Coffee is hot but business is quite cold

Complacency is the ultimate enemy in today's world. Just when you think you understand a few, simple business and financial verities, you find yourself in an Alice-in-Wonderland environment where the safe, solid logic of yesterday no longer applies.

Consider the following: we've seen gold, oil, base metals and soft commodity prices rocket over the past year. Oil explorers, refiners and retailers find themselves selling a product that is undoubtedly – we've all seen the apologetic shrug of the shoulders at this point – vastly and unaccountably more expensive than before. Of course, the margins they make are a percentage of costs, so if they're making 12 per cent on something that's going for $300 per unit as opposed to $100 – well, that's business.

The moral is simple, and – so I thought – universal: Inflation works its magic, and the profit is in the percentage. Ask any real estate agent in Britain or Europe. The fees are fixed – as a percentage of a soaring asset base. Europe is now pretty much static, and the UK in gentle decline, while US realtors have been suffering for a while as vast tracts of their domestic market is tanking. But the principle is the same: if the prosperity of traders, supplier and producers is directly aligned to the robustness of the market in the underlying asset.

So what about coffee retailers and distributors? Coffee contracts hit ten-year highs at the beginning of the year and have marched on from there. So you'd find some producers, distributors and retailers, and buy the shares. Moreover, it ought to be a relatively easy business, as coffee is one of the world's most popular commodities, being favoured by just about every nation and religion, with the exception of those strange people, found mainly on the west coast of America, who demonise caffeine as an addictive drug.

But these people are in a small and rightly derided minority. On the back of the booming commodity price and the fact that we drink more than 500 billion cups of the stuff every year, it has to be a good time to brew up a coffee portfolio – a strong, sweet investment plan to put you firmly in the black.

Sadly, as I discovered on a recent visit to Turin, home of the Lavazza empire, this is far from the case. I thought I had a clever plan, but discovered that it was, as the Americans say, time to wake up and smell the coffee. The publicly quoted distributors and retailers are having a tough time of it. And, as my trip to the privately owned Lavazza illustrated, being quoted is perhaps not the best thing for investors or businesses when equity markets are as unpredictable as those we see today.

So, to Turin. Turin is in the north of Italy, and is that country's capital of chocolate, ice cream, and, of course, coffee. The Lavazza factory, a few kilometres from the city centre, is the biggest in Europe.

It may possibly be the world's biggest coffee production unit, but this family-owned business does not really care.

Lavazza is the sixth-biggest producer in the world, and the only big one which is not part of a giant international conglomerate – Sara Lee, Kraft, Proctor & Gamble, Nestle and the like all have competing brands, and cover the Lavazza franchise. With turnover running at €I billion (Dh5.6bn) per annum, and profits at €100 million, one can see why.

Especially as the company has been privately owned for more than 100 years, and remains in the hands of two closely related branches of the Lavazza clan. Right now, not having neurotic shareholders is a great benefit to people who want to run a business. By "neurotic shareholders" I mean the institutional investors who run pension funds and the like, and who say they understand all about risk, returns and long-term strategy.

All it takes is a couple of quarters of negative returns and these same sage investors are bleating incessantly at management, making demands for divisions to be sold off to boost the share price. Long-term sweet silence is turning into a cacophony of short-sighted panic.

Witness the difficulties currently being experienced by global retailer Starbucks. Last month, Starbucks revealed plans to shut down 500 of its coffee shops in the United States, having previously announced 100 closures. Some 12,000 full and part-time jobs are to be axed, with many of the cuts coming in – guess where? – areas such as Florida, which is probably the biggest victim of the disastrous slump in US house prices.

While the underperforming stores have got the chop, new outlets are still being opened in the US and Europe, with 200 new American stores (down from the previous year's new opening figure of 250). In Europe, 150 stores will spring up – mainly in airports and railway stations over the next two and a half years. Starbucks has chopped and changed its management, re-instating former chief executive Jim Schulz, partly as a result of shareholder pressure. The market reaction to this paradigm of orgy of re-organisation and re-structuring? A six per cent rise in after-hours electronic trading.

Giuseppe Lavazza, the marketing supreme at Lavazza, is unsurprisingly relaxed about the furore surrounding a quoted retailer: "Starbucks' expansion of the market is a very good thing. Till they arrived in the US, the market in coffee was dead – a sort of commodity donated with a meal. Very cheap, very poor, of no value. Before Starbucks in the United States it was difficult to find an espresso coffee machine outside fine-dining restaurants. Espresso machines are our life! So thanks very much.

"They have a medium- to long-term strategy that's focused on their core approach, which is shops, shops, shops, shops. They were looking for some sort of partnership, but not acquisition of something that's not Starbucks-branded. For us, it's the same. Developing the business through acquisition is very difficult because our strategy is focused on the brand. We want to expand our vision of coffee globally."

Lavazza has bought a couple of retail chains of its own in India, and is believed to be looking in the "emerging" coffee consumption markets, including the Middle East.

But right now, the contrast between the quoted and the privately owned world – even set against a supposedly favourable backdrop of rising underlying base commodity prices – could hardly be greater. As we Brits like to say, it's a different cup of tea.

Follow Emirates 24|7 on Google News.