Business Lessons Learned: Fair trade and Community Enterprise
Bob Thomson, Managing Director TransFair Canada, November 1996
(An almost identical version of this paper appeared in the Intermediate Technology Development Group's "Small Enterprise Development Journal", Vol.10 No.4, December 1999 [no longer available online it seems]. It was originally written for a West End Community Ventures/IDRC workshop on CED and Globalization held in Ottawa in November 1996.)
The fair trade experiences of companies like Oxfam Canada's Bridgehead Inc. [now a private cafe chain] and other members of the World Fairtrade Organization (WFTO - formerly IFAT) provide examples of issues and relationships in international trade which community enterprises can learn much from in their efforts to explore international trade and co operation. This paper attempts to summarize a number of these lessons and issues from the perspective of the author's experience with alternative trading companies (ATOs) and fair trade labels. It is by no means a complete summary and the complex nature of this sector also means that they are subject to personal interpretations.
The fair trade "movement" consists of a wide range of enterprises involved in international trade, mainly selling handcrafts and food commodities. WFTO has 370 members, with 40 marketing organizations in 70 countries. NEWS, the Network of European World Shops represents some 3000 shops and EFTA, the European Fair Trade Association has 13 ATO members in 10 European countries with US$160 million in annual wholesale and retail sales. Under the fair trademarks TransFair, Max Havelaar and the UKs Fairtrade Foundation, 11,000 metric tonnes of green coffee beans were sold in over 35,000 supermarkets by commercial coffee companies in 1995. Current estimates put total world "fair trade" sales in the neighbourhood of US$300-500 million per year.
In addition to their own unique histories and working capital situations, many alternative trading organizations (ATOs) face a range of common business and "political" issues. A number of these were well summarized by a 1981 USAID survey of fair trade or alternative marketing organizations (AMOs). Despite its date, many observers of the fair trade movement would agree that many of these comments are still accurate and that the issues remain major concerns.
Issues highlighted by the USAID study include:
"Factors which have contributed to the success of the AMOs surveyed include clarity of purpose, entrepreneurial leadership, a sufficient and secure capital base, a built in market, and a policy of evolutionary growth";
While AMOs generally generate sufficient income to cover expenses, 'subsidies' do exist in the form of inexpensive money, written off loans, donated facilities, exemption from corporation taxes, and lower operating costs because of non profit status, volunteer labour and lower salary scales"; A variety of distribution channels (small stores, wholesale, catalogues, consignment sales, etc.) give AMOs the flexibility to deal with poorer quality, higher prices, lower quantities and irregular supplies while producers develop and improve their capacity to cope with commercial trade operations;
- No systematic evaluations have been done of the impact of fair trade. "There is little but anecdotal evidence of the impact which AMOs may have had on producers and their communities."
- Some observers question whether the benefits of so called alternative trade are sufficiently different from commercial trade to balance its overall insignificance in world trade, or to justify "subsidies" from consumers and voluntary organizations;
- "Not all organizations can offer a wide variety of constantly changing products which are carefully designed, have a touch of originality and can be sold at competitive prices";
- The low market entry costs of many handmade products also results in downward pressure on prices;
- Market information is rarely available to producers in a format which is suitable to their particular levels of education, skills and language capacities;
- Large networks of both suppliers and distribution outlets are more expensive than normal commercial retail networks;
- Educational activities are frequently more elaborate (and expensive) than strictly commercial promotions;
- Differences in philosophy and/or personality conflicts can disrupt business operations;
- Volunteer labour is not as reliable or professional as paid staff, despite its lower cost;
- Integrated and consistent efforts to address a whole range of producer constraints are complex and difficult; and there is little integration of the many government, private and non-profit policy, credit, technical assistance, export promotion and other schemes designed to meet the needs of small producers, small business and other diverse producer interests;Bridgehead's Business History
A brief financial/economic history of Bridgehead, one of Canada's best known alternative trading organizations (ATOs), provides examples of some of these issues.
