Mainstreaming Fair Trade Coffee: A Systems Analysis

The Fairtrade Labelling Organizations International (FLO) was a non-profit organization that united 20 labeling initiatives in 21 countries and producer networks. However, FLO faced a crossroads due to its declining market share of Less than 3.8% of the coffee market and 6.1% of the specialty coffee market. To grow market share, stakeholders were divided on how best to do this, with some believing that Fairtrade coffee should stay within its niche market and others arguing that mainstreaming was necessary for long-term sustainability. The coffee industry was characterized by a perfect storm of deregulation, new producers, technology, and adverse climatic events, which led to a four-year period between 2001 and 2005 when the price of coffee fell below the cost of production. This crisis had significant effects on coffee-producing countries, including poverty rates and school enrollment. The Fairtrade movement aimed to work with marginalized producers and workers to help them move from vulnerability to security and economic self-sufficiency. However, mainstreaming challenges included educating consumers about the specifics of Fair Trade coffee and overcoming the confusion caused by multiple niche markets and similar certifications.

Arab Open University
Faculty of Business Studies
T306A TMA- 2017-2018
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Fair Trade Coffee: The Mainstream Debate
08-069
August 27, 2010
Richard M. Locke, Cate Reavis, Diane Cameron
In November 2008, Shaw’s supermarkets sold a 10-ounce bag of Green
Mountain Fair Trade certified coffee for $8.49. The bag which was adorned
with the Fair Trade certified logo, did not explain the meaning of Fair Trade.
Consumers were directed to a website or a phone number to get more
information. However, the bag did say the following:
A good cup of coffee can change your day. A great cup of coffee can help
change the world. By supporting farming communities, promoting sound
environmental practices and sourcing only the highest quality beans we work to
ensure that everyone who comes in contact with our coffee benefits. So while
you appreciate the results in your cup, you can also rest assured that this coffee
has had a positive impact on every person it has touched which to us makes
these little beans a pretty big deal.
The main premise of Fair Trade was that farmers were given a guaranteed “fair
price” for their coffee, a guarantee that became particularly appealing to farmers
in the late 1990s and early 2000s when the price of coffee fell below the cost of
production. For knowledgeable consumers, this was a positive reinforcement
knowing that they were helping a social cause even though it was not clear on
any bag of Fair Trade coffee just how much farmers were being paid and how
much they were profiting.
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The organization responsible for certifying food products (including coffee) as
Fair Trade was the Fairtrade Labeling Organization (FLO). Based in Bonn,
Germany, FLO was an umbrella organization that united 20 labeling initiatives in
21 countries and producer networks. But with a market share of Less than 3.8%
of the coffee market and 6.1% of the specialty coffee market, and a growth rate
that had plunged from 97% in 2003 to 2% in 2007, the leadership of FLO found
itself at a crossroads. Pressures were mounting inside and outside the
organization to grow market share for Fair Trade certified coffee, and
stakeholders were divided on how best to do this.
Coffee Industry
Coffee was the world’s second most valuably traded commodity, second only to
oil. More than 2 billion cups of coffee were consumed every day. According to
the International Coffee Organization (ICO), the size of the retail market for
coffee was over $70 billion in sales per year. An estimated 17- 20 million
families in more than 50 developing countries produced and sold coffee. More
than 80% of all coffee was produced by smallholder farmers, those who farmed
on 2 hectares or less of land which yielded between 15 and 30 bags. In many
producing countries, coffee accounted for over 75% of total export revenue. In
2007, production was about 117 million bags and world consumption was 123
million bags.
Coffee Crisis: The coffee crisis referred to a four-year period between 2001 and
2005 when the price of coffee fell below the cost of production, a time when
supply far outweighed demand. The makings for the crisis, which began in the
early 1990s, could be called a perfect storm of sorts: deregulation which ushered
in new producers, namely Vietnam, new technology and adverse climatic events
together created a volatile industry where the price for a pound of coffee went
from $.53/lb in 1993 to $1.19 in 1994 to $1.26 in 1995 before deflating back to
$.82 in 1996.The deregulation of the coffee industry came as a result of the
collapse of the 1989 International Coffee Agreements (ICAs) between producing
and consuming countries when the quota and supply control provisions of the
1983 ICA were suspended
The collapse of quotas ushered in new producers starting in the early 1990s.
