Ethical Product Sourcing in the Starbucks Coffee Supply Chain

Chuck Munson with Dustin Smith Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jeanne Glasser Levine Operations Specialist: Jodi Kemper Managing Editor: Kristy Hart Senior Project Editor: Betsy Gratner Compositor: Nonie Ratcliff Manufacturing Buyer: Dan Uhrig © 2014 by Chuck Munson Published by Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458 FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-382-3419, [email protected]. For sales outside the U.S., please contact International Sales at [email protected]. Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners. All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. ISBN-10: 0-13-358562-X ISBN-13: 978-0-13-358562-9 Pearson Education LTD. Pearson Education Australia PTY, Limited. Pearson Education Singapore, Pte. Ltd. Pearson Education Asia, Ltd. Pearson Education Canada, Ltd. Pearson Educación de Mexico, S.A. de C.V. Pearson Education—Japan Pearson Education Malaysia, Pte. Ltd. Reprinted from The Supply Chain Management Casebook (ISBN: 9780133367232) by Chuck Munson.

Dustin Smith† Introduction

Fair Trade is a movement that “seeks to empower family farmers and workers around the world while enriching the lives of those struggling in poverty.” 1 Fair Trade is based on the principal of paying above the market rate for goods that are environmentally friendly and made by workers in safe conditions who are paid a livable wage. Cof- fee is a significant focus of the Fair Trade movement, because coffee trails only oil in global trade volume.2 Despite high global demand, market price fluctuations can create hardships for many of coffee’s small producers. In the United States, the coffee market is estimated to be over $32 billion,3 with Starbucks being the dominant coffee retailer. With its large market presence, Starbucks has been under pressure to increase the amount of Fair Trade coffee it imports. How- ever, doing so has drastic implications for Starbucks’ supply chain as Fair Trade coffee is, by design, more expensive than similar goods.

† Washington State University, Pullman, Washington, USA; dustin.smith@email. wsu.edu 1 Fair Trade USA. (2010). About fair trade usa. Retrieved from www.fairtradeusa. org . 2 Global Exchange. (2011). Coffee in the global economy . Retrieved from www. globalexchange.com . 3 Specialty Coffee Association of America. (2012). Coffee facts and figures . Retrieved from www.scaa.org . 3 4 ETHICAL PRODUCT SOURCING IN THE STARBUCKS COFFEE SUPPLY CHAIN

Moving forward, Starbucks must decide whether the ethical mission of Fair Trade coffee warrants the increased procurement costs. Overview of Fair Trade

Fair Trade began in the 1940s as a small collection of European and North American organizations that focused on aiding marginal- ized producers by providing a market to sell basic crafts and goods.4 These small organizations focused their efforts on importing crafts from countries such as Angola and Nicaragua. In the 1960s, “alterna- tive trade organizations” such as Oxfam formed in Europe and started distributing imported products through a variety of small “world- shops.” The movement sought to alleviate poverty among distressed populations that some considered to have resulted from growing glo- balization and trade imbalances. Because sales were confined to small retail outlets and ordering through select publications such as the Whole Earth Catalog , sales growth was severely limited due to a lack of market presence. In order to expand distribution, retailers required a system that enabled con- sumers to identify a product as ethically sourced no matter where the product was sold. To solve this problem, the Fair Trade label was developed in 1988, giving products a recognizable symbol allowing fair trade goods to be readily identified as fair trade. Fair trade began to be offered in large retailers and grocery stores, spurring a growth in sales that reached an estimated $3 billion by 2007. 5 In 1997, vari- ous Fair Trade labeling groups were combined to form the Fairtrade Labeling Organization. Despite the original focus on crafted products, the declining demand for handicrafts in 1980 prompted a shift toward agricultural goods. Initially, coffee was the major commodity offered through Fair Trade, but it has since expanded to include other products such as tea, almonds, bananas, and olive oil. Coffee was a natural target for Fair Trade groups, as it is one of the few remaining international

