What new initiatives is Procafecol/Juan Valdez (JV) currently involved in?
MENDEZ: We continue our international expansion through our franchise model. 2 and Â½ years ago, we realized it was the time for us to expand worldwide. We had the knowledge and we had the experience to continue expansion throughout the world. There is a lot of appetite for our product. There are a lot of people requesting the JV franchise, so we decided to go with the franchise model. So far we have been establishing our franchise shops in countries such as Panama, Mexico, and Peru. We have even recently opened a shop in Aruba. We have also signed franchise agreements with Florida, South Korea, Singapore and Brunei, as well as the Middle East, where we will start operations this year with shops in Kuwait and Dubai.
What role does Procafecol/Juan Valdez (JV) play in Colombiaâ€™s economy?
MENDEZ: Juan Valdez is a character that was created 50 years ago by the National Coffee Association of Colombia and it was done to promote Colombian coffee. The idea was to differentiate Colombian coffee versus other coffees with a personified image of the hard working Colombian coffee grower. What we have done in the last 10 years is to take that figure and the brand equity that JV had built up over a long time and use it to promote our coffee through coffee shops throughout the world. But there is also something really important. That is that coffee in Colombia also represents a social stability factor because Colombia is mostly agricultural and the well being of the coffee growers is very important for the well being of our country. If you buy coffee from JV, you know that in the long run you are helping promote the social stability and the well being of the coffee growers and their families in Colombia.
Finally, one important thing that is also part of our business model is that the JV brand is owned by the coffee growers. We pay royalties to the National Coffee Fund for the use of the JV brand. Right now we have been operating for 10 years and those royalties are approximately $20m. This money has gone into R&D to improve coffee plantations and increase the output of coffee production, as well as to improving the welfare of the coffee areas through the construction of hospitals, schools, roads, and things that bring wealth to the coffee growersâ€™ communities. So that is something very important that comes from our company and which goes back directly to the coffee growers.
What are your future plans for growth and expansion? Which traditional and non-traditional markets is Juan Valdez looking to move into and how do you see this progressing over the medium term?
MENDEZ: We do have a very solid plan for growth through our franchises. What happens is that sometimes those plans get altered because we get people with really good experience that we see as great partners and with whom we have started to explore other parts of the world. What we are doing right now is to try and establish a back office too, which helps control and operate those franchises. In fact, one of the most important things about the franchises that we have found is that there is a lot of capital in the world and a lot of people with a lot of money to invest in coffee shop franchises. However, not everyone has the experience and the feel that we want to open a JV franchise.
JV is about Colombian coffee, is about Colombian coffee growers, it is Colombian national heritage, which is something deeply rooted in our hearts. We want people who are really committed and who share the same sentiment for the brand as all Colombians do. Thus, we need very special people. One of the things that we do, whenever we have a potential franchisee, is to bring him over to our coffee zone and tell him what we do, what our coffee growers do, what the coffee means to our country and upon that we can distinguish a really interested franchisee from another one. It is really important to have somebody with an emotional connection for Colombian coffee in order for him to open a new JV franchise, because this will ensure that the use of our brand is appropriately put in place worldwide.
How successful have you been in raising awareness of JV abroad and attracting further franchisees?
MENDEZ: We have been pretty successful. We received a lot of expressions of interest. The most interesting element for people to know is that Colombia, because of its geographical position and location and having various latitudes and altitudes, enjoys a rich variety of coffee profiles that give a different taste. This is an attractive factor for everybody. Coffee is becoming like wine, where you can start to appreciate the different flavours. This is one special element of Colombian coffee, which makes it very, very special. Another element of uniqueness is that, because of the hilly morphological aspect of the terrain in Colombia, beans are hand picked. We cannot make use of machines in the mountains to collect the beans, so the beans are selected and hand picked at the perfect stage of ripeness and then served in our coffee shops. This is something very special. You would see the Colombian coffee farmers going once, or twice, or three times, through the same bush and hand pick the bean only at the very ripe moment. Therefore, you always get high quality coffee, because it is always selected and picked when it is ripe.
Colombiaâ€™s output of coffee last year was its lowest in three decades, standing at roughly 7.4m bags. How have below average levels of coffee output along with declining prices impacted the downstream segment of the industry? How do you see this evolving over the next 2-5 years?
