achieving fairness in trading between supermarkets and

Achieving fairness in trading betweensupermarkets and their agrifood supplychainsUK Food Group Briefing: September 2005

Anne TallontireNRI, University of Greenwich at Medway Bill VorleyInternational Institute for Environment and Development

UK Food Group, PO Box 100, London SE1 7RT, UK Tel: + 44 (0) 20 7523 2369 Fax: + 44 (0) 20 7620 0719 Email: [email protected] Web: www.ukfg.org.uk

Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1 The retail context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.1 Fair trade - successes and limitations of fair trade labels . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.2 The limitations of ethical trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Integrating fairness into trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.1 Experiments in integrating fairness into trading; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

A new approach to FT own brands; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Introducing Trading Terms into the Guidelines on Implementing the ETI Base Code withSmallholders; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Preferred supplier and quality premiums; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Socially responsible trade as a key performance indicator. . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2.2 Ingredients of a fair trade retailer; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Procurement from small-scale producers and family farmers, and their organisations; . . . . . . 14Long-term and direct relationships with producers; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Minimum price, "Cost Plus" and its limitations; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Advance payments; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Coherence between corporate policies and procurement practices; . . . . . . . . . . . . . . . . . . . . 16Independent scrutiny and accountability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2.3 Risks; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Consumer confusion; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Greenwash; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Distraction from the policy agenda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3 A supportive policy environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173.1 Public sector policy; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Reform of the international trading system; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Recognising the problem, and the limits of self-regulation; . . . . . . . . . . . . . . . . . . . . . . . . . . 17Competition policy that recognises buyer power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

3.2 Private sector policy; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Rethinking CSR; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Customers and citizens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

4 Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Boxes

1 Fairtrade standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Procter and Gamble go Fairtrade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 EUREPGAP standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Minimum prices and farmer protests in France. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Strengthening the UK Supermarket Code of Practice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Figures 1 Soil Association co-labelling for ethically traded produce. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Tables 1 Extract from Carrefour's 2003 Sustainable Development Report. . . . . . . . . . . . . . . . . . . . . . . 13

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Achieving fairness in trading between supermarkets and their agrifood supply chains

UK Food Group Briefing: September 2005

Preface

This paper reviews the opportunities and risks inincorporating fairness into mainstream tradingbetween supermarkets and their agrifood supplychains. It was commissioned by the UK FoodGroup's Trans National Corporations WorkingGroup to inform member organisations' researchand campaigning strategies. The authors aregrateful to members of the UK Food Group andexternal reviewers for valuable comments onearlier drafts.

What are the prospects for fair trade tobecome the norm rather than exception fortrading between supermarkets, their suppliers,and farmers at home and round the world? Thatis the question asked in this paper, which comesat a time of widespread scrutiny of UKsupermarkets and their influence on thelivelihoods of food producers and suppliers.

Prime Minister Blair has twice describedfarmers' relationships with supermarkets as an"armlock", first in March 2001, when hepromised action, and almost exactly four yearslater in March 2005.1 Over the space of thosefour years, Tesco's profits doubled from £1billion2 to just over £2 billion,3 and the companyextended its lead over its rivals, with a marketshare increasing to very close to 30%. Tescoand Asda, which together account for nearly halfof UK supermarket spending, are squeezinghundreds of millions of pounds from theirsuppliers every year in a permanent price war todeliver these kinds of profits and growth rates totheir investors year after year.

The cost of this financial success in rurallivelihoods is clear, but there has been very littleregulatory action in those four years, despitemuch scrutiny from the competition authorities.Those charged with regulating supermarketpower seem to asking the wrong questions, asdemonstrated by a recent Office of Fair Tradingreport which gave supermarkets a qualifiedclean bill of health in their relationships withsuppliers (OFT, 2005). And competition policyseems incapable of looking beyond narrowly

defined economic efficiency and consumerinterest in prices, but not their wider interests.

Despite the increasing cost-price squeezewhich supermarkets are placing on theirsuppliers, the government has high expectationsfrom supermarkets as engines of ruraldevelopment in Africa. Making markets "workfor the poor" is a cornerstone of thedevelopment policy of the UK and many otherdonor countries. Long-term businessrelationships with small enterprises in Africa are,as the Commission for Africa states "one of themost important ways in which larger companiescan promote the participation of poor people ingrowth".4 This paper shows that, based onexperience to date, governments' faith in thebeneficial effects on poverty of large companiesmay be misplaced.

Summary

Fairness and equity in trading relations betweensupermarkets and their supply chains is a hottopic, both in the development debate (aboutsmallholder access to markets) and thedomestic farming debate (on the crisis in familyfarming).

But the topic is largely absent from currentapproaches to Corporate Social Responsibility(CSR). 'Fair trade', with its origins in the tradejustice movement, is largely treated in themarketplace as a high-end niche, in the form ofan extra cost to consumers for Fairtrade labelledproduce. And 'ethical trade', with more recentroots in CSR, is treated as a cost to suppliers inthe form of imposed standards and codes.'Ethical' codes make little mention of producerprice despite huge imbalances of market powerbetween producers and retailers. In fact, thecurrent trading environment is characterised byboth a proliferation of standards for ethics andsustainability and the abuse of market power bypowerful buyers, leading to a classic cost-pricesqueeze for producers.

The marketplace is about to get even moreconfusing, with a proliferation of 'sustainable',


UK Food Group Briefing: September 2005 3

'ethical' and 'responsible' claims with varyingdegrees of rigour.

In order to bring fairness and justice intomainstream trading relationships, innovativeretailers can start to bridge this arbitrary andartificial gap between 'fair' and 'ethical' trade.This briefing paper proposes the development ofa set of guidelines for retailers that wish toincorporate fairness and justice into their tradingrelations, learning from the Fairtrade experience,to expand rather than constrain opportunities forsmall and family scale producers. By thiscorporate standard (rather than a brand ormark), customers could be assured that theirpurchases across the board have notcontributed to the exploitation of producers andmisuse of market power. The potentialopportunities and risks associated withintroducing such guidelines are highlighted inthis paper.

But the room for manoeuvre for innovativecompanies is severely constrained by thecurrent structure and governance of agrifoodmarkets, which reward 'economies of scale' (i.e.squeezing suppliers) while failing to provide apublic policy environment which would curtail theabuse of market power. This paper concludeswith a series of public policies - especiallycompetition policy - that would be required tounderpin fairness and equity in companies'mainstream trading practices.

The challenge

Fairness in trading is at the cutting edge ofefforts to secure a more just and sustainableagrifood system. Many businesses haveimplemented programmes to reduce the damageto the environment and animal welfare of foodproduction and transportation. But there hasbeen much more reluctance to put policies inplace which reassure consumers that theirpurchases have not resulted in the exploitationand economic marginalisation of primaryproducers - the farmers and workers who growand harvest our food.

Meanwhile there is a crisis in family-basedfarming, both in the North and South. Thehistorically low farm-gate prices paid for coffeeare an extreme example, but the crisis is global,extending from the hill farms of Wales, to thebanana plantations of Ecuador and across theprairies of Iowa.

Fairness and justice in trading is partly aboutprice, which for commodities is influenced partlyby the balance of supply and demand. But priceis not the only ingredient of fair trading practices.Other trading practices reflect gross imbalancesin market power between producers and theircustomers, especially the large retail chains.These include a lack of any commitment to long-term trading relations, or demands for fees,discounts and credit terms, or compliance withcostly standards without a price premium, all ofwhich favour suppliers with deep pockets.

For a range of tropical commodities such ascoffee, cocoa and bananas, consumers canseek out labelled produce with embedded fairtrade criteria that have passed along dedicatedsupply chains. The fair trade criteria defined bycertification and labelling organisations include aminimum producer price and 'social premium'(an extra payment made to the producer groupusually for investment in group or communityprojects, the use of which is monitored).Experience with mainstream retail of Fairtradeproduct lines however demonstrates thelimitations of extending the concept of fairness intrade to the wider corporate policy. Moreover,ethical purchasing policies are restricted inscope and may actually pose barriers to smallerproducers, especially in poorer countries.5

The challenge is to integrate fairness intomainstream trading. Oxford Policy Managementand IIED (2000) list three main routes by whichthe scale and impact of fair trade6 can beincreased: (a) Rapid expansion of Fairtradelabelling, (b) encouraging large processors(Cadbury, Nestlé, Unilever etc.) to developFairtrade labels on branded lines; and (c) usingexperiences gained within fair trade more widelyfor producers to engage more effectively with thebroader market. This paper is focusing on (c).But incorporating fair trade into the mainstream



is a minefield. If done badly, it can erodeprogress to date. False or misleading ethicalclaims, like the experience of "greenwash" withsupposedly environmentally friendly products,may both confuse and alienate consumers andleave farmers worse off.

But the most serious obstacle lies in thestructure of markets and the imbalance ofmarket power between producers and retailers,with its inherent risk of entrenching unjusttrading practices.

