9B20M039

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
KARATU COFFEE COMPANY IN TANZANIA: WHAT STRATEGY
NEXT?

Manuel Siegrist, Gary Bowman, Colette Southam, and Paul Beamish wrote this case solely to provide material for class discussion.
The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveypublishing.ca. Our goal is to publish
materials of the highest quality; submit any errata to publishcases@ivey.ca. i1v2e5y5pubs

Use outside these parameters is a copyright violation.

Copyright © 2020, Ivey Business School Foundation Version: 2022-09-24

On a late summer evening in 2018, Peter Fischer sat in the Karatu Kahawa1 Lodge in the Arusha region of
northern Tanzania, sipping on a cappuccino. As the sun drifted beyond the Great Rift Valley, he pondered
the future of his business, the Karatu Coffee Company (KCC): “I have spent half my life working on getting
this company to where it is today. Finally, I can see some results, and I can harvest what I have sowed. The
company is well established and financially sound. As I approach retirement age, the big unanswered
question remains—what should I do next?”

Capital existed to grow the company’s original coffee farm, develop another coffee-themed resort in
Tanzania’s growing tourism market, or get involved with developing apartment buildings in the country’s
dominant city, Dar es Salaam. Each had its merits, but all were cast in the shadow of political uncertainty and
the inherent risk of doing business in Tanzania. For 30 years, Fischer had managed to avoid serious problems
and had maintained the highest ethical standards. He had seen others lose everything, and he always knew
that he could suffer the same fate. Despite the risks, the thought of retirement sat uncomfortably with him; he
loved the coffee industry and Tanzania, and he did not want to walk away from either.

THE WORLDWIDE COFFEE MARKET

Coffee connected much of Western society and was one of the most significant agricultural exports of the
developing world. Coffee tastes and preferences had become refined over the years; quality had improved
significantly, and the quantity consumed had experienced startling growth. Approximately 2.5 billion cups
of coffee were consumed every day.2 Within the coffee market, consumers had a plethora of options to
choose from, with the main divider being fresh versus instant coffee. Large chains such as Starbucks
Corporation, Costa Coffee, and McDonald’s Corporation, as well as bespoke local cafés, dominated city
centres, offering the newest blends and freshest trends, with local small-scale roasters also active. On the
other hand, brands such as Nescafé and Douwe Egberts (owned by conglomerates Nestlé S.A. [Nestlé] and
J. M. Smucker Company, respectively) dominated supermarket shelves—the primary channel of
distribution to consumers.3 The home market was even further divided into ground coffee, whole coffee
beans, instant coffee, and coffee capsules. In countries such as Tanzania, hotels and restaurants were major
coffee consumers. Since many hotels catered to international guests, coffee was always in demand. While
Page 2 9B20M039

instant coffee had been the dominant product category until recently, both local and international guests
had become savvier, demanding fresh coffee. In Tanzania, tea was a major substitute for coffee, stemming
from the country’s British and Indian influences. However, coffee consumption was rising steadily as the
nation’s disposable income grew. In 2003, only 2 per cent of locally produced coffee was consumed locally;

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
however, this number had risen to 7 per cent by 2015 and was growing at a rate of 1.5 to 2 per cent annually.4

The global production of coffee was very fragmented, with about 25 million farm shareholders making a
living from growing coffee.5 Five million people were involved in the Brazilian coffee industry alone.
Brazil was the world’s largest producer of green (unroasted) coffee, producing twice as much as Vietnam,
followed by Colombia and Indonesia (see Exhibit 1). As of 2015/16, Tanzania claimed the 18th position
worldwide, with an annual production of 48,000 metric tons. In the same year, Brazil produced 2.6 million
metric tons (see Exhibit 1). In Tanzania, 90 per cent of the coffee-growing industry’s yearly output was
supported by about 450,000 small-scale farmers; the remaining 10 per cent was grown on large-scale coffee
estates. The entry barrier to becoming a coffee grower was high, with the largest obstacle being the need
for fertile soil at the right altitude (arabica coffee grew at approximately 1,500 metres [m] above sea level).
In Tanzania, such altitudes could be found in the northern highlands (Arusha, Moshi) as well as the southern
region (Mbeya, Ruvuma). Water rights needed to be available, as the coffee fields required irrigation during

Use outside these parameters is a copyright violation.

periods of little rain. From a financial perspective, a rather large sum needed to be invested before the first
positive cashflows could be expected. Newly planted coffee fields required at least three years of growth
before the first decent harvest. However, existing coffee plants could yield good coffee for several decades
before they needed to be cut back to allow a new stem to grow or be replaced by fresh plants.

