Wholesome Marketing Ideas, Bite Size

Wholesome marketing ideas, bite size

Sunday, October 16, 2011

Fair Trade?

Hardly a week goes by without yet another milestone for “ethically labeled” products. You know, the products that are labeled “Fair Trade,” “Organic,” “Green,” and so on.
Here’s a recent report, for example, that says that 10,000 products are now sold with a Fair Trade certification in the U.S., and that sales of such products are up 63% in the last QUARTER! In markets such as the United Kingdom, more than one of every five cups of coffee sold is fair trade labeled.

This is an enduring puzzle for me: why do people buy fair trade products?

Now before you convince yourself on the scant evidence of that one question that I am a cold, heartless, cynic, I want to assure you that I am all for helping farmers get a better deal.

But the why question is really two questions: the first is, what is the consumer motivation to purchase fair trade products? And the second is, given that motivation, is buying fair trade products the best way for consumers to achieve those goals?

So in terms of what drives the consumer to buy, and often pay more for, ethical products? First, I am sure that consumers who buy these products are nice people, who look at consumption as a means of doing good for their community, society, and humanity. So they buy products that are “fairly” sourced. And buying such products encourages other products and companies to fairly source their products.

“Fairly sourced” generally means that the third-world farmers who grow the stuff (the coffee or chocolate beans, the nuts, and the vanilla) are given a fair shake on the deal, often including fixed prices that protect them from volatility in commodity prices.

For example, a company buying fair trade coffee from a third world farmers’ coopertaive may agree to pay the farmers a fixed price of $2.80 per kilo of coffee beans, regardless of the market price. This fixed price could be twice as high as the market price when there’s a coffee glut, or it could be close to the market price in “normal” times.

To ensure the product is noticed by consumers and successful in the marketplace, the coffee brand advertises its fair trade line.

But if you’re a consumer who wants to do good, you probably want to know how much of the premium you pay for your fair trade coffee goes to the farmer. In other words, how efficient is your voluntary contribution?

The answer is that in times of coffee glut, farmers’ cooperatives benefit tremendously from the price floor provided by a fair trade program. Their revenue per kilogram of coffee can be double what they would otherwise get.

But in terms of the percentage of the premium paid by the consumer for fair trade coffee, there are probably more efficient ways of channeling funds to the farmers’ cooperatives.

In fact a larger amount is often spent by brands on advertising the fair trade affiliation and credentials to the consumer than is handed over to the farmers as a premium; sometimes several times larger.

If fair trade labels are an inefficient way of channeling funds back to the farmers, why do consumers insist on buying fair trade rather than sending money directly?

First, perhaps because they are unaware of the inefficiency of the system, or unaware of other means of channeling the funds. But there is a second reason, and one that is often ignored: the fair trade label is efficient for the consumer in that it is a by-product of consumption – it does not require any extra thinking or action on the part of the consumer to make a contribution to the greater good.

Recent research suggests that consumers buy ethical products not just to contribute to the greater good: they buy them to signal to themselves (and perhaps to others) that they are good people.

If this is the motivation, as long as the fair trade is fair and does some good for the farmers, consumers are likely to be ok with it. The relevant measure of efficiency of the program is not whether it gets a good chunk of the money into the hands of the farmer, it is whether it is a low-hassle way for consumers to feel good about themselves.

Perhaps fair trade must be fair first for those paying for it.

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Sarah said...
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Sarah Sturtevant said...

Thought-provoking post, Niraj! Notwithstanding its inefficiency, and whether buying Fair Trade is "trendy" or just makes Western consumers feel good, I have to believe there is still more benefit to the farmer in the Third world than there would be if Fair Trade did not exist. This is simply because of the sheer volume of buyers willing to support higher priced products in order to ensure a fair deal to the farmer. Giving directly to a farmers' cooperative certainly makes more sense, but it might prove too cumbersome to attract the volume of benefactors (aka consumers) that the Fair Trade brand does with its high priced marketing campaigns.

Given the choice between not giving because the philantrophic mechanism is too cumbersome, or using a less efficient means of giving guaranteed to help farmers, I suspect many would still choose the latter.

Niraj Dawar said...

Thanks Sarah. Something is indeed better than nothing. Perhaps there's an opportunity here: to design a more efficient way of getting money to the farmers, while providing consumers with all the psychological benefits of contributing to a good cause.

Tatiana said...

Interesting post: how fair is towards farmers the fair trade... Very often I wonder how "green" are the green products.

People buy fair because they feel better, but probably there is also a guilt feeling involved.
The fairtrade label is popular rather in developed countries...And somewhere in back of the mind there is the idea that Western countries became rich thanks to the resources of 3rd world countries. Maybe fairtrade is a way to pay back...

Kim Hoffman said...

You mentioned "there are probably more efficient ways of channeling funds to the farmers’ cooperatives." What are the more efficient ways of channeling funds to the farmers for an average person who buys one cup of coffee a day?

Niraj Dawar said...

Hi Kim, check out sites such as http://www.justcoffee.coop/ that have a variety of ways in which you can help. As you may know, recently the American Fair Trade organization broke form the mail Fairtrade Labeling Organization. From what I understand, part of the reason was a desire to open FT certification to coffee plantations and farms that are not organized cooperatively -- possibly to meet the needs of Starbucks, Green Mountain, and other large licensees. So if your goal is to help cooperatives, you're better off seeking direct channels.