This briefing paper begins by discussing thelimitations of fair trade and ethical purchasing inthe current retail context. This is followed by adiscussion of some recent attempts toincorporate fairness into mainstream tradingrelationships, especially in terms of broadeningthe market and integrating fairness into itsbuying and contracting policies. The ingredientsof a fair trade retailer are proposed, based onkey elements of current fair trade standards, andgoing beyond the simple issue of price. Beforesetting out recommendations and a frameworkfor research, relevant essential public policyinterventions are suggested to support such atransition. However, there are important risks inthis approach too; so this area will continue torequire careful research.

The emphasis is on supermarkets, though it isappreciated that there are other ways ofdeveloping fair trade structures that bypassmajor retailers, which deserve more widespreadattention.

1 The retail context

What makes the issue of fairness and justice intrading increasingly topical and urgent is theprocess of consolidation in UK food retailing,which is partly driven by corporate expectationsthat larger buyers can extract more favourableterms7 from suppliers. The loss of Safeway fromthe UK retail scenery has increased the four-firmconcentration ratio (CR4) to around 75%; inother words, three-quarters of the country'ssupermarket food shopping is done in just fourfirms-Tesco, Asda, Sainsbury's and Morrisons. A

strong oligopsony (i.e. a market dominated by afew buyers) is considered to occur when theCR4 rises above 50%. Bearing down onsuppliers and passing savings onto customershas been one of the pillars of the Wal-Martstrategy.8

The Competition Commission 2000 report onUK supermarkets concluded there was evidencethat supermarkets were abusing their position ofpower and engaging in practices that adverselyaffected the competitiveness of suppliers. Toaddress these adverse effects it wasrecommended that a code of practice beintroduced to govern supermarket-supplierrelationships. Competition lawyer MichaelHutchings points to the annexes of the 2000report which show a clear relationship betweena supermarket's share of the market and theirability to extract more favourable terms fromtheir suppliers. Tesco, then with 25% marketshare and now over 29%9 can extract 4% betterterms from suppliers for their top five lines.

The fact that retail consolidationunquestionably leaves a declining share of valuefor other parts of the chain-workers on the retailshop floor and processing sector, primaryproducers and farm or plantation labour-meansthat attention to trading fairness and justice is ofparamount importance. Though these supplyend problems are not visible to customers, theyhave been described in the case of bananas asanti-development and regressive and a"perverse transfer of wealth, by some of thesupermarkets, from farmers and farm workers ofdeveloping countries to the consumers ofdeveloped countries".10

As modern retailing spreads to mid- and low-income countries, this becomes a global issuerather than one of exports from the South to theNorth.

1.1 Fair trade-successes andlimitations of fair trade labels

Retailers will point to a commitment toFAIRTRADE labelled (FT) goods that arecertified against Fairtrade standards (Box 1) as a



sign of commitment to fairness and justice intheir trading relationships.

'Getting' Fairtrade has been part of a trendsince the mid-1990s in which supermarkets andfood companies have sought to de-commodifytheir mainstream lines, with organic, Fairtradeand 'local' branding offering both reputationaland profit benefits. Major supermarket chainsnot only stock Fairtrade products but haveintroduced Fairtrade lines amongst their ownbrands in products such as coffee, tea andchocolate, contributing to both the growth insales and increased public awareness of theconcept of Fairtrade. Similarly, some majorbranded food companies, both processors andfood service, offer the consumer a fair tradechoice.

In northern Europe the range of fair tradeproducts available continues to expand andmore conventional companies offer a productwith a fair trade label. In Europe alone theannual retail sales of fair trade products amountsto EUR 260 million,11 with an additional $183m inNorth America and the Pacific Rim.12 In the UKmarket, Fairtrade is becoming more widespread;there are now 140 products with theFAIRTRADE mark.

However, Fairtrade labelling alone is not astrong proxy for a retail company's commitmentto fairness and justice in trading.

The first problem is that for most retailers ittends to be 'salad on the plate' (Ruano, 2003)and does not affect their core businessoperations. It is "one of the tools in the CSR[Corporate Social Responsibly] armament ratherthan a basis for doing business" (Young 2003).This is underlined by the fact that many retailershave positioned FT as an up-market niche. Ineffect retailers have made fairness and justice intrading a consumer choice-a test of theircustomers' willingness to pay for non-exploitativetrading with primary producers-rather than acorporate standard and a means to transformtheir mainstream businesses.

And as a high-value niche, there has beenevidence that retailers are extracting more ofthat price premium than the producers. Some ofthis increased retailer mark-up may be justified

to cover the increased costs of handling smallvolume products. But clearly when Fairtrademeets processor and retail power, pricedistortions are an inevitable consequence. Incoffee, retailers and especially roasters benefitdisproportionately from product differentiation(Ponte, pers comm.). For bananas, a commontactic is to price Fairtrade bananas per pack,while dollar bananas are priced per kg.13 Asurvey in June 2003 by Connect Global14

reported that of the Fairtrade mark-up onbananas of £0.78-0.90/kg in the three largestsupermarkets surveyed, around £0.35-0.65/kgwas retained by supermarkets and £0.24 passedto farmers.15 Producers do of course have aminimum price guarantee, but due to nicherather than mainstream positioning, retailers aremissing the opportunity to grow the market,though there are some exceptions (see The Co-operative Group in section 2).

So if fair trade does not break out of its nicheposition or rapidly increase the range of labelledproducts, including those bought from the North,there is always the risk of it being used as a figleaf over socially destructive relations withinmainstream trading relations. Examples includeretailers using Fairtrade bananas from theCaribbean as an 'alternative consumer choice' totheir mainstream business of 'dollar' bananasfrom the plantations of Latin America.

Even within the fair trade movement,questions are being asked about whether thepurchase of certified fair trade goods is aneffective a way of achieving systemic fairness intrade (Vallely 2003). Some groups are investingin other approaches such as schemes tofacilitate improved access to conventionalmarkets for marginalized producers, andlobbying on codes of practice on retailer-suppliertrade relations.16

The second and related problem is of marketsize. Over the 10-year life of the FAIRTRADEmark, sales of FAIRTRADE labelled products inthe UK have grown rapidly, with good shares ofsome tropical commodities such as coffee, teaand bananas. The volume of sales ofFAIRTRADE marked products grew by 90%between 2000 and 2002 (Fairtrade Foundation



2003).17 The FAIRTRADE mark has beenrigorously protected and now has high consumerrecognition, and has encouraged a debate about'third world' farmers way beyond its marketpresence.

But at around £130 million, FT sales accountfor only 0.17% of the £76bn spent on food anddrink in the UK in 2003, or 0.09 % of the £144bntotal consumer expenditure on food, drink andcatering services. Despite high current rates ofgrowth, the FT market is likely to hit a ceiling, inthe same way as the UK organic market, whichnow seems likely to plateau close to its currentvalue. A recent World Bank report on coffee(Lewin et al, 2004) raises the question ofwhether some FT coffee markets in Europe maybe maturing in this way.

A third issue is that the FAIRTRADE mark ispositioned to try to tackle poverty in the ThirdWorld and is recognised by consumers as such.There has been no way for consumers to seekout large portions of their purchases which havebeen grown in the North-meat, dairy, non-tropical fresh produce or processed food-fromfairly traded sources, other than via directmarkets such as farm shops. An attempt by theSoil Association to expand FAIRTRADE labellingto UK produce failed because of serious uneasein the Fairtrade movement about brand equitybeing diluted and consumers becomingconfused. Instead, an 'ethical trade pilot scheme'was recently launched by the Soil Association, inwhich selected suppliers of UK producedprimary products are applying standards for (a)fairer treatment of workers, (b) a fairer return for



Box 1: Fairtrade standards

The FAIRTRADE labelling Organisation (FLO)stipulates two sets of generic producerstandards, one for small farmers and one forworkers on plantations and in factories. Thefirst set applies to smallholders organised incooperatives or other organisations with ademocratic, participative structure. The secondset applies to organised workers, whoseemployers pay decent wages, guarantee theright to join trade unions and provide goodhousing where relevant. On plantations and infactories, minimum health and safety as wellas environmental standards must be compliedwith, and no child or forced labour may occur.

As Fairtrade is also about development, thegeneric standards distinguish betweenminimum requirements, which producers mustmeet to be certified Fairtrade, and progressrequirements that encourage producerorganisations continuously to improve workingconditions and product quality, to increase theenvironmental sustainability of their activitiesand to invest in the development of theorganisations and their producers/workers.

Trading standards stipulate that traders haveto:� pay a price to producers that covers the

costs of sustainable production and living;� pay a premium that producers can invest in

development� partially pay in advance, when producers

ask for it;� sign contracts that allow for long-term

planning and sustainable productionpractices.Finally, there are a few product-specific

Fairtrade standards for each product thatdetermine such things as minimum quality,price, and processing requirements that haveto be complied with.Source: FLO

Figure 1Soil Association co-labelling for ethicallytraded produce

© Soil Association

farmers, and (c) a positive contribution to thelocal community. Compliance with thesestandards will be demonstrated through co-labelling (see Figure 1) with the first product(s)carrying the symbol due to appear in Spring2005.18 Interest from suppliers seems to havebeen limited.