There were many types of coffee, but the two most established ones were robusta (Coffea canephora) and
arabica (Coffea arabica). Arabica coffee originated from the southwestern highlands of Ethiopia and
comprised approximately 60 per cent of global coffee production.6 It produced more acidity, less bitterness,
and less caffeine than robusta. Arabica was usually grown at a higher altitude than robusta (1,300–1,550 m
above sea level), which made Karatu in Tanzania, at 1,560 m above sea level, ideal for arabica coffee.7
Roasted coffee, especially traditional Italian espresso blends, comprised mostly arabica beans, with
approximately 10–15 per cent robusta beans, providing a full-bodied taste and a better crema (a flavourful
and aromatic froth on top of a shot of espresso). Since arabica had a lower yield than robusta and was also
perceived as the “premium” coffee, its price per unit was higher. As of March 22, 2017, Arabica was sold
at US$3.6678 per kilogram (kg), while robusta was sold at $2.348 per kg—a difference of $1.319, or a
premium of 56 per cent.9

One large barrier to operating the coffee farm was the social licence to operate, which was especially true
in the case of Tanzania. The most fertile land available was surrounded by various villages, all of which
would request certain easements, such as the right to pass through the fields at any time. Furthermore, a
potential conflict could arise from water rights, which needed to be acquired from the water authority.
However, since many villages live by tribal laws, it can be difficult to execute these rights without the
consent of the village leaders. It is therefore essential to have good relations with the leaders of the
surrounding villages to achieve smooth operations, more so since all workers will be from said villages.
Karatu employed around 50 local people on a permanent basis, which included paid vacation, maternal
leave, and medical care, at both the coffee farm and the coffee resort. Most jobs were low-wage contracts
for gardening, cleaning services, maintenance, and fieldwork. During the harvest season from October to
February, the number of casual labourer rose to over 200 to assist with picking the coffee cherries. Cherry
pickers were traditionally paid by the number of buckets harvested to incentivise productivity.

The supply side of the coffee farming business held relatively low power. Of major importance was the
purchase of fertilizers, nutrients, and pesticides, which could be widely sourced. Farm equipment, such as
Page 3 9B20M039

tractors, trailers, and irrigation supplies, could be found in abundance throughout Tanzania. A larger
obstacle was the acquisition of spare parts for the pulping machine—a process often aggravated by complex
import laws, duties, and taxes, as well as generally long waiting periods.

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
The margin distribution among farmer, exporter, importer, trader, and roaster was a complicated matter.
Coffee farmers used the Coffee C Futures price–the world benchmark for arabica coffee—as a guideline.10
The quoted price used certain coffees to represent the “basis” and starting point for differentials.11 Average
coffee that was available in large quantities, such as arabica from Brazil, traded at a negative differential
($0.00–$0.20 per pound), whereas specialty varietals, such as Colombian coffee, could trade up to +$0.20
per pound of coffee. Since coffee from the Karatu farm was established as among the top 1 per cent of
coffee in the world, it traded at a differential of about +$0.80 per pound. Therefore, farmers could derive
an expected price for their harvest from Coffee C Future prices. A coffee farmer’s revenue, aside from the
quality differential, was completely dependent on the market-based price mechanism. Their margin was
usually around 0.5–1 per cent, regardless of price. Therefore, to offset the cost of high market volatility,
farmers had to focus on cost control and yield management year-round.12 Several large coffee traders
dominated the green coffee market. Among the largest players were Neumann Kaffee Gruppe, who supplied
approximately 10 per cent of the worldwide coffee demand.13 Other major players included ECOM

Use outside these parameters is a copyright violation.

Agroindustrial, Olam International, and Nestlé.14 Coffee traders held certain bargaining power; however,
their margins were usually between 0.5 and 1 per cent. Therefore, the average coffee price largely depended
on a market-dependent price mechanism driven by the supply side. As the world’s largest coffee-producing
country, Brazil determined much of this price based on its annual harvest. Coffee farmers could do very
little to influence the price of their product, aside from maximizing their yield and controlling their cost.
Some farms chose to focus on quality coffee over quantity, which enabled them to charge a larger
differential over the average price per kg of green coffee. Farms could try to expand their business
horizontally by starting to roast their coffee and sell it on the local market.

Peter Fisher noted that coffee roasters purchased at market price and could pass fluctuations in price onto
their customers. They also tended to have the highest profit margins. Coffee-producing countries exported
most of their beans due to limited local demand and the beans’ short shelf life. While green coffee could be
roasted up to three years after harvest, roasted coffee was ideally consumed within three months of being
roasted. Thus, coffee was usually roasted at or near the point of sale and not in the country of origin.
Furthermore, with coffee having become a cultivated good, consumers preferred to have their coffee roasted
in small batches at a roasting facility of their choice. In Tanzania, green coffee could be exported or used
locally without constraints. However, there had recently been calls to revert to a socialist scheme, whereby
future sales would go through the centralized Tanzanian Coffee Board. Here, the coffee would be auctioned
off at the Moshi Coffee Exchange, and coffee export licences would need to be acquired.

