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BREWING CONFLICT

Ethiopia Battles Starbucks Over Rights to Coffee Names Chain's Image Rattled By Trademark Spat; Hints of Chocolate, Rum.

By JANET ADAMY and ROGER THUROW March 5, 2007 FERO, Ethiopia -- Starbucks Corp.'s top coffee buyer journeyed to this hilltop village a year ago to thank farmers for creating what he calls the world's best coffee. Delighted growers wearing ceremonial animal skins lined up to greet him, and then danced and performed an elaborate coffee-pouring ritual. "I looked everyone in the eye and shook their hand and said, 'Thank you for giving us this wonderful product,'" recalls Dub Hay, the Starbucks executive. "It's one of the more special things I've ever experienced." Within months, though, the celebration dissolved into feuding that has rattled Starbucks's image. The world's largest coffee chain is locked in a trademark dispute with Ethiopia, one of the world's poorest countries. The battle was spurred by a rare aggressive attempt by a developing country to assert intellectual-property rights.

Ethiopia, which Starbucks trumpets as the birthplace of coffee, is seeking to trademark the names of its most famous coffee regions
Sidamo, Harar and Yirgacheffe -- which appear on the packaging of Starbucks and other coffee roasters.

The country aims to gain more control over the distribution and promotion of its most valuable export and, ultimately, secure a better price for farmers. The growers in Fero, which is in the Sidamo region, receive about 75 cents a pound for their coffee. Starbucks has sold the processed product for as much as $13 a half pound.

"For us, the issue became, how do we address this unfair price gap? How do we ensure that the poor farmers get a reasonable return?" says Getachew Mengistie, the director general of Ethiopia's intellectual-property office. NAME GAME

• The Issue: Ethiopia wants to trademark and license the names of its coffee-growing regions.

• The Background: Starbucks, which initially opposed Ethiopia's trademark quest, still refuses to sign its license agreement.

• What's Next: Starbucks continues to buy Ethiopian coffee, while taking some of the disputed names off its packages.

Starbucks spent months discouraging Ethiopia from trying to trademark the names. While the company has recently retreated from that, it refuses to sign a royalty-free trademark licensing agreement offered by Ethiopia. Starbucks executives say the agreement is legally onerous and believe it would place too much responsibility on the company to defend Ethiopia's trademark. "It's not something you would do as a business," says Mr. Hay, senior vice president of coffee and global procurement for Starbucks.

As the dispute has percolated, Ethiopian officials and the local media have accused Starbucks of "coffee colonialism." Farmers feel betrayed. "If anyone should have the trademark, it should be us," says Tilahun Garsamo, chairman of the Fero Farmers Cooperative, which has more than 3,000 members. They live in mud-brick houses and tend by hand the coffee plants that grow on their small plots of land. A number of families in the cooperative depend on food aid to combat malnutrition. "Our name," says Mr. Garsamo, "is the most important thing we have."

WAR OF VIDEOS

The humanitarian group Oxfam drew attention to the dispute between Ethiopia and Starbucks in a video posted on YouTube, filmed during a "Starbucks Day of Action" in mid-December. (Watch the video.2)

Two days after that video was posted, on Dec. 20 Starbucks posted its own video3, in which Dub Hay, the company's top coffee buyer, discussed the dispute and explained the company's relations with coffee farmers. (Watch the video.4)

In early January, another posting by Starbucks5 showed how the company helped support coffee farmers on one Tanzania estate by funding the construction of a cistern. (Watch the video.6)

At the end of February7, Bob Winter, a D.C. lawyer representing Ethiopia in its efforts to trademark the names of three of its coffee-producing regions, posted a response. (Watch the video.8)

Social advocacy groups that once heralded Starbucks's coffee-buying practices have turned against the coffee giant. Critics say the company refuses to support Ethiopia's trademark effort because that could open the door for other countries to do the same thing, adding a layer of cost that could raise the prices Starbucks pays. Starbucks buys virtually all its coffee from foreign countries, mostly from Latin America. It buys about 2% from Ethiopia.

"Their immediate focus is on their profit margins," says Adam Kanzer, managing director at Domini Social Investments, which manages $1.8 billion, including shares of Starbucks. He phoned the company last year to voice his concern that Starbucks's stand is inconsistent with the company's socially responsible heritage. "This is part of the real value of the company from an investment perspective," Mr. Kanzer says.

Starbucks executives say the issue isn't about money. They say they want to help farmers earn more but don't think trademarking is the right way to go about it. Starbucks has argued that Ethiopia should instead try to win "geographic certifications"
a different legal method that other coffee-growing regions have used to build the reputations of their regional names.

