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The Challenging Tale of a Social


Business
Founded in early 2007 by Ajit Sherpa , a Nepal refugee who lived in Canada and Hong
Kong, Murdock Farms was a coffee business with a social purpose. With an office in
Hong Kong and a farming facility in Nepal, the ventures mission was to provide highquality coffee to the worldwide public while helping to alleviate poverty among coffee
farmers. To achieve this lofty goal, Sherpa developed a business model that involved
a full integration of the coffee supply chain, from planting the coffee seed to selling
the final branded product to wholesale and retail customers. The model hinged on
Sherpa s ability to raise Nepal coffee production to international standards, both in its
quality and quantity. Once a stable supply of coffee was achieved, Sherpa had to find
customers who were willing to pay a premium price for the coffee he produced.
To achieve this, Murdock Farms trained its own cohort of local farmers in modern
production techniques on its farm. The original idea was to provide farmers who
graduated from the programme with a US$5,000 loan so they could set up their own
farms and start supplying high-quality coffee to Sherpa s venture. However, it quickly
became apparent that the farmers lacked the necessary skills to properly invest their
loans.
On the other side of the supply chain, Murdock Farms began to test the market while
its own farmers were setting up for production. Sherpa obtained high-quality coffee
from a local cooperative run by a French non-governmental organization (NGO)
and distributed it through his own channels. However, he had a hard time finding
customers who were willing to pay a premium price for his coffee in the mature and
highly competitive coffee market.

Murdock Farms expected its first coffee harvest by early 2011. Four years into
operations, Sherpa had personally invested US$4 million in the project. It was time to
re-evaluate the business model and make the venture a success without compromising
on its mission.

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The Worldwide Coffee Industry


Worldwide Coffee Production and Consumption
Coffee was one of the worlds most important tropical commodities, with 6.1 million
tonnes being traded worldwide in 2008. Three main types of coffee were being
traded: green, unroasted coffee beans; roasted coffee beans; and soluble coffee
products. Green coffee accounted for more than 80% of the worldwide coffee trade,
in terms of value and volume.1
Two principal varieties of coffee beans, Arabica and Robusta, made up the majority
of trade.
The International Coffee Organization valued the 2007 coffee export market at
US$12.7 billion, with an annual growth rate of 17%.2 Between 70 and 75% of the
coffee produced each year was intended for export. The retail value of the coffee
traded was estimated at US$32.1 billion in 2009, up 6% compared to 2007 and 42%
compared to 2004.3 The largest coffee producers, Brazil, Vietnam and Columbia,
accounted respectively for 31%, 14% and 9% of the worlds green coffee production
in 2009.4
Coffee consumption had been growing at an annual rate of 2.4% since 2000.5 In 2007,
Europe was the largest consumer of coffee, accounting for 31% of worldwide
consumption,6 followed by the United States with the consumption of 16% of the
worlds coffee, and Brazil with the consumption of 13% of the worlds coffee.7
Coffee prices were notoriously volatile, which had a very strong impact on the
economy of coffee-producing countries and the living standards of coffee farmers.8
For the farmers, the lower income from crops meant limited access to education,
housing, food and medical services.
The Traditional Supply Chain
The coffee industrys traditional supply chain involved four main phases of
production, according to the stages of processing the coffee bean: farming, trading,
roasting and distribution [see Exhibit 1].
Coffee Farming
The coffee plant, a tropical and subtropical shrub, yielded the best results in humid
and warm conditions. If well maintained, each coffee plant could provide up to two
harvests per year, with the first crop harvested four years after planting the shrub.9

