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CRANFIELD UNIVERSITY

CRANFIELD SCHOOL OF MANAGEMENT

STRATEGIC MARKETING GROUP

MSc Dissertation

Academic Year 2005-2006

DEBORA CRISTINA DA SILVA PAIVA

The Fair Trade as a business model to converge social and economicdevelopment.

Supervisor: Professor Simon Knox

September 2006

This thesis is submit ted in part fulf ilment of the requirementsfor the degree of Master of Science



Shoulders Support the World

There comes a time when we no longer say: my God.

A time of absolute purity.

A time when we no longer say: my love.

Because love proved useless.

And eyes don’t cry.

And hands only weave in rough work.

And the heart is dry.

Women knock at the door in vain, don’t open it.

You stay alone, the light goes out,

and in the dark your eyes glow enormous.

You’re convinced, you no longer know suffering.

And you expect nothing from friends.

Old age matters little, what is old age?

Your shoulders support the world

and it weighs no more than a child’s hand.

The wars, famines, and talks in buildings

only prove that life goes on

and not all have freed themselves yet.

Some, finding the spectacle barbarous,

prefer (the delicates) to die.There comes a time when there’s no point in dying.

There comes a time when life is an order.

Merely life, without perplexity.



THE FAIR TRADE AS A BUSINESS MODEL TO CONVERGE

SOCIAL AND ECONOMIC DEVELOPMENT

The heart of the Fair Trade movement is fairer pricing that gives growers in developing

countries a better price for their work and gives longer term stability to producer/buyer

relationships. Consumers are more conscious of ethical issues and the Fair Trade

phenomenon faces a trade-off as it reaches mainstream due to the partnerships withcorporations like Starbucks that breaks one of the Fair Trade principles. On the other

hand, big retailers’ chains show a concern with brand and reputation reflected in the

implementation of ethical sourcing practices that as the Fair Trade look at the working

conditions of suppliers.

Adopting a literature review method and expert interviews, I apply the critical success

factors framework based on the findings of the literature. As a next step the blue ocean

strategy is used for examining the Fair Trade business model. The blue ocean strategy

proposes a different look at the industry to create market space with the following

application of the four-actions framework.

Aiming to understand how the Fair Trade produces social and economic development,

some research gaps within the Fair Trade literature were identified, including

longitudinal studies to measure the impact in the communities receiving the Fair Trade

premium price.



Acknowledgement

The development of this thesis came with a move from Brazil to the UK and a

disruption of my home life. A large number of people have helped me along the way.

First, I want to thank my parents for being supportive and ready to tell me words of

encouragement needed for the hard task of taking a Master’s degree in a language otherthan Portuguese. My brothers and sisters helped me in many different ways and this has

made me realize how important they are in my life.

There are a number of people in Cranfield who have helped in various ways. My

supervisor Simon Knox for his critical appraisal of my work. Mary Betts-Gray and

Emma Turner from Cranfield Library for the support. Dr. Roger Palmer and Penny

Mingay gave me a warm welcome and Margaret Norwich gave me all the help a

foreigner could ask for. Ian Crawford gave the research impetus.

Bekim Gashi was a close friend with his endless patience to read my work and help me

with the language. Without his support this one year abroad would not have been as

sweet. I thank my classmates Rene Affolter, Nathan Sukkar, and Roopalee Dave for

their friendship.

Outside Cranfield, my supervisor in Brazil, Prof. Luciano Junqueira and Fatima Silva,

for the encouragement and exchange of ideas. Cirene Catchpole and Adriana

Albuquerque are women who I admire. I thank the interviewees Dr. Lance Moir and Dr.

Iain Davies who gave their time.

This thesis is dedicated to 183 million Brazilians who do not give up.



Table of Contents

1. INTRODUCTION .............................................................................................. 1

1.1 Introduction .......................................................................................................1

1.2 Review Rationale...............................................................................................2

1.3 Review Objectives.............................................................................................3

2. METHODOLOGY............................................................................................. 4

2.1 Introduction .......................................................................................................4

2.2 The literature review process.............................................................................4

2.2.1 Mapping the field of study................................................................................ 7

2.2.2 Structured search .............................................................................................. 7

2.2.3 Evaluation....................................................................................................... 10

2.2.4 How findings are going to be utilised............................................................. 12

2.2.5 Changes from protocol ................................................................................... 12

2.2.6 The interviews ................................................................................................ 12

3. DESCRIPTIVE FINDINGS ............................................................................ 13

3.1 Introduction .....................................................................................................13

3.2 Papers included in the literature review ..........................................................13

4. THE BUSINESS CASE FOR FAIR TRADE ................................................ 22

4.1 Introduction .....................................................................................................22

4.2 The Fair Trade movement ...............................................................................23

4.3 The Fair Trade principles ................................................................................26

4.4 The Fair Trade story so far ..............................................................................28

4.5 The Fair Trade business model........................................................................30

4.6 The Fair Trade supply chain............................................................................34



4.9 Corporate Social Responsibility and the Fair Trade........................................46

4.10 Starbucks case study........................................................................................49

5. DISCUSSION OF RESULTS.......................................................................... 52

5.1 Introduction .....................................................................................................52

5.2 Main findings...................................................................................................52

5.3 The blue ocean strategy applied to the Fair Trade...........................................53

5.4 Fair Trade critical success factors ...................................................................555.5 Future of the Fair Trade...................................................................................58

6. CONCLUSIONS............................................................................................... 62

6.1 Re-statement of thesis objectives ....................................................................62

6.2 Summary of the findings .................................................................................62

6.3 Contributions of the report ..............................................................................626.4 Research limitations ........................................................................................63

6.5 Suggestions for future research .......................................................................63

REFERENCES ............................................................................................................. 65

APPENDIX 1 - Elements of the Fair Trade discussed in the papers ..............................70

APPENDIX 2 – Fair Trade product and information flows............................................72APPENDIX 3 - Marks & Spencer code of conduct ........................................................73



List of Figures

FIGURE 1- LARGEST NATIONAL MARKETS FOR FAIR TRADE ..............................................3

FIGURE 2 - THE LITERATURE REVIEW PROCESS ...................................................................6

FIGURE 3 - FAIR TRADE ADVERTISING ................................................................................8

FIGURE 4 - THEMATIC AREAS ADDRESSED IN INCLUDED PAPERS .......................................13

FIGURE 5 - THE FAIR TRADE AIMS ....................................................................................27

FIGURE 6 - THE FAIR TRADE COFFEE ADVERTISING ..........................................................28

FIGURE 7 - THE LIFE CYCLE OF THE FAIR TRADE ..............................................................30

FIGURE 8 - THE COFFEE COMMODITY CHAIN .....................................................................34

FIGURE 9 - FAIR TRADE PRODUCERS ’ COMMUNITY ..........................................................39

FIGURE 10 - SPECTRUM OF BUSINESS RESPONSES TO ETHICAL TRADE ...............................42

FIGURE 11 - MARKS & SPENCER ADVERTISING OF FAIR TRADE .......................................45

FIGURE 12 - MAINSTREAMING : CRITIQUE OF FAIR TRADE ................................................46

FIGURE 13 - CAFEDIRECT ADVERTISING ...........................................................................54

FIGURE 14 - THE BLUE OCEAN STRATEGY APPLIED TO FAIR TRADE COFFEE .....................58

FIGURE 15 - THE FOUR -ACTIONS FRAMEWORK .................................................................59

FIGURE 16 - THE FOUR -ACTIONS FRAMEWORK FOR FAIR TRADE COFFEE .........................60



List of Tables

TABLE 1 - LITERATURE R EVIEW OUTPUT ...........................................................................9

TABLE 2 - THE QUALITY MATRIX FOR INCLUDED PAPERS ..................................................11

TABLE 3 - K EY AUTHORS IN THE FAIR TRADE SUBJECT ....................................................14

TABLE 4 - PAPERS INCLUDED IN THE LITERATURE R EVIEW ..............................................15

TABLE 5 - JOURNALS INCLUDED IN THE LITERATURE REVIEW ...........................................21

TABLE 6 - LITERATURE REVIEW SUMMARY ......................................................................22

TABLE 7 - ETHICAL TRADE AND FAIR TRADE ...................................................................43



1. INTRODUCTION

1.1 Introduction

According to the Fairtrade Foundation, 32% of people correctly associated the

FAIRTRADE mark with the phrase “Guarantees a fairer deal for producers” in 2003

(Mintel, 2004). The research was conducted with 962 adults in the UK and it shows that79% of adults allow their concern for one or more ethical issues to affect their

purchasing behaviour, although the market share of ethical foods is usually of a single

figure only.

