Identify the tangible and intangible resources utilized by Cafedirect, based on a the case study.

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Refer to the Case Study on p. 523 of the textbook; Cafedirect:
After reading the entire study, answer the 5 questions on page 533.
1. Identify the tangible and intangible resources utilized by Cafedirect to support its competitive position in the UK hot
beverage market.
2. Do you think companies in an ethical niche have to compromise their ethics to compete successfully in mainstream
markets?
3. Should Cafedirect become more involved in the fair trade movement again?
4. Should the company be getting involved in climate change discussions or is this diluting its core purpose?
5. What marketing strategies would you pursue?
Case Study
Cafédirect: The Marketing Evolution and
Market Penetration for Fair Trade Products
By Bob Doherty, Iain A. Davies, and Simon Knox Bob Doherty is an associate professor at
Liverpool Hope University, United Kingdom. His research interests include ethical marketing
and fair trade business models. Contact: dohertb@hope .ac.uk
Iain A. Davies is a lecturer in marketing at Bath University, United Kingdom. His research
interests include ethical marketing and business networks. Contact: i.davies@bath.ac.uk
Simon Knox is a professor of brand marketing at Cranfield University, United Kingdom. His
research interests include strategic marketing, branding, and sustain- able marketing. Contact:
s.knox@cranfield.ac.uk
Overview
This case study investigates the performance of the fair trade pioneer Cafédirect and how it
achieved its prominent position in the United Kingdomâ??s mainstream coffee market based on
ethical positioning. The case explores how Cafédirectâ??s market- ing and communications
channels resulted in rapid growth from niche player to a mainstream product. The company,
however, is now experiencing a market growth slowdown. Some question whether it is possible
for Cafédirect to regain its former momentum with its current marketing strategy.1
Background to Cafédirect
Following World War II, coffee prices fluctuated significantly. When prices peaked, nations
exporting coffee earned windfall profits, but when prices collapsed, their economies collapsed.
In 1962, coffee exporters and importers sought to achieve a reasonable balance between the
supply and demand of coffee by signing the Interna- tional Coffee Agreement, brokered at the
United Nations.2 The agreement stabilized the price of coffee over a five-year period by
establishing a quota system prohibiting coffee exports from exceeding consumer demand.
This international agreement temporarily collapsed in 1989, when coffee prices fell to record
lows of just one-third of their pre-1989 level. The price decline had a
(Collins 523)
devastating effect on the incomes of small-scale coffee farmers globally.3 Small family- owned
farms were producing three-quarters of the global supply of coffee, and many of them could no
longer earn a subsistence income from their coffee beans. The cost to provide coffee beans far
exceeded the revenue being generated.
In response to this crisis, Oxfam, a British-based non-government organization (NGO), and three
alternative trading organizations (ATOs)â??Traidcraft, Equal Ex- change, and Twin Tradingâ??got
together in 1991 and formed Cafédirect as a branded â??fair tradeâ? coffee company to ensure
adequate wages for those providing coffee beans.4 Each of the four partners owned 25 percent of
Cafédirect.
Cafédirectâ??s specific aim has been to pioneer fair trade products into the main- stream United
Kingdom (UK) hot beverage market. By 2007, Cafédirect had become the UKâ??s largest fair trade
hot drinks company and the fourth largest hot beverage company in the UK with annual sales of
£21.8 million.5 Its fair trade brands include Cafédirect Coffee, Teadirect, and Cocodirect
(drinking chocolate), which are sold through major supermarket chains and alternative channels
of distribution, includ- ing Oxfam shops. Cafédirect is the fifth largest coffee brand in the UK
with an 8 percent market share of the roasted and ground coffee market and sources coffee beans
from 39 producer organizations across 13 different countries, which benefits more than 250,000
coffee producers.
