In today’s business environment, corporate social responsibility and business ethics is an increasing issue of interest. Hence, during my internship I have researched what factors reshape the environment the organic food chain deals with. This was very interesting because I was able to contact a number of experts of different

companies and organizations (on farms, in trading companies and non-governmental organizations), already involved in the topic. Visiting these companies and

interviewing the experts was instructive and a good experience.

Now I have come so far to write the preface and complete this thesis. Therefore, special thanks go to Mr. Peter Segger of Organic Farm Foods and Mr. Volkert Engelsman of Eosta, who came up with the idea for this assignment and who gave me the opportunity to research the Fairtrade Organic initiative. Furthermore, I would like to thank Peter Segger and Dr. Paul Nicholas for their support and useful

feedback during my time at Organic Farm Foods.

At last I would like to thank my supervisors at the University of Groningen, Prof. Dr. L.

Karsten and Dr. C. Lutz, for their time, effort and valuable remarks to this thesis.

Without their help this thesis would not have been the same.

Georg Wiechert

The Hague, June 2003

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Summary

The very idea of Fairtrade Organic is to create a food chain with equal relationships, mutual trust and an atmosphere of willingness to work together. The co-ordination between farmers, distributors and retailers allows the different parties to develop a close and sustainable relationship based on respect and being competitive. It is to provide everyone involved in organic farming and processing with a quality of life that satisfies their basic needs, within a safe, secure and healthy working environment.

‘Fairtrade Organic is to support the establishment of an entire production, processing and distribution chain, which is both socially just and ecologically responsible’

Organic standards define the method of production for food and other products such as textiles and health and beautycare products. The standards are the rules and regulations through which the integrity of these products is maintained. Organic production and processing practices take a 'whole system' approach which necessarily addresses environmental issues. This also means that workers are protected from the health risks associated with using agrochemicals, which can be a serious problem in developing countries.

Fairtrade standards have a social goal: they are primarily designed to ensure that disadvantaged producers - small farmers or plantation workers - in the developing world can gain more control over their lives. The standards therefore cover issues such as working conditions, fair prices and conditions that allow producers to

participate in decisions that affect them. Environmental conditions are also important and producers are required to implement environmental improvement plans. In addition the standards include a list of the most dangerous chemicals, which have been banned to protect the workers and environment alike.

As environmentally and ethically conscious consumers we are frequently faced with difficult decisions. This often includes the choice between organic and Fairtrade products. Fairtrade and Organic produce both deliver vital benefits but in the past were not often applied to the same products. The Soil Association has always been committed to the principles of Fairtrade and is now working hard with the Fairtrade Foundation to deliver the benefits of both approaches into one scheme.

With the development of the ‘social’ Fairtrade Organic standards within the basic organic standards, the Soil Association and the Fairtrade Foundation have brought social justice concerns into the world of organic agribusiness. In this way economical, social and environmental values are incorporated into normal business practice.

Fairtrade Organic standards are to stimulate the interaction by means of long term trading relationships (based on trust), transparency and sustainable contracts. The supply chain contexts forces small producers to coordinate their activities and initiatives, and therefore co-operate on a producer level.

The purpose is to develop a strong consumer focus- and supply chain oriented way of doing business in tomorrows trading practices in the organic agricultural. This ‘pull’

strategy is forcing the supply chain to develop equitable trading practices throughout the organic food chain.

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Chapter 1: Introduction

In this first chapter I will describe the topic of my research, the general objective of my study and how I structured my report. This dissertation is written as part of my study Master of Science in International Business.

1.1 Scope of the research

The research area of my dissertation is the organic food chain in Britain and

overseas. The Soil Association (certification body for organic products and produce) and the Fairtrade Foundation (certification body for the UK Fairtrade products and produce) have launched a new pilot project to combine organic and Fairtrade

certification in a single process. It will apply to British as well as imported organically grown products. For the consumers this means that the existing Soil Association Organic logo and the FAIRTRADE Mark will appear together on many products.

The first part of my study is an analysis of some new movements in sustainable corporate performance, initiated by government commissions, NGO’s and

businesses. The reason for this part of my research is to demonstrate that mayor players towards the end of the food chain (powerful retailers for example) are willing to participate in economical-, social- and cultural sustainability projects. Fairtrade Organic produce is an example of such a project.

In order to give an indication of the attractiveness (for all parties in the organic food chain) of a product with such a combined label, my study contains a research on market trends for Fairtrade and Organic products. A gap-analysis on the existing fair trade standards compared with the new Fairtrade Organic standard will allow the reader to get informed (of a technical level) about the new era of organic agriculture.

In this dissertation, I will study these previous matters as they (re) shape the environment the food chain deals with. People talk about the food chain in the food industry but in reality it’s a fear chain¹. Every one involved is frightened of losing out – the buyer of not meeting his profit margin, the packer of being de-listed by the

supermarkets, the grower of rejects or being priced out of business.

In order to determine whether this new pilot scheme will contribute to these problems in existing trading practices, I have interviewed some important contributors to

organic production.