Fourth, the Fairtrade markets, as niches, areeasily saturated. Renard (2004) reports that insome Fairtrade markets there is a situation ofoversupply, because the niche has not grownfast enough to meet the expectations of farmerorganisations that want to escape from poorcommodity prices, especially in coffee. Becauseentry barriers are low and price premiums arehigh, this gap between FT registered productionand actual sales is likely to worsen. This is not afault of Fairtrade per se; it is unsurprising thatFairtrade registers would be full, as any supplierwould prefer to sell at the better terms which FToffers. As long as sales of each product linecontinue to grow, it will be possible to sellproducts from more producers on the registers.

Fifth, the 'alternative' credentials of Fairtrade,that has defined itself as an oppositionalmovement, are constantly disputed as the brandattracts the interest of the largestagribusinesses. The FT niche is big enough todraw attention of the main retailers and someprocessors, especially from an imageperspective. Kraft, for example, hasacknowledged that the demand for Fairtrade,while only minor in business scale, hasnevertheless created "major image problems for

the traditional coffee industry as a whole"(Vallely 2003). And in some markets such asbananas in Switzerland, with a 15% marketshare for FT that is soon projected to grow to30%, "neither Chiquita nor Dole will be able tocontinue ignoring this new competitor in themarket."19 The amendment to FT standards inJanuary 2002 has made it possible to certifyagricultural estates, so far for bananas and tea.Dole has teamed up with FLO to certify asFairtrade some bananas it sells in Europe, andthe company is exploring "the feasibility offurther collaboration with the Fair Trademovement."20 Similarly, Procter and Gamblelaunched a Fairtrade coffee line in the US underthe Millstone brand to a great fanfare (Box 2).21

The question is, whether this is thisappropriation or a sign of FT success? For manylarge companies, Fairtrade accounts for aninsignificant proportion of their overall purchasesand may be simply a defensive move to counterhostile lobbying. Until the fair trade movementresolves these smallholder vs. plantationtensions, perhaps with a clear definition of'disadvantaged producers and workers' basedon access to markets as well as income, thenthese threats to the credibility of the brand arelikely to become more serious.22

Meanwhile, there is no doubt that unfairnessin conventional trading is continuing to squeezeprofits and people out of farming worldwide, andeven in those niches where Fairtrade issucceeding, the continuing price deflation inconventional food is undermining the Fairtrade


Box 2: Procter and Gamble go Fairtrade

In September 2003, Procter and Gamble announced that it would introduce Fairtrade coffee productsthrough its specialty coffee division, Millstone. Fairtrade purchases will start at around 1% of imports,and will eventually amount to 2-3 million pounds per year or 6% of coffee imports. This is equivalentto the current annual Fairtrade purchases of the small coffee company Equal Exchange. Oneresponse to the announcement was for NGO and humanitarian groups to drop their campaignsagainst the company, including a shareholder resolution filed in April 2003 complaining about thecompany's purchasing practices and calling for the company to take steps to address the crisis in thecoffee market.

Source: Oxfam America press release; SustainAbility


brand by widening the price gap between thetwo-the so-called 'spillover price effect.' There isa risk of a mini 'race to the bottom' within FT,with buyers scouring the world for the cheapestFT produce.

At the same time, there has been somethingof a backlash against the Fairtrade movementfrom advocates of neo-liberal market reforms,from Nestlé to the Adam Smith Institute.23 Theysee Fairtrade's minimum prices as sendingmarket signals to continue overproduction, anddelaying the inevitable need for producers tomove into higher-value production. Nestlé "donot believe that the fair-trade approach is asolution for the present coffee crisis" because itwould "encourage those farmers to increasecoffee production, further distorting theimbalance between supply and demand and,therefore, depressing prices for green coffee."Nestlé claim that their purchase of 14 % ofbeans directly from farmers "enables the farmerto retain a greater portion of the price paid byNestlé, therefore improving his income."24 TheFairtrade Foundation stressed, however, thatdue to domination by the roasters, the currentmarket is itself far from competitive. Also, supplyis not so price elastic as the orthodoxeconomists would have us believe; low price hasnot led to lowering of production due to thedependence of farmers on the crop and limitedalternative production opportunities; actuallythere are perverse effects when prices fall,whereby farmers in some contexts actuallyincrease production to compensate for lostincome.25

1.2 The limitations of ethical trade

Another existing set of internationally recognisedstandards that relate to fairness and justice intrading is rooted in CSR and is aimed atimproving working conditions and human rightsin the workplace. In the UK the most prominentof these ethical trade standards is the EthicalTrading Initiative's Base Code, developed by aconsortium of companies, trade unions andNGOs in response to public concern and some

rumblings from government. This set ofminimum standards (hence 'base' code) isapplied by member companies in a wide rangeof retail and wholesaling sectors, includingsupermarkets and major clothing outlets.

The ETI and similar initiatives elsewhere inEurope and North America have had undoubtedsuccess in raising awareness within participatingcompanies of labour standards along supplychains. Nevertheless, it is increasinglyrecognised that codes have a limited scope andthe way in which they are implemented mayactually undermine good working conditions.

A first limitation is the fact that codes havetended to focus on formalised workers in largelyindustrial-type employment but rarely informalworkers or own account producers such ashome-workers or out-growers andsmallholders.26 However, the ILO definition of aworker is anyone who substantially contributestheir labour to making a product, which meansthat their core conventions now do coverinformal workers.

A second limitation of ethical trading codes isthat they focus on working conditions andworker rights but say very little about tradingrelations and put all the responsibility forcompliance on the supplier.27 The ETI'sPrinciples of Implementation do require that "thecode and the implementation process isintegrated into the core business relationshipand culture…Negotiations with suppliers shalltake into account the costs of observing thecode."28 But this requirement is a subject ofdebate amongst ETI members rather thansomething that is considered by all corporatemembers or rigorously enforced by the ETIBoard. ETI is now focusing more on purchasingcontracts. But in most retail companies there is awide structural, management and cultural gapbetween the people who develop and monitorcodes and those who make purchasingdecisions. Some supermarkets have recognisedthat buyers need to be made more aware ofworking conditions and link purchasing decisionsto compliance with codes, and have institutedtraining for their buyers on codes so that theyreward good practice rather than just best prices



and quality, but by and large there has been littledone to change buyer incentives.

Oxfam's recent report Trading Away our Rights(2004a) highlighted the way in which ethicaltrading standards, including labour rights, arebeing undermined by the way in which the supplychain is managed and by the business model ofglobal supply chains adopted by powerful retailand brand firms. "Global supply chains havecreated new opportunities for labour-intensiveexports from low cost locations…A dramaticgrowth in the number of producers heighteningcompetition for a place at the bottom of the chain.At the top end, however, market share has tendedto consolidate among a few leading retailers andbrand names…Through the contracts theynegotiate and the conditions they demand, theycan capture much of the gain generated by trade"(Oxfam 2004: 34). This is echoed by Bendell(2004) who, referring to sweatshop practices,writes "The power of Northern actors in theseprocesses meant that the cause of the problemwas largely defined as the practices of Southerncountry suppliers, rather than regarding this as asymptom of the problem of one-sided buyer-supplier relations between Northern and Southerncompanies and countries."

The application of codes in supply chainsraises a number of challenges for smaller scaleproducers:� Logistics and the sheer number and

traceability of smaller producers involved inexport supply chains

� The potential of codes to exclude smallproducers from the supply chain, especiallygiven the investment needed to meet thestandards and demonstrate compliance

� The appropriateness of standards (especiallythe indicators used to measure them)

� The cost of monitoring large numbers ofscattered producers.These concerns are particularly acute in sectors

where small producers compete with largerproducers for the same market and where buyerscan choose whether to buy from large producersor small producers. In export horticulture therehave been trends towards supply chainconsolidation, which inappropriate application of



Box 3: EUREPGAP standards

EUREPGAP began in 1997 as an initiative ofthe Euro-Retailer Produce Working Group(EUREP, which now has 23 members in10countries, including the major supermarketsand McDonald's Europe) with the laudablegoal of harmonising supply chain standardsworldwide for good agricultural practice (GAP).In 2003 there were 445,000 ha certified in 41different countries, with 13,040 growersregistered, 11,000 of which are in Europe.

The main focus of the EUREPGAP Protocol2000 is standards for food safety andtraceability designed to meet consumerconcerns about pesticides and food hygiene,with environment and worker welfare issues asa secondary concern. Growers receiveEUREPGAP approval through independentverification from an approved certification body.But representatives of poorer countryproducers have expressed alarm at the'imposition' of EUREPGAP standards byretailers without due consideration of localconditions. There are two main objections:

1) The current standards favour large-scaleproducers and threaten the livelihoods of'hundreds of thousands of people' inexporting countries. In a study in the SaoFrancisco Valley in Brazil, it was found thatlarge and integrated suppliers are bestequipped to deal with EUREPGAP.