There are several fair trade product certification organizations. Cafédirect chose the standards
developed by the Fairtrade Labelling Organisation (FLO) for estab- lishing its brand. FLO
determines standards for Fairtrade6 commodity products, in- cluding minimum prices for
specific types of coffee beans, and FLO-CERT conducts supplier audits to ensure compliance
with these standards.7
To further assist coffee growers, Cafédirect exceeds FLO minimum price stan- dards by paying
an additional 10 percent above the Fairtrade Certification price. Cafédirect refers to this as its
â??Gold Standard.â? When in 2004 and 2005, tea prices fell from US $1.60 to US $1.35 per
kilogram (equivalent to 2.2 pounds) in Tanzania and as low as US $1.18 in Uganda, Cafédirect
bought these products for US $1.95 per kilogram.8
In 2007, Cafédirect paid nearly £1.0 million above the market price for its cof- fee, tea, and
cocoa raw materials. The company then paid an additional £600,000 to producers through its
Producer Partnership Programs, which build the organiza- tional capacity of producer
organizations. The programs include providing invest- ment for marketing capability, quality
control, and improved agricultural practices.
What is Fair Trade?
Under the standard market mechanism, many of the growers of commodities such as coffee live
in poverty. Competitive forces drive down product costs, and under the standard market
mechanism, large variations in the price for coffee exist. This can result in unsustainable income
levels; poor working conditions; exploitation; and limited health, safety, and environmental
protection for coffee growers.9 A major contributor to these problems are international
commodity markets, which often set prices that fail to provide growers with a sustainable
livelihood.10
The most recent coffee crisis (2000â??05) was so extreme that coffee prices and farmersâ?? incomes
were depressed to such an extent that many coffee farmers faced starvation and the loss of their
land.11 The cost of production was twice the price
(Collins 524)
received via the standard market mechanism. For example in Nicaragua, 245,000 workers in the
coffee industry lost their jobs, and the families of 30,000 small coffee producers suffered chronic
hunger. The lack of income on farms prompted massive rural-to-urban migration, increasing the
poverty belts around Nicaraguaâ??s major cities.
In contrast, fair trade aims to be a transformative tool for modifying the eco- nomic model
toward more social ends.12 Fair trade has been described as
a trading partnership, based on dialogue, transparency and respect that seeks greater equity in
international trade. It contributes to sustainable de- velopment by offering better trading
conditions to, and securing the rights of, marginalized producers and workersâ??especially in the
South. Fair Trade organizations (backed by consumers) are engaged actively in supporting
producers, awareness raising and in campaigning for changes in the rules and practice of
conventional international trade.13
Fair trade differentiates itself from the standard market mechanism according to several key
principles and practices, including14
â?¢ direct purchasing from producers
â?¢ the payment of both a fair trade minimum price and a social premium
â?¢ long-term relationships and supply contracts
â?¢ co-operative, not competitive, dealings with producers
â?¢ access to capital, such as the provision of credit, for producers when requested, usually in the
form of pre-financing
â?¢ provision of market information to producers â?¢ democratic organization of producers and â?¢
practicing sustainable production
In 1991, the Fairtrade Foundation was created in the UK by a number of charities, including
Oxfam, Christian Aid, and the World Development Move- ment. The foundationâ??s primary
responsibility was to oversee the Fairtrade Cer- tification Mark, a product label informing
consumers that a productâ??s supply chain complies with the Fairtrade standards established by
FLO.15 The Fairtrade standards aim to ensure both better working conditions and more
sustainable farming practice in grower communities. The standards establish minimum pric- es
for a range of products and prohibit the use of certain materials, such as toxic insecticides.
Coffee and tea prices are volatile. The FLO sets minimum market prices (a floor price) paid for
Fairtrade certified products that cover the cost of production. For example, in November 2006,
the Fairtrade minimum price for Arabica coffee beans was US $1.31. When world market prices
go above these minimum prices, growers of Fairtrade certified products are guaranteed a higherâ??
thanâ??market price through an additional â??social premiumâ? of between 5 cents and 15 cents per
kilogram, de- pending on the product. For coffee, this equates to paying the market price plus 10
cents per pound. Through minimum market prices and social premiums, Fairtrade certification
aims to guarantee a long-term sustainable commitment to growers, giv- ing them more
opportunity to plan for the future and to invest in their farms and communities.