The aim of this dissertation is to give a sound and thorough analysis of Fairtrade Organic for all interested and relevant parties in organic produce.

General objective

The general purpose of this dissertation is to investigate what the impact on and the responsibilities of the food chain actors will be, according to sustainability in

economic-, social- and cultural policies, and responsible business behaviour² in organic agriculture, in order to formulate an advise about strategy development for businesses involved in organic agriculture. By studying those movements, the

1 Patrick Holden, Director of the Soil Association.

2 Definition of concepts in Chapter 3

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purpose of this research is to enable businesses to formulate a strategy that takes these elements into practice. To be more specific, the general objective of this dissertation is: “ to advise organic producers/processors about the impact of

sustainability and responsible business behaviour on tomorrows trading practices in the organic agricultural food chain”.

Research questions

In order to achieve the general objective the first part of this dissertation will contain a study of new contributions to sustainable development from different stakeholder views (e.g. governments, commercial, NGO’s). It will answer the question:

How can Fairtrade Organic contribute to (corporate) social responsibility and ethical trading practices throughout the organic food chain?

Secondly, a thorough study of marketing trends in Fairtrade and Organic products is required. What is the trend in the market for Fairtrade- organic products (vegetables, fruit and salads)? The importance of this question is to verify whether the project enables consumers to express their preference for Fairtrade-Organic products.

Thirdly, to determine in which ways the new standard for Fairtrade Organic differs from the existing generic Fairtrade standard, the following research question will be answered. How will a new Fairtrade Organic standard contribute to the organic food chain, compared to existing Fairtrade and Soil Association standards and

procedures? This will provide a framework of the practical and ideological scope of the new Fairtrade Organic standard.

Fourth of all, I interviewed three people actively involved in creating the new

certification standard. The main objective of this part is to obtain the expert opinions of the people practically involved in Fairtrade Organic. Therefore, the last question to be answered is: How does the Fairtrade Organic standard affect the actors (parties) in the Organic food chain?

The research question combines these previous questions.

“Can the merger³ between the Organic certification and the Fairtrade certification effect in-, and contribute to sustainable trading practices throughout the organic food chain in the developing, as well as in the developed world?”

1.2 Outline of the report

In chapter 2, I will start with the research motive followed by the research plan and the methodology explanation of my research.

Chapter 3 will give an analysis into the movement of corporate social responsibility-, and sustainable development concepts from a governmental view, non-governmental organizations view and the perception of commercial organizations. I will discuss this in order to find out what is really happening within these organizations in terms of willingness to contribute, future governmental regulations and future obligations towards sustainability. However, most important of all: if-, who- and how the action is taken towards the subject.

3 This merger is on the level of the pilot-project for Fairtrade Organic certification. It is to allow both, the Fairtrade movement and the Organic movement, to work together efficiently on this certification study. Both movements are still operating separately from each other.

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Chapter 4 will give an overview of the market trends in Fairtrade Organic. This will explain the very basics of the initiative: the demand for this product (an instrument for the consumers to use its purchasing power to keep farmers on the land).

Chapter 5 contains a gap-analysis between the current General Fairtrade standard, which the Fairtrade Labelling Organization (FLO) uses to certify Fairtrade products, and the Soil Association’s additional standard for Fairly traded Organic products.

Chapter 6 describes the practical effects of the new Fairtrade Organic standard on the food chain, obtained from interviews with the different parties involved in the project.

Chapter 7 will contain conclusions and recommendation for the Fairtrade Organic pilot project, concerning the previous issues.

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Chapter 2: Methodology

In this chapter, I will explain how I got to the topic of my dissertation, the construction plan of my research and the research methodology I used.

2.1 Research motive

In the orientation for my dissertation, I was looking for a topic related to ethical practices of today’s businesses. I had the preference to know Volkert Engelsman⁴, one of the leading entrepreneurs in organic fruit and vegetable import/distribution in Europe. He told me that he was involved in a dramatic new pilot project to combine Organic and Fairtrade certification in a single process. His company, EOSTA⁵, has a strategic alliance with Organic Farm Foods⁶ the leading importer/packer/distributor of Organic fruits, vegetables and salads in the United Kingdom. The pilot scheme was supposed to be launched on the British market of Organic products. I was lucky enough to assist Organic Farm Foods with the introduction of the first Fairtrade Organic products.

In the first meeting with my supervisor Prof. Karsten, we developed the idea of having a closer look at the food chain for Organic products and the impact the combined Fairtrade Organic standard would have on this food chain, instead of focusing on marketing strategies for implementing the product.

With this broad idea, I went into the library and looked for information to specify this topic. Discussions with my fellow students, and the remarks of Mr. Segger⁷ and Dr.

Nickolas⁸ form Organic Farm Foods, were very helpful to develop my research idea.

I believe my research topic is a very interesting and current subject to study for an international business student who wants to develop itself on the field of (inter) national sustainable trading practices.

2.2 Research plan

The aim of this report is to achieve the general objective as formulated in Chapter 1.