2) The standard is in effect a barrier to marketentry. EUREPGAP requires growers to havean annual farm audit. An audit costs about450 Euros; for a grower in Ghana forexample, this will absorb perhaps 70% oftheir profit.

Sources: Fresh Produce Journal 19 Sept 03;Banana Link; van der Grijp et al. (2004)

codes amongst smallholders may only accelerate,especially with the dominance of the EUREPGAPcode (Box 3). Pushing small producers out of thesupply chain may be less likely in beverage cropssuch as tea, coffee and cocoa where smallholdersmay, in some regions, dominate production.However, the insensitive application of codes mayunduly increase the costs borne by smallerproducers reducing their returns and leading tofurther impoverishment and marginalisation.

The limitations of codes of practice andperformance standards alone as a way ofimproving worker and supplier conditions areincreasingly recognised. Codes say very littleabout the responsibilities of purchasingcompanies; the onus is on the producer tocomply, and ethical standards audits at farm andfactory 'focus on documenting labour problemsthat exist, without asking why those problemspersist' (Oxfam 2004a: 7). Moreover, codes havebeen implemented in an ad hoc way acrosssectors and countries with limited collaborationwith stakeholders, including government.

In summary, standards for ethical procurementhave not addressed the issues of inequitableand unjust trading relationships that underliepoor conditions for workers in the farms,plantations and packing plants that supply ourfood retailers and processors. It is thereforeimportant to look at other ways to bring fairnessand equity in trading into the mainstream.

2 Integrating fairness into trading

2.1 Experiments in integratingfairness into trading

Apart from stocking niche FAIRTRADE labelledproducts, or implementing codes for ethicalprocurement, what have innovative companiesattempted to integrate fairness and justice intotheir mainstream supply chains? And do theseefforts point to types of best practice which couldbe recommended for food manufacturers andretailers?

A new approach to FT own brandsThe decisions by the Cooperative Group-rankedfifth in UK supermarket retailing-to buy its entireown-brand block chocolate through FT sourcesin 2002, followed by own-brand coffee in 2003,were important milestones for FT in the UK. Thedecision represented a significant risk for theretailer. Rather than going for low volume at ahigh price, the Co-op decided to take a hit to itsmargins, gambling on a compensatory increasein volume. This gamble has paid off, and the Co-op has actually grown the FT market in a difficultretail sector. Whilst Tesco may now stock moreFAIRTRADE marked products than the Co-op,29

it has not taken the same leap of faith intoFairtrade supplies. Other initiatives forcomprehensive rather than niche marketing ofFT are the AMT chain of coffee outlets, whosecoffee is 100% FT, and Marks and Spencerwhich converted all its High Street coffee shopsto Fairtrade.

Similarly, the success of the Max HavelaarFairtrade bananas in Switzerland is due todeliberate policies by the leading retailers Coopand Migros, which are engaged in an ethical'race to the top'. Since February 2004 the Coopis selling all its bananas with the Max Havelaarlabel.30

Introducing Trading Terms into theGuidelines on Implementing the ETI BaseCode with SmallholdersAs discussed earlier, the ETI Base Code andother 'ethical' codes of practice focus on therights and needs of workers. As such, tradingterms are not explicitly covered in their criteria orrecommendations. However, the ETI is nowinvestigating the special situation of smallholdersin member supply chains and is considering howcertain clauses may need re-interpretation inrecognition of the smallholder position as workerand employer. For example, what does the livingwage requirement (ETI Base Code 5.1) meanfor prices paid along the supply chain? How doprices relate to the costs of production? Whatsort of contract should the smallholder receive?What does the requirement for security of



employment mean for a smallholder? Does itmean a long-term commitment from buyers?

The ETI recommendations for its Base Codewith respect to smallholders are currently beingfield-tested and are subject to final approval bythe ETI board. However, it is significant-that theparticular challenges of smaller producers withregard to labour standards and how these mayrelate to trading relationship-are now comingonto the agenda.

Preferred supplier and quality premiumsIn the coffee sector, some companies havebegun to reward producers for supplying qualitycoffee through offering longer term contracts andabove-market prices. Most significant amongthese is the price incentives pilot project byStarbucks and the Utz Kapeh scheme whichencourages participating buyers to pay a'sustainability differential'. In contrast to FT,neither of these schemes implements a floorprice (as in Fairtrade), but their contracts offersome stability for preferred suppliers.

� Starbucks Preferred Supplier Programme 31

Starbucks began a pilot programme to linkpreferred supplier status with social andenvironmental performance in November 2001and is starting to spread this programme to itssuppliers around the world. Price incentives,offering a healthy premium over the marketprice, are offered based on a points system forenvironmental (50%), social (30%) andeconomic criteria (20%), which are assessed bya third party. In addition, the programme offerslong-term contracts which offer some stability forproducers. Only those suppliers gaining fullmarks are awarded preferred supplier status. Itis not clear if the price differential is sufficient tocover the costs of production; moreover, theprice differential is discretionary on the part ofStarbucks.

� Utz Kapeh 32

The Utz Kapeh code for 'Certified ResponsibleCoffee' was developed by a Foundation withheadquarters in both the Netherlands andGuatemala, set up with the support of the global

retailer Ahold. The code is based onEUREPGAP and is thus a baseline assurance ofgood agricultural practices in coffee production,but is more detailed and onerous than thenormal EUREPGAP standards as regardsworker welfare. The Foundation aims to "bringsocial and environmental performance to themainstream"; the proposed code for goodpractice is intended to be "a ticket to entry to anemerging market for mainstream certifiedresponsible coffee". Utz Kapeh sets out tosupport existing brands rather than stake itself inthe market as a separate brand. Ahold's AlbertHeijn chain of supermarkets in the Netherlandsnow uses Utz Kapeh certified coffee in all of itsown-brand "Perla" coffees.

Utz Kapeh aligns itself with CSR, and stronglydifferentiates itself from FT, which it sees asniche. Like other codes of conduct, it does notspecify a floor price or a 'living wage' but thecode includes a commitment to long-termcommercial relationships between buyers andproducers. Utz Kapeh certifies large estates aswell as cooperatives of smallholders (Ponte,2004). The Foundation recommends that buyerspay a Sustainability Differential to producerswhen market prices are low. These are not fixedand at present it is not clear if this is monitored.List prices paid by Utz Kapeh buyers cited byRenard (2004) were above market prices (US$0.70-0.77/lb compared to US$ 0.60/lb) butsignificantly below the FLO price of US$ 1.26/lb.

Representatives of the Max HavelaarFAIRTRADE label have expressed concern thatUtz Kapeh represents a threat in the form of'Fairtrade-Lite'. But Utz Kapeh counter that "Forthese cooperatives and others that are not ableto join the Fair Trade register, the Utz Kapehcertification offers them new possibilities forselling their coffees and for adding value to theirmember farmers. We have received positivefeedback from these producers about the extravalue that the Utz Kapeh program is bringing tothem. One point of difference from Fair Trade:Utz Kapeh is open to all kinds of producers andproducer groups, large and small, cooperativeand estate. And while some would want to focusalmost exclusively on the issue of price, Utz



Kapeh takes a broad approach to create accessto mainstream markets and to increase thecompetitiveness of participating producers overtime." 33

Socially responsible trade as keyperformance indicatorThe world number two food retailer Carrefour(sales EUR 81 billion in 29 countries) isaddressing the issue of "fair, long-termrelationships with our suppliers" within itsstrategy for sustainable development, under its'economic and social responsibilities' (Table 1).The performance indicator-the "number ofproducts sourced through socially responsibleand fair trade" is encouraging, but terms are notdefined other than that "Responsible tradeproducts are own-brand and retail-bannerproducts" while "Fair trade products are certifiednational brand-name products (e.g. MaxHavelaar)." The company also lists the defenceof customers' purchasing power among itssustainability strategies, which is optimised

through "rationalisation, massification and theshortening of channels" - which graphicallydemonstrates the Janus-faced position of majorretailer in trying to generate consumer valuewhile conducting "socially responsible trade".

To summarise, innovative companies haveexperimented with the concept of 'sociallyresponsible trade' within their CSR andsustainability agendas. These initiatives mayincorporate elements found within certifiedFairtrade production, such as direct and/or long-term contracts with producers. But they do notnecessarily share the objectives of fair trade withregard to either a floor price or enabling marketaccess for disadvantaged producers. Some ofthese initiatives have been accused of confusingthe consumer, devaluing the fair trade standard,or 'greenwashing' to provide a fig leaf overinjustices in mainstream business operations.