Academics and business executives have shown an increasing interest in discussing

ethical issues underpinning the economic activities in society. Whilst some authors

argue that ethical considerations do not impact consumers’ purchase decision making

behaviour (Carrigan & Attala., 2001), the rise of the Fair Trade movement as a business

model selling £ 200 million in 2005, an increase of 43% on the year before (The

Guardian, 2006), sparked an interest in doing this research to find the drivers connecting

the phenomena.

Fair Trade’s philosophy is based on a concept of fairness. But what is fairness?

Fairness is, according to the Cambridge Dictionary:

“…the quality of treating people equally or in a way that is right or reasonable”

In research carried out with suppliers of UK supermarkets, Duffy & Hornibrook (2003)

report about fairness from the perspective of distributive justice. This perspective

describes the fairness of the economic price or outcomes actually received. Looking at



Our modern and complex society cannot be understood with a view bending to

Manichaeism, where good and evil will fight forever and a black and white approachwould not lead us far on the research journey. However, to discuss Fair Trade the moral

component is inherent, because it belongs to the very ideology that the Fair Trade is

made of, fairness. According to Taylor (2005) the Fair Trade has stemmed from the

clarity of its purposes and principles, and the direct access it enjoyed with consumers It

can be defined as:

“…an alternative approach to conventional international trade. It is a trading

partnership which aims at sustainable development for excluded and

disadvantaged producers. It seeks to do this by providing better trading

conditions, by awareness raising and by campaigning” (Traidcraft , 2006).

Furthermore, the literature findings suggest that the diffusion of the Fair Trade values

includes heightened awareness of Third World issues as a result of media coverage, an

increased number of the Fair Trade products and information available to help ethical

consumers to make informed decisions (Strong 1996).

1.2 Review Rationale

The aim of this dissertation is to investigate the dynamics of the Fair Trade business

model and consequently the interaction between the main actors to understand how Fair

Trade delivers social and economic development.

The Fair Trade is a movement with strong ties in Western Europe and the USA.

Research shows that the Fair Trade is the most important issue of ethical concern in

consumer behaviour in the UK (Shaw & Clarke, 1999). The discussion of the Fair Trade



The researcher considered doing a literature review on Fair Trade as a valid point to

allow the development of an historical retrospective to understand its driving forces, andto suggest managerial approaches to the challenges the movement faces today. Among

many of these challenges are: the launch of own label Fair Trade products by giants like

Nestle as a market opportunity, and the incorporation of Fair Trade products in some

retailers’ portfolios as a tool of Corporate Social Responsibility strategy.

1.3 Review Objectives

The literature review has the purpose of analysing the research findings that are shared

in the academic arena. The dissemination of these findings helps us to better understand

our world (Hart, 1998). The literature review identified in which context the Fair Trade

issues were being discussed, and the key aspects of these discussions. The overlap of the

Fair Trade and ethical souring and corporate social responsibility (CSR) will also bediscussed. The main focus of this research is the UK, because it is the main market, with

the Fair Trade sales rising by 50% every year (Mintel, 2006) and £63 million of sales in

2002 (Figure1):

Sales in Million Pound s, 2002

5.5 6 6.7

18.8

26.8

32.4

49.4 50.4

58.5

63

d a ly r k ce d s a n n y nd SA UK



2. METHODOLOGY

2.1 Introduction

This chapter will detail the literature review process, its justification and how the search

in the databases was conducted. In the sequence, I report the criteria to include papers,

the way results are going to be presented and some changes the researcher has done tothe literature review protocol. Finally, I explain the process of the interviews.

The overarching question of this dissertation is “How does the Fair Trade converge

social and economic development?” I approach the question in order to understand

the Fair Trade phenomena and to evaluate its sustainability on a long term basis, and

how the small producers in developing countries can benefit from the scheme.

Following the literature review, I conducted interviews to get expert opinions and in a

further step I applied the findings in the literature into a conceptual framework of

competitive strategy, the blue ocean strategy developed by Kim & Mauborgne (2005).

2.2 The literature review process

Since the ethical consumption and the Fair Trade subject have a fair amount of market

research and primary data is available, it seemed there was no need to conduct surveys

to understand the Fair Trade dynamics.

The search in the literature was based on the search string “Fair Trade”. By “search

string” I mean the word or compound words used to search in databases. The process of



Due to the huge amount of material produced in the primary search, the results were

narrowed down by restricting the review to scholarly and academic publications.Although the basis for this project is the review in literature, other papers, books and

market research reports were used due to their valid contribution to the subject. They

are related to areas of knowledge such as competitive strategy, strategic marketing and

sustainable development. This project was conducted in two stages: a literature review

and interviews with experts.

The following figure shows the literature review process adopted by Cranfield

University, School of Management for its Masters programmes:



“…the need for a new study is not as great as the need for the assimilation ofalready existing studies”.

Although many authors discuss the limitations of a systematic review in social sciences,

others see that problems such as bias are an accepted part of knowledge and we should

not try to eradicate it (Denyer & Tranfield 2006).

2.2.1 Mapping the field of study

Ethical consumption and ethical sourcing practices are concepts that the literature shows

as intertwined, and the researcher considers both relevant to this work. Regarding the

ethical consumer, the development of ethical consumption specifically in the UK and inother countries is reported. The consumer behaviour, probably the most extensive

theme, is not going to be examined in depth, because retailers in this case have more

power to create the shift in the agro-food system, and they are the main players in the

grocery retail supply chain. Hence, the search string “supply chain” was used, as it is

shown in Table 1. However, to narrow down the scope, I adopted “ethical sourcing” as a

sub-theme to compound the search strings. Mainly because both the Fair Trade and

ethical trade are underpinned by ethical concerns from the economic point of view.

The aspect of Corporate Social Responsibility (CSR) was addressed as a way to

understand the development of ethical sourcing codes by retailers and the adoption of

own label Fair Trade products.

2.2.2 Structured search



of these items resulted in the reduction from 308 to 45 papers (Table 1) actually related

to the interest of this research. Since this dissertation has been done within a limitedtime frame, only published papers in scholarly and academic journals were included in

the literature review and some papers were excluded because although related to the

scope of this research they did not bring new information or an innovative approach to

the subject.

The first screening was based on title and abstract. The string “Fair Trade” in

Proquest/ABI covering all dates produced 3,721 entries, and the selection of the criteria

academic/scholarly resulted in 287 works. From these, 24 papers were considered

related to the scope of this dissertation.

The search in EBSCO brought 1,004 papers with 230 academic and 31 papers related tothe scope. The search in Emerald brought 137 papers with 72 academic and 14 papers

related to the scope. The final 24 papers appeared in more than one database, and I

conducted a cross-check to ensure that a substantial amount of academic papers about

“Fair Trade” were screened.



9

Database name Search term In Time Frame Number of entries Number relevant

“Fair Trade” All

Schol. Journ.

All dates

All dates

3721

287

45

ethical consum* OR consumer ethic* All

Schol. Journ.

All dates

All dates

292

77

ABI Trade &

Industry

(Proquest) ethical sourc* OR ethic* supply chain All

Schol. Journ.

All dates

All dates

273

42


Academic. Journ.

All dates

All dates

1004

230

31


Academic. Journ.

All dates

All dates

126

92

EBSCO

Business Source

Premier

ethical sourc* OR ethic* supply chain All

Research Paper

All dates

All dates

26

06


Research Paper

All dates

All dates

137

72

14


Research Paper

All dates

All dates

298

140

Emerald

ethical sourc* OR ethic* supply chain All

Research Paper

All dates

All dates

311

72

Table 1 – Literature Review Output



2.2.3 Evaluation

The selection of papers followed the main criteria of relevance to the investigation and

newness of data. A quality matrix (Table 2) was used to help the researcher to assess the

papers and to decide on the ones to be included. Undoubtedly, the assessment of the

papers and the consequent decision about their inclusion or exclusion is a process open

to my personal bias. Many factors influenced my decision, such as my cultural

background, the current studies I am taking in Strategic Marketing and other elements

that built on each individual’s intellectual fabric.



11

Elements LevelPoints/Quality 0 – Absence 1-Low 2-Medium 3-High Not applicable

Contribution The article does not provide enoughinformation to assessthis criterion.

The paper adds little tothe body of knowledgein this area.

Contribution toknowledge is trivia inimportance andsignificance.

Significant addition tocurrent knowledge; fillan important gap.

This element is notapplicable to this paper.