MENDEZ: I know that the output of production levels would not affect us, or most coffee shops operators. What I can say is that I know that Colombia has been in a program for some years in renovating the coffee plantations and in developing better quality output, which has started to give it positive results. We do expect Colombia to go back to the production levels it had before. Actually, recently political figures said that the production has gone up 26% versus last year. This is very important for us, as it represents a significant output. We do expect Colombian coffee production to go back to the levels it had some years ago. However, the volumes that we use in the coffee shops are really small in comparison to the big volumes that get exported, so we should not be affected by it at all.
Other coffee chains can come to Colombia and buy our coffee, but they cannot tell you our story.
Where do you see Procafecol/Juan Valdezâ€™s main revenue coming from? In which business segment do you anticipate the most growth will be coming from?
MENDEZ: Today, the coffee houses are where most of our profit comes from. In terms of revenue, roughly 70% comes from the coffee shops. We anticipate that will continue to grow. Additionally, the coffee we sell to supermarkets is rapidly growing. In about 2 to 3 years, we should see at least 10% of the supermarkets to take over the coffee shops. There is also another distribution channel, which is steadily growing, which is called the horeca (Hotel, Restaurants, and CafÃ©s) business. We do sell to those kinds of establishments too. We also have a fantastic business today with a Chilean airline, LAN. They are very good clients of JV and they are so happy with our products, that now they are making use of JVâ€™s products, not only in internal flights, that is, Colombia and Chile, but also in their international flights. This represents another great channel for growth.
How competitive is the coffee retail sector throughout the region? As Juan Valdez continues to expand globally, how would you describe your position relative to other major industry players such as Starbucks and Costa Coffee?
MENDEZ: In this region, the overall retail sector is growing very rapidly. There is a lot of economic development going forward in this region. There is a growing appetite for people to start spending on a better quality lifestyle and so you see a lot of income going into the retail sector. The things that we are trying to promote and tell in our stores are twofold. One is that we represent coffee growers in Colombia, that is the National Coffee Growers of Colombia, which has approximately 555,000 associates. Thus, we do represent a very large portion of the rural population of Colombia. Our company is owned by the coffee growers. We also have almost 90,000 stockholders that are coffee holders in our company. So this is a model that is very different from anyone else, because the ownership belongs to the coffee growers.
Secondly, we are promoting Colombian coffee, which is also very distinct, because Colombian coffee is renowned worldwide for its quality. Another important message to the world is that Colombian coffee has various coffee profiles and you can taste various different coffees coming from the mountain region, from the south of the country, from the coastal area, from the Caribbean coast. So, the way we compete with other chains is by saying to people to come to JV and try the many different coffees available, as there is a special coffee profile for everyone. This means that you do not have to stick to one single type of coffee, but you can try the many varieties of coffee profiles available from the different regions of Colombia. I would like to stress that JV has a unique business model, because as I mentioned, we are owned by coffee growers and what we are doing is to add value. By doing this we are also promoting the different types of coffee profiles that Colombia has, which makes us very different from the other coffee shops in the world. Other coffee chains can come to Colombia and buy our coffee, but they cannot tell you our story.
Industry insiders have stated that Colombia is now at a crossroads between quality and volume with regards to coffee production. As global demand for coffee continues to grow, what actions are being taken in order to ensure that Colombiaâ€™s reputation for quality coffee products stays intact? How successful has Juan Valdez been with regards to the further promotion and revitalization of the Colombian coffee brand to the global arena?
MENDEZ: From our side, we only purchase the best coffee from Colombia. We purchase the best coffee and we know that there is enough of the best coffee to continue purchasing and having it in our coffee shops, that is, for our business. Colombia is very aware that worldwide there is a big acceptance for specialty coffees and so the Colombian farmers and the Colombian federation work very hard to maintain that niche and distinguish themselves from the rest of the competitors. So, I would say that in the long run Colombia is going to bet much more on the specialty coffee than the larger, more standard coffee. So I would not say that this is a concern for Colombia today, because there is a lot of consciousness, that this is the best way to go.
You can have a bigger profit from investing in specialty coffees than remaining in the mainstream coffee. The farmers know that if they concentrate on specialty coffee they will obtain a very good price in the market, not only in Colombia, but worldwide, because there is a lot of people looking for more specialty and high quality coffee. Considering where we are, we believe we have been successful, because we have spread the message that Colombian coffee is very special, has a variety of coffee profiles, and we feel that people understand this message and have an appreciation for our coffee and for all the varieties of profiles that we can offer. We would like to be more successful worldwide and that is why we decided to go through the franchise model, to have the opportunity of expanding with local partners that have the local knowledge in their markets and that want to differentiate themselves with the quality of our coffee in their local markets.