TANZANIA’S RECENT HISTORY

Between 1980 and 1990, Tanzania still exhibited post-socialistic traits, introduced under Julius “Mwalimu”
Nyerere’s presidency from 1964 to 1985. Under Nyerere’s “ujamaa”15 visions, many people were forcibly
moved into villages to collaborate in collective farms. The implementation of Nyerere’s social and
economic policy brought the country to the brink of starvation, facing a declining economy as well as
systematic corruption, and Tanzania became one of the most foreign aid-dependent countries in the world.
On the plus side, Nyerere managed to unify the country, composed of more than 125 tribes, under the
umbrella of a common language, Swahili. Nyerere was succeeded in 1985 by Ali Hassan Mwinyi, whose
first steps mostly involved trying to reverse the socialist policies of his predecessor, allowing the economy
to become more liberal.16
Page 4 9B20M039

After the constitution was amended in 1992, and Tanzania’s first multi-party elections were held in 1995,
the ruling party, Chama Cha Mapinduzi (“Party of the Revolution”), won the majority of the seats and
elected Benjamin Mkapa as president from 1995 to 2005. In the years following Mkapa’s election, Tanzania

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
was widely heralded as the champion of structural reform and served as a model for other countries. Among
other things, the unification of the exchange rate as well as the simplification of import regulations allowed
the private sector to trade freely. This enabled an export boom, which helped restore Tanzania’s foreign
exchange reserves. Simultaneously, the financial sector underwent a strict reformation process. Foreign
banks were allowed to apply for licences, which provided financing opportunities for private enterprises.
At the same time, bankrupt public companies no longer had access to credit, public finances were subjected
to stricter regulations, and inflation was eventually curbed. The economic transformation unleashed a
virtuous cycle that fuelled private investment (both nationally and internationally) and some semblance of
sustained economic growth.17

Tanzania’s population grew from 14 million in 1970 to 52 million in 2017, with about 20 per cent residing
in urban areas. Economic development in Tanzania had been strong and steady, growing at 6 to 7 per cent
annually,18 with the country outperforming its sub-Saharan neighbours in growth rate but still falling well

Use outside these parameters is a copyright violation.

behind in terms of gross national income. Between 2000 and 2017, gross domestic product (GDP), on the
basis of purchasing power parity, grew steadily from $1,200 to $3,090.19 Tanzania had also become the
number one destination in East Africa for foreign direct investment, with the natural gas reserves and
mineral industry attracting investment from the United Kingdom, China, Canada, and other countries.
Although agriculture remained the predominant industry and employed more than half the country, a
significant growth area was tourism, accounting for more than 14 per cent of GDP and the clear majority
of its foreign exchange earnings. Tanzania was home to some of the biggest tourist attractions in all of
Africa. Mount Kilimanjaro, the Serengeti, the Ngorongoro Crater, Zanzibar, and Dar es Salaam attracted
1.1 million visitors per year—up from 285,000 in 1995.20 The natural areas of Tanzania were also well
protected; 38 per cent was designated land reserves,21 16 per cent was national parks, 7 per cent was
UNESCO World Heritage Sites,22 and the country had a wide variety of flora and fauna.

TANZANIA IN 2018

With a campaign centred on anti-corruption, transparency, and infrastructure, John Pombe Magufuli was
elected president in November 2015, initially helping to increase Tanzania’s appeal to foreign investors.
The effectiveness of Magufuli’s policies was questionable, with the public (both Tanzanians and foreign
residents) divided on the benefits such policies had brought to the local economy and the burden that recent
restrictions had placed on the import of cheap goods. More concerning was both the reality and perception
of corruption. Despite establishing the Prevention and Combating of Corruption Bureau, the World
Economic Forum Global Competitiveness Index 2017–2018 ranked Tanzania 113th out of 137 countries,
noting corruption, along with infrastructure investment and tax policy, as major concerns for investors.
Similarly, Transparency International ranked Tanzania 166th out of 176, indicating general petty
corruption, institutional weakness, and dysfunction or corruption in public institutions such as the police
and judicial systems. The most affected governmental institutions were procurement, land administration,
taxation, and customs. High tax rates, in combination with an inefficient and corrupt tax administration,
were named as the main deterrents to investment.23

The initial actions taken by the newly elected president surprised even the most avid critics. Magufuli fired
an army of government officials and civil servants that were suspected of cronyism. Recent political
developments in Tanzania, however, were worrisome, challenging the decades-long status of Tanzania as an
African “island of peace.” President Magufuli had taken an authoritarian populist stance, transforming
Page 5 9B20M039

Tanzania’s formerly flawed democracy into one of Africa’s more ruthless dictatorships. One of the main
reasons for this quick transformation could be attributed to the weak institutions, which were subsequently
hijacked to create a one-man rule system. Critics of the government, the ruling party, and the president had
become increasingly silent, as they feared repercussions. Political rallies had been banned, and several media

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
outlets, most of which were linked to the opposing party, were shut down or temporarily closed. In March
2017, Magufuli stated, “Media owners, let me tell you: Be careful. Watch it. If you think that you have that
kind of freedom—not to that extent.”24 At the same time, the government denied any wrongdoing, claiming
that their sole focus was on curbing corruption as well as economic and infrastructural development.25

The challenge for Tanzania was to increase its international standing and grow its economy through regional
and global integration while avoiding the temptation within public and private organizations to succumb to
corrupt practices as a means of overcoming bureaucratic delays, ensuring a smooth operating environment,
or simply generating a little extra income.