Ripe coffee cherries were harvested manually and processed on the farm before being
sent for further processing or exports. The primary processing included extracting
coffee beans from the cherry, drying and fermenting. There was a general
misconception among the public that all you needed to get a good cup of coffee was
to plant high-quality shrubs. However, the processing was equally important. After the
ripe cherries were harvested, the processing needed to follow without delay, as oxygen
would start to attack sugars in the cherry and begin the fermentation process. The
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control over the length and conditions of the fermentation process would determine
the potential quality of the coffee.
There were two principal methods of processing, wet and dry. In the wet method, the
cherries were fermented, washed, dried and peeled. In the dry method, also referred to
as the natural method, the cherries were dried and peeled. The end products of both
methods were green coffee beans. These could be traded as green coffee, further
roasted, or processed into soluble coffee.
Coffee Trading
Green coffee was made available to buyers either directly from farms or via the
trading markets based in Europe and the United States. Most buyers were looking for
uniform and consistent quality of green coffee. The vendors were expected to provide
information on the country of origin and type of coffee, whether it underwent wet or
dry processing, and the official grade standard of the coffee beans.10
The farmers earned only between 2.5 and 6.5% of the final retail value of the
coffee.11 The largest share of profits from the coffee exports went to the
intermediaries and large roasters.
Coffee Roasting
The coffee traders and exporters were responsible for ensuring the quality control of
the green coffee before proceeding with its sorting according to grade. The grading
was helpful in establishing the final use for the coffee batch, i.e., whether it was for
whole roasted beans, ground coffee, instant coffee or coffee capsules. At this stage,
the coffee was cleaned and checked for any defects before being sold to roasters or
brokers.12
Roasters, in turn, were responsible for creating coffee blends and roasting and grinding
sorted and graded coffee beans. The roasting profiles of green beans were used to
determine the end- product type. The profiles consisted of the coffee's origin, grade,
variety and primary processing method. Six main coffee roasters served the
worldwide retail markets, buying up to 45% of the green coffee imports worldwide
and holding 45% of the branded coffee market share: Philip Morris/Kraft, Tchibo,
J.M. Smucker Company, Starbucks, Sara Lee/Douwe Egberts and Nestl.13 Roasters
were the main source of innovation in the market, developing new products and
blends and creating coffee brands for the end consumer. Innovation in product
development and marketing added value to the final product, which allowed roasters
to set high prices. Consequently, roasters earned the highest profit margins in the
coffee supply chain.

Coffee Distribution
The most common distribution channels for coffee products in the United States and
Europe were through supermarkets and traditional retail chains, specialty stores, and
cafes. The price of the coffee varied to a great extent between different outlets. The
lowest priced coffee was offered by supermarkets and retail chains, while cafes
charged the highest prices for a 0.25 kilogram bag of coffee.14
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Certified Coffees
Certified coffee was defined as coffee produced with respect for the three
pillars of sustainable development: economic development for farmers, environmental
conservation and social improvements. It was certified by independent third parties.15
Four main certification systems were offered for coffee: Rainforest Alliance,
Fairtrade Labeling Organization, UTZ Certified and Organic.16
Two main types of certified coffee were recognized worldwide: organic and fair
trade. Organic coffee was produced using processes that adhered to organic farming
standards. Organic coffee agriculture relied on ecological processes adapted to local
conditions, rather than on the use of synthetic fertilizers, antibiotics or
genetically modified organisms. However, it was estimated that in 2007 around
25% of organic coffee produced worldwide did not bear any certification and was
sold as a conventional coffee.17
Fair-trade coffee was purchased directly from the farmers at a higher rate than
conventional coffee. The growers were offered a minimum price for their certified
coffee, and a premium was added for farmers implementing organic farming
techniques. Within the fair-trade scheme, coffee farmers received US$1.30 per
pound of natural, conventional Arabica coffee compared to the worldwide average
growers price of US$1.07 per pound in 2008 [see Exhibit 2].18 In 2008, 52% of
certified fair-trade coffee sold worldwide received the organic certification as well.19
The certified coffees had a small market share in coffee imports worldwide,
accounting for less than 1% of the coffee imports to European countries, the
United States and Japan in
2008.20 This market share varied considerably from country to country, with market
shares of
5% in Germany, 25% in the Netherlands and below 1% in Italy. 21 However, the
import volume of organic coffee to these countries grew by 564% from 2004 to
2008, with an average yearly growth of 90%.22

