Fair Trade and the Coffee Industry

                 The International Coffee Organization estimated approximately 1.4 billion cups of coffee were poured each day world wide in 2008 (Gittell, Magnusson, Merenda ). Germany is the second largest importer of coffee, followed by Italy, Japan, and France. The European Union countries imported approximately 5.4 million bags of coffee a month in 2009 (Gittell, Magnusson, Merenda ). The largest coffee producing countries are Brazil, Vietnam, Colombia, Indonesia, and Ethiopia.  The coffee industry’s supply chain consists of farmers, traders or certification organizations, and government agencies. From this stage it goes to manufacturers and roasters, and then to suppliers, and then wholesalers or shops or restaurants and then finally to the coffee consumer. As seen from this supply chain, this industry is very vertical. The largest multinational industries in the coffee industry are Proctor&Gamble, Kraft Foods, J.M Smucker (Folgers, Millstone, Brothers), and Nestle. Procter & Gamble dominated the coffee market with 40 and 30% market share in 2007 (Gittell, Magnusson, Merenda ). Starbucks is considered one of the largest coffee roasters, owning more than 8,000 stores, or 32% market share, in 2007 (Gittell, Magnusson, Merenda ). Other large roasters include Green Mountain and Dunkin’ Donuts.

            Fair trade started in 1988 when world coffee prices declined greatly. The fair trade movement worked to reduce the environmental degradation that occurred in coffee producing countries, along with giving a better quality of life to the farmer. The main obstacles for a coffee farmer are low wages and working conditions along with a lack of infrastructure and services (MacDonald 795).  The Fair Trade Labeling Organization (FLO) was created in 1997 to act as an umbrella organization representing more than twenty different certification initiatives around the world (Sage 265). Fair trade typically means that farmers are organized into local cooperatives and receive a “fair price” for their products (Sage 265). CSR in the form of Fair trade in the coffee industry is vital and beneficial.

Fair trade is important in the coffee industry because coffee farmers are very subject to price instability. The 1999 coffee crisis negatively impacted many coffee farmers and raised awareness of the importance of price stability (Tellman 109). Fair trade has also supported sustainable coffee growing methods, such as shade grown coffee. This is better for the environment and is sold at a higher rate because of its environmental friendly label (Sage 266). The main issues are located within the intermediaries of the supply chain. Author Alice McDonald writes, “in ‘conventional’ chains of intermediaries throughout global coffee trade, buyers are separated from producers via the often lengthy, intermediate trading chains through which producers sell to exporters—either directly or indirectly via additional intermediaries” (MacDonald 756). Furthermore, most small farmers sell to middlemen exporters who are nicknamed coyotes. These middlemen are known to take advantage of small farmers, paying them below market price for their harvests and keeping a high percentage for themselves (globalexchange). These statements reiterate the fact that the coffee industry is very vertical and where the problems lie within the supply chain.

Primary managerial dilemmas

            Some of the main managerial dilemmas include the premium payments the cooperatives have to pay in order to pay farmers a higher income. Another managerial dilemma is that to use the fair trade label a distributor must purchase a license from the national labeling initiative FLO (Bezencon, Bili 97).  To complicate things further, different countries in some cases have different labels (Bezencon, Bili 98). This could be a problem if consumers don’t know what the label means or understand why they have to pay a higher price. To combat that Fair trade is often seen as a way for distributors to have a competitive advantage because of their targeting of the ethical consumer market (Bezencon, Bili 98).

            According to corporatewatch.org, Nestle does not have any fair trade policy (corporatewatch). The site goes on to state, “as one of the four corporate giants dominating the coffee-rroasting industry, along with Sara Lee, Kraft, and Procter&Gamble, it is thus partially responsible for the plight of millions of coffee growers in the global south, who are being paid unfairly for their produce and face economic ruin due to collapsing world prices”  (corporatewatch).  Farmers are getting an average of 24 cents a pound when consumers in wealthy countries are paying $3.60 a pound.(corporatewatch). After careful research it is clear that Nestle does not have a strong CSR initiative and is not implementing fair trade (Nestle). The Nestle website makes it clear that they do not own any farms and therefore have no responsibilities to the farmers.

            In contrast, Starbucks implements their C.A.F.E  principles for ethical sourcing. C.A.F.E. stands for Coffee and Farmer Equity, which promotes farmers growing coffee in a way that is beneficial for both people and the environment (Starbucks). C.A.F.E. focuses and follows four main categories. One of those areas is product quality. This is considered a requirement and states that all coffee must meet Starbucks standards of high quality. The second area is economic accountability which is also considered a requirement, and means that transparency is required and suppliers must submit evidence of payment through the coffee supply chain. The third area is social responsibility.  This is evaluated by third-party verifiers, and analyzes safe, fair, and humane working conditions and protecting the rights of workers (Starbucks). Lastly, there is environmental leadership, which is also evaluated by third party verifiers.  This reflects how they manage waste, protect water quality, conserve water and energy, preserve biodiversity, and reduce agrochemical use (Starbucks). The site also provides viewers with the ability to read Starbuck’s Global Responsibility Goals & Progress Report. It is also important to note that Starbucks began purchasing Fair Trade Certified coffee in 2000.

Porter and Kramer would analyze Starbuck initiatives in the following ways.  They would look at their policies to see if they meet moral obligation, sustainability, license to operate, and reputation. As far as the first argument goes Starbucks policies reflect their effort to act for their moral obligation. This can be seen through their C.A.R.E principles and there purchasing of fair trade. Starbucks has made many efforts to be sustainable. They are a large purchaser of organic coffee. They are also considered a very green and environmentally conscious company. Starbucks does have a license to operate. The company works with the government and stockholders to make sure that everyone is satisfied with their business plan. Lastly, Starbucks works very hard to maintain their reputation as seller of high quality coffee.  Starbucks also works hard to portray that they are a socially and environmentally conscious company.

 

            I agree with author Colin Sage that it is unlikely that Wal-Mart, Starbucks, and Nestle will advance and support a farmer driven movement agenda for social change within fair-trade. I think that the companies supporting fair trade are making steps in the right direction but could push their CSR initiatives farther. Farmers are still being paid a very small percentage of what a cup of coffee actually sells for. I believe that these large companies in the coffee industry could increase the wages of the farmers and also help provide more infrastructure and services to these farmers. For example, companies could offer lessons and tools to these farmers to grow their crops in a more sustainable and efficient way.  In addition, schooling and health services could be provided as well. 

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