Theory The article does not provide enoughinformation to assessthis criterion.

Literature review isinadequate; Failure tomotivate study with

practical implications.

Theoretical base isacceptable; Having

practical rationales forstudy in some extent.

Excellent review of prior literature; Strongtheoretical basis.


Methodology The article does not provide enoughinformation to assessthis criterion.

The idea of study is poorly executed; Failureto justify proxies foreconomic variables.

Justified researchdesign; Acceptable

proxies for economicvariables; The idea ofstudy is not fullyexecuted.

Research designadequately examines thetheoretical argument;Proxies are adequatelydefined.


Data Analysis The article does not provide enoughinformation to assessthis criterion.

Data sampleinsufficiency; Weakconnection betweenstatistical results andeconomic story.

Appropriate datasample; Adequatestatistics but inadequateexplanation.

Adequate data sample;Statistical resultssupport theoreticalarguments.


Newness The article does not provide enoughinformation to assessthis criterion.

The article was writtenmore than 5 years ago,and only some findingscan still be applied.

The article was writtenmore than 2 years ago.

The article was writtenin the last 12 months.


Table 2- The quality matrix for included papersSource: Adapted from Morgan, 2006



2.2.4 How findings are going to be utilised

In order to contextualise the research question and to establish the body of knowledge

that will be the scope of the literature review, the researcher presents the findings in

three ways. Firstly, the descriptive format to provide an overview of the lenses used to

address the subject. Secondly, in the thematic format to build the business case. And in

parallel to these two methodologies, the findings are also presented throughout the

dissertation to build a logical line of reasoning.

2.2.5 Changes from protocol

The Cranfield protocol for the literature review is primarily aimed at PhD and Masters

by Research students. In the case of Masters students, the findings in the initial phase ofthis project were presented as a First Review about the research project as a whole, to a

panel and not about the literature review itself. Hence, a data extraction tool as

suggested in the School’s protocol was not developed.

2.2.6 The interviews

Interviewing is one of the most used methods of collecting data in qualitative research,

with the aim of answering the research question (Byrne, 2001). For my dissertation,

however, the interviews had the purpose of accessing the perspective of experts in Fair

Trade and Corporate Social Responsibility, in contrast to the findings from the literature

review. Informal interviews were conducted with the Fair Trade expert, Dr. Iain Davies,

who holds a PhD in “The Management and Implementation of Strategy in Fair TradeCompanies” at Nottingham University . Dr. Lance Moir who holds a PhD in “Why

does business support the arts? Philanthropy, marketing or legitimation” from Cranfield

University.



3. DESCRIPTIVE FINDINGS

3.1 Introduction

The guiding concept for this literature review is the investigation of Fair Trade issues to

understand how the Fair Trade converges social and economic development.

This part of the dissertation discusses the characteristics of the studies identified in the

literature review. The papers included in this review are addressing the following

thematic areas:

Figure 4 –Thematic areas addressed in included papers

The full description of authors included in the review and the thematic areas they are

MarketingConsumer

Behaviour

SustainableDevelopment

Supply

Chain

Corporate

Governance

Broad

Industry

Fair Trade



Although academia has been discussing the Fair Trade since 1997, the amount of papers

published is not huge. The authors I consider contribute to the subject are:

Key authors Approach Affiliation

Blowfield, M. Supply chain Boston College, USA

Moore, G. Broad industry New Castle Business School, UK

Nicholls, A. Strategic marketing University of Surrey, UK

De Pelsmacker, P. Consumer behaviour University of Antwerp, Belgium

Raynolds, L. Supply chain Colorado State University, USA

Rice, R. Supply chain Natural Resources Defence

Council, Washington, USA

Strong, C. Consumer behaviour University of Wales, Cardiff, UKTaylor, P. Sustainable

development

Colorado State University, USA

Table 3 – Key authors in the Fair Trade subject

The following table shows the papers included in the review using the criteriauncovered in the quality matrix. As mentioned before, the intent is to give an overview

of the findings that will be shown throughout the dissertation. In order to better

visualize the papers, they are shown in three columns with this criteria in Table 4:

a) author’s surname sorted by alphabetical order,

b) kind of data used in the study,

c) summary of findings.

Table 5 summarises the journals where the paper were published to provide a



15

Table 4 - Papers included in the Literature Review

Author Data used in the study Summary of findings

Argenti, 2004 Case study. This article presents collaboration as a growing

and important alternative to confrontation in

business-NGO relations.

Auroi, 2003 Conceptual approach. Peasant and consumer associations should also be

considered as active contributors to the

implementation of fair-trade principles within

world trade.

Bacon, 2005 A research team surveyed 228

farmers to measure the impact of

sales on organic and Fair Trade

markets.

The results suggest that participation in organic

and the Fair Trade networks reduces farmers'

livelihood vulnerability.

Blowfield, 2003 Conceptual approach. It shows that many of the primary concerns among

growers are not included in ethical trade standards.



16


Davies & Crane, 2003 Case study in a Fair Trade company

involving work shadowing, semi-

structured interviewing.

The Fair Trade mission of the firm is experienced

as an over-riding ethical claim, which is often

invoked to justify potentially ethically questionable

decisions.

De Pelsmacker, et al., 2006 A survey of 858 Belgians drawn

from the general public and visitors

to Oxfam World Shops.

Highly educated respondents, older people and

people with a high income are more prepared to

pay the Fair Trade premium price.

De Pelsmacker, et al.,

2005

Survey of 808 Belgian respondents. Fair-trade lovers (11%) were more idealistic, aged

between 31 and 44 years and less "conventional."

De Pelsmacker, et al.,

2005

Buying behavior is studied by

means of a web-based survey in a

sample of 750 Belgian consumers,

using conjoint analysis.

The Fair Trade labeled coffee is the most preferred

over eco- and bio-labels.



17


Doherty & Tranchell, 2005 Case study. The paper concludes that a Fairtrade company was

successful in meeting its objectives without cocoa

farmer ownership being at the centre of the brand.

Hira &Ferrie, 2006 Conceptual approach. It addresses major challenges such as the extent of

the potential contribution of the Fair Trade to

development under the current system.

Jones, et al., 2003 Case study. It reviews the extent to which the major foodretailers have incorporated Fair Trade products.

LeClair, 2003 Survey conducted with 30

Alternative Trade Organizations

worldwide.

The author warns that there is a precarious future

for the artisans relying on The Fair Trade system.

LeClair, 2002 Case study. Fair Trade prolongs the dependence of developing

countries on products with poor future prospects.



19


Nicholls, 2002 Conceptual approach. An ethical strategy matrix is developed, outlining

the strategic options open to retailers for

addressing the increase in ethical consumerism.

Raynolds et al., 2004 A comparative analysis of the

experiences of seven coffee

producer co-operatives in Latin

America.

The capacity building nature of the Fair Trade will

prove the most important in fueling sustainable

development in the long run.

Rice, 2001 Conceptual approach. The philosophical underpinnings of both certified

organic and fair-trade coffee run counter to the

historical concerns of coffee production and trade.

Smith & Barrientos, 2005 Conceptual approach. The paper concludes that convergence of Fair

Trade and ethical trade may occur in some UKsupermarket chains.



20


Strong, 1996 Reports on a survey to investigate the

factors contributing to the development of

ethical consumerism in the UK.

It explores features characterizing the

manifestation of ethical consumerism.

Strong, 1997 Conceptual approach. It is proposed that there are several

problems which have hindered the

translation of the Fair Trade principles into

consumer purchase behavior.

Taylor, 2005 Conceptual approach. A framework is proposed for comparative

assessment, focusing on distribution of

benefits, and how internal governance

manages diverse stakeholder interests.



Journal CountryBritish Food Journal UKCalifornia Management Review USADevelopment CanadaEuropean Journal of Marketing UKGreener Management International UKInternational Journal of Non-profit and Voluntary Sector UKInternational Marketing Review UKJournal of Agricultural and Environmental Ethics NetherlandsJournal of Business Ethics NetherlandsJournal of International Development UKMarketing Intelligence & Planning UKSustainable Development UKThe Journal of Consumers Affairs Not identifiedThe Service Industries Journal UKWorld Development UK and Canada

Table 5 - Journals included in the literature review

The following chapter will present the issues discussed in the literature to set the Fair

Trade industry landscape. It is structured to show the historical perspective and the

dynamics of this economic model and its supply chain. Ethical trading and corporate

social responsibility are also discussed through the case studies of Marks & Spencer and

Starbucks.