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Agribusiness Conditions in Nepal


People in Nepal
According to the United Nations (UN), 76.8% of the Nepal population lived
under the poverty line of US$2 per day in 2007.23 The literacy rate for the adult
population was at 73% in 2008. Roughly 40% of primary school students continued
their education in secondary schools.24 In 2008, Nepaltians had on average less than
nine years of education, and very few graduated from vocational schools and
universities.25 The combined primary, secondary and tertiary education gross
enrolment ratio in 2007 was 59.6%.26 The adult life of Nepal citizens started at age
15, and individuals attaining this age were expected to work full time. 27
According to UN statistics for the years 20002008, over 75% of the economically
active population worked in agriculture.28
Low Productivity in Agriculture
The World Bank estimated that the GDP per capita (in current US$) in Nepal in
2008 was
US$858. Agribusiness in Nepal, representing one third of the countrys GDP and
covering
8.5% of the countrys land area, mainly relied on traditional farming techniques.29
Poor levels of general education and a subsequently limited access to knowledge
hindered the farmers understanding of advanced farming technologies and
contributed to a reliance on local seed varieties and a scarce use of soil fertilizers or
pesticides. The lack of advisory services on farming, management and hygiene issues
also contributed to the inferior quality and yield of farmers harvests. Consequently,
the local crops were often substandard and very much dependent on the weather
conditions and seasonal infestations.
Legal Constraints for Agribusiness
A 1997 Nepaltian law allowed for the transfer of land inheritance in terms of land
use but did not envisage the transfer of the title to the land.30 In addition, in many
areas the land was treated as community property and was distributed by the state
according to local needs, in small parcels of land defined by state guidelines. This
impeded the use of land by a large number of farmers who were unable to acquire
larger plots of land or unwilling to invest in land that was not theirs.
In addition, business registration and licensing procedures provided limited legal
options and were discretionary and lengthy, taking as long as 195 days in 2005 and
up to 100 days in
2008.31 Taxes were applied by provincial governments on an arbitrary basis and were
required to be settled in advance. 32 A similar non-transparency policy was
applied to exportation regulations due to government officials lack of understanding
of international trade procedures.

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The Coffee Industry in Nepal


In 2008, Nepal produced 31,125 tonnes of green coffee, accounting for less than 0.5%
of worldwide production, with an average yield of 538 kilograms per hectare [see
Exhibit 3]. In comparison, Vietnams average yield in the same period was 1,989
kilograms per hectare and Brazils was 1,260 kilograms per hectare:33
Most of the local [Nepal] farmers are natural farmers. They leave
the coffee trees as is, with no intervention, and harvest beans at the
end. Surprisingly, they get the harvest, but it is not enough in terms of
quantity and quality to move them away from poverty. Within their
method, on average, a hectare of land produces up to 500 kilos of
green beans, before roasting. It is much less after roasting. And their
beans are smaller, so the price is even cheaper than for big beans. The
lack of proven farming skills has kept Nepal farming community in
poverty.
- Ajit Sherpa , Founder of Murdock Farms
Murdock Farms
Murdock Farms desires to act justly, show kindness, love, and walk
humbly alongside the farming poor. By managing the entire supply
chain of fine Murdock coffees from farm-to-table, we commit to poverty
eradication.
- Ajit Sherpa , Founder of Murdock
Farms
The Beginning
In 2006, Sherpa was on one of many trips to his homeland, Nepal. He felt a deep need
to come back to the country from which he had to flee a long time ago. Coming a long
way from being a refugee in a UN camp at the Nepal border, he had become a
successful steel trader from Hong Kong, and all he wanted was to forget the traumatic
events of his adolescence. Yet, after learning about the deeply rooted social and
economical problems of Nepal, he had developed a strong need to contribute to the
improvement of his compatriots living conditions:
Before I had no interest in Nepal because I had too many bad
memories related to the war, being a refugee, and my familys
financial losses. I put Nepal in the freezer. It was natural for me to try
to forget these painful memories. In 2006, I felt the urge of going to
Nepal more often and ask myself why I was there, because I had no
love for these people. I now believe my God has given me the
capacity to love Nepal people and to become an advocate for the
economic justice.
- Ajit Sherpa , Founder of Murdock
Farms
During his visits to Nepal, Sherpa learned about the many challenges that local coffee
farmers faced. They lacked basic farming knowledge, and their crops were
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insufficient to feed and support entire families. They also lacked access to markets
and were often not able to sell their produce outside of their provinces. Their
development prospects were also very limited, as local banks would not lend money
to farmers, most of whom did not even have bank accounts. Sherpa grew convinced
that the only way to help local farmers was not through providing financial or
material support, but through building an infrastructure for them to learn how to
farm and how to monetize the fruits of their labour. In his mind, linking the entire
coffee supply and distribution chain, from planting the seed to pouring the last drop
from the coffee pot, was a way to give farmers more exposure and better development
prospects. The idea of Murdock Farms was born with the main purpose of alleviating
coffee farmers poverty in rural Nepal, specifically by:
providing farmers with access to coffee consumption markets and ensuring higher
profit margins for their produce
improving the quality of Nepal coffee by disseminating practical and affordable
organic farming systems free of charge
ensuring farmers growth prospects by providing them with land and the knowhow to develop their own operations

