Introduction industry to assess private sector sustainability standards.

Topic: BusinessInternational Marketing
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Last updated: April 19, 2019

Introduction This essay will focus onthe coffee industry to assess private sector sustainability standards. Theprivate sector is the part of the economy that is not under state control, thestate can, however, set regulations. However, within the coffee industry, thereis very little state regulation to ensure Sustainable Business Practices (SBP)are met.

Thus, the essay’s focus will remain the industries meta-standardisationframework. The formulation of these voluntary standards is, “a process in whichnon-state actors from more than one country generate behavioral prescriptionsthat are intended to apply across national borders” (Dingwerth & Pattberg, 2009). The characteristicof a sustainable standard can be defined as, “as a set of ‘voluntary predefinedrules, procedures, and methods to systematically assess, measure, audit and/orcommunicate the social and environmental behavior and/or performance of firms” (Gilbert, et al., 2011). Thesesustainability standards ensure that the business practices which follow, are sustainablefor both the environment and stakeholders. In the coffee industry, thesestandards are set through coffee certification.

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Examples of standards include;a fair price of for the farmer and reducing soil degradation. Such standardsare highlighted through well-known certifications such as Fairtrade and Organic.To ensure that private sector sustainability standards are sufficient to ensureSBP I will assess three and critique three themes. The competition betweenstandards, competitive market structure of the coffee industry and cruciallythe market price of coffee. Competition between standards Firms desire to differentiate their coffee, a very homogeneous product,has created an overabundance of sustainability standards. Between 2006-2009 salesof these new differentiated coffees rose by circa 150%, (Figure 1), resultingfrom a positive market reaction. Nonetheless, this plethora of standards hascreated a phenomenon of “market in standards” (Reinecke, et al., 2012).

The issue arising from a multiplicity of standards is the dividedapproach. This system creates duplication of activity, poor coordinationbetween cultivators, increasing certification costs and consumer confusion (Fransen, 2011) which has led to afailing in ensuring SBP. The desiredeffect of standards setting should be to create positive environmental andstakeholder externalities through a premium price (Bacon, 2005).

           Figure1:  Worldwide sales of certified coffeeSource: (ITC, 2011) This disconnected approachhas also led cultivators who wish to grow certified coffee (CO), anever-increasing cost, because they must certify across a multitude of standardsagencies (Mutersbaugh, 2005; Thrupp, 1997). For example, certification from Organic, Fairtrade andSmithsonian Bird Friendly, include hefty annual auditing and establishmentcosts. These costs essentiallyeliminate the premium price effect of the coffee they sell, resulting in noadditional compensation. Furthermore, the methods involved in being organicallycertified often produce a lower coffee yield than conventional methods (Akkerman & Van Baar, 1992). This puts organic coffee cultivators at a disadvantage over theircounterparts who grow to achieve high yields with lower costs. Moreover, thedifferentiation between producer and farmer born costs because of certificationis crucial.

In organic coffee, production costs fall to the producer however insome certifications, like Fairtrade, the financial costs imposed are born bythe distributors/roasters. This differentiation is crucial because it shows theeffectiveness of selected certifications in improving SBP because the financialpremium for their coffee is not outweighed by the cost of certification. On evaluation, if thedirection of the industries certification system aligned the effectiveness ofcertification would be improved. It would re-establish the standardized norm ofcoffee growing ethics allowing all farmers to reap the rewards of premium-pricedcoffee and not be undercut by non-certified farmers. More research would needto investigate this theory because current literature does not yet show theeffect of normalising standards across an industry and the ability to introducea premium price.

Thus, the balance between certified and non-CO would need tobe identified to ensure SBP. A perfect world case scenario would be to ensureSBP is by formally establishing legislation for all coffee producers not justindividual farms. Nonetheless, most independent standards are ‘remarkablysimilar in their organizational design, processes and rhetoric (Dingwerth & Pattberg, 2009), which means theircombined effect is to some extent ensuring SBP.

Some firms evenimprove these standards to increase customer market share. It has now even becomea race “to continually innovate, and, in fact, increase their effectiveness” (Fairtrade, et al., 2011). This would argue that private sector sustainabilitystandards are more than sufficient to meet SBP as firms race to continuallyimprove them. Competitive Market Structure The coffee industry is partof a competitive market system. “The U.S.

coffee market is neither purelybrand, flavor, nor form-primary, since items of different brands, flavors, andforms are ‘perfect substitutes'” (Fraser & Bradford, 1983). The consumers’ ability to ‘perfectlysubstitute’ their coffee demonstrates the necessity for firms to conform to newconsumer demands to remain profitable. During the past decade, consumers havepaid increasingly close attention to the sustainability of their coffee andexpressed a want for SBP due to “concerns over environment, health and safety,ethics and diet” (Goodman & Watts, 1997).

 Assisted by globalisation,the ideology of collectivism and a civil society has been created. Cooperationand a unified direction for a change in welfare are hallmarks of this recent ideology(Forgas & Bond, 1985). This unified collective bargaining pressurises firms to makechanges to the sustainability of their business. A failing to react to consumerdemands in a competitive market would ensure that those companies no longerremain profitable. For example, Costa Coffee now only uses coffee which hasbeen sourced from farms who have only been approved and certified by theRainforest Alliance. This certification places a premium on the purchasingprice of the coffee beans. CO sees price premium of between $0.