4. THE BUSINESS CASE FOR FAIR TRADE

4.1 Introduction

This chapter presents the findings in the literature in the thematic format. They are

summarised in the following table:

Section of Literature Review Content

The Fair Trade movement (4.2) The inequality of global trade with a

macroeconomic perspective.

The Fair Trade principles (4.3) Fair Trade objectives and principles.

The Fair Trade story so far (4.4)

Grassroots, certification and

mainstreaming.

The Fair Trade business model (4.5)

Industry structure, Fair Trade

organisations.

The Fair Trade supply chain (4.6)

Ethical consumers, UK retailers and

producer’s communities.

Ethical trading (4.7)

Codes of conduct and retailers, ethical

sourcing and overlap with Fair Trade.

Marks & Spencer case study (4.8) Drivers towards ethical sourcing.

Corporate social responsibility (CSR)

and the Fair Trade (4.9)

Drivers of CSR.



4.2 The Fair Trade movement

In 2003, during the World Trade Organisation talks in Cancun, 21 developing nations

refused to negotiate with the USA and the European Union until they agreed to open up

their internal market to foreign trade (Mintel, 2004). This fact illustrates the importance

of the macroeconomic context in order to achieve a more balanced distribution of

wealth among countries.

The Fair Trade objective is:

“to maximise the return to the supplier rather than the margin of the buyer,

within an agreed developmental structure” (Nicholls & Opal, 2005:7)

In which aspects the market fails so that there is a need for the Fair Trade business

model? The Fair Trade is the outcome of a market-driven need attempting to overcome

the structural inequities in the international trading system (Nicholls & Opal, 2005).

Some authors address the Fair Trade with a macroeconomic approach (Auroi, 2003,

Blowfield, 2003 & Nicholls &Opal, 2005) considering the reach of Fair Trade benefits

in terms of social development.

According to Nicholls (2005) the historical origins of the Fair Trade movement are in

the harmful consequences of the development of a distorted global market for trade.

Together with the increase in the level of trade over the last thirty years, the global

unfairness has also grown. The researcher concludes that the benefits of increased free

trade have not been evenly spread among countries and this failure is macroeconomic.

Other important aspects associated with the appearance of the Fair Trade model is the



• lack of market access,

• lack of access to financial markets,

• lack of access to credit,

• inability to switch to other sources of income generation,

• weak legal systems and enforcement of laws.

Another important aspect is that exports of commodities from developing countries are

under-valued, and face extreme conditions on the supply side, such as climatic

variations and excess product peak production (Auroi 2003 & LeClair 2003).

New globalisation measures have reinforced tendencies of trade monopoly through

concentration process. Hence, a small number of companies regulate trade buying in the

commodity markets of Chicago, New York and London. In the case of coffee, the

decrease in prices over the long run was a result of overproduction in many countries

(Auroi, 2003). On the other hand, most value added is produced on the manufacturing

side of the chain in the Western countries and as a result, the growers in the South are

left in a less favourable position to market their commodities at a profit. This is the gap

the Fair Trade tries to address, because the price received by producers in developing

nations should at least provide for a subsistence standard of living and to cover expenses

(LeClair, 2003).

Some critics point out that instead of trade the most effective way of helping these

disadvantaged farmers would be through targeted developmental aid. The logic behind

this statement is that £1 given to a development charity generates more immediate

income for relieving poverty than £1 spent on a the Fair Trade product. It is a

controversial position, considering that although huge amounts of money are invested in

poor countries through these development agencies, in some economies like Belize the



Trade’s principles is to provoke the discussion of global trade and according to Kofi

Annan, Secretary-General of the United Nations, this discussion needs to include the

industrialised countries abolishing protectionist policies that actively discourage poor

countries from developing their own industries instead of discussing the Fair Trade

(Annan, 2001).

4.3 The Fair Trade principles

There is no standard definition for Fair Trade and the different key players involved

present some concepts. Moore (2004:73) quotes:

“The Fair Trade is a trading partnership, based on dialogue, transparency and

respect, which seeks greater equity in international trade. It contributes to

sustainable development by offering better trading conditions to and securing the

rights of, marginalized producers and workers – especially in the South”.

According to Traidcraft (2006) the Fair Trade principles can be translated into the

following main actions:

• focusing on trading with poor and marginalised producer groups, helping them

develop skills and sustainable livelihoods through the trading relationship,

• paying fair prices that cover the full cost of production and enable a living wage

and other fair rewards to be earned by producers,

• providing credit when needed to allow orders to be fulfilled and pays premiums

to be used to provide further benefits to producer communities,

• encouraging the fair treatment of all workers, ensuring good conditions in the

workplace and throughout the supply chain,



activities” (Jones et al., 2003). It can be said that the Fair Trade as an alternative trade

model have created a niche in the trading system to pursue its goals (LeClair, 2002).

Nicholls & Opal (2005:7) define the Fair Trade as:

“…new approach to the buyer-supplier transaction which aims at equality of

exchange within a partnership approach, underpinned by a developmental, rather

than confrontational, agenda”

They mention key practices for the Fair Trade in operational terms, such as:

1) agreed minimum prices, usually set ahead of market minimums,

2) focus on development and technical assistance,

3) direct purchasing from producers,

4) transparent and long-term trading partnerships,

5) co-operative, not competitive, dealings,

6) provision of credit when requested,

7) provision of market information to producers,

8) farmers and workers are organized democratically,9) a sustainable production is practised.

alleviate

extreme poverty

enhance social

capital of

small

producers

Figure 5 The Fair Trade aims



Figure 6 – The Fair Trade coffee advertising

Source: UNCTAD, Sao Paulo, Brasil, 2004

One of the Fair Trade principles says producer groups have to handle environmental

issues properly, but there are no established timelines or tangible targets (Rice 2001),

which makes one think of how the environmental aspect of the Fair Trade is being

measured. If consumers are told that the Fair Trade products are more environmentally

friendly than mainstream products, it is a claim that adds value to the product but needs

a deeper scrutiny.

4.4 The Fair Trade story so far

The Fair Trade origins can be traced back to 1860, when Max Havellar denounced the

injustices of the coffee trade between Indonesia and the Netherlands. Today there are 17

fair-trade certification organisations, 800,000 producers in developing countries, 1,300 products certified by the Fair Trade Labelling Organization International (FLO) and 45

countries involved, that generates £ 1/2 billion worldwide, meaning 0.01% of the global

trade (Appropriate Technology, 2004).



“The interesting thing about Fair Trade it is how physically long it has been

around. Not in the forms it is now, like the Fairtrade Foundation, the FLO they

are more recent events. But Fair Trade with the same ideology, the same names,

it has taken a long time to grow it now it hit critical mass it has a long pedigree.”

(Interview with Iain Davies, 2006)

Together with the shape it has now, the Fair Trade has a peculiar element. According toMoore (2004) the element of tension in the Fair Trade is that it works inside and outside

the market, in and against it. The author argues that although the concept of justice

underlies many of the principles on which Fair Trade is established , paying a higher

price not necessarily makes it fair.

In contrast to the statement that the Fair Trade started in 1860, Rice (2001) argues that

the origins of the Fair Trade can be traced as far back as to the 1960s, with its first

appeal being charity-led by a young Catholic group in the Netherlands. However,

Nicholls (2005) shows that the origins can be traced as far back as the post-Second

World War, both in Europe and in the USA (Fig. 7).



In the USA the

Mennomite

Central

Committee

markets

embroidery from

Puerto Rico

The Fair Trade

certification

marks

Retail

businesses

promoting the

Fair Trade

Traditional

players adopting

Fair Trade

products

(Starbucks,

Sainsbury’s, Sara

Lee,)

Charities in

Western Europe

start importing

handicrafts from

producers in

Eastern Europe

ATOs with a

business

mindset

addressing

social problems

ATOs launched

Cafedirect

and Divine

Chocolate

Retailers

launching own-

label Fair Trade

products (Tesco,

Marks & Spencer)

pos-II WW 1980s 1990s 2000

Figure 7- The life cycle of the Fair Trade

Source: Adapted from Nicholls & Opal, 2005 and websites from Traidcraft, Gepa, Divine Chocolate

4.5 The Fair Trade business model

The concept of business model used in this dissertation is:

Gras sroots Strategic groups Mainstreaming



From the beginning of the first Fair Trade activities in the post-Second World War

period until nowadays, many important aspects helped to shape the form the movement

has now in the context of an ethical foods market which in the UK was valued at £1.75

billion in 2003 (Mintel, 2004).

