Fair Trade Coffee: Ethics, Religion, and Sustainable Production Global Marketing Management International Summer University 2010- WU, Wien Table of Contents Introduction3 Problem Statement3 The Fair Trade vision3 Background: The Fair Trade Foundation4 Background: Fair Trade Labeling Organization International4 Fair Trade Mark4 Fair Trade Pricing5 The Fair Trade Premium5 Question 1. Why should Starbucks, Kraft, and Nestle create ‘ethical supply chains’? 6 Question 2: Do you agree with the finding that few consumers consider the impact of their purchase decisions on anyone or anything but themselves and their family? Question 3: What recommendations would you make to help cure the ills of the coffee market? 8 Conclusion9 References10 Appendix11 Introduction Coffee is the world’s seventh largest legal agricultural export by value. Globally, 400 billion cups of coffee are consumed annually. The greatest players in the Coffee market are P&G, Nestle & Kraft. Approximately 25 million farmers in 50 developing countries produce coffee (Facts & Figures 2010). This case study will look at the Fair Trade Foundation and the Fair Trade Mark’s role in alleviating the current issues in the Coffee Market.
It will also aim to make recommendations on how the Fair Trade Brand could be strengthened. Problem Statement In 1999, the coffee price was $1. 42 per pound. Various producers entered the market during the following two years and by 2001, the market had reached saturation. By 2001, 115 million bags of coffee were being produced and yet only 105 million could be sold according to the International Coffee Organization (cited in Keegan & Green 2008). Prices dropped to an all time low of $0. 42 per pound.
This excess supply and low demand brought devastation to the lives of 25 million coffee farmers in 50 poor developing countries around the world. Various farmers quit the market as the true cost of producing coffee, is around $0. 80 to $0. 90 which meant there was a major shortfall of around $0. 40. After many farmers exited the market, the price recovered slightly to $0. 50 by 2003. The biggest source of oversupply is the poor quality Vietnamese Robusta bean which has flooded the world market. This bean is bitter and inferior to the Arabica beans produced elsewhere and makes up a big proportion of the 950,000 tons that Vietnam produces.
In essence, the three major issues facing the coffee market are: low prices, oversupply and the poor quality Robusta beans flooding the market (Keegan & Green 2008). The Fair Trade vision Fairtrade is a strategy for poverty alleviation and sustainable development (Fair Trade Foundation 2010). Its purpose is to create opportunities for producers and workers who have been economically disadvantaged or marginalized by the conventional trading system or free trade system which is driven by demand and supply.
Fair access to markets under better trade conditions could help small farmers in isolated areas (Fair Trade Coffee Map 2010) to overcome barriers to development (Fair Trade Foundation 2010). Fair Trade is a tool for development that ensures disadvantaged farmers and workers in developing countries get a better deal through the use of the international Fair Trade Mark (FTM) which signals to the consumer that the product qualifies as a good that is produced in a sustainable manner (Fair Trade Mark 2010).
It means farmers get a fair price for their products which covers sustainable costs of production. The Fair Trade premium means producers get an additional amount of money which the farmers can then reinvest in local social, environmental or economic development projects (Fair Trade Foundation 2010). Background: The Fair Trade Foundation The Fair Trade Foundation is the independent non-profit organization that licenses use of the FTM on its products in accordance with internationally agreed Fair Trade Standards (FTS) (Fair Trade Foundation 2010, Fair Trade Mark 2010).
The Foundation was established in 1992 by CAFOD, Christian Aid, Oxfam, Traidcraft and the World Development Movement, later joined by the National Federation of Women’s Institutes. Member organizations now also include Banana Link, Methodist Relief and Development Fund, Nicaragua Solidarity Campaign, People & Planet, SCIAF, Shared Interest Foundation, Soroptimist International, Tearfund and the United Reformed Church.
The Foundation is the UK member of Fairtrade Labelling Organizations International (FLO), which unites 21 labeling initiatives across Europe, Japan, North America, Mexico and Australia/New Zealand as well as networks of producer organizations from Asia, Africa, Latin America and the Caribbean (Fair Trade Foundation 2010). Fair Trade Labeling was created in the Netherlands in the late 1980s. The Max Havelaar Foundation launched the first Fair Trade consumer guarantee label in 1988 on coffee sourced from Mexico (Fair Trade Mark 2010).
In the UK, the Fairtrade Foundation was established in 1992, with the first products to carry the Fair Trade Mark launched in 1994 (Fair Trade Mark 2010). Background: Fair Trade Labeling Organization International The Fairtrade Labeling Organizations International (FLO) was established in Bonn, Germany to ‘unite the labeling initiatives under one umbrella’ and to establish worldwide standards and certification. For a product to display the Fair Trade Mark (FTM), it must meet international Fairtrade standards, which are set by the international certification body, FLO.