16 and $0.20 perpound (Loureiro & Lotade, 2005). Thus, an increase in the costs of production. This additionalproduction cost is voluntarily undertaken by the firm because the nature of theof the market forces would result in a fall in revenue if otherwise avoided.The possibility of negative business performance is sufficient to ensure thatthese private sector companies self-regulate and promote the ideology of SBP. However, not all privatesector industries have high levels of market competition. The consequence of anoligopolistic or even a monopoly market structure would mean that firms nolonger commit to additional costs of production nor to some extent listen totheir consumer demands because product differentiation and innovation becomeless of a challenge.

Hence, there is no need to set sustainability standards todifferentiate their product/service Nonetheless, this civil society response inthe coffee industry remains effective because there is no other overarchinginternational standards body that can regulate companies across international borders.Thus, multinational corporations who operate in multiple jurisdictions couldignore governmental standards implemented by one country whilst working inanother. Hence, meta-standardisation voluntarily undertaken by the companies transcendsinternational borders which individual governments cannot.

Voluntarysustainability standards are, therefore, effectively an indirect attempt togovern international areas (Levy & Newell, 2005). Self-regulation ina competitive market demonstrates itself as an effective means to ensure SBP astheir standards are applied globally not just nationally. Market Price Price is a key variablewhich defines whether an individual is willing to pay a premium for a certifiedproduct over and above a non-certified product. Currently, there is no legalminimum price for a pound of coffee, and thus some consumers choose thecheapest. This does not allow for a margin to implement SBP. Ethicalconsumerisation, which involves a purchasing choice with a moral thought aboutthe production of the product, is argued by Browne et al, to remain influencedby price and ease of purchase (2000).

Most coffee consumers remain solely influenced by price, even withknowledge about Fairtrade, for example, and hence, industry standards wouldeventually succumb to low coffee prices without the aid international regulation. Historically, coffeeprices were set by the International Coffee Agreement. In 1989, however, thisagreement was not renewed and other producers entered the market.

The price ofcoffee fell sharply to $0.49 per pound in 2001 (Figure 2). The consequence; consumersnow dominate coffee production and have become increasingly price sensitive.

Birdand Hughes argue in their three levels of ethical consumers that premium-pricedCO would now become less attractive to ‘selfish’ consumers who are affected byprice alone (1997). This price sensitivity has meant that CO, and the SBP born from it,only create positive externalities for a small number of cultivators. Thus, sufficientSBP is not met because its impacts are so small. In 1995, Fair Trade producershad a productive capacity of 250,000 MT of coffee for a demand of only 11,000MT (Thomson, 1995).This demonstrates that without a worldwide minimum price, firms andconsumers become dictated by price and the premium-priced certified productbecomes obsolete, and consequently sufficient SBP are not met.

               Figure2: Coffee price 1997-2002Source: (ICO, 2002) In 2009,nearly 1.7 million bags of organically CO were traded, a substantial increase,335% since 2001 (ITC, 2011). This data suggests that the consumers are becoming more consciousabout the production of their coffer and thus price elasticity of demand (PED)for CO is becoming more inelastic.

This transition to a more inelastic PED hasallowed firms once again, to improve standards and instil price premiums creatingsufficient SBP. Furthermore, the ability of the free market to differentiateits regulating standards into hierarchies of certification, something called’stringency’ (Muradian & Pelupessy, 2005) has meant that somecompanies such as Nespresso have differentiated themselves outside of just’organic’. Nespresso’s AAA Sustainable Quality (2003) not only promises asuperior quality of bean with an organic property, but also with a focus ontaste. ‘Only 1-2% of all the coffee in the world meets the quality, taste andaroma profile required for Nespresso Grand Cru coffees’.

Consumers in this newhierarchal system can now ignore organic versus non-organic and instead havebeen persuaded by improved quality, to pay a premium price. This new marketsystem has meant that Nespresso is able to offer a ‘premium’ levelcertification of coffee, creating advantages for both the consumer and producerthrough its taste and premium pricing. This shows how a free competitive marketcan maintain is SBP even with a historically volatile commodity at the heart ofits business.

Conclusion In conclusion, thecompetitive market system does to a large extent play a crucial role in theprivate sector of the coffee industry. Firms forced to adhere to the civilsociety demands and accept additional costs of certification to remainprofitable is a key driver in ensuring sufficient SBP. The additional advantageof forced meta-standardisation is that their policies transcend borders,proving very effective for SBP.  Nonetheless,issues may arise with this theory should an industry have anoligopolistic/monopoly market structure. The concept of ‘market in standards’ hascreated a standards war only enhancing the level of sustainability each companyendeavours to be. But, the key issue is the cost of certification.

The cost maycancel out the premium price for CO creating a lack of incentives for farmersto grow it, leading to a decrease in participation and insufficient SBP.Finally, the market price of coffee is the key fundamental that finances SBP.Producers can only ensure these standards are met if the price of the coffee isboth competitively priced for consumers and contains enough margin to ensure SBP.Nespresso is a good example to show how the market can innovate to achieve suchan objective.

Overall, private sector standards as they are in the economytoday, prove effective to the localised farms and businesses. However, there isa serious lack of market share for CO, showing the consumers indifferencebetween products, and their focus on price. In addition, the effect,multiplicity of standards has, is a major cause as to why there is a lack in literatureabout the certificated coffees positive global effect on sustainability. Thus,the best way to ensure SBP is by setting a minimum global price of coffeethrough an international body. 

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