2.2.1 General Objective

To advise organic producers/processors about the impact of sustainability and responsible business behaviour on tomorrows trading practices in the organic agricultural food chain.

In order to reach the general objective the following research question needs to be answered.

4 Managing Director of EOSTA BV.

5 EOSTA BV; Organic & Biodynamic Importer/Distributor: www.eosta.com

6 Organic Farm Foods Ltd; Organic & Biodynamic Importer/Distributor/Packer: www.organicfarmfoods.co.uk

7 Managing Director of Organic Farm Foods; Initiator of Soil Association pilot-project for Fairly Trade Organic

8 Head of the Services department of Organic Farm Foods.

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2.2.2 Research Question

“Can the merger between Organic certification and Fairtrade certification effect in-, and contribute to sustainable trading practices throughout the organic food chain in the developing, as well as in the developed world?”

Derived from this research question are the following sub questions.

2.2.3 Sub Questions

• Can Fairtrade Organic certification contribute to social responsibility and fair trading practices throughout the organic food chain?

• What is the Organic- and Fairtrade movement, and which parties are involved in the project?

• What is the trend in the markets for Fairtrade and Organic products (vegetables, fruits and salads)?

• What does the new Fairtrade Organic standard adds to the organic food chain, compared to existing Fairtrade and Soil Association standards and

procedures?

• How does the Fairtrade Organic standard affect the different parties in the organic food chain?

2.3 Research Methodology

This research can be classified as exploratory research⁹. In this type of research the explorer takes the role of discoverer, based on three principal ways of conducting information; a search of the literature, talking to experts in the subject and conducting focus group interviews. The researcher tries to discover what factors play a role, if there are linkages, and what the motives are behind the events.

I will collect and study secondary data and primary data, in order to answer my research question and to achieve the general objective. I will explain my study in more detail.

2.3.1 Secondary Data

In the first part of this research I studied secondary data, also called desk research.

Secondary data¹⁰ is already available information collected by someone else and available for this purpose. The disadvantage of secondary data is that it almost never gives all data needed for answering the research question. Nevertheless, the

advantages of using secondary data for research are numerous, and in this case very convenient to describe the market trends. Using secondary data for research saves time (and money) and the use of diverse sources presents different points of view from different time periods. The last point is important for my research as this gives me the opportunity to make trends and market movements and market developments visible.

9 Saunders, M.N.K. et al, Research Methods for Business Students, Pearson Education, 2000, p.97

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I had access to a lot of internal resources of Organic Farm Foods, Eosta, the Soil Association and the Fairtrade Foundation. I looked into reports, internal documents, standards and archives. The other source of secondary was external; I used many books, published articles, and web pages, called organization and asked for

information for my research. Especially online databases of published journals were very useful for my research.

2.3.2 Primary Data

For this research I also used a qualitative research method¹¹ in order to answer the fifth sub question. Qualitative data can be classified as data based on meanings expressed through words. Data conducted from interviews are called primary data.

Primary data are original data especially collected for this research. The objective of qualitative research is to obtain opinions about the research topic or to study

behaviour. The focus is on ‘understanding’ instead of ‘measuring’. Primary data give a good indication for needs, wants, and wishes of possible developments.

The qualitative research done for this study was in the form of interviews with different actors in the organic food chain. I believe that researching this new pilot project will not be complete without the expert opinions from the people in practice.

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2.4 Conceptual Design

The conceptual model illustrates the way the Fairtrade Organic project has been developed in order to come to a new certification standard for fairly traded organic products.

Figure 2.1. Conceptual model

The model shows the way the Fairtrade initiative emerged at the very beginning of the organic supply chain, after organic farmers, the Soil Association and the Fairtrade Foundation studied the possibilities to redesign the organic food chain (the cause of Fairtrade Organic certification). Meanwhile, at the end of the supply chain the

consumer uses its purchasing power to stimulate retailers, wholesalers and NGO’s to cope with their concern for organic agriculture and fair trading practices (the reason for the FTO certification body to develop a certification standard for fairly traded and organic produce). The literature studied in order to answer the research questions is about the way different stakeholders can influence the practices of a supply chain (ethical business codes by supply chain actors, governmental policy concerning sustainability, non-governmental organizations and commissions with reports and studies).

Importer Packer Distributor ^Wholesale Consumer Retailer

Organic Farmer

Market Trends Dem and for Ethical

trade Principles

FAIRTRADE ORGANIC CERTIFICATION STANDARD

Soil Association

&

Fairtrade Foundation

MNE’s

Ethical Business codes

EU

Self-Regulating policy

NGO’s

Studies and reports Certification body

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Chapter 3: Theoretical Background of the Research

3.1 Introduction

In this part of my dissertation, I will try to find an answer on the question of how the interests of smallholder producers can be addressed in a global environment where multinational corporations ‘run the show’. More accurate; how can the new Fairtrade Organic standard provide a contribution in achieving ethical and sustainable trading practices in corporate agribusiness?