While Tanzania had made tremendous progress with regard to its university education system, it was still
difficult to find staff with decent agricultural education and experience in coffee and business administration,
leading many farms to hire expatriates at a high cost and with accompanying administrative issues.

Use outside these parameters is a copyright violation.

Arusha

Arusha was the capital of the Arusha region, located in northern Tanzania, approximately 630 kilometres
from Dar es Salaam (see Exhibit 2). As of the 2012 census, Arusha’s urban population was about 420,000,
with an additional 320,000 in the surrounding district. Arusha was situated at an altitude of 1,400 m above
sea level in the northern highland region and was known for its agricultural fertility. It was famous for its
proximity to Mount Kilimanjaro, the highest mountain in Africa. Tourism was highly developed in the
Arusha region, offering excellent hiking and walking scenery. Furthermore, Arusha was located on the
northern safari circuit, with proximity to some of the best national parks and game reserves in Africa,
including the Serengeti and the Ngorongoro Crater.26

Dar es Salaam

Dar es Salaam was the largest and most important city in Tanzania for both business and government, and
one of the fastest-growing cities in the world. As of the 2012 census, it had a population of approximately
1 million. It was also home to Tanzania’s largest universities as well as many non-governmental
organizations and international organizations, including the United Nations and the World Bank.
Tanzania’s largest airport, Julius Nyerere International Airport, was in Dar es Salaam and served
approximately 2.5 million passengers per year, connecting Tanzania with a broad range of destinations
across Africa, Europe, and the Middle East27. For this reason, along with a large expatriate community and
the increasing importance of tourism, the number of international restaurants and cafés in Dar es Salaam
had risen exponentially between 2010 and 2020.28

Zanzibar

Zanzibar was a semi-autonomous region of Tanzania, famous for growing a large variety of spices, and was
home to an abundance of beautiful beaches, tropical rainforests, and numerous historic points of interest.
Furthermore, it was a melting pot of various cultures. Over the last centuries, Zanzibar had been under
Arabic (Omani) and European (Portuguese and British) influence before its independence from the United
Page 6 9B20M039

Kingdom in 1963, merging with Tanganyika in 1964 to form today’s Tanzania. Since the early 2000s,
Zanzibar had been a bustling tourist destination, particularly attracting visitors from Italy and the United
Kingdom (37 per cent of total arrivals).29 A visit to the island was often combined with climbing Mount
Kilimanjaro and a safari in one of the national parks. Tourists usually chose Zanzibar as the last destination

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
of their journey, relaxing at one of the many beach resorts and hotels. Of interest was the capital of Zanzibar,
Stone Town, a World Heritage Site and home to one of the last intact old towns in East Africa. Stone Town
reflected Zanzibar’s illustrious past and hosted an architectural and cultural mix of Arab, Persian, Indian,
and European elements.30

KARATU COFFEE COMPANY

As of 2018, KCC was running smoothly. Fischer had vertically integrated his businesses over the past
several decades, and his vision had finally come to fruition. KCC had become less dependent on average
coffee prices and dominating coffee traders. However, this business model required a long lead time to
allow for brand and relationship building.

Use outside these parameters is a copyright violation.

Since Fisher had taken over the farm in 1986, the coffee farm had gradually increased both the quantity and
quality of its coffee, with harvest variations attributed to different rain patterns. The lodge had seen a
substantial increase in guest arrivals, in part due to the upgrade of the nearby airport. Furthermore, revenues
from the symbiosis with the coffee farm, offering educational tours, demonstrating the roasting process,
and the sale of coffee beans were soaring. The boutique hotel in Zanzibar received many referrals from the
lodge, and vice versa. Furthermore, the hotel was an excellent vehicle for the promotion of KCC coffee,
since it offered free daily coffee-roasting shows to its guests. At the same time, largely due to the economic
upswing of the last decade, the roasting business in Dar es Salaam was enjoying healthy growth rates,
running near full capacity. (See Exhibit 3 for the company structure.)
Fischer had been able to steer clear of relying on debt financing for his expansion. In 2018, KCC had cash
at its disposal, and Fischer was trying to determine the next steps (see Exhibit 4). He was building his
retirement home near the coffee farm and envisioned dividing his time between Tanzania and Switzerland.
Now that his two children were all grown up and pursuing their individual careers, it was time to think
about the near future and the development of KCC.