It is necessary, therefore, to spell out what arethe potential ingredients of a 'fair trade retailer',and what public and private policies would be



Table 1: Extract from Carrefour's 2003 Sustainable Development Report(emphasis added)

Our economic and social responsibility

Our commitments in 2001� Respecting our suppliers � Getting involved in the local economy � Motivating our staff� Satisfying our customers

Our 2002-2005 action planStrengthen our partnerships with local business in every country and promote fair, long-termrelationships with our suppliers

Key performance indicators� Percentage of total food sales achieved using local suppliers (in-country products)� Number of products sourced through socially responsible trade and fair trade

Our main advances in 2003Creation of a Supplier Relations Monitoring Committee at the group level(p.20)/conclusion of agreements with local organizations (p.40)/organizationof commercial and communications events (pp.20 and 40)

Source: www.carrefour.com/english/nosengagements/telechargement.jsp

necessary to create a facilitating environment forthose initiatives to succeed.

2.2 Ingredients of a fair traderetailer

The challenge is to take fairness in trading intothe mainstream, learning from the successesand challenges of Fairtrade, while avoiding (a)dilution and 'greenwash' and (b) undermining theFAIRTRADE mark.

As mentioned in the introduction, Fairtradehas four key elements: (1) direct purchase, (2)long term relationships, (3) guaranteed minimumprice and price premiums (the 'Social Premium',and (4) payment in advance. The question is,can a retailer take key elements of FT andintroduce those elements into all of a company'sdealings with primary producers andintermediaries, as a corporate standard (ratherthan a brand), so that customers can be assuredthat their purchases have not contributed to theexploitation of producers and workers?

Procurement from small-scale producers andfamily farmers, and their organisationsAn essential component of any shift tointegrating fairness into mainstream trading mustbe a reversal of the trend towards a narrowsupply base of a few large-scale suppliers.

Through effective organisation, smaller scaleproducers can overcome the higher transactioncosts associated with dispersed production.Fairtrade procurement encourages the formationand effective working of co-operatives, whichthen have positive effects on the wider ruraleconomy (Milford, 2004). Learning from FT,supermarkets and their suppliers have a role inassisting in the development of economicorganisations of smaller producers, ensuring thatsupermarket business supports national policiesfor broad-based rural development.

A persistent challenge is the demonstration ofcompliance with standards and 'due diligence'across so many smaller producers. Tesco franklyacknowledge the difficulties of incorporatingsmallholders into their fresh produce supply

chains without (presumably public sector) projectsupport. In 1994 Tesco established a scheme forsmall growers in Kenya supplying beans andpeas, with a "simple farm assurance standard."But within 12 months the scheme was closed, as"to manage 'due diligence' consistently proveddifficult for local managers." The company hasconcluded that "Schemes for fresh produceinvolving small growers will require substantialsupport." 34

Such barriers to the participation of smallproducers and suppliers will have to beaddressed by a retailer that is serious aboutequitable trading relationships, both in theapplication of current standards and the designof new ones. This was echoed by the AfricaCommission who, in their recent report(Commission for Africa, 2005), complained thatinadequate account is taken of poorer countryperspectives in standards: "Prescriptive codes -reflecting concerns of developed countrystakeholders - can have unintendedconsequences on small-scale suppliers,excluding them from market opportunities if theyare inappropriate or costly." [Ch 7 para 134].They conclude that "Supermarkets shouldassess the development impact of theirprocurement and standard setting practices onsmallholders and help them integrate into thesupply chain [Ch 8 para.]"

Long-term and direct relationships withproducers A cornerstone of fair trade is the long-termtrading relationship between producer and buyerthat lasts longer than a season, and whichcreates a more stable environment for producersto plan and re-invest in the farm. A longer termmutually beneficial relationship built aroundinformation and training empowers the farmers'organisation to link to the market. It allowssmallholders and family farmers to adapt tomeeting a buyer's requirements, whether it is acode or quality specifications. Fairtrade's focuson enabling producers to comply with standardsover time is in contrast to many performancestandards in which "standards have to be fulfilled



before you can label the product" (Cierpka2000).

Minimum price, 'Cost Plus' and its limitationsThe price element of fairness in trading can beachieved in theory by basing prices on the so-called 'cost plus' methods, calculating productioncosts and building on a margin which covers areasonable return on labour and investment.Fairtrade pricing for tea is set in this way-price is

negotiated between buyer and seller to coverproduction costs as a minimum, unlike coffeewhere a futures market allows a minimum 'fair'price to be set. Some supermarkets also professto use cost-plus; Asda/Wal-mart claim to be"working to create ways of paying farmers thatare based more on what a crop costs to growrather than the dropping market price." 35

But some farmers complain that 'cost plus' isjust another exercise in market power, a way ofratcheting down farmgate prices by forcinggrowers to open their books and "shareefficiencies" with their buyers, and this certainlyseems to have been the experience of suppliersto Asda/Wal-Mart.36 One east Anglian farmerreported the experience of having to submitminimum costings in order to remain a supplierand was then forced down to the costingssupplied.37 Since then costs have risen but "noaccount has been taken of that" by thecustomer. There are also risks of priceagreements and minimum pricing encounteringobjections from national and EU competitionauthorities (Box 4); competition concerns havealso been raised about crisis agreementsbetween UK retailers and dairy farmers to raisefarm income by passing payments back up thesupply chain.38

Advance paymentsAccess to pre-shipment finance is a significantbarrier to the participation of many small andmedium size enterprises in high value markets.Producers' access is generally limited due tofactors such as lack of collateral, limited tradingexperience and complex banking procedures, aswell as the semi-formal or informal nature ofmany producer enterprises. Where artisans havepreviously only sold small quantities (theproceeds from which they use to buy rawmaterials for the next order) they have noworking capital when a big order arrives. Inagriculture where crops are sold seasonally andfarmers receive payment long after delivery,there is often a shortfall in cash to purchaseinputs for the next season's production.

Recognising this constraint, a key element offair trade systems is the pre-financing of



Box 4: Minimum prices andfarmer protests in France

Falling revenues sparked angry protests fromFrench farmers recently with fruit andvegetables being dumped outside governmentbuildings. Tonnes of tomatoes, peaches,nectarines and melons were left outside officesin the south-western towns of Perpignan andMontauban. The farmers claim that many bigsupermarket chains are underpaying them andover-charging consumers to drive up profitmargins.

France's economy and finance minister,Nicolas Sarkozy, has suggested imposing aminimum price for producers on wholesalersand supermarket groups. However the head ofthe union representing tomato farmers, PierreDiot, warned such a move would be "suicidal"without state subsidies for unsold stocks.

Sarkozy has suggested tomato farmers bepaid 85 euro cents a kilo instead of the 30euro cents currently obtained on the market.But Diot said buyers were unhappy with thatprice, particularly when Belgian and Dutchgrown tomatoes could be had much cheaper.Other fruit and vegetable farmers have yet tostrike a deal with the supermarket chains.

There were also questions over whether anyprice agreements would pass scrutiny by boththe French and European competitionauthorities.

Source: French farmers protest. Freshinfo News22 August 2004

production. The details of a mechanism for pre-financing are the subject for a separate paper.But in the FLO coffee criteria, producers mayrequest up to 60% of the price as an advance.This may create severe cash flow problems forsome importers and a study of North Americanimporters of fair trade coffee indicated that thevast majority did not provide advances andwould not be able to do so if requested (cited inMay et al 2004).

A first step in better business practices ispayment within 30 days, rather than the 60 oreven 90 day payment terms which present suchan obstacle to smaller scale producerengagement with supermarket supply chains.

Coherence between corporate policies andprocurement practicesThere is a serious issue in most retailers ofdouble standards, between the policies ofcorporate responsibility and sustainabledevelopment, and targets and incentives givento buyers. It is the buying departments that arethe interface between retailers and their supplychains, and yet very few retailers have actuallychanged buyers' incentives to incorporate ethicalstandards. A Financial Times special report39

summed this up as "One part of the companycould be attempting to ensure contractors'employees are not exploited, while the buyingdepartment is pressing for lower prices. Thisforces contractors' margins down, which makesit more difficult for them to raise wages or givestaff time off." Some retailers have begun to traintheir buyers on the codes that their technicalcolleagues are implementing, and the Co-operative Group is introducing targets for buyersbased on co-operative values as well ascommercial sales targets. This may ease somepressures on suppliers but does not go so far asincorporating buyer responsibilities or tradingterms into codes.

Independent scrutiny and accountabilityRetailers' performance on fairness and equity intrading must be subject to external scrutiny andverification, which requires comparativemeasurement tools. Ground-breaking work at

Imperial College for the Race to the Top project40

led to the design of a quantitative survey ofsuppliers, asking supermarkets' first tiersuppliers to evaluate their UK supermarketcustomers on the aspects of integrity ofsupermarkets' trading relationship with suppliersand ultimately farmers/growers. The surveydesign was based on extensive qualitativeresearch with the apple and pear, milk, potato,red meat, poultry and pork chains, and wasgrounded both in organisational theory (Kumar'sconcepts of distributive and procedural justice41)and the Competition Commission's findings. Thesurvey rightly starts from the premise that priceis not the only driver of supplier satisfaction ordissatisfaction, compared to process issues suchas sharing information, adequate notice ofchanges, and rapid turnover and poorknowledge of supermarket buyers (see Fearneet al., 2004).