3.2 Corporate social responsibility and ethical trading practices

Many companies nowadays have ethical business codes and/or mission statements suggesting they are actively involved in responsible business practices. In reality however, companies do not suit the action to the word.

Nevertheless, corporate agribusiness is becoming more involved in sustainable ways of thinking. In fact, there are already examples of multinational retailers (Sainsbury’s, CWS (co-op supermarkets) and Ahold), who are practically involved in ethical and sustainable practices in agriculture.

In the recent years, there has been a growing attention for the responsibilities of corporations and business ethics. In general, this is the attention for human well- being and the care for the environment besides the economic performance of organizations. It is often referred to as a triple bottom line: consciously creating long- term value in terms of Profit, People and Planet¹². John Elkington, a consultant, is the inventor of the triple bottom line. The triple bottom line is distracted from the term bottom line, which is a commonly used as a financial term. There is a growing belief that organizations should be evaluated on the three dimensions: their economical, social and environmental performance; one can conclude that this triple bottom line is the very basic thought of the new Fairtrade Organic standard.

In order to convince the major players, towards the end of the (organic) food chain (wholesalers and retailers), of the positive effect of this new standard for their performance (and the wish of consumers to by fairly traded Organic products), I will give an introduction about the way some multinational enterprises, banks and governments deal at a corporate level with corporate social responsibility and sustainable corporate performance already.

12 Janssen Groesbeek, M, Maatschappelijk ondernemen: theorie, praktijk, instrumenten, Amsterdam (2001) Business Contact: p.15

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3.3 From corporate social responsibility to sustainable corporate performance

Some literature and company managers link the corporate responsibility concept to the views and opinions of their stakeholders¹³. Stakeholders are the parties whose interests can be influenced by the activities of the organization, or the stakeholders can influence the interests of the organization. Recognition of the most important stakeholders and their interests is essential for an organization to understand the needs, desires and concerns of the various parties involved.

In general one can indicate two groups of stakeholders. The first group can be categorized as internal parties concerned in the activities of the organization:

suppliers, customers, employees, and stockholders (shareholders). The second group includes external parties such as neighbors (hinder and inconvenience), non- governmental organizations (like the Soil Association and the Fairtrade Labelling Organization), banks, governments, competitors and unions¹⁴.

One can imagine the way in which every stakeholder is important in its own way for an organization. In this case I would like to highlight some stakeholders and their involvement in this matter.

Non-governmental organizations (NGO’s) are often one-issue groups. They watch the activities of organizations with regard to their ideologies (environmental, social or cultural). Stockholders and investors (mainly banks) are increasingly paying attention to social and environmental behaviour of corporations besides their economic

performance, because they are increasingly aware of the long-term benefits of it.

Moreover, banks are willing to invest in new ways of financing. Green funds are examples of this trend.

Some banks have been founded already to support innovative businesses. The Triodos bank¹⁵, for example, is one of Europe’s leading ethical banks, offering a range of simple targeted and regular savings accounts to support innovative businesses and organizations pursuing positive social, environmental and cultural goals, within everyday banking needs.

Consumers also become more and more interested (and critical) about the behaviour of corporations. Consumers increasingly prefer to buy products that are ethically and environmentally friendly produced. The market research in the third chapter of this dissertation shows the trends in the demands of Fairtrade and Organic products.

With the growing attention to corporate social responsibility, corporations also start to evaluate the behaviour of their suppliers and buyers (customers) (: This is where Fairtrade issues are at stake).

At this moment, governments try to play a stimulating role for corporate social responsibility developments, instead of the policy-making role they usually play. In the next paragraph I will describe the governmental standpoints at a European level on corporate social responsibility more detailed.

13 Steg, L. and Vlek, C. et al, Towards a comprehensive model of sustainable corporate performance, University of Groningen, Interim report (revised), May 2001, p.17

14 Freeman, R.E, Strategic Management: A Stakeholder Approach, Pitman Publishing Company, 1984.

15 www.triodos.co.uk

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The employees of organizations are regarded as important stakeholders. A good relation with the workforce is a valuable asset for an organization and has a positive influence on the job market.

However, there are limitations to the stakeholders’ approach of corporate social responsibility. Stakeholders’ information, perception knowledge and interests are often limited and they may be biased¹⁶. The stakeholders’ approach or the corporate responsibility concept does not deal with fair rules of the game and human welfare, and is according to the opinion of developing countries ”western-industrialized”.

Freeman argues that the way to ensure that stakeholders are treated fairly is to adopt the ‘veil of ignorance’¹⁷ argument for all the parties to a contract. In short, if ignorant of the stakes involved, each party would be prepared to accept what is on the other side of the table if seats were reversed. Therefore, Freeman proposes six ground rules to ensure appropriate ‘rules of the game’. These rules focus on a way of development that meets externalities-, morality- and corporate governance needs (see box 3.1). This he calls the doctrine of fair contracts.

To overcome the critics of human welfare, corporate social responsibility has been linked to the term sustainable development.

Sustainable development is defined by the World Commission on Environment and Development (WCED)¹⁸ as ‘a development that meets the needs of the present without compromising the ability of future generations’.

