnings reached $4 billio
n, enough to match its whopping oil import bill, but rising prices caused problems there too. Greedy farmers broke fixed-price contracts with brokers. Smuggling out of countries with high export taxes, or low state-controlled prices to growers, increased dramatically, particularly from Colombia and Brazil. As one coffee expert observed, “Smuggling occurs almost everywhere. . . . If custom officials do not go along with the bribes, smugglers have been known to dispose of custom officials by beatings, intimidation and death.”
In one swindle, four men sold $8.7 million worth of mythical Dominican Republic beans to Cuba, intending to sink the ship en route. The scam was uncovered when the crew failed to scuttle the freighter, which arrived empty. In another case, New York’s Citibank lost $28 million in loans to a Colombian coffee broker who turned out to be in business with the Citibank agriloan officer.
The higher coffee prices did filter down to smallholders (those with tiny coffee plots) in many countries, including some in Brazil, where the number of large fazendas was declining. Those who benefited from the high prices realized that it was unlikely to last. “Coffee gives you a jacket,” an old Brazilian aphorism has it, “and takes your shirt.”
In Mexico’s Chiapas, some Indians could temporarily afford meat with their rice and beans. In the Papua New Guinea Highlands, while most white planters had abandoned their plantations, natives found that their tiny plots, averaging five hundred trees, provided a handsome income in their terms. Colombian smallholders were unhappy, though, since they received less than a third of the international price, due to high export taxes. Some growers burned their coffee in protest, threatening to grow marijuana instead.
The U.S. coffee industry responded, as it had to previous periods of high coffee prices, with substitutes and coffee-stretching claims. Nestlé introduced Sunrise, an instant coffee “mellowed with chicory,” imported from its European plants, where the 46 percent chicory mix had long been a standard. General Foods came out with Mellow Roast, a coffee and cereal mixture that was easy enough to produce, since the firm simply added Postum to its regular roast. Procter & Gamble developed Folgers Flaked Coffee, specially cut into slivers with roller mill groovings, thus allowing overextraction in automatic drip machines. Procter & Gamble sold it in full-size cans that held only thirteen ounces, boasting that the flaked product made the same amount of coffee as a regular pound. Under its Brazilian management, Hills Brothers developed a “jet zone” roasting process in which beans were subjected to blasts of intense heat that expanded the cellular structure, resulting in a puffy product with more air, allowing Hills Brothers to pack its thirteen ounces in a pound-size can of the new High Yield blend. General Foods followed with a similar high-yield product called Master Blend.
Uncommon Grounds: The History of Coffee and How It Transformed Our World Page 35