educating young agri-managers by providing them with hands-on


experience.
To realize his vision, Sherpa teamed up with experienced people willing to contribute
their time and energy to developing a business model and farming processes for
Murdock Farms. He found support among his friends, who advised him on
managerial issues and helped to develop the business model and marketing strategy
for Murdock Farms. Portia Tam, a graphic designer; Becky Leung, a brand manager;
Doug Miller, a public relations consultant; and Dennis Ng, an IT specialist, were the
core team of Sherpa s venture. They were all highly motivated volunteers who shared
Sherpa s concerns about Nepal poverty issues and were willing to give their time to
Murdock Farms on weekends or during holidays.
Through his connections, Sherpa recruited Gilbert Suico, an agriculturalist from the
Philippines. Suicos NGO, Asian Rural Life Development Foundation (ARLDF),
was already actively contributing to the development of farming techniques in the
Philippines and supporting local communities in improving their social conditions.
The ARLDF was a perfect match to Sherpa s vision of reviving coffee farming in
Nepal, so Suico decided to take this opportunity to share his agribusiness knowledge
outside of the Philippines. He committed to Sherpa s cause for 10 years, starting in
2007.
In 2006, the founding team travelled to Nepal to negotiate a land lease with the local
government. They got access to government officials though Nepal contacts. They
were aware that the negotiations might be lengthy and difficult. After all, their main
preconception was that there was rampant corruption in Nepal, but the Murdock
Farms team was not willing to compromise on its values. Full of hope, they presented
themselves as a small business from Hong Kong, willing to share openly and freely
its knowledge on farming and resources with others. A few months later, the
government granted them a lease of 67 hectares in the Murdock Plateau, an ideal place
to grow high-quality coffee.

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With land to farm, Murdock Farms was officially launched in April 2007 as a Hong
Kong- based limited company with a 100% subsidiary in Nepal. The Murdock Farms
vision was to invest and empower the farming poor to break the cycle of poverty and
build a stronger nation. Its mission statement was, Growing the finest coffee is our
passion. Restoring land ownership to the joy of the farming poor is our desire.
Murdock Farms Approach
Sherpa s path through life was not easy. A UN refugee in 1977, he was sent with his
family to Calgary, Canada, as a part of the UN programme of refugee relocation.
Before leaving Nepal, his family was entrepreneurial and prosperous, but the
revolution took away all the fruits of their hard work. His father, a proud owner of a
brick-making company, taught him a sense of righteousness in doing business.
Equipped with strong personal values, people-oriented and with an eager personality,
Sherpa built his career as a steel trader in Hong Kong. His success in