It is meant as fair terms of trade with producers in less developed parts of the world as well as the developed world, local sustainability for small producers, more equally shared profits and decent working conditions, enabling producers to improve their lot and have more control over their lives.

By aiming for sustainable development in ‘our common future’, the injustices of world trade, which traditionally discriminates against the poorest and weakest producers, will be addressed.

Table 3.1 Ground rules to ensure appropriate ‘rules of the game’¹⁹

17 Mc Ewan, T, Managing Values and Beliefs in Organizations, Pearson Education Limited, 2001, p.330

18 World Commission on Environment and Development, From one earth to one world: An overview. Oxford 1987, Oxford University Press.

19 Freeman, R.E., Strategic management: A stakeholder approach, London, Pitman, 1984

The principle of externalities proposes that when contracts between stakeholders A and B are agreed, costs cannot be imposed on C without the latter agreeing to become party to the contract. The principle is designed to ensure that no stakeholder is placed in the same unacceptable situation as C.

The principle of morality proposes that the organization must be managed as if it can continue to serve the interest of all stakeholders over time and must accept that the continued existence of an effective organization is in their interest.

The principle of governance proposes that the procedure for changing the rules of the game must be agreed unanimously, to ensure that no stakeholder is excluded by others, but retains the right to participate in the governance of the organization.

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Sustainable Corporate Performance (SCP) became the new word in the debate around these issues since it was introduced in the Brundtland report “Our common future” of the World business council for sustainable development.

In this dissertation, I will use the definition of SCP developed by the Sustainable Corporate Performance Project of the University of Groningen in co-operation with the Royal Ahold.

Sustainable Corporate Performance is ‘the apparent dedication of businesses to contribute positively to the welfare of various stakeholder groups, ‘here and now’, but also ‘there and in the future’. This definition is based on a set of values and

principles; among others these include values of social responsibility and caring for others. It simply is not fair, neither necessary that so many people throughout the world must live in poverty, or work in unacceptable conditions. That is why this

definition stresses the cooperation towards a wide range of interest groups in order to help people, and addresses multinational corporations to use their power and

international business expansions to initiate joint responsibilities.

In order to give an indication on how the standards for Fairtrade Organic makes sustainable development operational for the different parties in the organic supply chain, table 3.2 shows the requirements, certification methods and verification of Fairtrade Organic operations.

Certification methods to asses practices of supply chain parties

Requirements of Fairtrade organic standards

Verification of Fairtrade Organic produce

Practices of farmers and/or co-operatives must be financially and administra- tively sound. Minutes of all meetings, voting records, annual accounts and other records of co-operative activities must be made available to members.

All parties must be able to demonstrate aware- ness of national legislation on employment policies, terms and conditions (written).

All parties must prove the trading relationship between them are of three years duration as a minimum, unless specific conditions prevent this.

All parties must prove the price paid for product must, as a mini-mum, be related to the cost of production plus a margin for profit and in-vestment.

Organic Farmer

(Co-operatives)

Importer

Packer

Distributor

Wholesale Retailer

The operational procedures and practices, from intake of raw materials through the packaging and dispatch stage, including sourc- ing of raw materials and adequate identification during storage, processing and transport, must be supported by effective and documented control systems and records to provide an audit trail to enable the inspectorate to trace:

The origin, nature and qualities of fairly traded organic products which have been delivered by and left the unit

Descriptions of management systems have to be in place to ensure effective moni- toring, delivery of ethical practices. For example details of personnel filing sys-tems, systems to deal with grievance, training procedures and control mechanisms for the whole of the supply chain.

A purchasing policy statement is required, which must be publicly available, records must be retained and be made available to the certification body.

Table 3.2 Methods to make sustainable development operational (source: standards for FTO Appendix II)

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3.3.1 The European Union

At the European Council Summit in Lisbon in March 2000, the European Union set itself a new strategic goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion. Underlining the

important contribution of the private sector in achieving this goal, for the first time the European Council addressed businesses directly in "a special appeal” to companies' corporate sense of social responsibility regarding best practices on lifelong learning, work organization, equal opportunities, social inclusion and sustainable development.

In the viewpoint of the European Commission for Employment and Social affairs (July 2002²⁰) all businesses should aspire to corporate social responsibility. Up front the necessity of far running transparency is mentioned. If businesses would take their own responsibility, and therefore could be called into account for their actions, the role of government regulations should be limited. Furthermore, the EC pointed out that businesses that would not implement principles of corporate social responsibility, would react to positive signals (sharing of best practices, providing renewed

initiatives) and in that way would be stimulated to joint the new developments.

If necessary, certain developments will be laid down in litigation and/or regulations.

These measurements will be based on minimum requirements. The fact of the matter is that corporate social responsibility could not be enforced by legal action, according to Brussels.

In situations where European governmental bodies will cooperate with private parties in order to reach for social responsible goals, the government’s role must be coherent and consequent. The EC must be a very reliable partner for organizations and

entrepreneurs in this case (naturally the same principles have to work the other way around). The EU standpoint means there are no fixed recipes in this way of private- public cooperation: corporate social responsibility is made to measure.