2.3 Risks

Expanding the concept of fairness and equity intrade also carries some serious risks, especiallyto the integrity of the FAIRTRADE mark and thebrand reputation of Fair Trade companies.

Consumer confusionRepresentatives of FAIRTRADE labellingorganisations have expressed concern that theproliferation of ethical claims will causeconsumer confusion and represents a threat inthe form of "Fairtrade-Lite." The FAIRTRADEmark has very high brand recognition-around50% of consumers surveyed by the FairtradeFoundation knew the symbol. There are risks ofconsumer confusion arising from a surfeit oflabels and claims from both businesses (in retail,manufacture or distribution) and other ethical orsustainability labels. A recent Guardian articlepointed to the experience with ecolabels in the1990s-when retailers developed their own labelsand on-packet claims-as an example ofundermining a market through consumerconfusion; a point borne out by a recent



Consumers International report on 'green claims'(Consumers International, 2004).

The two largest coffee companies, Nestlé(which has been a harsh critic of Fairtrade) andKraft Foods (now part of Altria), are bothplanning to launch 'ethical' coffee brands in2005, including a 'Kenco SustainableDevelopment' brand from coffee certified by theRainforest Alliance.42 Kraft is proposing to payfarmers who adhere to its ethical criteria a 20%premium on the price of coffee beans on theworld market. And the 'Ethical Tea Partnership',which includes Tetley, Sara Lee, Twinings andUnilever, are starting an on-pack campaign todemonstrate 'ethical sourcing'-primarily aroundlabour standards-though again there is noguarantee of minimum price and the aim is notmuch more than complying with nationallegislation.

There is also risk of confusion with the newcertification offered by IFAT (the InternationalFair Trade Association)43 which certifies memberorganisations in relation to their overall policiesand objectives rather than the purchasing of anyparticular product. An FTO (Fair TradeOrganisation) Mark is awarded to tradingmembers of IFAT in relation to nine standards,which are concerned with reaching theeconomically disadvantaged, transparency andaccountability, capacity building, promoting FairTrade, improving the situation of women, childlabour, working conditions, the environment andthe payment of a fair price.

GreenwashSome businesses would be tempted to boost theequity of their own brands through some form ofco-branding, declaring themselves a 'Fair TradeRetailer'. If these claims have a weakunderpinning and companies have simplyjumped on the fair trade bandwagon, then fairtrade will encounter criticisms of being hijackedfor the purpose of greenwash, leading todeclining consumer confidence and a net loss inbenefits for small farmers.

But greenwash is already a feature of fairtrade, through no fault of its own; retailers whenchallenged will point to their Fairtrade products

as their main contribution to fairness and justicein trading relationships, despite accounting foronly a small element of their total food and drinkturnover.

Distraction from the policy agendaLast but not least, the 'privatisation' of fairnessand justice in trading can be a distraction fromthe serious public policy agenda of regulationswhich must underpin the fair and efficientworking of markets.

3 A supportive policy environment

For supermarkets to improve the equity andfairness in their trading relationships with theworld's farmers, there are a number of policyareas which need reform in both the public andprivate sector to ensure a supportive andcoherent policy environment for companies to dothe right thing. This is an area which needs aconcerted programme of action research, so theproposals presented here are tentative.

3.1 Public sector policy

Reform of the international trading system.Trade justice is an essential cornerstone of fairtrade. Fairness and equity in trading requirescomplementary reforms of the internationaltrading system, to ensure - among other things -the end of dumping products on world marketsbelow the cost of production, and re-regulationof commodity markets to reduce volatility andchronic oversupply. This key theme has beenwell covered in many other publications (e.g.Einarsson, 2000).

Recognising the problem, and the limits ofself-regulationThe first step for national public policy isrecognising the problem of severe imbalances ofmarket power in agrifood. And yet there is plentyof evidence that policy makers are unable tosituate the problem in a policy context, andtherefore unable to regulate around fair dealcriteria between producers and consumers. The



recent draft UK Food Industry SustainabilityStrategy,44 for instance, only addresses 'ethicaltrade' (as identified within the ETI), and this ishandled primarily as an issue of social ratherthan economic sustainability. Incredibly, there isno mention of supplier or producer welfare orproblems of price in the section on 'economic'sustainability.

Another area of policy myopia is the belief thatvoluntary self-regulation can deliver asustainable agrifood system without supportinglegislation. The failure of the Race to the Topproject showed that in such a relentlesslyconsumer-oriented industry as food retail, self-regulation and voluntary initiatives are only likelyto be appropriate for concerns that are alignedwith the mainstream consumer interest. Creatingincentives for supermarkets to drive positivechange on other aspects of sustainabledevelopment implies a more robust role for thestate (Fox and Vorley, 2004).

Competition policy that recognises buyerpowerCompetition policy traditionally equates socialbenefits with consumer benefits rather thanfairness to suppliers. But in order for competitionpolicy to also protect suppliers and primaryproducers in an era of extreme imbalance inmarket power, buyer power needs to beexamined in the development of nationalcompetition policy on its own terms.

A number of European countries haveintroduced laws intended to curtail supermarketpower, mainly to protect small retailers ratherthan suppliers and primary producers (Vorley,2003). In France, the 1996 'Loi Galland' forbidsselling at a loss and 'excessively low prices.'More transparency now exists in how buyingprices are declared, because non-goods relatedconditions (for example payments forpromotions) now have to be separately invoicedto the suppliers. This regulation has somewhatbackfired. The main area of negotiationsbetween suppliers and retailers has moved awayfrom price to services such as promotions andpayment terms. Consequently, the Galland lawunintentionally favours the large well-capitalised

suppliers, and the largest food retailers, whichcan force such payments without returnbenefits.45 The law is now being reformed, but tobenefit consumers rather than producers.

In Germany the 1999 Restraints onCompetition Act forbids retailers from settingprices permanently below purchase prices,allows firms to take action in the courts againstthe abuse of a dominant position without havingto wait for the Cartel Office to take action, andallows suppliers who wish to complain about theabuse of purchasing power by a retail chain toremain anonymous during the Cartel Officeinvestigations.

But as Dobson et al. (2001) concede,practices that exploit dependency relationshipsbetween retailers and suppliers are likely tocontinue even when codes are given legislativeteeth, considering suppliers' reluctance to bringcases to court. In the UK, this has been borneout in the case of the Code of Practice proposedby the UK Competition Commission andintroduced by the Department for Trade andIndustry. No complaints have been broughtforward to the DTI though supermarket abuse ofmarket power is apparently still rife, and this hasled to parliamentary and civil society calls for astrengthening of supermarket supply chainlegislation (Box 5). Two proposals, though notmutually exclusive include an ombudsmanproviding a place where producers can airconcerns confidentially, leading to specificaction, and an independent regulator withauthority to seek out and act on problems. TheNational Farmers Union (NFU) has proposed abuyers' charter, with a broader scope than theCode of Conduct, being (a) owned andadministered by representatives of all majorparties in the food supply chain, (b) applicable toall key aspects of trading relations, including theday-to-day relationships between suppliers andtheir customers, and (c) independently auditedwith an independent panel to considercomplaints and disputes which cannot beresolved at company level.

However, consolidation of supermarket buyerpower is at the root of many of these problemsthat make many trading relationships unfair. The



decision by Sainsbury's to extract more from itssuppliers through delaying payment terms from3 weeks to 7 weeks46 is yet anotherdemonstration of potentially unfair trade behindthe products on many of the shelves, around afew enclaves of labelled FT products.

More heretical policy approaches may berequired to level this particular playing field, suchas a ceiling on supermarket market share wellbelow the 25% which currently triggers reviewby the UK competition authorities, inappreciation of the evidence that buyer powermay affect farmers and suppliers at lower marketshares than seller power affects consumerwelfare (Vorley, 2003). Another public policyintervention could be a reversal of legislationwhich discriminates against the accumulation ofcountervailing market power by producercooperatives and exposes poorly organisedproducers to very one-sided conditions of marketpower.

3.2 Private sector policy

It is a mistake to look only to public policy for a'supportive policy environment'. Retailersthemselves can do much to ensure that internalpolicies support a fair and just trading regime.We have already noted, for example, thatserious mixed signals are generated inbuying/procurement departments that linkaggressive buying policies to individual financialrewards. There are also often stark differencesbetween individual companies' policies andthose adopted (and lobbied for) by industry tradeassociations.

