September 17, 2008 9:07pm
Posted in: Excerpts from the Book

Empathy is an antidote to a world of abstraction. Faced with a deluge of information, people like to boil things down. This puts them in danger of making poor decisions based on incomplete or distorted information.

The following is an excerpt from Chapter 2 of Wired to Care by Dev Patnaik with Pete Mortensen, copyright 2009 Jump Associates.

People assume that great-tasting coffee is a recent phenomenon in the United States. Nothing could be further from the truth. In the 1950s, you could get a great-tasting cup of joe anywhere in the country for a nickel. America was a nation hooked on coffee. But just at the moment when demand for coffee was booming, its supply fell into disarray. In late June 1953, a killer frost wiped out almost the entire Brazilian coffee crop, sending wholesale prices soaring. After what came to be known as The Fourth of July Frost, the price of a cup of coffee shot up to a dime and even higher as American coffee roasters like Maxwell House, Folgers and Hills Bros. scrambled to keep up with demand.

It’s never a good idea to get in between a committed coffee drinker and his daily cup. The higher prices infuriated Americans. Consumers staged protests in diners and wrote angry letters to coffee company executives. Politicians and newspapers accused Latin American governments of artificially limiting exports to exploit the U.S. market. The supply problems that American coffee companies faced had turned into a public relations disaster. Coffee companies became convinced that they needed to cut their expenses drastically or face the very real possibility that the American love affair with coffee was about to come to an end. In desperation, they did the unthinkable: They played the Robusta card.

Of the many sub-varieties of coffee beans, two major categories predominate, Arabica and Robusta. Arabica is a gently bitter, temptingly smooth, and nutty variety that carries within it all the flavors we look forward to when we order a cup of coffee. But as American coffee companies had discovered, Arabica trees are also expensive to raise and highly vulnerable to bad weather and parasites. One year might yield a bumper crop. The next could be a bust. After the frost of 1953, it became clear that Arabica was far too fragile a plant for coffee companies to base their long-term futures on. They needed to find a more reliable coffee bean. Enter Robusta beans, which are cheap, impervious to the elements, and plentiful. They also produce coffee that’s nearly undrinkable. For decades, major American coffee-makers had resisted using Robusta beans in any of their products. Now faced with dwindling Arabica supplies, managers at Maxwell House started to reconsider that decision. Perhaps, they speculated, it would be possible to add just a few Robusta beans to Maxwell House’s blend without noticeably ruining the taste. If successful, the overall blend would be much cheaper than pure Arabica.

The Robusta content would have to be negligible – it was important that no one notice the unwelcome addition. To ensure that Maxwell House wouldn’t lose any customers through this cost-cutting measure, the company ran sensory tests in which people tasted coffee made with Robusta right alongside the traditional Maxwell House blend. Almost no one could tell the difference. The company decided to launch the new blend. By supplementing its blend with Robusta, Maxwell House was able to keep costs lower while its competitors were forced to raise prices. The company’s gamble on Robusta paid off immediately. Most consumers didn’t notice any difference, and Robusta helped keep coffee prices low. Other coffee companies quickly followed suit. No one complained.

While Maxwell House had found a way to protect profits for the short term, it hadn’t been able to solve the coffee industry’s long-term problem. Demand for coffee would continue to grow, and Arabica beans remained scarce. The following year, continued pressures on margins forced Maxwell House managers to again consider modifying the blend. Consumers hadn’t noticed the addition of a small amount of Robusta beans the first time around. Would they be able to tell if Maxwell House added a little bit more? There was only one way to know. The company ordered another round of consumer tests. Thankfully, these, too, came back with positive results. Consumers couldn’t tell the difference between the slightly increased levels of Robusta and the previous blend.

And so it went for several years. Demand for coffee continued to rise. The pressure on profits was equally unrelenting. And each year, Maxwell House, together with Folgers and Hills Bros., increased the percentage of Robusta beans in their coffee blends by a nearly imperceptible amount. Every year, coffee makers turned to consumer testing to ensure that their new “improved formula” was acceptable to consumer palates. And, indeed, it was. In the short term, this fact-based approach helped coffee companies offer a commercially viable product that consumers didn’t reject outright. And the tests were right. Sales were booming and profits were healthy. But the test data was hiding a darker trend.

In 1964, coffee sales declined for the first time in the history of the United States. At first, companies weren’t sure what had happened. Testing showed that long-time coffee drinkers were satisfied with the product. However, this didn’t tell the whole story. Coffee drinkers weren’t getting any younger. Any healthy consumer business depends on attracting new generations of customers to replace the old. And that wasn’t happening. The small additions of Robusta each year had quickly added up to a lot of Robusta in the latest blends. If you had been drinking coffee for years, the taste of a high-Robusta blend seemed perfectly tolerable. But if you had never drunk coffee in your life, a cup made with Robusta seemed like a bitter and unpleasant way to start the day. Young people, in particular, couldn’t understand why their parents were hooked on such a foul drink. Sales continued to decline as substitutes like Coke and Pepsi started to make inroads. Coffee had turned into a low-growth, low-margin business. Since focus groups had proven that the quality of their products was good, executives presumed that young people were just responding to the packaging and advertising of the soda companies. The major coffee companies began to invest heavily in snappier marketing. But none of their efforts seemed to turn the tide.

It’s important to note that coffee companies had relied on some very good maps to make their decisions. Marketers had paid careful attention to the expressed preferences of their consumers, and multiple studies insisted that people were unwilling to pay more for a cup of coffee. And multiple tests had proven that coffee drinkers couldn’t tell the difference between the existing blend and one with more Robusta beans in it. What those consumer tests failed to show was an obvious truth: Independent of any incremental comparison, the coffee tasted bad. It also failed to show that people would be willing to pay a little more for good coffee if the companies only gave them a reason to do so. The map was not the territory.

The coffee business stayed focused on cost-cutting and additions of Robusta for decades, until someone decided to change the game. As it turns out, the market for high-quality Arabica coffee never completely went away. It survived as a niche business in small cafes located largely in urban centers and university towns. Things remained this way until a young entrepreneur named Howard Schultz visited Italy in the early 1980s and saw how espresso bars put coffee into a completely new light. People were perfectly willing to spend more for a good cup of coffee if the difference in quality was made clear to them. Returning to the States, Schultz was sure of one thing: The maps were wrong. At his new company, Starbucks, he built a chain of espresso bars that were focused on brewing premium quality coffee drinks. He provided a great experience to his customers. And little by little, his sustained success has pushed the American coffee industry to completely overhaul its approach. Starting in the 1990s, most coffee companies switched back to serving pure Arabica. A new generation of coffee drinkers got just as hooked on java as their parents once were.

2 Responses to “Maxwell House Destroys Coffee”

  1.   Wired To Care » Blog Archive » Sad Coda to the Arabica/Robusta Story at Starbucks Says:

    […] flashed across my computer screen this afternoon: “Starbucks to Sell Instant Coffee.” As we discussed in Wired to Care, one reason Starbucks made such a splash in the late 1980s is that it was one of the […]

  2.   Chandramani Panda Says:

    Devu is basically belonging to Orissa state of India.

    His observation on how the tastes and preferences of of people changes given a change in availability of competitive products thows a solid light to micro-economic environment.

    Today Star-bucks has its wings spread-across continents and enjoy a remarkable goodwill which is sole result of empathy to customers.

    Therefore it is often told that understand others to facilitate them to understand you better.

    Chandramani Panda
    Chartered Accountant – India