KARATU COFFEE COMPANY HISTORY

In 1984, Fischer, a Swiss-trained agronomist, saw a job posting advertised at his university; a Swiss family
was looking to hire a manager for their 100-hectare coffee farm in the Arusha region in northern Tanzania.
The farm, originally founded in 1910 by German missionaries, had ideal soil, altitude, and rain conditions
for growing coffee. Fischer saw the opportunity to embark on an adventure, applied for the job, and was
hired shortly thereafter.
Fisher knew that at the time, Tanzania was mired in economic problems, but prosperity existed for prudent
local investors capitalizing on high-quality resources with strong global demand. The Arusha Declaration
of 1967, the first act of Tanzania’s first president, Nyerere, had set a stringent socialist and unified vision
for Tanzania (ujamaa). Private institutions were nationalized, agricultural production dropped sharply, and
the economy declined accordingly. Exporters were no longer allowed invoicing in foreign currency and had
to obtain licences for each consignment, effectively giving corrupt ministries the right to regulate almost
all exports. Large budget deficits, as well as loss-making public enterprises, led to the printing of vast sums
of the Tanzanian shilling, which eventually resulted in inflation rising to more than 30 per cent per annum.
Page 7 9B20M039

Foreign currency, especially US dollars, became scarce, with premiums on the black market reaching up to
700 per cent in the 1980s.
Phase 1: Coffee Farm Purchased amid High Political Risk

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
After two years on the job, Fischer made a shrewd and timely offer; he acquired the farm in 1986, at which
time, KCC was founded. He had realized the diminishing interest of the family in the farm business and
saw an opportunity arising due to the economic turmoil, as Tanzania was transforming from a socialist
country into a young democracy.
Amid a challenging business environment, the farm grew. The local coffee market was small and stagnant
in the mid-1980s. Most Tanzanians drank tea, and there were few expatriates to prop up demand. The coffee
market that did exist was dominated by instant-coffee producers such as Nescafé and the locally owned and
produced Africafé Coffee. Instant coffee was easier to store and brew and did not require specialized
equipment such as percolators or grinders.

Phase 2: Karatu Kahawa Lodge Established during Economic Liberalization

A process of recovery and reform, as well as a gradual economic liberalization, took place during the 1990s,

Use outside these parameters is a copyright violation.

after Mwinyi became president. Prices and exchange rates were adjusted to market levels, while economic
restrictions were lifted. The US dollar–Tanzanian shilling exchange rate went from USD 1 = TZS 55031 in
1995 to USD 1 = TZS 2,100 in 2016.32 At the same time, governmental intervention and state ownership were
reversed, and privatization started to return to Tanzania. Despite significant structural changes between 1986
and 1996, economic growth remained weak, and signs of sustained stability were faint at best.
KCC continued to perform well amid economic trouble. With the farm running soundly and providing a
somewhat steady cash flow, Fischer sought to diversify his business and expand into sources of income that
would protect KCC from the volatility of green coffee prices. Fischer envisioned turning parts of the vast
bushland surrounding the farm into a lodge to accommodate the slowly rising number of visitors in the area.
Construction began in 1987, and the Karatu Kahawa Lodge (KKL) opened its doors in September 1990,
with only four rooms, a bar, a restaurant, and a swimming pool. Located less than a one-hour drive away
from Arusha’s 720,000 residents, the lodge offered Tanzania’s growing middle class a place to relax for an
evening or a weekend. The lodge had a very slow start due to little tourism and business in the area and
therefore incurred losses for the first six years. Moreover, there were too few room numbers to support
professional management, and the lodge was eventually closed for several months in 1994. After
consideration, significant investments were made, including 12 rooms of different sizes, 8 four-bedroom
bungalows for long-term rent, a pizzeria, sports facilities, and rebuilding the pool. These investments and
an improving national economy brought about better business, mainly supported by travel groups, which
now found suitable accommodation at the lodge, as well as local day visitors and special interest groups.

Phase 3: Zanzibar Boutique Hotel Established

Shortly before the lodge opened, KCC investigated further opportunities for investing and expansion,
purchasing a run-down, but historically significant, four-storey building in Stone Town, Zanzibar. The
house belonged to the family of KCC’s long-serving financial director, Amit Jai. Fischer had visited
Zanzibar several times during the 1980s and, with its perfect beaches and rich culture, thought of it as an
ideal up-and-coming tourist spot. When the opportunity to buy the property appeared, he used a family
wedding gift to purchase the house.
Fischer’s vision was to create a boutique hotel with a vibrant café; however, the tourist market was poor
and taking time to develop. He chose instead to rent out the property while the market improved. Fifteen
years later, conversion began, and Fischer invested $195,000 in completely renovating the private property
Page 8 9B20M039

into a boutique hotel with eight rooms. This was a laborious process because the antique character of the
property had to be preserved, by rule of the Stone Town Conservation and Development Authority. The
Zanzibar Boutique Hotel (ZBH), which opened its doors in 2005, turned a profit in its first year and has
continued to do so ever since. Over the following years, it developed an iconic status as the place that had

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
the best coffee in all of Tanzania, and it was also known for its unique historical atmosphere.