Bridgehead was founded in 1980 by four individuals with close ties to the United Church of Canada, in order to market Nicaraguan coffee. By 1984, the assets and energies of the founding members, which provided the bulk of Bridgehead's working capital, imposed limits on the expansion of sales beyond the level of some $400,000 a year. The company was sold to Oxfam Canada, which paid off outstanding debts of approximately $45,000 and provided a short-term credit to Bridgehead as working capital.
Oxfam Canada had a unique history with alternative trade which both helped and hindered Bridgehead in this phase of its development. They introduced Bridgehead to the network of Oxfam traders, without which expansion would have been much more costly and difficult. However, many Oxfam Canada staff and board members were not convinced that business was the best or even a legitimate model for international co operation.
Insufficient profits on too narrow a range of products, inadequate "political" and economic support from Oxfam Canada and other factors contributed to Bridgehead accumulating some $160,000 in debt by 1987, while increasing and diversifying annual sales (and therefore income for producers) from $400,000 to $560,000. In 1987, Oxfam Canada was convinced that trading had sufficient potential to warrant a loan guarantee of $300,000 to test a small mail order catalogue. The catalogue was a significant success, generating income to pay off the debt and raising Oxfam Canada's profile. Recognizing this potential and finally finding a comfortable, pragmatic balance between political correctness and business/trade as a development tool, Oxfam Canada gave Bridgehead the freedom to expand and sales grew to $3.7 million by 1993.
Bridgehead faced perennial difficulties in raising the working capital needed to cover advance payments to producers. Credit organizations such as the Ecumenical Cooperative Development Society (EDCS) and Shared Interest, as well as Canadian church and commercial sources of credit filled this gap, but only just, making the annual financing of operations a stressful balancing act.
The company's profitability was threatened by other factors: slower sales growth, underestimated and unexpected costs, the high cost of interest on advance payments and large inventories, and higher than industry average staff costs. These latter were partly needed to maintain the close relations with both producers and customers inherent in a fair trade environment, but also the result of inadequate attention to costs and strategic planning in an environment of constantly changing markets and margins. Bridgehead is now undertaking a significant restructuring in order to put fixed and variable costs in line with sales and margins in its three main business activities: the mail order catalogue, retail stores and wholesale operations.
[Note: Subsequent to the publication of this paper, Bridgehead Inc. went bankrupt (in 1998). An effort was made by creditors to resusitate it for two years under the name Bridgehead (1998) Inc. but despite coming back to near break-even, they decided to close it down. The name was purchased by an individual and Bridgehead (2000) Inc. now operates some 15 coffee shops in Ottawa. May 2014]
Several other factors mentioned in the USAID paper contribute to higher than usual costs for most ATOs:
The most common problems which AMOs have with their suppliers include:
- shipment of lower quality goods than agreed
- shipment of different goods than agreed
- late deliveries (missed important events eg. Christmas)
- poor packaging causing damage to goods
- mislabelling and lack of documentation
- unresponsiveness to market information or new product ideas
- misinformation re sources of supply & producer conditions
- high prices
- pilferage and infestation
- inability or unwillingness to meet agreements (eg. coffee farmers selling to intermediaries instead of their co ops and/or fair trade partners when prices are temporarily high.)
Increasing producer's costs and difficulties, the most common problems which they experienced with AMOs include:
- lack of market related information
- unintelligible orders (language differences)
- small size of orders
- low AMO marketing reliability (staff turnover, policy changes, etc.)
- late remittances
- lack of understanding of constraints (root causes of delivery problems)
Islands of Wealth
One issue noted in the USAID paper is the dependence of many AMOs on products from a relatively small number of producer partners for a large proportion of their sales. This is the "islands of wealth" issue, whereby only relatively few third world producers have the flexibility, skills and management capacity to respond to constantly changing demand and tastes by northern consumers. The ability to work in partnership with small inexperienced partners is touted as one of the main strengths of the fair trade movement, yet the pressure of competition in northern markets from large corporations with lower capital costs, economies of scale and well developed distribution channels often pushes us in directions which favour compromise in this key area. More information is needed to determine the importance of this concentration or whether higher costs due to large numbers of suppliers and distribution outlets is a more significant factor.