The European Commission however, is promoting a European framework for corporate social responsibility²¹. This framework allows private corporations to foresee the challenges of the changing environment in the context of globalization and in particular the internal market. The European Commission is increasingly aware of the corporate social responsibilities and its direct economic values. It

therefore points out that organization will stay behind if they neglect this process (and implicitly points in the direction of EU legislation in the future).

The main contribution of a European governmental approach, suggested by the European Commission, is to complement and add to existing activities by:

• Developing broad principles, approaches and tools, and promoting best practice and innovative ideas, and

• Supporting best practice approaches to cost-effective evaluation and independent verification of corporate social responsibility practices, thereby ensuring their effectiveness and credibility.

20 European Commission for Employment & Social affairs, Promoting a European framework for corporate social responsibility, Green Paper, July 2002

21 European Commission for Employment & Social affairs, Promoting a European framework for corporate social responsibility, Green Paper, July 2002

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3.3.2 The private sector

In the contemporary global economy, Sustainable Corporate Performance is the primary responsibility of multinational corporations and their relevant stakeholders, due to the business expansion, internationalization (globalization) and the political diversity in the world²². That is true, perhaps because there is no international legislation nor certifying programs for sustainable performance at the time.

Organizations, especially large multinationals, are increasingly aware of this responsibility. Many organizations, such as the Organization for Economic Cooperation and Development (OECD), the Global Reporting Initiative (aims to standardize sustainability reporting and put it on a par (level) with financial reporting in terms of credibility and comparability)²³, Universities and Governments, are working on these matters together with multinational organizations.

The focus of most recent studies is on the assessment, management and supervision of Sustainable Corporate Performance. Until now there are no generally accepted reporting standards, and the existing ones are too limited to reflect the value of business practices to society. The Fairtrade Organic standard is a standard that aims on the contribution of business outcomes for society as a whole. It looks for equal relationships, mutual trust and an atmosphere of willingness to work together in order to create profits for all parties involved in producing organic food.

The other problem is the validity and reliability of a corporate social report. Since no generally accepted reporting standards have been developed, chances are that corporate social reports are used as propaganda and that reports especially reflect the good things a corporation is doing, while neglecting the negative consequences of corporate performance. This has been underlined by the report on sustainable corporate performance by the University of Groningen (January 2003).

In line with these difficulties the Social and Economic Council (SER) in the Netherlands, for example, advised the Dutch Government to encourage

organizations to report Sustainable Corporate Performance but not legally enforce it (yet). Mr. H. Wijffels, chairman of the SER, stated: “without having the right

measurement instruments enforced regulations of the government would be symbolic legislation” ²⁴. Mr. C. van der Hoeven, former CEO of the Royal Ahold, said he

expected that there will be a general acceptance reporting standard within five or ten years, in may 2001. Mr. Van der Hoeven thinks that such reporting standards will increase the involvement of corporations in Sustainable Corporate Performance “it is the nature of business, corporations want to score better than their competitors”.

Nevertheless, Mr. Van der Hoeven had to resign (ironically) as CEO of the Royal Ahold late February 2003, because of a $ 500 million black hole in Aholds accounts, relating to Aholds US foodservice subsidiary²⁵.

In line with Mr. Van der Hoeven’s comments on future standards towards ethical involvement however, this is the point where the British Soil Association launches its new standards for Fairtrade Organic, with the meaning of ethical and sustainable relations in the organic food chain.

23 The Global Reporting Initiative, Sustainable reporting guidelines, June 2000

24 Albrecht, Y, Verbeter de wereld, begin bij je beurskoers: interview met H. Wijffels, C. van der Hoeven en M.

Tabaksblat, Vrij Nederland, 19^th of May 2001, 2001, P.54

25 www.observer.co.uk/business/story/ Deloite faces SEC problems with Ahold, 2^nd of March 2003

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3.4 From Sustainable corporate performance to an efficient supply chain

Interest in Supply Chain Management (SCM) has been spurred by recent socio- economic developments. Because of demographic and socio-economic

developments (for example strong increase of the ageing population, more double- income families) there is a growing demand for fresher products and products with higher added values. Furthermore, the effects of globalisation, the market entrance of new competitors, and stricter governmental requirements for food safety and

environment-friendly production place increasing demands on retail companies.

These developments have resulted in a change in performance requirements for food supply chains as a whole and, consequently, for all stages in the supply chain.

Managers realised that sub-optimisation (inefficiency) occurs if each organisation in a supply chain attempts to optimise its own results rather than to integrate its goals and activities with other organisations to optimise the results of the entire chain.

To illustrate, there is the situation at the very end of the food chain were the multinational retailers run the show nowadays. The retailers are able to determine what and how many products they need (because they have the resources to finance all relevant research on market trends). It therefore knows what the consumer is asking and is able to tell the farmers what to produce. The retailer can afford it to determine what the demanded price is, since it can buy huge quantities. In other words: the retailer’s goal is profit optimisation. Therefore price-setting towards small producers occurs²⁶.