Vietnam, with help from international aid agencies, began a subsidized coffee
growing program. The international market was flooded by cheap Robusta
beans putting further downward pressure on prices. In 1990, Vietnam was the
17th largest coffee producer with 1 million 60kg sacks. In 2001, it had become
the world’s second largest supplier after Brazil producing over 12 million 60 kg
sacks.By the early 2000s, the International Coffee Agreement’s goal of
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developing a sustainable coffee economy had met a brick wall in the guise of
plummeting prices. In the early 1990s, earnings by coffee producing countries
were about $10-$12 billion and retail sales were $30 billion. In 2002, Earnings
were about $5.5 billion and the value of retail sales was $70 billion. In 2003,
with world prices at historic lows, Mexican coffee producers in Oaxaca’s
Pluma region were fertilizing less, growing less and picking less. Farms in
Costa Rica were switching to other crops. With producers in Vietnam and
Brazil pushing prices lower, Guatemalans had taken to burning their
unprofitable coffee fields.between 1998 and 2001, poverty rates in Nicaragua
increased by 2% among coffee farmers, while poverty rates fell by 6% in the
overall rural population. School enrollment fell by 5% among coffee farming
families, while school enrollment rose by 10% in the overall rural population.
Alongside price, the quality of coffee beans had also suffered. The coffee crisis
had been fueled by an overflow of cheap, sun-loving, easy-to-grow Robusta
beans from chemically fertilized plantations in Brazil and Vietnam. Brazil
replaced some of its high quality, mountain-grown, hand-farmed Arabica
coffee for cheaper, less flavorful Robusta that could be harvested by
machines. Meanwhile, good coffee was becoming a rare commodity due to the
hit that farmers’ incomes were taking. Part of what allowed the quality to
deteriorate was the fact that U.S. import guidelines stated that only 75% of
raw, imported coffee consisted of beans. In other words, up to 25% could be
triage—spoiled beans, sticks and rocks usually filtered out during the roasting
process.
Fair Trade Movement
Definition: According to FLO’s website, the most widely recognized definition of
Fair Trade was created by FINE, an informal association of the four main Fair
Trade networks (Fairtrade Labelling Organizations International, International
Fair Trade Association, Network of European World shops, and European Fair
Trade Association): Fairtrade is a trading partnership, based on dialogue,
transparency and respect that 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. Fairtrade organizations (backed by consumers) are engaged actively
in supporting producers, awareness raising and in campaigning for changes in
the rules and practice of conventional international trade.
Based on its definition, Fair Trade had three strategic intents:
1. to work with marginalized producers and workers in order to help them
move from a position of vulnerability to security and economic self-
sufficiency;
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2. to empower producers and workers as stakeholders in their own
organizations;
3. To actively play a wider role in the global arena to achieve greater
equity in international trade.
Mainstreaming Challenges
While many in the coffee trade believed that Fair Trade coffee should stay
within its niche market where the brand would be better protected, others
believed that the long-term sustainability of Fair Trade coffee hinged on its
ability to access larger markets. As a development economist pointed out, “If
you count on everyone to [buy Fair Trade] because of their ideological
commitments, you’re going to be stuck in a niche market that doesn’t serve a
broad range of people.” But mainstreaming would mean overcoming some
significant challenges.
One of the biggest challenges in mainstreaming the sale of Fair Trade coffee
came down to educating the consumer on the specifics of Fair Trade coffee.
The coffee aisle in a typical supermarket was stocked with many different
types of niche coffees — Bird Friendly, Shade Grown, Organic, Rain Forest
Alliance Certified, Sustainable, Fairly Traded—all of which espoused similar
missions and offered few details. Even Starbucks which had sold Fair Trade
certified coffee since 2002 was adding to the confusion. As of 2008, the
company was no longer selling Fair Trade certified coffee but was marketing
all of its coffee as “fairly traded.” When asked what fairly traded meant, a
Starbucks employee simply replied: “We pay our growers a fair price.”
But should price be the most important element stressed in trying to
mainstream Fair Trade coffee? As industry insider attempting to help farmers
improve the quality of their coffee noted, It isn’t just about paying more for
coffee. It is looking at the quality of what you’re buying, how you’re increasing
consumption, and how you’re increasing excitement about coffee. I don’t
believe that simply funding programs at origin without taking into consideration
promotion to consumers will be the answer. There has to be a considerable
effort made to educate consumers at the real retail level about high-quality
coffees.
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Questions:
Q1. Apply the Hard Systems Method to this Situation case, including spry
diagram and conceptual mapping in order to brainstorm, analyse and make
suitable recommendations. Provide a detailed narrative explaining your thinking
process. (1500 words) (50 marks)
Q2. Investigate further suitable approaches and tools that could be used to
investigate, illustrate and make recommendation to solving problems. Please
consult all your course materials and undertake relevant literature search. (400
words) (20 marks)
Q3. What are the main insights or new understandings that you gained from the
application of HSM to the case study? (400 words) (20 marks)
Q4. Review the relevance and suitability of hard or soft approach in highlighting
issues faced by it. (400 words) (10 marks)
End of Questions
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