Introduction industry to assess private sector sustainability standards.

Introduction

 

This essay will focus on
the coffee industry to assess private sector sustainability standards. The
private sector is the part of the economy that is not under state control, the
state can, however, set regulations. However, within the coffee industry, there
is very little state regulation to ensure Sustainable Business Practices (SBP)
are met. Thus, the essay’s focus will remain the industries meta-standardisation
framework. The formulation of these voluntary standards is, “a process in which
non-state actors from more than one country generate behavioral prescriptions
that are intended to apply across national borders” (Dingwerth & Pattberg, 2009). The characteristic
of a sustainable standard can be defined as, “as a set of ‘voluntary predefined
rules, procedures, and methods to systematically assess, measure, audit and/or
communicate the social and environmental behavior and/or performance of firms” (Gilbert, et al., 2011). These
sustainability standards ensure that the business practices which follow, are sustainable
for both the environment and stakeholders. In the coffee industry, these
standards are set through coffee certification. Examples of standards include;
a fair price of for the farmer and reducing soil degradation. Such standards
are highlighted through well-known certifications such as Fairtrade and Organic.
To ensure that private sector sustainability standards are sufficient to ensure
SBP I will assess three and critique three themes. The competition between
standards, competitive market structure of the coffee industry and crucially
the 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 sales
of these new differentiated coffees rose by circa 150%, (Figure 1), resulting
from a positive market reaction. Nonetheless, this plethora of standards has
created a phenomenon of “market in standards” (Reinecke, et al., 2012). The issue arising from a multiplicity of standards is the divided
approach. This system creates duplication of activity, poor coordination
between cultivators, increasing certification costs and consumer confusion (Fransen, 2011) which has led to a
failing in ensuring SBP. The desired
effect of standards setting should be to create positive environmental and
stakeholder externalities through a premium price (Bacon, 2005).

 

 

 

 

 

 

 

 

 

 

 

Figure
1:  Worldwide sales of certified coffee

Source: (ITC, 2011)

 

This disconnected approach
has also led cultivators who wish to grow certified coffee (CO), an
ever-increasing cost, because they must certify across a multitude of standards
agencies (Mutersbaugh, 2005; Thrupp, 1997). For example, certification from Organic, Fairtrade and
Smithsonian Bird Friendly, include hefty annual auditing and establishment
costs. These costs essentially
eliminate the premium price effect of the coffee they sell, resulting in no
additional compensation. Furthermore, the methods involved in being organically
certified often produce a lower coffee yield than conventional methods (Akkerman & Van Baar, 1992). This puts organic coffee cultivators at a disadvantage over their
counterparts who grow to achieve high yields with lower costs. Moreover, the
differentiation between producer and farmer born costs because of certification
is crucial. In organic coffee, production costs fall to the producer however in
some certifications, like Fairtrade, the financial costs imposed are born by
the distributors/roasters. This differentiation is crucial because it shows the
effectiveness of selected certifications in improving SBP because the financial
premium for their coffee is not outweighed by the cost of certification.

 

On evaluation, if the
direction of the industries certification system aligned the effectiveness of
certification would be improved. It would re-establish the standardized norm of
coffee growing ethics allowing all farmers to reap the rewards of premium-priced
coffee and not be undercut by non-certified farmers. More research would need
to investigate this theory because current literature does not yet show the
effect of normalising standards across an industry and the ability to introduce
a premium price. Thus, the balance between certified and non-CO would need to
be identified to ensure SBP. A perfect world case scenario would be to ensure
SBP is by formally establishing legislation for all coffee producers not just
individual farms. Nonetheless, most independent standards are ‘remarkably
similar in their organizational design, processes and rhetoric (Dingwerth & Pattberg, 2009), which means their
combined effect is to some extent ensuring SBP. Some firms even
improve these standards to increase customer market share. It has now even become
a race “to continually innovate, and, in fact, increase their effectiveness” (Fairtrade, et al., 2011). This would argue that private sector sustainability
standards are more than sufficient to meet SBP as firms race to continually
improve them.

 

Competitive Market Structure

 

The coffee industry is part
of a competitive market system. “The U.S. coffee market is neither purely
brand, flavor, nor form-primary, since items of different brands, flavors, and
forms are ‘perfect substitutes'” (Fraser & Bradford, 1983). The consumers’ ability to ‘perfectly
substitute’ their coffee demonstrates the necessity for firms to conform to new
consumer demands to remain profitable. During the past decade, consumers have
paid increasingly close attention to the sustainability of their coffee and
expressed 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. Cooperation
and a unified direction for a change in welfare are hallmarks of this recent ideology
(Forgas & Bond, 1985). This unified collective bargaining pressurises firms to make
changes to the sustainability of their business. A failing to react to consumer
demands in a competitive market would ensure that those companies no longer
remain profitable. For example, Costa Coffee now only uses coffee which has
been sourced from farms who have only been approved and certified by the
Rainforest Alliance. This certification places a premium on the purchasing
price of the coffee beans. CO sees price premium of between $0.16 and $0.20 per
pound (Loureiro & Lotade, 2005). Thus, an increase in the costs of production. This additional
production cost is voluntarily undertaken by the firm because the nature of the
of the market forces would result in a fall in revenue if otherwise avoided.
The possibility of negative business performance is sufficient to ensure that
these private sector companies self-regulate and promote the ideology of SBP.