Fair Trade Labels
As can be seen from the above descriptions of ATO problems, a lack of working capital is a major business factor. Designed to harness the working capital of conventional business, a relatively new phenomenon (from 1988), the fair trademark movement provides a link between alternative and commercial trade.
Fair trade marking organizations (FTMOs) license an independent consumer seal to commercial companies which purchase goods under fair trade conditions. Together, they have put fair trade coffee on over 35,000 supermarket shelves in Europe and are now expanding to North America. These FTMOs have expanded fair trade coffee sales approximately tenfold, have gained between 20% and 90% consumer recognition and between 1% and 5% of national markets in several European countries. They have exposed far larger numbers of consumers to fair trade issues than traditional development education programmes.
Within the FTMO movement, 300+ mainly co-operative producer groups, representing 500,000 small farmers, have a production capacity of some 250,000 metric tonnes of coffee, of which the co ops only have enough working capital to purchase 85,000 m.t. and the fairtrade market only buys 11,000 m.t. However, having provided many small farmer coffee co-operatives with the experience of direct negotiations with commercial importers, FTMOs have helped eliminate the most unproductive of intermediaries and directed a higher percentage of the world coffee price, even unfair prices, to producers themselves.
FTMOs provide small and medium business with a means by which to show that not all business is greedy and rapacious. They show promise as a business tool in which alliances between producers, consumers and business make sustainable development a real long term possibility, despite global trends which favour big business over government and consumers.
The lessons of the fair trade movement can be focussed in three areas:
- working capital;
- market information, especially demand for a wide range of products, as well as design and quality requirements;
- management and administrative capacity
The multi-facetted array of difficulties faced by ATOs over 30 years of experience points to the importance of meeting these needs, and therefore providing a wide range of macro and micro skills and analysis in each enterprise: technical, administrative, managerial and operational.
However, technical assistance, credit facilities, training and market research are rarely focussed on the needs of the most disadvantaged producers. Government support programmes are often directed at Chamber of Commerce members or existing small businesses and individuals, rather than unorganized or even organized small producers. They are rarely integrated or flexible enough to respond to the myriad of micro-contexts of small community based enterprises.
Thus there is a growing interest in trade as a means of generating economic activity to replace reduced government support, particularly in the area of international development co-operation and education, but there is not a parallel provision of needed supports.
The empowerment of producers through a process of trade development is a laudable and possible goal, but only when attention is given to avoiding key dependencies; on exports vs local production for local consumption, on well intentioned but inexperienced partners and on fickle consumer trends which do not contribute to long-term sustainable and ecologically sound development. And clearly, making profits from one group of producers and distributing them to another group of "disadvantaged" partners, with the mediation of development NGOs or marketing organizations, is not an acceptable definition of fair trade.
See also: Thomson, Bob, "Fair Trade: A Successful Social Innovation. But Is It Enough?", The Philanthropist, Vol.23, No.3, 2010
- USAID, "Trading with the Third World and promoting awareness of development issues: Experiences of alternative marketing organizations in Europe and the United States" pp.369, Contract AID/otr C 1805, 1981
- Durwael, Stefan, "The Development of Fair Trade in the Netherlands", Fair Trade Organisatie, Culemborg, 1994
- EFTA, " 30 YEARS OF 'NOT AID BUT (FAIR) TRADE' IN EUROPE", Survey of Fair Trade in 14 European Countries, 1994, (European Fair Trade Association EFTA)
- Beekmans, Bert, Presentation to the Smithsonian Migratory Bird Centre Congress on Sustainable Coffee, Washington D.C., September 1996
- Thomson, Bob, "A Brief History of Fair Trade Labels", unpublished, Ottawa, August 1995
- WFTO, The World Fairtrade Organization's history of fair trade
and my (now dated) Fair Trade FAQ