The majority of the Fair Trade products are in the food sector: coffee, bananas, cocoa,

tea, rice, honey, sugar, fruit juices and fresh fruits (Raynolds et al., 2004) and according

to Nicholls & Opal (2005) the key Fair Trade organisations are:

• FLO – Fairtrade Labelling Organization International: is the global umbrella

organization for the 19 The Fair Trade certification initiatives. It inspects

producer groups to certify them for fulfilment with Fair Trade standards,

• IFAT – The International Fair Trade Association: it is a global trade group for

Fair Trade producers and trades of both FLO-certified products and non-certified

products. It works to develop the market to the Fair Trade, to build trust and to

articulate for the Fair Trade,

• EFTA - The European Fair Trade Association – it is an advocacy and research

body. It is a network of eleven Fair Trade organizations in nine European

countries. It works to make the Fair Trade importing more efficient and

effective, and to promote the Fair Trade to commercial and political decision-

makers,

• NEWS - The Network of European World Shops: it aims to promote the Fair

Trade by stimulating, supporting and linking world shops in Europe that retailthe Fair Trade products, representing about 2,500 World Shops in Europe,

• The Fair Trade Federation – it is a US-based trade association of the Fair

Trade wholesalers retailers and producers



The Fair Trade movement faces governance problems, such as the “pyramid decision-

making structure” of the main organisation FLO. Research shows that this structure

does not allow a good communication flow with the base, and that there are concerns

that the organisation would be subjugated by Northern interests (Taylor, 2005):

“The Fair Trade label organisation currently is not in the standard it needed to be

for the benefit of Fair Trade… This lobbying instance disappeared. There were

lots of people offended when the Fair Trade got into supermarkets. It lost the

campaigning instinct…” (Interview with Iain Davies, 2006)

Global brands such as Nestlé, Kraft and Sara Lee have moved into the ethical coffee

marketing with their branded products, producing heavy criticism as their movement

can be seen as an attempt to cash in on a growing market other than a more socially

responsible approach to the business (The Observer, 2006). The introduction of

powerful new corporate actors produces two important facts within the Fair Trade

movement. First, a dramatic growth and secondly, a greater vulnerability to the Fair

Trade if these big players decide to withdraw (Taylor, 2005).

As the Fair Trade proposes a more ethical approach to the global trade, Davies & Crane

(2003) researched about the ethical component in the governance of a Fair Trade

organisation. They show that ethical issues do not have a permanent innate moral

strength for each individual. The researchers identified the developing of a “moral

curtain” which divided certainty from uncertainty in ethical decision making within this

Fair Trade organisation.

Adding to the controversy in the Fair Trade corporate governance, there is the issue

concerning the original targets of the Fair Trade critique, the powerful global



mainstream the claim to include the most disadvantaged among the marginalized groups

is also legitimate.

Doherty & Tranchell (2005) studied a Fair Trade organisation and they conclude that

barriers southern producers face in marketing their goods such as capital, expertise and

market understanding are overcome by the governance structure of the organisation. In

the case study they present, Body Shop had the ownership structure of the Fair Trade

chocolate company what helped to solve the problem of distribution. A product andinformation flow for a Fair Trade chocolate is depicted in Appendix 2.

Another important operational aspect is the certification process. Certification is a:

“procedure by which a third party provides written assurance that a product,

process or service conforms to specified standards, on the basis of an audit

conducted to agreed procedures” (Taylor, 2005:132)

Hira & Ferrie (2006) argue that one important challenge the Fair Trade movement has is

how to certify itself. Many Fair Trade vendors adhere to the basic standards but they are

not certified and the institutions charged with the certification process cannot cope withthe demand. The solidification of the certification process would lead to an international

public standard that would compel public agencies to assume responsibility of the

process making it more efficient.

In this respect, the French government is setting a standard, as it was proactive to

regulate the proliferation of ethical products to avoid the consumer being misled and to

reinforce the trust in the Fair Trade label. The aim is to constrain labels called ethical,

but that have no commitment to sustainable development (Datamonitor, 2005).

C rrentl there are Fair Trade prod cers ith FLO accreditation and those itho t



4.6 The Fair Trade supply chain

The figure 8 shows the two dominant models and the Fair Trade model.

Figure 8 - The coffee commodity chain

Source: Adapted from Taylor, 2005

4.6.1 Ethical consumers

Fair Trade

Localmiddlemen

Large

landowners

Plantationworkers

Exporters

Multiple brokers

Importers

Roaster -distributors

Processors

Retailers

Consumers

Co-o peratives

Small producers

Small producers

World shops,

Co-Op, Oxfam,

Big retailers

Ethicalconsumers



USA has only 1% of market share. The researcher argues that ethical consumer

behaviour can be influenced by different aspects, such as dogmatism, conservatism and

alienation. How much marketing can act to influence these aspects? It is a matter of

better understanding how each informational component is effective in the talk with

these consumers.

The ethical component is inherent to the discussion of the Fair Trade scheme.

According to Mintel (2004) the Fair Trade products are labelled in the category “ethical

food” which originates the discussion of the ethical consumption theme in this

dissertation. The ethical food concept considers three attributes:

a) animal welfare,

b) environment and sustainability and

c) the Fair Trade.

The authors supporting the existence of ethical consumers classify them as having the

same concerns as the green consumers, but with a greater focus on people, while the

green consumer is worried about the environment. Strong (1997) emphasises that ethical

consumers are concerned about goods produced in the Third World by people receiving

a fair wage and working in good conditions, and who benefit from this activity. On the

other hand, De Pelsmacker et al., (2005) define ethical consumption with a broader

perspective, including the concerns with issues such as animal well-being and

environment. In contrast to Strong’s position, Doane (2005) argues that consumers are

passive and do not place ethics as a priority when they go shopping, as other factorssuch as price and taste and are at the top of their list of concerns.

Market research shows that ethical consumers are concerned primarily with



information now, which leads to an increase in claims regarding products in general.

However, it is not realistic to expect consumers alone to drive the change towards a

more socially responsible approach to business, and to the increase of the market share

of ethical products.

“The ethical concern issue actually I don’t think it matters in the end. If you can

pay a premium for something you really got two choices: charity or selling a

product. If you want me to give money to help poor farmers make out the point.If you ask me to buy a premium price product why should we lose all those other

good characteristics that go with buying a premium product: quality,

presentation, all the others basics of marketing? (Interview with Lance Moir,

2006)

Regarding fair-trade buying behaviour, personal values such as altruism, peace, and

equality values play an important role (De Pelsmacker et al., 2005). This research has a

bias due to the research sample being university students and staff, meaning over-

representation of segments in the sample. However, it is interesting to see which aspects

are important in the fair-trade buying behaviour for coffee in Belgium. One of thefindings is that the brand attribute has the highest relative importance for the total

sample, and the fair-trade label and the flavour were considered in second place by

consumers. As coffee is a low-involvement good, any attribute is of low importance,

although the involvement with specialty coffee is high.

Looking at consumers, there seems to be a gap between behaviour and attitude towards

products with an ethical dimension. In a survey of 858 Belgian consumers, it was found

that only 10% of the sample wanted to pay the 27% price premium for the fair-trade

coffee and e can see price as an obstacle to the Fair Trade gro th The Belgian



The strategy canvas is going to analyse the ethical component as a critical success factor

to the Fair Trade industry.

4.6.2 UK retailers

European Union food products represented around 60% of retail turnover of which

approximately 50% was from coffee sales in 1999 (Moore, 2004).

The UK retail sector has become increasingly dominated by a relatively small number

of large players (Jones et al., 2003), and they realised that major savings can be made by

dealing with fewer suppliers. Grocery retailing in the UK has shown such an economic

impact that the government set an inquiry to investigate allegations of price fixing and

abuse of market power (Pal & Byrom, 2005).

The retailer’s response to the Fair Trade market is underdeveloped, and this market is

being more properly targeted recently (Nicholls, 2002). According to the Fairtrade

Foundation, most supermarkets are interested in developing the Fair Trade as a category

and the discussions are on methods of achieving this. Together with adopting the Fair

Trade products, there is an interest in developing own-label Fair Trade lines. The FairTrade products have the challenge of getting more space on supermarket shelves and

providing consumers with the necessary information about the concept. Jones et al.

(2003) argue that the promotion of the Fair Trade products in conventional retailer’s

stores is not adequate, and that the staff sometimes cannot provide appropriate

information. Since promotion is a component of the marketing mix that influences the

purchase decision (McDonald & Christopher, 2003), it is an issue that needs to be

addressed.