But we must acknowledge that the stockmarket likes buyer power, seeing it as ameasure of a 'sustainable business' that willgenerate competitiveness, profits andshareholder value. Thus voluntary self-regulationas a tool for improving agrifood companies'dealings with their suppliers and ultimately withsmall and family-scale producers will be limitedboth by shareholder pressure and companymindset. There are suspicions within foodretailing of an inverse correlation between

investments in higher social and environmentalperformance and financial performance of asupermarket - the 'negative synergy' hypothesis- and these in fact have some support in theliterature (Moore, 2001).



Box 5: Strengthening the UKSupermarket Code Of Practice

Early Day Motion 817 sponsored by MPsAndrew George and David Drew, 11 March2003. At August 2004, the EDM had 108signatures.

"That this House notes the conclusions of therecent OFT review that the Supermarket Codeof Practice has failed to protect suppliers to thebiggest four supermarkets from unfair tradingpractices; notes that suppliers are too afraid tobring complaints forward under the existingmediation system; regrets that the OFT failedto recommend any firm action other than moreinvestigations; notes the original findings of theCompetition Commission that the tradingpractices of the four biggest supermarkets areleading to adverse effects including the loss ofsmaller suppliers and smaller retailers and thereduction of quality and choice to consumers;notes with concern that the adverse effects arefelt most by small and family farmers in the UKand overseas, by independent shops andsmaller retailers and by people without carsthat rely on local shops; and calls on theMinisters to draw up a new strengthened andlegally-binding code of practice with stricterterms and to appoint an independentsupermarket watchdog pro-actively to monitorthe effectiveness of the code, provide anindependent mediation process betweensuppliers and supermarkets, monitor otheraspects of the grocery market, and make itsfindings public."

Source: http://edm.ais.co.uk/weblink/html/motion.html/ref=817

Rethinking CSREquity and fairness in trading are almost entirelyabsent from the gamut of benchmarks, codesand standards for corporate social responsibility(CSR), even though these are features thatmuch of society would expect to be included inmeasures of company performance. There ismuch work to be done on bringing tradingrelationships to the heart of CSR, and to bridgethe arbitrary and artificial gap between 'fair' and'ethical' trade. As we have stated, the use ofFAIRTRADE labelling has a number oflimitations where the principles are notintegrated into the philosophy of the buyer. Thechallenges faced by small producers incomplying with codes and other standards hasbeen recognised for some time (e.g. NRI 2003),but the process of small producermarginalisation from mainstream supply chainscontinues, especially as industry standards suchas EUREPGAP take centre stage. An expansionof the concept of CSR to fairness and equity intrading is an extension of the stakeholderaccountability model of business (Fox andVorley, 2004).

Customers and citizensThe supermarket sector prides itself on beingconsumer-oriented in the extreme. The focus oncreating customer value has underpinned thebusiness strategies of the most successfulsupermarkets. But this has reached a point atwhich it is in danger of crowding out the interestsof some other stakeholder groups. For thesecompanies, concerns about their social andenvironmental impact only become significantwhen they affect consumer trust. The issue offairness and equity in trading will chime with onlya small proportion of consumers; buyer powerand fairness in trading are tricky issues tocommunicate to the public, especially whenaction may not be complementary to immediateconsumer interests, such as convenience andlower prices. This logic of exclusive customeraccountability bodes badly for other urgent areaswhere there are high expectations for self-regulation that potentially conflict with customerpreferences, or at least (in the words of

Carrefour), are not "a lever to create value."Carrefour's CEO states both that "Changing theworld is not our primary task. Our first task is toserve customers well," and "Sustainabledevelopment is the intelligent and demandingchoice."47 It is this logic which markets ethics asa consumer choice rather than a corporatestandard; fairness and justice in trading are putinto a niche as FAIRTRADE labelled specialityproducts and not integrated into businesspractice. The false conflation of 'customer' and'citizen', 'stakeholder accountability' and'customer accountability', and 'public good' and'customer value' has to be addressed for CSR infood retailing to mean anything.

4 Conclusions

Producers of food for supermarket shelves arefacing the effects of unrelenting retail buyerpower. This affects not only farmers but alsotheir workers, the environment and wider rurallivelihoods.

This paper is a call to incorporate fairness andequity into mainstream trading betweensupermarkets and their supply chains. It is alsoa call for some new thinking, at a time when it iseasy for fairness and justice in trading relationsto be niche-marketed, and easy for corporatesocial responsibility to be, in effect, a tax onsuppliers in support of manufacturer or retailerbrands. Why should CSR deal with 'ethical trade'with its emphasis on labour standards, and'sustainable production' with its focus on farmmanagement with costs and risks passed tosuppliers, while fair pricing and a living wage forproducers is the realm of Fairtrade, with extracosts borne by consumers?

But achieving integration is a lot easier saidthan done, in a market which is very distorted,and about to get a lot messier, with competing'ethical', 'fair', 'sustainable' and 'responsible'claims which risk causing consumer confusion orcynicism.

The first step has to be a re-evaluation ofpublic policy to address the disparities of market



power between producers and retailers,cognisant of the following:� Voluntary self-regulation, whether in the name

of 'ethical' or 'fair' trade, cannot in itself delivera fair and just trading system, because marketforces which reward buyer power and thehegemony of the largest retailers are pulling ina different direction

� FAIRTRADE marked products get neitherpolicy makers nor retailers off the hook ofdealing with unfairness in mainstream trading

� Good retailers need good regulations to avoida 'race to the bottom'

� Competition policy is out of step withcontemporary problems of abuse of buyerrather than seller power

But the absence of these new public policiesis not an excuse for private inaction.Supermarkets can do much to improve fairnessand justice in their trading relations at home andabroad. The real risks of such an improvementwill be minimised if retailers:� Avoid aggressively positioning or

differentiating themselves in the marketplaceas 'Fair Trade' retailers

� Focus on the implementation of corporatestandards for fairness in trading withinmainstream procurement. Incorporating theingredients of fair trade retailing on a muchwider scale as a corporate standard allowscustomers to be reassured that their mainpurchases have not been bought through thecontinued impoverishment or marginalisationof farmers, growers and workers.

� Emphasise accountability through subjectingtheir claims to external scrutiny.

� Continue investing heavily in products bearingthe FAIRTRADE mark. Frances Scott ofSustainAbility has raised the question ofwhether there should be a minimum thresholdof Fairtrade purchased before a company canmake Fairtrade claims about its business.48

� Build economic criteria in sustainabilitystandards. Recent debates within the CSRand certification community have highlightedthe dearth of economic criteria in sustainabilitystandards. The environmental and social

pillars are well covered by standards suchthose for organic agriculture, conservationagriculture and labour standards, buteconomic issues are often omitted.

One potential route would be to develop a setof guidelines for retailers that wish to incorporatefairness and justice into their trading relations inways which expand rather than constrainopportunities for small scale producers. Anyinitiative must also face the challenge ofaccountability, ensuring that standards orguidelines are being upheld while at the sametime ensuring that barriers to participation arenot created. This would involve engagement withboth mainstream retailers and Fair Tradeorganisations. Further research should beundertaken that would involve greater, in-depthinvestigation and comparison of currentschemes for fair and ethical trading in themainstream, exploration of supporting publicpolicy options, and last but not least, furtherconsideration of alternatives to mainstream foodretail.



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Notes

1 'Farmers Still in an Armlock on Prices' WesternMorning News, 9 March 2005

2 On 10 April 2001, Tesco, posted its first £1 billionprofit

3 Tesco announced on 12 April 2005 that its annualprofits had for the first time exceeded £2 billion

4 Commission for Africa (2005). Our commoninterest. Report of the Commission for Africa, Ch7. www.commissionforafrica.org

5 The limited scope of ethical buying policies isparticularly clear in relation to the neglect ofgender issues (Barrientos, S., Dolan, C andTallontire, A. (2003) 'A Gendered Value ChainApproach to Codes of Conduct in AfricanHorticulture', World Development 31(9):1511-1526; Oxfam (2004a). Trading away our Rights,Oxfam International). The content of codes inparticular tend to be written for larger producers,neglecting the particular concerns of smallerproducer e.g. price, contractual terms.Smallholders may also lack the managerialcapacity to implement codes and be unable tomeet the associated financial costs of meeting,monitoring and being audited against codes,thereby excluding them from key export markets(Dolan, C. S. and Humphrey, J. (2000) -Governance and Trade in Fresh Vegetables:Impact of UK Supermarkets on the AfricanHorticultural Industry. Journal of developmentStudies 37 (2): 147-77)

6 The FAIRTRADE Mark is already a RegisteredTrademark and therefore FAIRTRADE as inFAIRTRADE Mark is written as such in uppercase. When referring to Fairtrade in the contextof the labelling system of Fairtrade LabellingOrganisations International (FLO), Fairtrade iswritten as one word with a capital 'F'. Therefore'Fairtrade products' specifically refers to productsthat carry the FAIRTRADE Mark. When referringmore generally to fairness in trading, fair trade is

written as two words. The term 'Fairtrade' (oneword, capitalised) refers to a certified process;'fair trade' (two words, no capitals) refers to thegeneral principal and does not imply acertification process.