These standards are agreed through a process of research and consultation with key participants in the Fair Trade scheme, including producers themselves, traders, NGOs, academic institutions and labeling organizations such as the Fairtrade Foundation (Fair Trade Mark 2010, Fair Trade Foundation 2010, FLO 2010). Fair Trade Mark ‘Fair Trade’ is the label attached to products that meet the very strict and specific criteria set by the Fair Trade Labelling Organization (FLO). These criteria aim to help communities of small-scale farmers in the developing world with social, economic, and environmental development (FTM 2010).
For example, this means ensuring that producers and traders of Fairtrade products are given a fair wage / price for their goods and a premium to be invested in community development and that minimum environmental standards are adhered to in the production of goods (Fair Trade Mark 2010). Fair Trade Pricing The Fairtrade minimum price is the minimum price that a buyer of Fairtrade products has to pay to a Producer Organization for their product. It is not a fixed price, but should be seen as the lowest possible starting point for price negotiations between producer and purchaser.
It is set at a level, which ensures that Producer Organizations receive a price, which covers the cost of sustainable production for their product. This means it also acts as a safety net for farmers at times when world markets fall below a sustainable level. However, when the market price is higher than the Fairtrade minimum, the buyer must pay the market price. Producers and traders can also negotiate a higher price, for example on the basis of quality, and for some products, FLO also sets different prices for organic crops, or for particular grades of produce (Fair Trade Labeling Organization 2010).
The standards also allow producers to request partial pre-payment of the contract. This is important for small-scale farmers’ organizations as it ensures they have the cash flow to pay farmers at the time they deliver their crop. Buyers are also required to enter into long-term trading relationships so that producers can predict their income and plan for the future. Fairtrade minimum prices are set by the Standards Unit at FLO following research into producers’ costs of sustainable production and consultation with traders and other stakeholders (Fair Trade Foundation 2010).
The Fair Trade Premium The Fairtrade premium is a sum paid in addition to the Fairtrade minimum price (The Fair Trade Minimum Price 2010). The Fair Trade premium means producers get an additional amount of money which the farmers can then reinvest in local social, environmental or economic development projects (Fair Trade Mark 2010). It means farmers get a fair price for their products which covers sustainable costs of production. Table 1: Fair Trade Coffee: Estimated UK retail sales by value 1998-2009 (? million) 1998| 1999| 2000| 2001| 2002| 2003| 2004| 2005| 2006| 2007| 2008 | 2009 | 13. | 15. 0 | 15. 5| 18. 6 | 23. 1| 34. 3| 49. 3 | 65. 8| 93. 0 | 117. 0| 137. 3| 157. 0| Source: Fair Trade Foundation 2010 Question 1. Why should Starbucks, Kraft, and Nestle create ‘ethical supply chains’? Companies are under increasing pressure to address the issues of working conditions and labour hours as well as ethical conduct issues in the organizations that make up their supply chains (Jamieson & Murdoch 2010). This pressure is coming from sources including the general public as people’s awareness of these issues and expectations of companies’ responsibilities rise (Levin 2010).
Investors are also applying pressure, as socially responsible investment becomes the norm. Managing supply chain issues is seen as one indicator of how well a company is run. The media are also becoming more interested in reports about malpractice, as are campaigning groups as they target new sectors and become more skilled at harnessing public opinion to further their agenda. Public exposure of poor labour standards in factories located in developing countries can inadvertently undermine a company’s progress on establishing ethical trade and good labour practices.
Companies serious about addressing these issues are getting to know their supply chain, developing and communicating their code of conduct or implementing their policy through monitoring suppliers and encouraging progress. These companies negotiate with suppliers, factory managers and local organizations or undertake collaborative projects with other companies, non-governmental organizations (NGOs) such as SOMO and multi-stakeholder groups (Jamieson & Murdoch 2010). These negotiations are in essence ‘Supply Chain Management (SCM)’. Consumers often blame the largest purchaser for ethical issues, malpractices and lapses that ere committed upstream by suppliers. The purchasing company gets the blame even though the suppliers that caused the issue, malpractice or lapse are really legally unconnected with the purchasing company. Unfortunately, the biggest brand that is a player in this particular supply chain bringing the product from raw material to final consumer, will most likely take the blame for bringing this offensive product to the market or for allowing this lapse during this process. In order to avoid this Public Relations drama, companies should practice ethical Supply Chain Management (SCM) or Supplier Ethics Management (SEM).
The Supply Chain is the system of organizations including manufacturers and suppliers, retailers and wholesalers as well as distributors; the technology; all activities, information and resources involved in moving a product or a service from the first raw product supplier to final consumer or customer (Nagurney 2006). SCM is used to communicate expectations, standards, values and the minimum requirements in any aspect from labour standards to product quality and environmental business as well as social aspects to the network.
SCM is the managing the network of interconnected businesses involved in providing the service and the product to the final consumer (Harland 2003; Lundberg 2010). Image courtesy of Chris Caplice 2010 Question 2: Do you agree with the finding that few consumers consider the impact of their purchase decisions on anyone or anything but themselves and their family? No, we do not agree. A recent study by the UK’s institute of grocery distribution determined that the majority of consumers do not buy fair-trade products (De Pelsmacker et. al. 2005).