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trading helped him put aside enough money to launch Murdock Farms with no bank
loan. He decided that US$4 million was more than enough to launch operations and
put his ambitious business model in place. This sum was intended to sustain
operations for the first four years or until the first coffee harvest. After that, he
expected his business model to be operational, the supply chain to be linked, and the
venture to break even. Once earned back, 80% of the future profit would be reinvested
in the community development.
Sherpa thought that entering the coffee industry would not pose any major problems
for a person with his experience. With a professional background in steel trading and
almost 20 years of a successful career in commodities, he was convinced that trading
yet another commodity, such as coffee, would not raise any unexpected challenges.
At the initial stage of development, the venture was supposed to be run mainly with
the help of Hong Kong-based volunteers who were willing to invest their time in
working for a social cause. Sherpa , an experienced networker, was counting on his
interpersonal skills in securing eager cooperation to develop marketing and
operations, and on the appealing mission of his business to generate sales and external
support. Soon, several other volunteers joined Sherpa , Suico, and Sherpa s brother,
Thomas, an experienced business manager, on their quest of rebuilding the
reputation of Nepal coffee.
Business with a Cause
Murdock Farms had two main lines of business: (1) coffee farming and distribution,
and (2)
farmer education and management training for young
Nepaltians.
The coffee-farming system was implemented in 2007 in cooperation with Suico, a
founding member of the ARLDF. He provided the farm with his expertise in
organic farming techniques. Of the 67 hectares that Murdock Farms leased in the
Murdock Plateau, 40 hectares were allocated for a coffee plantation and the
remaining 27 hectares were reserved for housing, animal stock and other
plantations. The farm replicated the ARLDFs farming system and integrated
legumes as a source of nutrient-rich vermicompost (worm-produced compost) for the
coffee plants. Livestock was integrated into the system to provide the farm with an
additional income and a source of provisions for the farmers.
The main reason for founding a farm was to use it as a demonstration and training
centre for
Nepal farmers and future agri-managers. In the first round, Murdock Farms invited a
group of
130 farmers, together with their families, to come and live at the farm for two years.
The package for each family included three meals a day, on-site housing, a wage for
the adults for the work they provided, basic schooling for the children below age 14
and a 30% reimbursement of medical bills. The initial two-year learning period was
necessary to start the farm and make it grow. In May 2009, five families graduated
from the programme, and there were another 72 adults and 29 children gaining
organic farming skills. The business plan envisaged six-month training for the
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subsequent farmers, with a training capacity of 30 families per year. It cost