(Collins 525)
Cafédirect and Three Phases of Fair Trade Marketing
Scholars have identified three evolutionary phases in the marketing of fair trade products: the
Solidarity Era (1970â??90), the Market Development Era (1990â??2002), and the Mass-Market Era
(2002â??09).16 During the Solidarity Era, fair trade busi- nesses highlighted their solidarity with
third-world producers. Buying fair trade products was akin to charity. During the Market
Development Era, fair trade busi- nesses tried to shake their charity image and competed openly
on the market with quality products, using Fairtrade certification as a product differentiation
selling point. In the current Mass-Market Era, fair trade businesses compete in the main- stream
with a wide range of fair trade brands positioned at different pricing points and qualities (from
budget to premium). They also compete with long-established multinational coffee brands that
now include a fair trade brand in their portfolio.
The following sections describe Cafédirectâ??s evolution through the three phases of industry
marketing development.
Fair Trade Solidarity: Marketing Ethics, 1993â??99
Although Cafédirectâ??s high product quality has remained constant over the years, the sales,
distribution, advertising, branding, and packaging have gone through some major changes. Early
packaging tended toward simplicity, but with large amounts of text educating customers about
the product and the producers. This fits well with a solidarity view of the products by bringing
the consumers and producers closer together. It also supports Cafédirectâ??s aim to market the core
ethics of its products. Customers demonstrated compassion for the lives of coffee growers by
paying extra for the certified products.
Poster campaigns during this six-year period highlighted the living and working conditions of
coffee growers. Cafédirect suppliers demonstrated pride in their ac- complishments, whereas
exploited mainstream suppliers suffered through poverty living conditions. The advertisements
tended to contain a testimony and portray how purchasing Cafédirect helps coffee farmers and
their communities. This links closely with attempts to draw consumers into feeling solidarity
with producers and to commence the process of showing how Cafédirect provides a more ethical
and sustainable alternative choice.
As brand recognition increased, Cafédirect became more controversial by sug- gesting that not
only was its coffee ethical but, by its very nature, the mainstream competition was not. Big-brand
competitors were attacked for having a â??fat-catâ? mentality. In a stroke of creativity, on
September 8, 1997, Cafédirect ran an antiâ?? fat cat mentality advertisement in the Guardian
newspaper. The advertisement ap- peared on an almost full-page obituary for Mobuto Sese Seke,
one of Africaâ??s most corrupt dictators.
A problem with this type of branding is that consumers are being asked to be charitable, rather
than purchasing a product based on its quality. Prior to the Fairtrade Certification Mark,
consumers assumed that fair trade products were of â??poor quality,â? and the charity approach
reinforced this image. Cafédirect shook off the stigma associated with poor-quality charity
products by benchmarking prod- uct quality to mainstream competitors, such Kencoâ??s medium
roast. This could be achieved because Cafédirectâ??s Producer Partnership Programs helped
suppliers
(Collins 526)
through quality control initiatives. As a result, Cafédirect achieved recognition as a premium
quality brand with retail prices 20 percent to 30 percent higher than its competition.
In 1994, the company entered the less prestigious freeze-dried coffee market be- cause market
research revealed that the majority of UK consumers were drinking freeze-dried coffee.
Cafédirectâ??s instant coffee product enabled the company to make its first profits in 1995 and
heralded the start of Cafédirectâ??s strong growth continu- ously fuelled by new product launches.
During this era, Cafédirectâ??s sales relied heavily on product distribution through its ATO
founding partners Traidcraft and Equal Exchange. Employees were often recruited from these
ATO organizations. Cafédirect depended heavily on ATO mar- keting campaigns to increase
consumer awareness about its products. The companyâ??s primary marketing efforts had been
through public relations, journalism, and print advertising. Marketing success was achieved
through the skilled use of partners, volunteers, and network associates.
Market Development: Marketing Quality, 1999â??2002
There is a perceived limit within the fair trade community as to how much market share a â??core
ethics� marketing strategy can gain a company. Market experts esti- mate that socially conscious
consumers account for a small percentage of the buying public, just 3 percent of the cocoa and
coffee market in Europe. Other fair trade ini- tiatives such as Max Havelaar, Transfair,
RaÌ?ttvisemaÌ?rkt, and Reilun Kaupan have all struggled to grow beyond 3 percent market share.
In 1999, in an effort to increase its sales above the 3 percent level, Cafédirect dra- matically
changed its advertising messages. Rather than focusing on portraits of small- scale coffee
farmers, the new Cafédirect advertisements focused on its high-quality product offerings. Its
premium coffees were shown related to the pristine environmen- tal scenes in which they were
produced. The company even changed the name of Ca- fédirect Instant to 5065â??the average
height at which its coffee beans were grownâ??to make a clear transition to the premium end of
the market.