Last year Starbucks bought 6% of its coffee from "fair trade" certified co-ops, which guarantee farmers a minimum price. Starbucks bought 53% of its coffee from sellers who adhered to guidelines that the company established to promote economic sustainability for farmers. Starbucks says its guidelines are more comprehensive than the fair-trade standards.

If Ethiopia can secure trademark rights, it hopes to issue licenses to distributors around the world. Ethiopia says it wouldn't charge for licenses, but would require the licensees to work to expand the market for its coffee. "The more our coffee is known, the more demand will grow. As demand grows, price grows, and there will be more money for the farmers," says Mr. Mengistie.

The executive committee of the Fero Farmers Cooperative. Chairman Tilahun Garsamo is standing third from the right.

Starbucks executives, however, say that if Ethiopia wants to increase the value of its regional coffee names, the best way is to allow Starbucks to freely promote them in its nearly 13,000 stores around the world. "We want them to have full marketing power, if you will, and I don't think any company today does it better than Starbucks," says Starbucks Chief Executive Jim Donald.

Exotic Appeal

Touting the exotic appeal of specialty coffees from around the world is part of Starbucks's strategy to give customers a sense of discovery inside stores. For years, Starbucks has put pictures and stories about coffee farmers on its packaging. Recently it started designing some stores using bright colors and bamboo touches to evoke the feel of its coffee-growing countries.

In 2002, Starbucks's coffee buyers went to the Fero co-op in the Sidamo region of Ethiopia and asked growers to experiment with a new method of drying beans. Starbucks said it would buy the beans, regardless of how they turned out. The first batch flopped and Starbucks bought and discarded nearly 40,000 pounds.

The next year, Starbucks instructed the growers to pick only perfectly ripe coffee cherries, then thinly spread them in the sun to dry. In 2004, the co-op sent Starbucks its second batch.

At Starbucks headquarters in Seattle, Mr. Hay sipped the coffee from the Sidamo region. "I've never tasted anything like this," he recalls saying, as hints of black cherry, chocolate and dark rum crossed his palate. Mr. Hay designated the coffee for Starbucks's Black Apron Exclusives line, reserved for its highest-priced beans. The co-op was rewarded with a $15,000 bonus.

In coming up with a name, Starbucks asked farmers from Fero what the word for "partnership" is in the local language. The farmers discussed it. "Shirkina," they finally said. Starbucks dubbed the coffee "Shirkina Sun-Dried Sidamo" after the region where it was grown. Even with a price tag of $13 a half-pound, it sold out in eight weeks.

In Ethiopia, meanwhile, the notion of trademarking coffee names was gaining ground. The country established its first intellectual-properties office in 2003 as a tool for economic development. Mr. Mengistie saw that Ethiopian coffee names had great value in Western countries, where the coffee sold for high prices. Ethiopia, which claims to have pioneered the coffee trade more than 500 years ago, also worried about the future. According to the World Bank, Ethiopia's coffee exports in the fiscal year ended June 2006 totaled $354 million, which was about 35% of the country's total exports. But because of low prices, some farmers have begun pulling up coffee plants and replacing them with khat, a plant whose leaves and stems produce a mild stimulant when chewed. Khat fetches three times the price of coffee and can be harvested three times a year; coffee has only one season. "Is saving specialty coffees like Sidamo and assuring supply not in the interest of Starbucks and other companies?" asks Mr. Mengistie, who often climbs eight flights of stairs to his office in the capital of Addis Ababa because the elevators stall. "The intent is to build a market where both Starbucks and the farmers gain."

In March 2005, the Ethiopian government applied for three trademarks in the U.S., for names of its coffee-growing regions. A few months later, the U.S. Patent and Trademark Office blocked Ethiopia's application for "Sidamo" because Starbucks had already applied to trademark the name "Shirkina Sun-Dried Sidamo."

Rude and Selfish

The Ethiopians say they were astonished. "It is rude and selfish of a company to take the name of its partner," says Mr. Garsamo, the Fero co-op chairman. Mr. Hay says the company only wanted to keep competitors from stealing the word "shirkina," but was required to submit the entire name of that coffee to secure the trademark. Starbucks never intended to take ownership of the word "Sidamo," he says.

Other countries, including Canada, Japan and the European Union, have granted Ethiopia trademarks for some of its regional names. In March 2006, the U.S. trademark office awarded Ethiopia a trademark for Yirgacheffe, the name of one of its coffee regions.