Analysing the distribution component, big retailer chains feel constrained to committing

to a Fair Trade product on the shelf and not having a guarantee of the supply on a long-

term basis, considering that Fair Trade producers are marginal farmers working in

remote locations (Jones et al., 2003). This concern coming from retailers can be added

to major concerns regarding the producers, such as management and training in the

cooperatives of the small growers. Rice (2001) states that the financial security and the

enterprise longevity rely upon the development of professional managerial staff. This

factor would impact directly on the operational effectiveness of the cooperatives.

The Competition Commission, a UK independent public body which conducts in-depth

inquiries into major regulated industries, found out that the nature of trading

relationships and retail buyer behavior varies considerably between retailers. However,

research shows that in some cases, retailers use their purchasing power to drive down

supplier’s prices to uneconomic levels. Suppliers face threats of de-listing, and

consequently by being squeezed by retailers, they squeeze the primary producers at the

end of the chain (Duffy & Hornibrook, 2003).

Supporters of Fair Trade going to big supermarkets claim the benefits of greater sales

and economies of scale. However, Low & Davenport (2005) are dissenting voices

warning about the risks inherent to crossing the line between more income to producers

to dependency on the mainstream market. They conclude that isolation from retailers

brings the risks of being irrelevant, and consequently is not going to deliver the extent

of change necessary to support producers appropriately.

There is some concerns that big grocery retailers are probably adopting the Fair Trade

as a market opportunity, and not necessarily as an action aimed at long-term change in



4.6.3 The Fair Trade producer’s communities

Although reliable impact metrics in social accounting are still under development(Nicholls & Opal, 2005), there are some figures to support the statement that the Fair

Trade movement is benefiting small-scale producers. According to TransFair USA, in

five years of activity in the USA, the Fair Trade has returned to coffee farmers over

£16.8 million above that which they would have received in the non-fair trade market

(Nicholls & Opal, 2005).

Figure 9 – Fair Trade producers’ community

Source: Marks & Spencer, 2006

One important aspect is how to measure the benefits from the Fair Trade business model

to producers, and which benefits are more important. Research on measuring impact

show that case studies are the preferred methodology rather than comparativeassessments that could show how a Fair Trade community is impacted against a non-

Fair Trade community. As the Fair Trade principle is the empowerment of small scale

producers, the social outcome of the Fair Trade is very important because is the main



external stakeholders. As reputation is a valuable corporate asset the ethical sourcing

comes with the statutes of a competitive strategy rather than with a flavour of altruism.

.

“Traditional” fair trade “Traditional” ethical trade

Classic features

• guarantee of a “fair” pricefor producers,

• long term relationships andtrust,

•

premium for socialdevelopment,• campaigns against

conventional trade rulesand practices.

• codes of labour practiceto ensure decentconditions for workersin global value chains,

•

buyer monitoring ofsupplier compliance.

Parties involved

• small scale producers indeveloping countries,

• alternative tradingorganizations and worldshops.

• medium and large scale producers,

• retailers, brands andtheir agents.

Value chain governance • relational • modular (buyer driven)Quality coordination • civic (and domestic) • industrial (and market)

Table 7 – Ethical trade and Fair Trade

Source: Smith & Barrientos, 2005

Scrutiny of companies’ activities according to the profile of the brand-led corporations

resulted in actions to avoid risks, as did Marks & Spencer (M&S) with its Global

Sourcing Principles. However, if M&S can track action in its supply chain, the same is

not that simple for confectionery brands companies for example. They face the triplechallenges of long supply chains, diffuse sources and powerful intermediaries (Roberts

2003).



- payment of living wages,

- prohibition of discrimination,

- regular employment relationships,

- prohibition of harsh or inhumane treatment.

Marks & Spencer is one of the members of the ETI and through the case study

discussed in the next section the researcher aims to provide a better understanding of

how the momentum took place to produce the existing code of conduct.

4.8 Marks & Spencer case study

Marks & Spencer (M&S) is a retailer of clothing, footwear, gifts, home furnishings, and

foods in UK. Its products carry the M&S own label. Marks & Spencer operates 450

stores in the UK and provides products to franchise operators in more than 30 other

countries. M&S has approximately 70,000 employees and revenues of £ 8.1 billion. The

company has a differentiated relationship with suppliers due to its position as the largest

solely “own brand” retailer in the UK (Marks & Spencer, 2006).

The development of M&S code of conduct for ethical trading is based on its concernwith reputation and the commitment to the corporate social responsibility strategy of the

organisation. The company was recognised as the top company in UK for responsible

business receiving the Business in the Community’s Awards for Excellence 2006.

According to Johnson (2004) M&S had to build long-term relationships with its

suppliers to keep up with the dynamics inherent to the segment. M&S used to buy most

of its materials and products within the UK. But as its competitors developed offshore

production capabilities due to the high UK labour costs, M&S had no choice and did the



Figure 11 – Marks & Spencer advertising of Fair Trade

Source: Marks & Spencer, 2006

M&S developed its own code of conduct for ethical sourcing in 1999 called Global

Sourcing Principles (GSP). An episode involving allegation of child labour in Morocco

made the overseas sourcing practices linked to low standards of human rights in the

mind of many consumers and that fact made M&S act immediately to avoid damage to

the company’s reputation and consequently to the brand (Johnson 2004):

“…the whole point about it wasn’t M&S products being produced by child labour,

but their supplier was using child labour for other customers but not for M&S. How

far does that go? M&S dealt with it appropriately, they were really concerned that it

might be true. It is all to do with the longevity of the issue and the quality of theorganisational response” (Interview with Lance Moir, 2006).

M&S’ Global Sourcing Principles were codified in 1999. The code has seven main

areas of action described in Appendix 3. In 2006, M&S assessed 1,250 clothing, food

and homewear suppliers against its Global Sourcing Principles.

In March 2006, M&S switched its entire coffee range (Figure 11) to Fair Trade

producers (The Guardian, 2006) and developed clothing lines made purely from Fair



convergence of Fair Trade and ethical trade depends on the organisation’s culture and

strategy and it seems to be the case of M&S.

4.9 Corporate Social Responsibility and the Fair Trade

The intersection of the Fair Trade and Corporate Social Responsibility (CSR) is

primarily due to the ethical component underpinning both subjects, meaning the

principle of ethics related to business. When Starbucks decided to introduce the FairTrade coffee into its portfolio (Argenti 2004), there are implications at many different

levels. For the Fair Trade it meant a huge step towards a wider and important market in

the USA. For Starbucks it meant the adoption of a strategy to protect image and to gain

support from important stakeholders. However, Fair Trade partnerships with big

corporations face fierce criticism (Figure 12).

Figure 12 – Mainstreaming: critique of Fair Trade

Source: New Internationalist, 2006

“I firmly believe that the Fairtrade Foundation broke some of its founding

principles accepting Nestle because one of its principles was we (Fair Trade

organisations) will not work with large multinational corporations that we can



bring unexpected and sad outcomes, like Enron and WorldCom (Doane 2005). But why

do companies spend resources on CSR programmes? According to Roberts (2003), one

of the key drivers for implementing CSR initiatives is a desire to avoid risks to

corporate reputation. The idea is that environmental and social issues can offer risks to

the corporate reputation and to the brand. Environics carried out a survey in 1999 with

25,000 individuals in 26 countries and found out that more consumers base their

impression of a company on their CSR actions than on brand reputation or financial

factors. Among the many benefits from CSR investment we can quote that companies

engaged in CSR programmes can attract, motivate and maintain good employers

(Roberts 2003).

Voguel (2005) claims that CSR makes sense only to some companies in some

circumstances. It means that the one-size-fits-all approach is not applicable. These

companies in need of CSR are the ones threatened by activists’ campaigns or with very

exposed brands. But who is driving the change towards a more socially responsible

approach to business?

“I think it is very complex to say how this is coming about but it is a combination of

factors. Undoubtedly there are some trends from shareholders. In the UK at least

one of the requirements is that firms have to explain to their pension funds whether

they took account of the social-environmental factors, with a key step to beginning

to make boards think about it” (Interview with Lance Moir, 2006).

Brand owners in a whole range of sectors have had their reputations affected bynegative publicity about issues in their supply chains (Roberts 2003) and that is where

ethical sourcing has become part of the organization agenda together with CSR.



threats were about ignoring the NGO’s claims fighting back in a long and unpredictable



threats were about ignoring the NGO’s claims, fighting back in a long and unpredictable

journey or accepting to negotiate.

