Arab Open University
Faculty of Business Studies
T306A TMA- 2017-2018
Please read these instructions carefully. However, contact your tutor in case any difficulties with the instructions. You should submit your completed assignment to your tutor no later than the date will be announced later on LMS.
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You can score very well on this assignment using the materials provided as part of the course. However, if you have access to other sources of information such as reference books or the Internet, you may find it interesting to look there for additional relevant information. Very short extract from published sources may be included in context but you should avoid copying significant amounts of text from other authors. You should note that whilst the internet can provide lots of information much of it is not refereed and should be treated with caution.
If you take material from the course or elsewhere and incorporate it in your answer word-for-word, you must indicate where you have taken it. Not to do so is regarded as ‘plagiarism’ and is regarded as an infringement of copyright. To attempt to pass off such work as your own is cheating.
You must therefore acknowledge all your sources of information.
Plagiarism will lead to a loss of marks and extensive plagiarism could mean that you fail this TMA. For more information about what constitutes plagiarism or cheating, you should refer to the current Assessment Handbook.
There are three questions in this TMA at the end of this case study. You should answer them all. You should notice the mark allocations for each question and allocate your effort accordingly. Appropriate use of diagrams is expected throughout the TMA.
Fair Trade Coffee: The Mainstream Debate
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.
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 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 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:
- to work with marginalized producers and workers in order to help them move from a position of vulnerability to security and economic self-sufficiency;
- to empower producers and workers as stakeholders in their own organizations;
- To actively play a wider role in the global arena to achieve greater equity in international trade.
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.
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. (400 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. (350 words) (20 marks)
Q3. What are the main insights or new understandings that you gained from the application of HSM to the case study? (350 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