Three months later, the National Coffee Association, a U.S. trade group, sent a letter to the trademark office urging it to deny Ethiopia trademarks for Sidamo and Harar. The association argued that they are generic names. Robert Nelson, the group's chief executive, said, "Ethiopia doesn't have the capacity to manage the trademarks." Ethiopia produces about 1.5% of the coffee imported in the U.S. as measured by dollar value, according to the U.S. Department of Agriculture. Starbucks's Mr. Hay is chairman of the coffee association's government affairs committee. He says Mr. Nelson filed the protest without consulting his committee, and that Starbucks didn't ask the group to try to block the trademarks. In July, after the coffee association filed its objection, Starbucks withdrew its trademark application for Shirkina Sun-Dried Sidamo. But after the trade group's protest, the U.S. trademark office provisionally refused Ethiopia's request for Sidamo and Harar. Ethiopia is now appealing that decision.

International Affair

What might have remained a little-noticed bureaucratic dispute became an international affair when Oxfam, a nonprofit relief and development group, began publicizing it in the fall. It urged customers to send cards to Starbucks complaining about the company's stance. And it posted a video on YouTube.com challenging Starbucks to honor commitments to poor farmers.

Starbucks executives were taken aback by the criticism. "It flies in the face of everything we do," says Dennis Macray, a director in Starbucks's corporate social responsibility department. Since 2003, Starbucks says it has spent $2.4 million on social projects in Ethiopia. Executives say they became concerned the trademark issue could erode the social goodwill they had built into Starbucks's brand.

But still, Starbucks hoped it could persuade Ethiopia to change course because its lawyers thought Ethiopia was pursuing the wrong path. Rather than seeking trademarks, Starbucks told Ethiopia it should try to win "geographic certifications" for its regional names, a method that Guatemala, Colombia and other countries have applied to coffee names that ensures the coffee came from the region where the packaging says it was grown. None of the countries Starbucks buys from have trademarked their coffee names, Mr. Hay says.

Starbucks began coaching its baristas to tell customers that Starbucks is a positive force in Ethiopia. And it posted its own video on YouTube, featuring Mr. Hay insisting that Starbucks already pays premium prices to Ethiopia's farmers. In November, Mr. Donald, the Starbucks CEO, flew to Ethiopia and laid out his position to Prime Minister Meles Zenawi. The Ethiopian leader said he would be happy to work through any business concerns but declared Ethiopia wouldn't give up its trademark quest. Mr. Donald left without signing a licensing agreement.

On that trip, Messrs. Donald and Hay climbed into an SUV and trundled over a rocky road to reach the Fero co-op. They applauded the farmers for growing a second batch of Shirkina beans.

"Congratulations on producing the world's best coffee for Starbucks," Mr. Hay wrote in the co-op's guest book. "Fantastic," wrote Mr. Donald.

Starbucks says last year it paid an average of $1.42 a pound for its specialty coffees, or 37% above the average price of coffee on the commodity market. Starbucks doesn't buy this lower grade coffee. The company declined to detail how the price it pays compares with what other specialty-coffee companies pay. Starbucks defends the gap between the price it pays for raw coffee and the price it charges in stores. Among other things, Starbucks pays to transport, store and insure the coffee. As much as 25% of the beans are lost in roasting.

Best Gift

"We're not really apologizing for the [profit] margins because what we do with that margin is open new stores," Mr. Hay says. "The gift that Starbucks can bring to the coffee farmer is the guarantee of more business next year."

The farmers of Fero say the best gift would be better prices. For their 2005-06 crop, they ended up with about 75 cents per pound of dried beans, according to co-op officials. After further processing and transporting, the Sidamo Coffee Farmers Cooperative Union in Addis Ababa says it sold 36 tons of Shirkina beans to Starbucks for $1.45 per pound.

Last month, Mr. Hay returned to Ethiopia to deliver the keynote speech at an African-coffee convention. Local journalists grilled him on why the company was against the trademarks. One government minister threatened to ban Starbucks from the country.

During the visit, Mr. Hay says he and others realized Ethiopia wasn't going to back down. After the trip, Starbucks promised to double its coffee purchases from East Africa and increase technical support to farmers there. It also changed its position and said it would stop discouraging Ethiopia from trying to get the trademarks. "Starbucks respects the right and choice of the Government of Ethiopia to trademark its coffee brands," the company said in a news release. Starbucks, however, still won't sign the licensing agreement with Ethiopia. To get around the issue, Starbucks has yanked the name "Sidamo" off the coffee it created with farmers in Fero. The company renamed it "Ethiopia Sun-Dried Shirkina." Write to Janet Adamy at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and Roger Thurow at roger.thurow@wsj.com10

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