“Starbucks came saying they were selling fair trade coffee, when in reality it was

an option one day a week you kind of say this is all Fair Trade but you are

selling me the ordinary stuff trying to take more credit than you really earned.

That seems to me that the marketing approach didn’t think it through, so

legitimate attack” (Interview with Lance Moir, 2006).

The company came to an analysis of all implications of each of these three choices. As

Starbucks was already paying a premium price for quality coffee ($1.20 per pound,

when the price stipulated under the Fair Trade standard is $ 1.26) the financial aspect of

adopting Fair Trade was not prohibitive. However, to accept GE’s claims would make

Starbucks appear fragile and they could be targeted by other NGOs with other demands.

One of the value propositions of Starbucks was the offer of quality coffee. Adding the

Fair Trade coffee to the portfolio the company could not guarantee the consistency of

product standard and the availability would be of unknown quantity. As an alternative

solution Starbucks have decided to develop its own Fair Trade supply chain in Mexico,

to have more control over the process and to protect its reputation (Argenti, 2004).

“Social inequalities, poverty, this kind of big social issues are always there to be

taken on and to be challenged…when you adopt an issue you can not simply drop it.

Fair trade is this season’s “must have” and now I am going to helping orphans in

Brazil. No, sorry you cannot choose your social issues as if they were marketing

fads. You got an issue and you’ve got to see it through.” (Interview with Lance

Moir, 2006).

with specific stakeholders but past reputation for responsible behaviour does not give



with specific stakeholders but past reputation for responsible behaviour does not give

immunity to activist attacks Argenti (2004).

The following chapter will present the findings in the literature in a thematic format.

The researchers’ opinions will be compared, to provide a wider view of the main issues.



5. DISCUSSION OF RESULTS

5.1 Introduction

This chapter will discuss the findings in the literature and the expert’s opinions. The

blue ocean strategy is applied to the Fair Trade coffee segment based on the critical

success factors compared to a mainstream coffee. The chapter concludes with adiscussion about the future of the Fair Trade.

5.2 Main findings

The literature shows that there is a lack of data to prove to what extent ethical issuesaffect consumer behaviour in the UK. Research so far is not conclusive.

The Fair Trade and the ethical sourcing address welfare of producers in developing

countries, and some organisations are embracing both the Fair Trade and the ethical

sourcing as part of their Corporate Social Responsibility strategy. The Fair Trade is

discussed in the literature in the context of different disciplines like marketing and

supply chain.

Macroeconomic barriers produce a major impact in the agro-food system which gives

the Fair Trade a limited power, but definitely a stronger power now in comparison to its

origins in the post Second World War.

Fair Trade organisations are working to reach mainstream and it seems to be already a

mainstream product in the coffee segment. However, this move faces critics for

Retailers act as important drivers to the Fair Trade due to their efficient distribution



p

systems and direct access to consumers, and they are helping the Fair Trade to reach

mass-market. This new stage of the movement requires an improvement in the metrics

in social impact to assure the benefits for the growers. As a brand intending to leave the

niche market, it needs to adopt competitive and aggressive positions that will be

discussed in the next section.

The findings in the literature show the broader picture of where the Fair Trade

movement is now. Drawing upon its core philosophy of fairness, I found out

peculiarities inherent to its social nature and similarities with other business models. As

the Fair Trade reaches the mainstream, other obstacles and enablers came up. In order to

establish the relationship linking key burning issues impacting the Fair Trade, I applied

a managerial tool to expose the findings in the Fair Trade literature and to provide a

basis for conclusions and recommendations.

5.3 The blue ocean strategy applied to the Fair Trade

Among the wide range of business strategy tools available, the researcher has chosen

the blue ocean strategy to apply to the Fair Trade industry to analyse how Fair Tradecan create an uncontested market space. The blue ocean strategy was developed

through the research of 150 companies in 30 industries during more than a decade. The

analogies used by the researchers W. C. Kim and R. Mauborgne are blue oceans

denoting all the industries not in existence today and consequently with no competitors

and red oceans for the existing industries. They found out that to create a blue ocean

strategy, competitors were not used as benchmarks, to allow an out-of-box thinking.

The proposition of the strategy is the reorientation of the strategic focus. In the red

ocean strategy the structural conditions are given and companies compete within, then

“The creation of blue oceans is about driving cost down while simultaneously



g y

driving value up for buyers. This is how a leap in value for both the company

and its buyers is achieved.” (Kim & Mauborgne, 2005:109).

Fair Trade operates now in a niche market, with the exception of coffee that has double

digit market share, as demonstrated previously. As trade barriers are dismantled and

information on prices and products become instantly available, the trend is that niche

markets will continue to disappear (Kim & Mauborgne, 2005). As brands are becoming

more similar, consumers decide based on price, and the premium price of Fair Trade

commodity products becomes an obstacle to growth, although premium price coffee is

the category that shows highest growth in the UK (Mintel, 2006).

The analysis of the literature and the interviews showed that if the Fair Trade movement

wants to increase market share, it has to readdress its strategy in the ethical consumptionindustry to convert the non-consumers creating new demand for the Fair Trade

products. Mainly because Fair Trade buyers today are not necessarily ethical

consumers.

“… I think a lot of people who now buy Fair Trade don’t buy it because they are

ethical consumers. Especially with Cafedirect the 5065 brand, the majority of its

purchases is not of what it is considered “ethical consumer” they have been

more into premium price products” (Interview with Iain Davies, 2006).

In order to better understand the use of the strategy, the Fair Trade coffee will be taken



as an example, as coffee is the world’s top fairly traded product (McDonagh, 2002).

5.4 Fair Trade critical success factors

According to McDonald (2003), any given market segment must establish its critical

success factors (CSFs) and how well it compares with its closest competitors. After the

review in the literature it is possible to identify which are the CSFs for the Fair Tradecoffee.

The objective of the CSF analysis is to provide an overview of relative competitiveness

when measured against the main competitors, in this case the mainstream coffee brands

in the UK. It is aimed also at highlighting the areas where improvements might be made

due to weaknesses and threats (McDonald & Christopher, 2003).

The Fair Trade industry competes with mainstream products of companies that have

scale economies and competitive advantages in vital areas such as distribution and

brand awareness (Nicholls & Opal, 2005).

The critical success factors for Fair Trade coffee are:

Brand: Conflicting messages in the media arising from the huge amount of information

available (Mintel, 2004) poses a threat to Fair Trade growth. Nicholls & Opal (2005)

argue that the Fair Trade brand was developed in a decentralized and not very strategic

process. There are different groups offering the brand such as Fairtrade Foundation, Fair

Trade companies (Cafedirect, Day Chocolate) and own label products like Tesco’s and

Marks & Spencer’s. The consequence is the difficulty in creating effective overall

coherent message for each category and this consistency builds trust in the consumer’s



mind. In this component the Fair Trade groups need to work together to avoid consumer

confusion (Nicholls & Opal, 2005).

Price: The premium price of the Fair Trade products can work as a barrier because it

keeps the price-conscious consumers away (De Pelsmacker, 2006). Some consumers

accept paying this higher price because they see this sacrifice as a way to benefit the

small producers on the other side of the chain. Conversely, if the Fair Trade aims to

really be a mainstream product it needs to look at this element and work towards price

reduction. This reduction could come via agreements on incentives with local

governments reducing taxes or the Fair Trade price could be reduced as supermarkets

increasingly introduce own-label Fair Trade products at more competitive prices. In

this factor the Fair Trade is doing well regarding the premium price category. However,

there is an oversupply of Fair Trade coffee so it is necessary to gain market share inother categories also to get more volume.

Distribution: Belgian research shows that consumers complain that they are not able to

buy Fair Trade products in a regular supermarket (De Pelsmacker et al., 2006).

However, in the UK Fair Trade products can be easily found in big grocery retailer’s

chains such as Tesco, Marks & Spencer and Sainsbury’s. This factor needs to be

improved in other countries than the UK. As the basis of this comparison is the UK, I

consider the Fair Trade and the mainstream brand having the same position in this

factor.

New product development: There is stiff competition in the hot drinks market andinnovation is one of the key drivers of growth, as consumers become knowledgeable

about coffee products being able to specify a preference for Kenyan or Costa Rican

coffee (Mintel 2006) The narro offer of the Fair Trade portfolio can be considered as

economic model has a problem with the certification process, which creates a time lag



between product development and the awarding of the mark (Nicholls & Opal, 2005).