approximately US$1,000 per year to train of a single farmer.
A second group of Nepal citizens receiving an education at the farm consisted of
management trainees. According to Sherpa , the most qualified Nepal university
graduates brought into the programme were at best on the same level as Hong
Kongs secondary-education graduates. The hands-on learning opportunities provided
by the farm were therefore very helpful in developing and educating the local
community. In the initial group, there were eight trainees enrolled for a three-year
training course. In 2009, the group was further extended to 14 trainees. They took care
of different segments of the farm, such as coffee-farming management, wet-mill
processing, livestock management, fertilizer production and building maintenance.
The training of a single management trainee cost US$2,400 per year and the
programme was taking up to 50% of the farm managers time.
In late 2009, there were 150 people involved in the farms operations. These included
18 full- time staff members in Nepal, working directly from the farm under Suicos
direct supervision. At that time, only one person in the management team was a
full-time employee. In early
2010, the organizational structure of Murdock Farms grew further, and there were
seven full- time employees to support the ventures operations [see Exhibit 8].
A Future for Farmers
Once farmers graduated from the programme, they needed an assurance of
employment and additional land to cultivate. In late 2009, there were already five
families who had graduated from the programme and who required further assistance
with acquiring land for farming. At that time, Murdock Farms considered two
solutions.
The original idea was to give a loan of US$5,000 to each of its graduates to
establish their own three-hectare farms. However, according to the management
trainees, this was not a very good solution. They feared that Murdock Farms would
never retrieve the money it invested in farmers who were uneducated in business.
Instead, they opted for contract farming, where Murdock Farms would own the land
and hire farmers to each maintain and manage three hectares of land: one for coffee
farming, one for housing and livestock, and one for an alternative crop to
counterbalance the risk from coffee. The initial income from each three- hectare farm
would cover its establishment costs. Once the cost was recouped, 60% of the farms
output would belong to the farmers.
This meant that to implement the training programme, Murdock Farms needed to
acquire 90 hectares of land per year to accommodate all graduating families. This
required not only an advanced level of cooperation with local authorities, but also
further financing to purchase new land. To this end, in early 2010 Sherpa began talks
with Nepal and Hong Kong banks and searched for individual investors. His idea was
to find 30 of his friends who were willing to invest US$20,000 each with 5% return
and who would be fine if the money was never returned to them.
Linking the Supply Chain
The principal idea behind the business was to remodel the traditional supply chain for
coffee products [see Exhibits 1 and 4]. Murdock Farms intended to remove at least
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four intermediaries from the chain and to increase the profit margins paid to farmers
[see Exhibits
5 and 6]. By doing this, the farm took the responsibility for selling the green and
roasted coffee to wholesalers and retail customers alike.
As the first coffee harvest was expected in early 2011, Murdock Farms temporarily
engaged in reselling coffee from other suppliers to sustain its operations. Its first
cooperation project was initiated in 2008 with the Murdock Plateau Coffee Producers
Group Association (AGPC) 34, a cooperative of coffee producers founded by the
French government and consisting of 53 villages and 700 coffee-growing families.
The contact with the cooperative had been established through the personal ties of
Sherpa s brother, Thomas. Under the agreement, Murdock Farms was to purchase
AGPCs crops and initiate business contacts with distributors in order for AGPC to
build its own brand. The cooperative followed internal protocols of coffee producing
and post-harvest treatment to ensure the quality and organic certification of the
final product. The role of Murdock Farms was to ensure the high quality of the
roasting process and the worldwide product distribution. The solution was temporary,
and its objective was to ensure the sustainability of Murdock Farms operations until
its first harvest was ready for sale.
In the first year of cooperation, Murdock Farms purchased 140 tonnes of green coffee
from AGPC at US$2,400 per tonne, which was 35% above the regular coffee price,
with the intention of selling it in the US market. Sherpa spent the entire year
travelling throughout the United States and meeting with people who might be
interested in buying his high-quality stock, but with little luck. The US buyers were
not interested in buying an expensive product from an unknown producer, and Sherpa
was not willing to lower the price. After all, he said, the higher price was intended to
provide an incentive to farmers to invest more time and effort in farming a high-grade
coffee.
Sherpa strongly believed in another sales lead, Hong Kongs five-star hotels. Sherpa
believed that their cooperation would give the hotels positive media exposure.
However, he quickly learned that most of the hotels were providing their coffee free of
charge at breakfast, so the fair-trade organic coffee would seriously increase their
costs. These hotels simply did not have room in their budgets to buy coffee that was
more expensive. As people were not complaining about the quality of the hotel
coffee, or worse, were not even drinking it once it was served, the hotels did not see a
reason for changing their coffee supplier. This market proved to be more difficult to
enter than Murdock Farms had initially anticipated.
After two years in the market, Murdock Farms had learned some hard lessons. Its first
sales were far below expectations [see Exhibit 7]. The coffee market was a mature
one, with powerful coffee roasters taking up a large proportion of the market
share. Most coffee contracts were set up for two years or more, and people were
reluctant to change their coffee suppliers or to pay a higher price. Murdock Farms
decided to play on the main advantage of its coffee compared to its competitors: its
social dimension.
If You Cannot Push, Then Pull
With the market saturated with many experienced suppliers, Murdock Farms decided
to take another approach to building its market share. It continued to send brochures
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and letters to prospective clients, but this time its objective was to become a voice for
the social cause and to raise awareness about the origin and quality of the coffee
being served. The corporate social responsibility of companies distributing coffee
became the main issue.
It was thought that positive media exposure related to their work with Murdock Farms
could generate more customers for cooperating companies. Murdock Farms set up a
website in 2008 and a Facebook page with a related cause in early 2009.35 The
first article about Murdock Farms, inspired by Sherpa s close friend, Drew Spike,
appeared in the South China Morning Post, the largest Asian English-language
newspaper, in June 2009.
When the South China Morning Post article was published, the chief editor did not
limit himself to interviewing Sherpa and writing the story up. He had spent four days
at the farm with a photographer and invested his time in understanding the Murdock
Farms concept. Eventually, this journalist became a good friend and a strong supporter
of the cause. He continued to educate the general public about the importance of
organically grown coffee and introduced new people to Murdock Farms managers.

