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Svenja Schroeder MASTER'S THESIS WHEN ETHICS ARE GOOD FOR BUSINESS A case study on the strategic importance of direct trade for three speciality coffee roasters in Copenhagen Svenja Schroeder MSc. Business, Language and Culture Business and Development Studies Supervisor: Stefano Ponte STU: 165 080 Pages: 68 Hand-in date: May 29, 2015 Copenhagen Business School 2015 ! ! TABLE OF CONTENTS ABSTRACT .............................................................................................................................................................. I KEY TERMS AND DEFINITIONS ........................................................................................................................ II LIST OF ABBREVIATIONS ................................................................................................................................ III LIST OF FIGURES ................................................................................................................................................ III LIST OF TABLES ................................................................................................................................................. III 1. INTRODUCTION .............................................................................................................................................. 1 2. CONTEXT AND LITERATURE REVIEW ................................................................................................... 4 2.1 GLOBAL COFFEE TRADE ......................................................................................................................... 4 Global trade flows .......................................................................................................................................... 4 From bean to cup: Activities in the coffee value chain .................................................................................. 9 Coffee consumption and the "Latte revolution" ............................................................................................. 9 The rise of the speciality sector .................................................................................................................... 10 The coffee paradox ....................................................................................................................................... 12 2.2 DIRECT TRADE ........................................................................................................................................ 14 From "Latte revolution" to "Bean revolution" .............................................................................................. 14 Direct trade in the Danish market ................................................................................................................. 16 2.3 THEORETICAL APPROACHES TO THE COFFEE COMMODITY CHAIN ........................................ 17 Global value chain thinking .......................................................................................................................... 17 Towards a holistic analysis of value creation in global chains ..................................................................... 18 Top down governance and lead firms ........................................................................................................... 19 The coffee value chain as an example for a buyer-driven chain .................................................................. 20 Academic perspectives on direct trade ......................................................................................................... 21 2.4 GOVERNANCE IN THE DIRECT TRADE CHAIN ................................................................................ 22 GVC thinking 2.0: Theory of global value chain governance ...................................................................... 23 Variable A: Complexity of transaction ........................................................................................................ 26 Variable B: Ability to codify transaction ..................................................................................................... 27 Variable C: Supplier capabilities .................................................................................................................. 27 3. METHODOLOGY ........................................................................................................................................... 28 3.1 RESEARCH PHILOSOPHY AND RESEARCH APPROACH ................................................................ 28 3.2 RESEARCH STRATEGY AND DESIGN ................................................................................................. 29 I ! ! Research strategy .......................................................................................................................................... 29 Research design ............................................................................................................................................ 29 Research technique ....................................................................................................................................... 30 Data analysis ................................................................................................................................................. 31 3.3 ISSUES OF RELIABILITY AND VALIDITY .......................................................................................... 32 4. ANALYSIS ........................................................................................................................................................ 34 4.1 CASE COMPANY PROFILES .................................................................................................................. 34 Case company 1: KONTRA Coffee ............................................................................................................. 35 Case company 2: The Coffee Collective ...................................................................................................... 38 Case company 3: Estate Coffee .................................................................................................................... 41 4.2 ANALYSIS OF VARIABLES .................................................................................................................... 43 Variable A: Complexity of transactions ....................................................................................................... 44 Variable B: Ability to codify transactions .................................................................................................... 47 Variable C: Supplier capabilities .................................................................................................................. 50 Other observations ........................................................................................................................................ 54 5. DISCUSSION ................................................................................................................................................... 59 5.1 EMPIRICAL IMPLICATIONS .................................................................................................................. 59 5.2 THEORETICAL IMPLICATIONS ............................................................................................................ 62 6. CONCLUSION ................................................................................................................................................. 65 LIST OF REFERENCES .......................................................................................................................................... i APPENDIX ............................................................................................................................................................. iv ! II ! ABSTRACT International roasters and large retailers are driving global coffee commodity chains since the 1980s, retaining most of the value created in the chain in coffee-consuming countries. Recently, independent micro roasters are challenging the status quo with new demands on quality, retail strategies and business ethics. Characteristic for the "third wave of coffee" movement is the ambition to create unique taste experiences from selected coffee beans of premium quality. Additionally, these roasters share a strong personal conviction that ethics and quality go hand in hand: Coffee growers should receive a fair share of the value created in the coffee supply chain. The coffee commodity market is not able to meet these new demands to ethics and coffee quality. As a result, progressive roasters turn to direct trade. In direct trade chains roasters face high complexity of transaction, low ability to codify the transaction and high supplier capabilities. They turn to relational governance to coordinate the activities in the chain. Direct trade has previously been understood as an ethical alternative to commodity trade. Through in-depth interviews with three direct trade roasters in Copenhagen, this study finds that there is a strategic dimension to direct trade that has previously not been considered. The case companies use direct trade strategically to (a) identify and secure exceptional quality coffees; (b) adopt the trade relationship to differences in supplier capabilities; (c) communicate product value to consumers; and (d) manage volatility and change in the global coffee market. KEY TERMS
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