Nestle launched its ethical coffee in 2005 to compete in this element which forcedCafedirect to improve its portfolio with new product development (Nicholls & Opal,

2005). The Fair Trade scheme is slow in the introduction of new products. It is focusing

largely on producer-driven product development instead of looking at the emerging

demand of the key target segments (Nicholls, 2005). This could be analysed as an

intrinsic characteristic of the trading model because some markets have a propensity to

be supply-side driven (McDonald & Christopher, 2003).

Ethical component: Ethical factors are having an increasing impact on consumer buying

behaviour (Jones et al., 2003) as mentioned before. Ethical coffees are becoming more

high-profile, as a result of coffee shops’ support, for example, Pret-a-manger, and also

the increased shelf space in supermarkets (Mintel, 2006). This element can have animpact on brand image, as can be seen with M&S successful campaign “look behind the

label” (The Independent, 2006) where the company is trying to build an ethical “bridge”

with consumers. The company claims to be the most ethical place to shop and it needs

to be observed how consumers are going to react to this marketing approach.

Figure 14 shows the Critical Success Factors for the coffee industry identified in the

literature, compared to the mainstream brand leader. Fair Trade used the ethical

component to get differentiation from mainstream coffee, and it can be considered the

main competitive advantage for the brand.



Brand Price Distr ibution New productdevelopment

Ethicalcomponent

Fair Trade Coffee Mains tream Coffee

Figure 14 - The blue ocean strategy applied to Fair Trade coffee

Source: Adapted from Kim & Mauborgne 2005

However, with well established brands entering the ethical food segment, this advantage

is no longer exclusive. The second step of the blue ocean strategy is the practical

approach with the four-actions framework that I present in the next section.

5.5 Future of the Fair Trade

Although a growing trading model, the Fair Trade alone is not capable of making the

shift necessary to make the global trading system fairer. As exposed at the UNCTAD XI

meeting (Nicholls, 2005), the Fair Trade declaration demands some actions to produce a

spread effect in the global commodity chain. Nicholls & Opal (2005) state that

consumer education and brand equity are key factors in the scheme. The researcher also

believes that strengthening FT advocacy in the international political arena is necessary.

High

Low

Critical

Success

Factors



Figure 15 – The four-actions framework

Source: Kim & Maugorgne, 2005

The definition of the critical success factors for the Fair Trade is a result of the findings

in the literature and the analysis of the interviews. These factors will be used as a basis

to capture the current state of play in the known market and to apply the four actions

framework (Fig. 16) to the Fair Trade coffee aiming to create uncontested market space.

The mainstream product will be used as a basis of comparison for the implementation of

the strategy.

Based on the critical success factors identified in the literature and contrasting with the



interviews, I suggest the following actions for the Fair Trade coffee:

Figure 16 - The four-actions framework for Fair Trade coffee

Source: Adapted from (Kim & Mauborgne 2005)

Developing southern markets, the South-South Fair Trade is pointed out as a next step

to the Fair Trade movement:

“I actually think that is going to be new growth area to Fair Trade. There are

plenty of people who have the money and have the national pride who want to

help their own people anyway. Having the product available, Fair Trade will be

RAISE

• Brand equity

• Coherent communication

•Dynamic new productdevelopment

CREATE

• South to South Fair Trade

• Fair Trade innon-commodities

segments

ELIMINATE

• Certification bottleneck

• “ have to” message

REDUCE

• Premium pric e

A New

Value Curve

RAISE

• Brand equity

• Coherent communication

•Dynamic new productdevelopment

CREATE

• South to South Fair Trade

• Fair Trade innon-commodities

segments

ELIMINATE

• Certification bottleneck

• “ have to” message

REDUCE

• Premium pric e

A New

Value Curve



Regarding the communication strategy the growing involvement of supermarkets should

be exploited to help support the Fair Trade messaging and the value of word-of-mouth

communications should be developed through debating societies, community and

university activities.

A move away from negative “guilt” or “have to” marketing positioning towards more

positive quality and aspirational or lifestyle statements (something you want to do).

Reducing the premium price and the elimination of the bottleneck in the certification

process are issues already discussed.

“I would rather focus on the more positive; it is easier to sell positive stories than to

persuade people to boycott negative stories….” (Interview with Lance Moir, 2006).

The move towards non-commodities segment could create the opportunity of adding

value in the primary layer of the chain, the producers.

The arrival of big corporations comes adding new concerns to the Fair Trade:

6. CONCLUSIONS



6.1 Re-statement of thesis objectives

This thesis set out to understand the Fair Trade business model and the key factors

underpinning its dynamics. It is positioned with the Fair Trade literature using it as a

base to understand how the Fair Trade converges social and economic development.

6.2 Summary of the findings

In order to benefit the more impoverished producers, the Fair Trade movement needs to

go mainstream and to work with the corporate actors that it was established to critique.

The real challenge to the model is to incorporate powerful conventional actors

effectively into a formal governance scheme represents the interest of distinct actors

(Taylor, 2005).

It needs to be recognised that the Fair Trade scheme has a restricted impact on the

global trade and it does not question the system but tries to cash on it. If the system is

unequal and unfair in its essence, the ethical label does not change this.

6.3 Contributions of the report

The findings of this research provide contributions to two distinct groups: academicsand managers within the industry. The academic contribution is the review of main

authors and their position on the main issues.

6.4 Research limitations



The first limitation of this research is time. As distinct from a PhD thesis with 3 years to

be developed or a Masters by Research thesis with a timeline of 1 year, the Master of

Science thesis has a shorter timeframe. From this perspective some aspects of the

business case were classified to “further research” as during the process I had some

insights and directions for a more in-depth approach to the subject.

This research has been positioned within the Fair Trade literature and one of thelimitations is that the analysis is made primarily with the perspective from the UK

market because it is the first market for the Fair Trade. The analysis of the Fair Trade

model in other markets, mainly due to any potential cultural specificity would enrich the

findings in the literature.

Another limitation was regarding the interviews. The first objective was to interview at

least one actor in each of the layers of the Fair Trade chain. Unfortunately it was not

possible to reach a Fair Trade producer and a Fair Trade retailer. These very important

actors would add to the research a legitimate and wealthier dynamics acting as a

counter-argument to some of the findings in the literature.

6.5 Suggestions for future research

I conclude this project by suggesting some areas for further research.

Comparative assessments of communities engaged with the Fair Trade and communities

working with non-Fair Trade crops is an important area needing research and not

covered appropriately so far. In the same approach it should be investigated if the cost

of certification is a barrier for producers to join the scheme.

the price paid for Fair Trade goods is arrived at? How much of the price the consumer

pays goes to the small farmer and what costs are included in the production costs?



pays goes to the small farmer and what costs are included in the production costs?

As a consequence of the expansion of the Fair Trade market, research into the

organisational structure of the Fair Trade movement is necessary, mainly because of the

complex networks involved in the scheme. Also, the interrelationship of different

networks in which this economic model operates and how to prevent possible loss of

original purpose with the arrival of large retailers and manufacturers.

From a broad industry perspective research should focus on how to create mechanisms

of strengthening legal and social support for Fair Trade networks and at what extent

government and other elements of civil society could help in this process.

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70

APPENDIX 1 - Elements of the Fair Trade discussed in the papers

Supply ChainNr. Author Marketing

Consumer

Behaviour

Corporate

Governance

Sustainable

Development (Retailers) (Producers)

Broad

Industry

1 De Pelsmacker et al. , 2006

2 Hira & Ferrie, 2006



5 Bacon, 2005

6 Doherty & Tranchell, 2005

7 Taylor, 2005

8 Low & Davenport, 2005

9 Smith & Barrientos, 2005

10 Moore, 2004

11 Nicholls, 2004

12 Raynolds et al., 2004

13 Argenti, 2004

14 LeClair, 2003



71

Supply ChainNr. Author Marketing

Issues

Consumer

Behaviour

Corporate

Governance

Sustainable

Development (Retailers) (Producers)

Broad

Industry

15 Jones et al., 2003

16 Davies & Crane, 2003

17 Blowfield, 2003

18 Auroi, 2003

19 LeClair, 2002

20 Nicholls, 2002

21 McDonagh, 2002

22 Rice, 2001

23 Strong, 1997

24 Strong, 1996



72

APPENDIX 2 – Fair Trade product and information flows

Source: Nicholls & Opal, 2005



73

APPENDIX 3 - Marks & Spencer code of conduct

Global

Sourcing

Principles

Supplier ’s

responsibility

Dedicated

production

units

Commitmentto

extending

principles

through

the supply

chain

Environmental

responsibility

Regular

assessment

Production

sites

and

labelling

Workforce

rights

Source: Johnson, 2004

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