Phase 4: Roasting Facilities & Equipment

The multi-party elections in 1995 and Tanzania’s subsequent improved economic situation helped KCC
continue to grow. More tourists to the region equated to more business for the lodge, while the yield of green
coffee continued rising over the years. It was during this period that Fischer thought of the fourth stage in
KCC’s development: the roasting business. Fischer also saw another benefit: A significant portion of the
annual coffee production—such as malformed beans, which were not suitable for export—had to be sold in
the local market at a large discount, despite being of good inherent quality and having virtually the same taste
characteristics as the export-grade beans. KCC sought to valorize this coffee and concluded that roasting and
grinding the malformed beans was the best way to extract the greatest value. The roasting business was
established in Dar es Salaam in 2007 and pursued two main goals: first, to produce good-quality roast and

Use outside these parameters is a copyright violation.

ground coffee for hotels and cafés in mainland Tanzania and Zanzibar, and second, to provide top-end whole-
bean retail products for the local private market. Both segments grew continuously; however, in a country like
Tanzania, with 55 million inhabitants, the big future business would be the retail market.
Fischer’s vision finally came around; all four elements—starting with the farm, via the KKL; the ZBH and
its coffee outlet; and the roasting business in Dar es Salaam—shared the same strategic foundation: coffee.
The three outlets sold value-added roasted coffee, while the KKL and coffee house increased local and
international demand and served as brand-strengthening channels.
Aside from a dip in 2015, which was attributed to the closure of some rooms for renovation and fewer
tourist arrivals to the region, revenue had seen a steady rise and had grown by 20 per cent in local currencies.
Meanwhile, overhead costs were under control, which allowed for good margins and net profits. The
outlook was good, with a strong tourism sector and a relatively cheap Tanzanian shilling further fuelling
growth. However, the government planned to force businesses to charge exclusively in Tanzanian shillings,
the volatility of which could cause problems in the near future.
Fischer’s philosophy was to keep investing in assets and management to assure quality in all aspects of
operations. Room for expansion or new ventures could only be considered if the existing businesses were
running well and growing with the market. The unshakable credo of Fischer was to work on 100 per cent
equity and self-finance, as this would provide maximum flexibility in decision-making; banking institutions
were used as service providers only, not as financiers or partners. At the same time, it was Fischer’s
intention to think of further diversifying his businesses’ potential. Doing so, however, would require certain
stability of the Tanzanian economy and its political system. Tanzania’s recent developments and the
subsequent changes in the country’s political landscape worried Fischer.

EXPANSION ALTERNATIVES FOR KARATU

As Fischer sipped his coffee, he pondered several options that had emerged over the previous weeks and
months. One could always find opportunities in Tanzania, but there was also always a high degree of risk,
and Fischer was nearing the point in his career where bold, new ventures carried extra weight.
Page 9 9B20M039

Alternative 1: Grow the Original Farm

Fischer was an agronomist; he had always had a passion for the farm, and the idea of growing it was
incredibly appealing. He also knew that KCC’s coffee was among the best in the world; growing KCC’s

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
production, increasing Tanzania’s reputation for coffee, and thus increasing the feasibility of agritourism
enthused him. The land next to the farm was available and well-suited to coffee. The cost would be minimal;
even with the extra equipment and staff, he would barely use half of the cash reserves. Expanding the farm
would require time and patience, but doing so could double the farm’s bean production over the next decade.
Fischer estimated that it would require an investment of $250,000 for the land purchase as well as additional
machinery, buildings, and staff. Since all existing plants on the new fields would be replaced by the variety
grown on KCC grounds, it would take a minimum of three years to achieve a good harvest. After five years,
it was expected that the farm could produce a positive net cash flow.
Alternative 2: Expand within Tanzania—The Manyara Coffee Resort

Lake Manyara was approximately two hours southwest from Arusha and a one-hour drive from Karatu. The
lake, together with the national park, was famous for hosting one of the world’s largest flamingo populations.
Furthermore, more than 400 bird species inhabited the park, which made it an excellent spot for birdwatchers.

Use outside these parameters is a copyright violation.

In anticipation of a potential upswing, Fischer had acquired a building permit on a sizable piece of land at
Lake Manyara a few years back. It was directly on the shore of Lake Manyara and a short distance to the
gates of Lake Manyara National Park. The idea was to build four to six self-contained lake houses, outfitted
with all amenities. Initially, guests would rent the units via the KKL and obtain food and beverages from
nearby guest houses or use the kitchenettes of the beach houses. Once the business was proven to work, a
restaurant could be considered, and a permanent team comprising management and staff would be relocated
to Matema to operate the resort year-round. Based on a rough calculation done by Fischer (see Exhibit 5),
an investment of $400,000 would reap a substantial return on investment (ROI) within seven years, as well
as a positive net present value with a weighted average cost of capital of 13 per cent.