The report noted, ‘Self-interest is at the center of food choice for most consumers. ’ Although this report shows that a small percentage of the population does not actively purchase fair-trade products, it does not mean that self-interest is the basis underlying it. Research shows that there is a discrepancy between what people’s opinions are concerning food choice and the actual buying behavior. This inconsistency is coined as the attitude-behavior gap. Surveys have indicated that around 10% of these people are actually willing to pay the actual premium price for fair-trade coffee, which in Belgium was around 27%.
This is in contrast with the actual 1% market share of the product. A large portion of the 10%, which we will call fair-trade lovers, are often women in their forties with higher than average education. Men who were over 50 and less educated are the exact opposite, being barely concerned with fair-trade. Surprisingly, there was another identifiable segment, which we will call Fair-Trade likers’, that covered 40% of the survey saying that they would be inclined to pay ‘some’ premium price for fair-trade, although lower than the proposed 27%.
The problem is that brand name and flavor still play the largest role in consumer buying behavior for coffee. Nonetheless, this amounts to 50% of the people that are willing to pay a ‘certain ‘ premium price for fair-trade coffee. Unfortunately, as we stated before, people are inclined to provide socially responsible answers to ethical matters. These answers almost never represent the actual behavioural attitudes (De Pelsmacker et. Al 2005). Even if ethically tainted surveys are hard to rely on, 50% is a large number to work with.
It seems that if good marketing strategies are put into place that focus on the broadest spread of information concerning the fair-trade concept, a substantial part of that 50% could be tapped. Since consumers still rely heavily on brand and quality, one of the solutions would be to develop a genuine fair-trade brand. Instead of sticking the fair-trade label onto other existing brands, one could create an original fair-trade brand that benefits from an intrinsic premium price advantage.
One of the other solutions concerning flavor would be to make sure that the fair-trade brand and actual brands are on the same adequate level of quality. Ethical awareness is very real among people, and stating that the consumer is only concerned with self-interest is an outdated way of thinking. If this presumable 50% can be enticed into buying fair-trade products like coffee, the 1% market share could easily expand. Although it will probably never increase to 50%, or at least not in the near future, it could still gradually take bigger shares.
The major point is to make sure people are aware of fair-trade coffee and that they are actively presented with the difference. Question 3: What recommendations would you make to help cure the ills of the coffee market? We recommend that the entire coffee market and everyone of its poor farming communities in developing countries should become an integrated market under the Fair Trade Labeling Organization and its various watchdogs and monitoring agencies’ watchful eyes. We recommend that the Fair Trade Labeling organization should ensure that the coffee division of FLO is adequately managed.
We recommend that the current Fair Trade Mark should be further developed to create a Fair Trade label recognized throughout the world with the aid of governmental-, non-governmental- (NGO) and Fair Trade Organizations. We also propose that these organizations improve the reliability of the Fair Trade Mark and also improve the standards under which the Fair Trade Labeling Organization (FLO) grades the different producers in the Fair Trade Scheme to ensure that every producer is adhering to the high standards that the Fair Trade Foundation is committed to.
This will strengthen the brand. If more consumers feel that the FTM is a reliable label to ensure that the entire supply chain involved in bringing this particular product from the raw ingredient to the final consumer, then the FTM and consequently the fair trade label will appeal to more consumers in the future as everyone becomes more concerned about sustainable production.
We also recommend that the Fair Trade Mark (FTM) should diversify its product offerings to include more consumer goods and more services from isolated parts of the world to ensure that these unique products do not exploited and then become unsustainable, but instead flourish and are awarded its true value. We also recommend that the Fair Trade Labeling Organization, should with the assistance of Government Organizations and NGO, set-up a program for effective supply chain management (SCM) to ensure that all the links in the Fair Trade Supply Chain are monitored and communicated to effectively.
Currently, software developers offer monitoring services that are very advanced and this could be utilized. In order to strengthen the brand of the Fair Trade Mark and its subsidiaries, the companies and organizations and consumer groups involved in this effort should communicate the same message and extend the same communication to the public, the media, and all of its local subsidiaries should do the same. The Fair Trade Foundation and all of its allies should present a consistent message and a consistent image alongside its consistent services and the products that it supports and monitors.
In order to do so, the Fair Trade Labeling Organization should align commercial and ethical agendas by examining purchasing practices, build suppliers’ capacity to manage the issues for themselves, engaging with local governments and NGOs and organizations to widen the impact of their activities. Regular audits and training of all of its subsidiaries should also be done and follow-up is essential. Conclusion The underlying challenge is for the Fair Trade Labeling Organization to gain the trust of the general public.
To do this, they must develop credible ethical supply chain management programs that work towards making genuine improvements to the life of workers in their supply chain. (Jamison ; Murdoch, 2010). Ethical awareness is very real and to capitalize on this, buying behaviour needs to be stimulated through intensive marketing joined by the spread of fair trade information and awareness for the general public. References De Pelsmacker, D. , Driesen, L. ; Rayp, G. (2005) Do consumers care about ethics? Willingness to pay for fair-trade coffee.
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