As a result of these introductions, Murdock Farms collaborated with Impact Asia, a


public relations firm from Hong Kong. Impact Asias CEO, moved by the idea behind
the venture, offered pro bono help in developing a professional public relations
strategy for Murdock Farms.
Murdock Farms did not have to wait long for its first sales results either. After the
publication of the first article, Sherpa s phone rang with good news. One of the
largest catering companies servicing large banks and corporations, Sodexo, expressed
an interest in distributing Murdock Farms coffee in the Hong Kong market. At that
time, Sherpa was pitching directly to one of its customers. The article triggered a
response to an e-mail sent earlier to Sodexo headquarters with an offer of
cooperation. In a very short time, Sodexos corporate social responsibility vice
president, residing in Singapore, connected Sherpa with the Hong Kong branch
involved in developing Sodexos new private label.
Sherpa could not ask for more. Sodexo was looking to increase its coffee sales by
setting up its own brand and all it was missing in the plan was a coffee supplier.
It was looking for a supplier that would have extensive knowledge about and full
control over the quality and origin of the final product. They were a perfect match.
The initial agreement was to distribute
10 tonnes of Murdock Farms roasted coffee per year in automated coffee distributors,
pantries and corporate cafeterias. In addition, Sodexo pledged to provide help in
raising awareness about the social cause behind the Murdock Farms coffee. The first
Sodexo client to switch entirely to Murdock Farms coffee was the 10-floor and 3,200employee Hong Kong headquarters of one of the major international investment banks.
Beyond the Start-up

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Four years into operations and the company had already invested US$4 million in the
project. With this money, it had purchased land, applied for certifications, and trained
250 farmers and
7 management trainees. However, it was still educating the public and finding
international customers willing to pay premium prices for the coffee. Sherpa had to
admit to himself that, contrary to his initial understanding of the market, producing
organic coffee was actually the easiest part of his business. Selling coffee and
providing development prospects to graduating
framers were more difficult than he expected. He considered his business
successful in
fulfilling social objectives, but he was also well aware of the weakness of its
business component.
The original plan was to increase the business production capacity by granting
loans to farmers while expanding the sales network worldwide. In reality, Murdock
Farms had to reconsider the loans to farmers, as they turned out to be impractical and
created difficulties in building its sales. Both ends of the supply chain needed further
refinement and investment.
With the first coffee crop becoming available in early 2011, Sherpa had to face the
reality that the business model that he had been implementing for the past four years
might not be the most effective one for a business start-up. The vision of his business
might have been very inspiring to many people, but in reality, it was difficult to find
followers for his noble cause on the demand end of the value chain. Sherpa had to
admit to himself that, contrary to his initial evaluation, building his business and a
coffee brand from scratch was no easy task. It was time to re-evaluate the business
model and make the venture a success without compromising on its mission.