This holds true especially in food supply chains where particular actors in the supply chain damage all the efforts initiated in other stages to preserve high product quality or integrity, in order to maximise profits. If a product is traded in a fair way, but at the end of the chain a party does not care about ethics, and is only out on making profits all efforts in previous processes can be damaged. Furthermore, it is generally

recognised that it is through logistics and SCM that the twin goals of cost reduction and service enhancement can be achieved²⁷ (so there are possibilities to have satisfying profits). The recent developments in Information and Communication Technology facilitate this process.

It is therefore important for managers to know that a 'best practice' supply chain scenario refers to a feasible chain scenario that achieves the best possible outcome for the whole system with respect to predefined supply chain performance

requirements. These methods should assist managers of food companies in

evaluating their current position in a food supply chain and in deciding whether and how they should redesign the supply chain in favour of every one involved in the system.

26 Towards large producers (e.g. Procter & Gamble, Unilever etc.) retailers have to fight for a broad selection of strong brands, and therefore they have to negotiate to get a best possible price (the large produces sets the price).

27 Torwill, D.R, Supply Chain Management; Production, Planning and Control, Taylor & Francis, 1995, P. 208- 284

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3.5 The Fairtrade Organic standard: a contribution to an efficient supply chain?

The transformation to efficient supply chain management requires changing processes of choosing and working with suppliers and the personal relationships between employees of firms in the supply chain. All organizations in the supply chain must have a common vision of how to collaborate to create value jointly. All parties have to recognize that trust in relationships will take root only if both parties are confident about sharing in the rewards (more detailed in chapter 6).

The Fairtrade Organic standard creates value by its aim and objective to emphasize on ensuring fair and equitable trading relations and employment relationships, together with socially responsible practices, in the organic food chain (more detailed in chapter 5).

Possibilities for collaboration will depend on the specific agricultural industry. Grain and livestock transactions are for example in general called ‘dominated by spot markets and contracts’. Flowers, vegetables fruit and salads are generally operating in more formal chain relationships (for example: farmer sells products to distributor, importer/distributor/packer to retailer, retailer sells to consumer). An increase in value adding, however, will clearly require a movement towards formal co-operation and vertical integration arrangements.

The Fairtrade Organic standard (articles in section 6 of Fairtrade Organic standards) stresses the impotencies of co-operation and co-operatives: co-operatives only work if they are independent, democratically controlled by its members and established for the benefit of its members. The standard states that co-operatives allow small and large producers to come together on an equal footing, enabling them to pool their resources and benefit from economies of scale that the individual members would not be able to do on their own.

In other words, as long as co-operatives are independent, democratically controlled by its members and established for the benefits of its members, they are welcomed by the Fairtrade Organic principles.

The transformation from a relationship consisting merely of open and impersonal market negotiations to a supply chain strategy require changes in mindset and strategic orientation among supply chain partners²⁸. A transformation from open market negotiations to co-operation can be considered as a starting point for supply chain management. This requires the partners to engage in long-term contracts. This is one of the ‘spearheads’ of the Fairtrade Organic principles. It defines that sound and sustainable trading relationships are built on trust, transparency²⁹, equity and continuity between parties. The standard takes the approach of good trading relationships with rules on long-term contracts (with a minimum duration of three years), a basis for minimum prices and purchasing policies.

Furthermore, if co-operation is successful it will allow parties to transform towards co- ordination of activities. Coordination requires strong information linkages, trust and commitment. Partners must also share a common vision and goals, and plan jointly

28 Interview with Mr. R. Hardy, Policy maker of the Soil Association , Bristol, Jan. 2003

29 Transparency in this context aims to establish shortened, localized supply chains where possible in order to allow stakeholders to identify and recognize fair trading practices.

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to reach such goals. This is basically the second trend Mr. Bretman³⁰ talked about: a movement away from open markets for raw agricultural products towards vertically co-ordinated transactions.

The very idea of Fairtrade Organic is to create a food chain with equal relationships, mutual trust and an atmosphere of willingness to work together. The co-ordination between farmers, distributors and retailers on making crop plans is, for example, to enable the different parties to develop a close and sustainable relationship based on respect for each others issues. It is to provide everyone involved in organic farming and processing with a quality of life that satisfies their basic needs, within a safe, secure and healthy working environment. ‘Fairtrade Organic is to support the establishment of an entire production, processing and distribution chain, which is both socially just and ecologically responsible’, Mr. P. Segger, my supervisor in Organic Farm Foods, and one of the initiators of the fairly traded Organic standard always highlights. It is to share the common vision of fair and ethical principles in doing business.

If co-ordination of practices with equal relationships, mutual trust and the willingness to work together between co-operatives, as well as between co-operatives and other parties in the supply chain, the situation is created that relations are profitable in both sides. It will be easy to assess in an early stage whether parties within co-operatives or between different parties in the supply chain do not function because of the transparent practices and shared interests.