Alternative 3: Apartment Development in Dar es Salaam

Fischer had never considered large-scale property development; however, Dar es Salaam was proliferating,
and high-quality city apartments were scarce and commanded attractive premiums. An opportunity to invest
in a 40-unit upscale apartment block in the downtown area had recently presented itself. Each partner was
required to put up $400,000. Additionally, the pitch was convincing and seemed low risk, claiming a return
of $800,000 within three years. Fischer was skeptical and knew such opportunities would take longer in
Tanzania; however, he figured that even if the project took five years and returned $600,000, it was an
attractive ROI. It also meant that he would need to find financing for the extra $150,000. Fischer had never
gone into debt before and was apprehensive about the concept of borrowing money.
Alternative 4: Exit Tanzania

Fischer was considering one last option: selling his life’s work and focusing on his retirement home, built on
nearby land, and living in Switzerland part-time. One of the biggest obstacles, aside from deciding on an
appropriate selling price as well as the administrative headache, would be to find a solvent buyer who was legally
entitled to own the land titles held by Fischer. This posed a significant problem for potential buyers from abroad,
as foreigners were not allowed to hold land titles anymore, and Tanzania did not allow dual citizenship.
Fischer was hoping to make a decision soon. Whichever option he selected would require some real work.

The authors would like to express their gratitude to Vanessa Hasse and Chengguang
Li for reviewing this case and improving it with their helpful suggestions.
Page 10 9B20M039

EXHIBIT 1: CROP YEAR PRODUCTION BY COUNTRY, 2018

Rank Country Metric Tons Rank Country Metric Tons
1 Brazil 3,895,500 9 Mexico 261,060
2 Vietnam 1,792,440 10 Peru 255,780

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
3 Colombia 831,960 11 Guatemala 240,420
4 Indonesia 588,780 12 Nicaragua 157,500
5 Ethiopia 466,560 13 Côte d'Ivoire 137,640
6 Honduras 439,680 14 Costa Rica 85,620
7 India 360,120 15 Tanzania 70,500
8 Uganda 282,240 Total global production 10,347,120
Source: “Crop year production by country,” International Coffee Organization, January 2020, accessed February 16, 2020,
www.ico.org/prices/po-production.pdf.

EXHIBIT 2: MAP OF TANZANIA WITH KARATU COFFEE COMPANY LOCATIONS

Use outside these parameters is a copyright violation.

Sources: “Africa,” Google Maps, 2019, accessed November 2, 2019, www.google.com/maps/@2.194233,5.2027339,4z;
“Tanzania,” Google Maps, 2019, accessed November 2, 2019, www.google.com/maps/place/Tanzania/@-
6.3424397,30.4943917,6z/data=!3m1!4b1!4m5!3m4!1s0x184b51314869a111:0x885a17314bc1c430!8m2!3d-
6.369028!4d34.888822.

EXHIBIT 3: KARATU COFFEE COMPANY STRUCTURE

Source: Company records.

Page 11 9B20M039

EXHIBIT 4: CASH BALANCE, AND PROFIT AND LOSS, 2015–2018 (USD)

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
Source: Company records.

Use outside these parameters is a copyright violation.

EXHIBIT 5: THE MANYARA COFFEE RESORT (NET PRESENT VALUE AND RETURN ON
INVESTMENT)

Note: NPV = net present value; ROI = return on investment; CAPEX = capital expenditure; PV = present value; WACC =
weighted average cost of capital; GDP = gross domestic product.
Source: Company records.
Page 12 9B20M039

ENDNOTES
1
“Kahawa” was the Swahili word for “coffee.”
2
Stefano Ponte, “The ‘Latte Revolution’? Regulation, Markets and Consumption in the Global Coffee Chain,” World

Authorized for use only in the course INS3208 at Vietnam National University Hanoi (VNU) taught by Dr. Nguyen Ngoc Anh from 1/1/2024 to 1/4/2024.
Development 30, no. 7 (July 2002): 1099–1122.
3
Stefano Ponte, “The ‘Latte Revolution’? Regulation, Markets and Consumption in the Global Coffee Chain,” World
Development 30, no. 7 (July 2002): 1099–1122.
4
“Tanzania - United Republic of Coffee Annual 2018 Coffee Report,” USDA Foreign Agricultural Service, accessed March 5,
2019,https://apps.fas.usda.gov/newgainapi/api/report/downloadreportbyfilename?filename=Coffee%20Annual_Nairobi_Tanz
ania%20-%20United%20Republic%20of_5-24-2018.pdf
5
“Coffee Farmers,” Fairtrade Foundation, accessed June 13, 2019, www.fairtrade.org.uk/Farmers-and-Workers/Coffee.
6
International Coffee Organisation, Crop Year Production by Country, January, 2020, accessed February 14, 2020.
7
“Tanzania Coffee Industry Profile,” Tanzania Coffee Board, accessed April 17, 2019,
www.coffeeboard.or.tz/tzcoffee_%20profile.php.
8
All dollar amounts are in US dollars.
9
“Coffee Robusta Price,” YCharts, May 2019, accessed June 7, 2019,
https://ycharts.com/indicators/world_coffee_robusta_price.
10
Alex Capurro, “Industry News: Coffee Pricing 101,” Bennetts, May 4, 2014, accessed May 22, 2019,
www.hab.com.au/news/article/24729.
11
“Coffee C Futures,” Intercontinental Exchange, accessed May 22, 2019, www.theice.com/products/15/Coffee-C-Futures.
12
“Coffee Arabica Price,” YCharts, May 2019, accessed June 7, 2019,