7 Either through demanding lower merchandiseprices, or demanding greater provision of servicessuch as special packaging or third-party foodsafety certification, or demanding payment offees.

8 Along with attention to managing labour costsand distribution logistics

9 The Grocer, 15 Jan 05

10 Interview of Bernard Cornibert, CEO of WindwardIslands Banana Development and ExportingCompany Limited, Eurofruit Magazines, April2004. www.windwardbananas.co.uk

11 EFTA 2001, EFTA Yearbook Brussels: EuropeanFair Trade Association.

12 Figure for 2001 sales from Fairtrade Federation2002; 2002 sales were significantly higher at$250m. The Fairtrade Federation report coversUSA, Canada, Australia, New Zealand andJapan.

13 See At What Price Virtue. Wall Street Journal, 28March 2004

14 Sunday Times 29 June 2003

15 Legally, there is little that fair trade labellers cando about this as pricing guidelines at the retailerlevel are illegal under competition policy.

16 Eg Friends of the Earth Media Briefing "Alliancecalls for new supermarket code and watchdog.www.foe.co.uk/resource/briefings/supermarket_code_media.pdf

17 Coffee with a Faitrade Mark accounts for 14% ofthe United Kingdom retail roast and ground coffeemarket, with the Cafédirect now sixth in the



market (Vallely 2003). In SwitzerlandFAIRTRADE marked bananas account for 15% ofthe market, a share that is said to be still growing.

18 Ethical trade - some common questionsanswered. Soil Association Fact sheet.www.soilassociation.org/

19 Roozen N and VanderHoff Boersma F (2002).Fair Trade: An Adventure in the Fair Trade Market

20 Market to sell certified Fair Trade bananas USAToday, 20 Jan 04

21 Press release from Domini Social Investments,CSR Wire, 15/9/03,www.csrwire.com/print.cgi?sfArticleId=2117;Press release from Equal Exchange, Fair TradeCoffee Leader Unconvinced by Procter& GambleAnnouncement, 16/09/04,www.equalexchange.org/news_info/pr9.16.03.htm).

22 Banana Link, pers. com..

23 Lindsey B (2004). Grounds for complaint? 'Fairtrade' and the coffee crisis. London: Adam SmithInstitute.

24 Nestlé SA (2003). What can be done?www.nestle.com/NR/rdonlyres/D07B9D8D-C9BD-4D67-A7D1-5CA18D4CF69D/0/Coffee_English.pdf

25 Articulated at by Ian Bretman of FTF, 18 May2004, International Coffee Organisation RoundTable on Equitable Trading and Coffee

26 Barrientos, S., Dolan, C and Tallontire, A. (2003)'A Gendered Value Chain Approach to Codes ofConduct in African Horticulture', WorldDevelopment 31(9):1511-1526; Oxfam (2004a).Trading away our Rights, Oxfam International;Dolan, C and Humphrey, J (2000) 'Governanceand trade in fresh vegetables: the impact of UKsupermarkets on the African horticulture industry',Journal of Development Studies, 37(2), 147-176;ETI (2003) The challenge of implementation insupply chains that include homeworkers and/orsmallholders, Key Challenges in Ethical Trade,

Report on the Ethical Trading Initiative BiennialConference2003, http://www.ethicaltrade.org/Z/lib/2003/12/eticonf/index.shtml

27 Du Toit, Andries (2001) Ethical Trading- A forcefor improvement or corporate whitewash? NaturalResource Perspectives 71, London: OverseasDevelopment Institute

28 Seewww.eti.org.uk/publications/purprinc/en/index.shtml

29 By May 2004 Co-op carried 40 Fairtradeproducts, whereas Tesco Tesco carried 60.

30 Other Swiss retailers are starting to follow the Co-op's lead to try to purchase greater volumes ofbananas on fair trade terms. But note that adeclining proportion of FT bananas come fromsmall scale producers.

31 From May et al (2004)

32 Adapted from Utz Kapeh website,www.utzkapeh.org and May et al (2004).

33 Letter from David Rosenberg, www.utzkapeh.org

34 Products from developing countries, coming to astore near you: Current developments, and a fewpredictions. Presentation by Chris Anstey, ProductIntegrity Manager, Tesco Stores Ltd. to session onMarket Opportunities for Developing Countries atthe 14th Annual World Food and AgribusinessForum, Symposium and Case Conference,Montreux, Switzerland June 12-15, 2004.www.ifama.org/conferences/2004Conference/Forum/ForumPresentations.htm

35 Daily Express 23 November 2000

36 "Wal-Mart suppliers have learned quickly that itisn't business as usual. Wal-Mart requires thatsome suppliers work off a system called 'costplus' which means producers must open theirbooks. That's a kind of business relationship thatexceeds the comfort level of many." Doing



Business by Wal-Mart's Rules. Top Producermagazine, November 2001.

37 See also "Asda asks suppliers to reveal all"Sunday Times 11 August 2002.

38 Industry reflects on OFT warning. FarmersWeekly 21 January 2005

39 Costs cuts and false economies. Financial Times24 November 2003

40 www.racetothetop.org

41 It is widely appreciated within the industry thatfairness and justice in trading is about more thanprice. Kumar's theory of justice (1996) states thatfairness encompass two types of justice: (a)Distributive justice - the perceived fairness of theoutcomes received in a relationship and dealswith how the costs and benefits are dividedbetween trading partners, and (b) Proceduraljustice deals - the fairness of one party'sprocedures and policies for dealing with itspartner(s). In procedural justice, duration ofcontract is key. If, say, a horticulture contract ismoved from East Africa to Central America atshort notice to chase a small (and probablytemporary) saving, then a procedural injustice hasbeen committed.

42 Forget Maxwell House. Would you like a cup ofKenco Sustainable? Guardian, November 22,2004. News release "Kraft Foods launchesSustainable Coffee Initiatives in the UK" KraftFoods UK and Ireland, 30 June 2004.

43 Formerly known as the International Federationfor Alternative Trade, hence the acronym, seewww.ifat.org .

44 Draft DEFRA Food Industry SustainabilityStrategy (FISS)www.defra.gov.uk/corporate/consult/fiss/index.htm

45 Source: The Food Chain: Europe's giant foodretailers have accumulated massive buyer power,forcing strategic change right through the supply

chain. Tony McAuley, CFO Europe, August 23,2004. www.cfo.com/printable/article.cfm/3014279?f=options

46 Pay delay for Sainsbury's suppliers. Guardian 3February 2005.

47 The Grocer, 31 August 2002

48 SustainAbility Radar Trends April/May 2004.



Address for correspondence:[email protected]

Editing by Jeanette Longfield

Design by Ian Tokelove

The UK Food Group is the leading UK networkfor non-governmental organisations working onglobal food and agriculture issues. The UK FoodGroup network represents a unique body ofexpertise and experience, with members drawnfrom national and international development,farming, consumer and environmentorganisations. The priority areas of action aretrade policies, sustainable agriculture and theregulation of food and agriculture transnationalcorporations, through research, documentingglobal trends in food and agriculture, awarenessraising, advocacy and facilitating South-Northexchanges of experiences.

Other UK Food Group resources, availableon www.ukfg.org.uk

'EU Competition Rules and FutureDevelopments from the Perspective ofFarmers and Small Suppliers' British Institutefor International and Comparative Law, April2005

'Food Inc: Corporate Concentration fromFarm to Consumer', Bill Vorley, November,2003

The UK Food Group network: Action Aid, Baby Milk Action, Banana Link, Catholic Fund for OverseasDevelopment (CAFOD), Catholic Institute for International Relations (CIIR), Christian Aid, ConsumersInternational, Centre for Food Policy - City University, Farm Crisis Network, Farmers' Link, Farmers WorldNetwork, Find Your Feet, Gaia Foundation, Garden Africa, Harvest Help, International Institute for Environmentand Development, New Economics Foundation, Oxfam GB, Panos Institute, Pesticide Action Network, PracticalAction (formerly ITDG), The Royal Society for the Protection of Birds (RSPB), Save the Children, ScottishCatholic International Aid Fund (SCIAF), Send a Cow, Susila Dharma Britain, Tearfund, War on Want, Women'sEnvironmental Network, World Development Movement, WWF. UK Observers: Greenpeace, OverseasDevelopment Institute, Sustain.

UK Food Group, PO Box 100, London SE1 7RT, UK Tel: + 44 (0) 20 7523 2369 Fax: + 44 (0) 20 7620 0719 Email: [email protected] Web: www.ukfg.org.uk

Achieving fairness in trading between supermarkets andtheir agrifood supply chains

UK Food Group Briefing: September 2005

AuthorsAnne TallontireNRI, University of Greenwich at Medway, Central Avenue, Chatham Maritime ME4 4TBBill VorleyInternational Institute for Environment and Development, 3 Endsleigh St, London WC1H 0DD

achieving fairness in trading between supermarkets and

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