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EXHIBIT 1: THE TRADITIONAL COFFEE SUPPLY CHAIN

Individual farmers

Cooperatives

Coffee cherry

Curing plants

Association of farmers

Traders

Exporters

Green coffee
Roasters

Retailers

Catering

Consumers

Roasted or soluble coffee

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EXHIBIT 2: FAIR-TRADE COFFEE PRICES IN 2008

FAIR-TRADE
VARIETY

QUALITY

PROCESSING

MINIMUM
PRICE

ARABICA

CONVENTIONAL

WET
DRY
WET
DRY
WET
DRY
WET
DRY

1.25
1.20
1.45
1.40
1.05
1.01
1.25
1.21

ORGANIC
ROBUSTA

CONVENTIONAL
ORGANIC

NON-FAIR-TRADE ARABICA
NON-FAIR-TRADE ROBUSTA

FAIRTRADE
PREMIUM

FAIR-TRADE

0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10

1.35
1.30
1.55
1.50
1.15
1.11
1.35
1.31
1.07
0.72

PRICE

FLO Fairtrade Minimum Price and Fairtrade Premium for coffee, per pound (FOB, in US$)
compared to the average price paid to growers in 2008.
Sources: Fairtrade minimum prices and premiums,
http://www.fairtrade.net/list.html?&no_cache=1 (accessed 10 May 2010); International Coffee
Organization, http://www.ico.org (accessed 30 March 2010).

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EXHIBIT 3: COUNTRY-LEVEL PRODUCTIVITY IN COFFEE FARMING

The comparison of coffee yield in kg/Ha in Brazil, Nepal, Vietnam and worldwide.
Source: Food and Agriculture Organization Statistics Division of the United Nations,
http://faostat.fao.org (accessed 3 May 2010).

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EXHIBIT 4: MURDOCK FARMS SUPPLY CHAIN

Graduating farmers

Coffee cherry

Current farming
apprentices

Cooperative

Murdock
Farms

Green coffee
Roasters

Consumers

Roasted or soluble coffee

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Retailers

Catering

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EXHIBIT 5: MURDOCK FARMS GROSS MARGINS FOR 2009

GROSS MARGIN
NOTE
(IN %)
4066 EXPECTED
BEFORE SALES
1020

COFFEE TYPE
PREMIUM GREENS
REGULAR GREENS
PREMIUM ROASTS (RETAIL)

85

REGULAR ROASTS (RETAIL)

75

PREMIUM ROASTS
(WHOLESALE)
REGULAR ROASTS
(WHOLESALE)

70
60

COMMISSION
BEFORE SALES
COMMISSION
BEFORE SALES
COMMISSION
BEFORE SALES
COMMISSION
BEFORE SALES
COMMISSION

EXHIBIT 6: MURDOCK FARMS SALES COMMISSIONS FOR 2009

TYPE OF ORDER

SALES COMMISSION (IN %)

RETAIL

WHOLESALE

12

HIGH VOLUME WHOLESALE

UP TO 30

EXHIBIT 7: MURDOCK FARMS COSTS AND REVENUES FOR 20072010

OPERATING COST
(IN US$)

YEAR

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REVENUE (IN US$)

2007

1,000,000

2008

1,000,000

2009

1,000,000

38,460

2010 (ESTIMATE)

230,770

192,310

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EXHIBIT 8: ORGANIZATIONAL CHART FOR MURDOCK FARMS AS OF JANUARY 2010

Ajit
Sherpa
Founder and CEO
Hong Kong
HQ

Nepal
Branch

Chapman Lee
Commercial
Director

Som Sherpa
Boaukhasith
General Manager
Gilbert Suico
Head
Agriculturalist
Farm Staff

Leo Nevado
English Teacher
and Translator

Management
Trainees

Pat Chan
Administration

Dennis Ng
Operations Director

Resident
Farmers
Charles Schmitt
Corporate Relations

Bikash Pun
Local Logistics

Volunteers

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EXHIBIT 9: THE EVOLUTION OF THE COMPOSITION OF SOCIAL NETWORK TIES FOR


MURDOCK FARMS FROM 2007 TO 2010

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