Over the following two years, progress continued in new advertising methods and media. In the
first highly evocative cinema advertisement produced for any fair trade company, Cafédirect
showed the peak of Machu Picchu waking up in the morning to the smell of its coffee. In another
first, Cafédirect was granted advertising rights on the London Underground for its new brand
5065. The success of Cafédirectâ??s innovative marketing culminated when the company, with its
limited marketing budget, won the Marketer of the Year Award in 2004 from the Marketing
Society.
The main aim of Cafédirectâ??s new advertising and packaging was to move the focus away from
the experience of the producer (or the â??core ethicsâ? message previously noted) to the experience
of the consumer. Consequently, there was a major decrease in the amount of fair trade text on the
advertisements and pack- aging. The space allocated to the Fairtrade Certification Mark was
significantly reduced. This new customer experience message sparked a rapid growth in sales
and much greater brand awareness. Cafédirectâ??s market share rose above the 3 percent barrier.
During this growth stage, Cafédirect began to rely less on the founding partners for sales and
distribution and secured significant supermarket distribution.
(Collins 527)
Collins, Denis. Business Ethics: How to Design and Manage Ethical Organizations. Wiley,
09/2011. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.
As each product was rebranded to reflect this new positioning, the company began to have a new
problem. Fair trade competitors began to follow Cafédirectâ??s lead by rebranding and adopting
product-quality messages, so more marketing expense was needed to differentiate Cafédirect
from other fair trade companies. Each brand now needed its own marketing and sales support,
which led to rapidly increasing costs.
New competition arose from mainstream coffee companies wanting to capital- ize on increased
consumer demand for fair trade products. The fair trade market experienced a vast increase in the
number of fair trade brands on the supermarket shelf, including premium coffees from major
roasters, own-label brands from su- permarkets, fair trade lines from Nestlé, and similarly
branded â??sustainableâ? cof- fee from Kenco. Cafédirectâ??s competitive advantages from the â??core
ethics� of its product were being eroded. With trusted brands bringing out quality products, the
product quality message was no longer as effective. Cafédirectâ??s revenue growth began to slow
down.
Internal market research attributed some of the stagnant growth to consumers not being aware
that Cafédirectâ??s coffees, teas, and cocoas came from the same company. As a result, Cafédirect
had been unable to leverage the success of its coffee to sell new- er products. With product
quality now established, the next step was for Cafédirect to leverage its organizational values and
corporate brand communications to fuel sales growth and help reduce marketing expenditures.
Mass-Markets: Marketing Uniqueness, 2004â??09
Commencing in 2004, Cafédirect undertook a three-year corporate product and rebranding
program with its brand portfolio being presented as a family of products sharing a common value
system. In making this move, the company departed from product brand marketing toward
corporate brand marketing.
Cafédirectâ??s uniqueness embraced both innovation and ethical products. Cafédi- rect was the first
fair trade company to advertise, the first supplier of fair trade instant coffee, and the first fair
trade company to have an initial public share offering. The company could also identify a
number of ethical market initiatives, such as setting up the Gold Standard by exceeding Fairtrade
certification minimum price standards.
This shift in focus was symbolized by Cafédirectâ??s effort to raise £5 million by offering shares of
stock through an initial public offering (IPO) on Triodos Bankâ??s â??ethical exchangeâ? Ethex.17
The IPO provided Cafédirect an opportunity to extend a financial ownership stake in the
companyâ??s ethical business model to its consumers. IPO press releases emphasized that
Cafédirect invested 70 percent of its pretax prof- its in growersâ?? organizations. Within just two
months, Cafédirect raised the £5 mil- lion. Sixty percent of Cafédirect was now publicly owned.
Cafédirectâ??s four founding partners each reduced its ownership from 25 percent to 10 percent.
Combined, the founding partners now shared one seat on the board of directors.
Over the next three years, Cafédirect invested £1.9 million, or 60 percent of op- erating profit,
into its Producer Partner Programs. The company also handed over a portion of its share issue to
producer partnersâ??accounting for 4.9 percent of the companyâ??s equityâ??in order to give
producers a role in the governance of Cafédirect.
During the M …
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