 

However, not all private
sector industries have high levels of market competition. The consequence of an
oligopolistic or even a monopoly market structure would mean that firms no
longer commit to additional costs of production nor to some extent listen to
their consumer demands because product differentiation and innovation become
less of a challenge. Hence, there is no need to set sustainability standards to
differentiate their product/service Nonetheless, this civil society response in
the coffee industry remains effective because there is no other overarching
international standards body that can regulate companies across international borders.
Thus, multinational corporations who operate in multiple jurisdictions could
ignore governmental standards implemented by one country whilst working in
another. Hence, meta-standardisation voluntarily undertaken by the companies transcends
international borders which individual governments cannot. Voluntary
sustainability standards are, therefore, effectively an indirect attempt to
govern international areas (Levy & Newell, 2005). Self-regulation in
a competitive market demonstrates itself as an effective means to ensure SBP as
their standards are applied globally not just nationally.

 

Market Price

 

Price is a key variable
which defines whether an individual is willing to pay a premium for a certified
product over and above a non-certified product. Currently, there is no legal
minimum price for a pound of coffee, and thus some consumers choose the
cheapest. This does not allow for a margin to implement SBP. Ethical
consumerisation, which involves a purchasing choice with a moral thought about
the production of the product, is argued by Browne et al, to remain influenced
by price and ease of purchase (2000). Most coffee consumers remain solely influenced by price, even with
knowledge about Fairtrade, for example, and hence, industry standards would
eventually succumb to low coffee prices without the aid international regulation.

 

Historically, coffee
prices were set by the International Coffee Agreement. In 1989, however, this
agreement was not renewed and other producers entered the market. The price of
coffee fell sharply to $0.49 per pound in 2001 (Figure 2). The consequence; consumers
now dominate coffee production and have become increasingly price sensitive. Bird
and Hughes argue in their three levels of ethical consumers that premium-priced
CO would now become less attractive to ‘selfish’ consumers who are affected by
price 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, sufficient
SBP is not met because its impacts are so small. In 1995, Fair Trade producers
had a productive capacity of 250,000 MT of coffee for a demand of only 11,000
MT (Thomson, 1995).
This demonstrates that without a worldwide minimum price, firms and
consumers become dictated by price and the premium-priced certified product
becomes obsolete, and consequently sufficient SBP are not met.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure
2: Coffee price 1997-2002

Source: (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 conscious
about 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 has
allowed firms once again, to improve standards and instil price premiums creating
sufficient SBP. Furthermore, the ability of the free market to differentiate
its regulating standards into hierarchies of certification, something called
‘stringency’ (Muradian & Pelupessy, 2005) has meant that some
companies such as Nespresso have differentiated themselves outside of just
‘organic’. Nespresso’s AAA Sustainable Quality (2003) not only promises a
superior quality of bean with an organic property, but also with a focus on
taste. ‘Only 1-2% of all the coffee in the world meets the quality, taste and
aroma profile required for Nespresso Grand Cru coffees’. Consumers in this new
hierarchal system can now ignore organic versus non-organic and instead have
been persuaded by improved quality, to pay a premium price. This new market
system has meant that Nespresso is able to offer a ‘premium’ level
certification of coffee, creating advantages for both the consumer and producer
through its taste and premium pricing. This shows how a free competitive market
can maintain is SBP even with a historically volatile commodity at the heart of
its business.

Conclusion

 

In conclusion, the
competitive market system does to a large extent play a crucial role in the
private sector of the coffee industry. Firms forced to adhere to the civil
society demands and accept additional costs of certification to remain
profitable is a key driver in ensuring sufficient SBP. The additional advantage
of 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 an
oligopolistic/monopoly market structure. The concept of ‘market in standards’ has
created a standards war only enhancing the level of sustainability each company
endeavours to be. But, the key issue is the cost of certification. The cost may
cancel out the premium price for CO creating a lack of incentives for farmers
to 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 is
both 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 such
an objective. Overall, private sector standards as they are in the economy
today, prove effective to the localised farms and businesses. However, there is
a serious lack of market share for CO, showing the consumers indifference
between 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 literature
about the certificated coffees positive global effect on sustainability. Thus,
the best way to ensure SBP is by setting a minimum global price of coffee
through an international body.