Use outside these parameters is a copyright violation.

https://ycharts.com/indicators/world_coffee_arabica_price.
13
“Who Moves The Coffee Markets? Meet The World’s Largest Green Coffee Traders,” Commodity Trading Guru, accessed February
2020, https://commoditytrading.guru/commodities/who-moves-the-coffee-markets-meet-the-worlds-largest-green-coffee-traders/.
14
David Goldstein, “Who Moves the Coffee Markets? Meet the World’s Largest Green Coffee Traders,” Commodity Trading
Guru, June 6, 2018, accessed November 27, 2018, https://commoditytrading.guru/commodities/who-moves-the-coffee-
markets-meet-the-worlds-largest-green-coffee-traders/.
15
Ujamaa (“familyhood” in Swahili) was a concept that formed the basis of Julius Nyerere's social and economic development
policies in Tanzania after it gained independence from Britain in 1961. Sean Delehanty, “From Modernization to Villagization:
The World Bank and Ujamaa,” Diplomatic History (2020).
16
Edward A. Gargan, “Nyerere Steps down but keeps his hand in,” New York Times, November 3, 1985, accessed March 3,
2020, https://www.nytimes.com/1985/11/03/weekinreview/nyerere-steps-down-but-keeps-his-hand-in.html
17
Kjell J Havnevik and Aida C. Isinika, “Tanzania in Transition: from Nyerere to Mkapa,” Mkuki na Nyota (2010)
18
“The World Bank in Tanzania,” The World Bank, accessed April 13, 2019, www.worldbank.org/en/country/tanzania/overview.
19
“GDP per Capita, PPP (Current International $) – Tanzania,” The World Bank, accessed April 17, 2019,
https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locations=TZ.
20
“International Tourism, Number of Arrivals – Tanzania,” The World Bank, accessed April 17, 2019,
http://data.worldbank.org/indicator/ST.INT.ARVL?locations=TZ.
21
“Protected Areas of Tanzania,” The Encyclopedia of Earth, September 23, 2009, accessed November 29, 2018,
www.eoearth.org/view/article/155415/.
22
“United Republic of Tanzania,” United Nations Educational, Scientific, and Cultural Organization, accessed January 12,
2019, http://whc.unesco.org/en/statesparties/tz.
23
“Tanzania Corruption Report,” GAN Business Anti-corruption Portal, October 2016, accessed February 12, 2019,
www.business-anti-corruption.com/country-profiles/tanzania/.
24
Dan Paget, “Tanzania’s Anti-corruption Crusader Cracks Down on Opponents,” CNN, November 7, 2017, accessed
November 17, 2018, https://edition.cnn.com/2017/11/07/africa/magufuli-crackdown/index.html; “Tanzania’s Rogue President,”
The Economist, March 15, 2018, accessed April 28, 2018, www.economist.com/news/middle-east-and-africa/21738919-
strong-constitutions-matter-tanzanias-rogue-president.
25
Samuel Gebre and David Herbling, “Rising Political Violence Stalks African ‘Island of Peace,’” Bloomberg, March 25, 2018, accessed
November 29, 2019, www.bloomberg.com/news/articles/2018-03-22/rising-political-violence-stalks-east-africa-s-island-of-peace.
26
“Arusha City”, Tanzania Tourism, 2020, accessed on March 5, 2020, www.tanzaniatourism.go.tz/en/destination/arusha-city.
27
“Traffic Statistics,” Tanzania Airports Authority, 2018, accessed on March 5, 2020, http://www.taa.go.tz/index.php/traffic-statistics.
28
“Rapid economic growth and an expanding private sector reshape Tanzanian real estate,” Oxford Business Group, 2020,
accessed March 5, 2020, https://oxfordbusinessgroup.com/overview/rapid-economic-growth-and-increasingly-confident-
private-sector-have-reshaped-marketplace-settling
29
National Bureau of Statistics, United Republic of Tanzania, The 2012 International Visitors’ Exit Survey Report, April 2014,
accessed July 28, 2018, http://wedocs.unep.org/handle/20.500.11822/9768.
30
“Zanzibar Island”, Tanzania Tourism, 2020, accessed on March 5, 2020,
www.tanzaniatourism.go.tz/en/destination/zanzibar-island.
31
TZS = Tanzanian shilling.
32
“SD/TZS – US Dollar Tanzanian Shilling,” Investing.com, accessed November 27, 2019, www.investing.com/currencies/usd-
tzs-historical-data.