Supply chain management is basically converting the supply chain from a ‘push’ to a

‘pull’³¹. A ‘push’ is to create and produce products through the food chain from which the consumer can select, while a ‘pull’ is to produce products, which were designed or selected by the customer or consumer, through the food chain. The demand by the consumer for Organic and Fairtrade products is a case in point. Thus, the Fairtrade Organic products are ‘pulled’ through the food chain by collaboration and co-

ordination amongst members in the food chain who know what the request of the market is.

30 Interview with Mr. I. Bretman, Deputy director of the Fairtrade Foundation, see paragraph 6.1

31 Torwill, D.R, Supply Chain Management; Production, Planning and Control, Taylor & Francis, 1995, P. 208- 284

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Chapter 4: An overview of the market for Fairtrade Organic

This chapter will give an overview of the trends in the Fairtrade industry, and the market for Fairtrade Organic products, in order to answer the first sub question.

4.1 Introduction of the market and the products

Fairtrade is commerce with a commitment to developing equitable partnerships between marketers in highly industrialized nations and low-income producers in developing regions of the world. The basic idea behind this chapter is to show the commercial advantages of Fairtrade Organic. The first component of this chapter is to show how the market growth develops on Fairtrade products (in particular fresh products) in the United Kingdom, continental Europe and the United States and Canada. Secondly, I will give an overview on the sale of certified Fairtrade products.

The third part of this chapter is to show how the market develops for Fairtrade Organic products.

Fairtrade is a rapidly growing industry in the United Kingdom, continental Europe, the United States and Canada, poised for continued growth in the near future. From 1999 to 2001, sales grew for both Fairtrade companies, and certified Fairtrade products. The Fairtrade Foundation³² emphasizes a growing interest in Fairtrade initiatives (such as Fairtrade-Towns and -Cities) and products. In the UK and Switzerland, the market trend shows a growth explosion in fair trade organic fresh products (bananas, mangos).

4.1.1 What is Fairtrade?

Historically, the Fairtrade movement has focused on creating equitable partnerships between Western marketers and low-income producers in developing regions of the world. Fairtrade partnerships seek to establish long-term relationships between low- income or disadvantaged artisans and farmers, and their Western trading partners, in order to guarantee a living wage for their work. Back in the 1960s Fairtrade’s big issue on trade was how to help get countries out of the monoculture of cash export crops, converting land instead for domestic food production, and encouraging the export of higher value finished products rather than mere raw materials.

4.1.2 Fairtrade Companies

The Fairtrade movement broadly referred to today as Fairtrade, originated with the Alternative Trade movement of the mid-twentieth century (1956). Alternative Trade Organizations (ATOs) started as religiously affiliated non-profit organizations

engaged in international development initiatives. People knew little about the realities of so-called "sweat shops”, and the conditions under which products were made, were not really considered to have anything to do with us western consumers.

32 The Fairtrade Foundation, Future plans for UK market, London, www.fairtrade.org.uk

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Oxfam started to buy on a very small-scale handicrafts from commercial importers in order to raise funds for an aid programme.

During the 1970s and 1980s the concept of Fairtrade materialized³³ as a new generation of businesses began operating based on the core business value of improving the lives of low-income developing world producers through the sale of their products in Western markets.

These Fairtrade companies import, wholesale and retail a wide variety of products, including: apparel, accessories, art, crafts, agricultural products, furniture, cards, holiday items, house wares, jewellery, music and musical instruments, paper, pottery, rugs, textiles, toys and others.

Today, the Fairtrade movement includes hundreds of companies all over the world that sell-, trade-, label- and distribute Fairly Traded products, as defined by the membership standards of major Fairtrade certifying organisations (Fairtrade Foundation (UK), Fair trade Labelling Organisation (continental Europe) and Fairtrade Federation (U.S and Canada)).

Figure 4.1: Structure of Fairtrade organisations³⁴.

The idea behind this structure of the Fairtrade movement is to enable developed countries to determine their own national needs and wants, within the Fairtrade philosophy. Fairtrade candidates can apply for Fairtrade certification by their national

33 Roozen, N, Hoff, F van der; Fair trade, Het verhaal achter Max Havelaar-Koffie, Oké-bananen en Kuyichi- jeans, Van Gennep, 2001.

34 Fairtrade Foundation, London, January 2003.

Max Havelaar Switzerland TransFair

Canada

TransFair Japan

TransFair U.S.A.

Reilun Kaupan Edistamisyhdistys

Finland

Max Havelaar Netherlands Max Havelaar

Belgium

Foreningen for Rattvisemarkt

Sweden Transfair

Austria

Fairtrade Foundation

UK TransFair

Germany

TransFair Minka Luxembourg

TransFair Italy Max Havelaar

France Max Havelaar

Denmark

Max Havelaar Norway

Fairtrade Mark Ireland

FLO Board

Standards &

Policy Committee Certification

Committee

Certification Unit

Product Management Producer

Support

National Members Producers

& Traders

Table of Contents

Preface

Summary