4 FairtradeUSA. (2010). History. In Fair Trade USA. Retrieved 9/24/2012, from http://www.fairtradeusa.org/what-is-fair-trade/history . 5 Rando, L. (2008, May 23). Worldwide fairtrade sales up 4 percent. Confection- ary News . Retrieved from www.confectionarynews.com . ETHICAL PRODUCT SOURCING IN THE STARBUCKS COFFEE SUPPLY CHAIN 5 commodities that are still produced in small estates. Prior to 1973, strict quota agreements were in place among producing countries that helped stabilize prices and keep producer margins high. The collapse of regulation in 1973 resulted in the swift entry of new growers from regions such as Vietnam. The additional production of beans caused a drop in coffee prices to record lows and severely impacted the economic livelihood of producers. In response, Fair Trade organizations partnered with producers in an effort to protect them from uncertain swings in global coffee prices. To promote economic well-being, the fair trade system uses two mechanisms. First, coffee purchasers agree to pay a minimum price for Fair Trade produced coffee. As of 2012, this minimum is set at $1.25 per pound. This creates economic stability as producers can be assured of a guaranteed price despite swings in global markets. If global prices for coffee increase above the $1.25 minimum, purchasers agree to pay a $0.10 premium. Exhibit 1 illustrates the price differences between Non-Fair Trade and Fair Trade coffee from 1989–2007.

360.00 May 2011 320.00 Frost damage May 1997 34-year high of 308.90 cents- in Brazil 1994 concerns about supply from Brazil 280.00 2-year high-supply concerns and aggressive and Colombia and aggressive Fairtrade speculator activity speculator activity 240.00

200.00 U.S. cents/lb 1989 Collapse of Drought in Brazil 1999 160.00 International Coffee Agreement 120.00

May 2011-Nov. 2012 80.00 Prices fall by 50%-Euro crisis New York and good crop forecasts 40.00 October 2001 30-year low of 45 cents-oversupply of coffee 0.00 Oct. 1989Sept. 1992 Jan. 1996 Dec. 1999 Nov. 2002 May 2007 Feb. 2013 Exhibit 1 The Arabica coffee market 1989–2013: Comparison of Fairtrade and New York prices. Reprinted with the permission of the Fairtrade Foundation. Notes: NB Fairtrade Price = Fairtrade Minimum Price * of 140 cents/lb + 20 cents/lb Fairtrade Premium ** When the New York price is 140 cents or above, the Fairtrade Price = New York price + 20 cents * Fairtrade Minimum Price was increased on 1 June 2008 & 1 April 2011. ** Fairtrade Premium was increased on 1 June 2007 & 1 April 2011. The New York price is the daily settlement price of the 2nd position Coffee C Futures contract at ICE Futures U.S. 6 ETHICAL PRODUCT SOURCING IN THE STARBUCKS COFFEE SUPPLY CHAIN

To be certified as a Fair Trade producer, farmers need to comply with an extensive list of production criteria, including using environmentally friendly pest control measures, enhanced storage procedures for chemicals and fertilizers, strict waste management practices, and the avoidance of genetically modified (GM) seeds for growing. For labor, Fair Trade producers are required to supply adequate personal protective equipment, prevent child labor, avoid discrimination, and provide a healthy working environment by maintaining sanitary conditions. In addition, a portion of the Fair Trade premium received by producers must be invested in the local community. 6 The Fair Trade Supply Chain

Typical coffee production occurs on small, mostly family-owned farms, with an average size of about 2 hectares (5 acres). 7 Due to a climate favorable for coffee growing, most farming occurs in countries near the equator, with a majority of world production occurring in Brazil, Vietnam, Colombia, Indonesia, and India. 8 Coffee beans must be picked by hand; therefore, harvesting is a labor-intensive pro- cess. The ideal time to harvest coffee beans occurs when the beans have ripened into a bright red “cherry”; however, ripening times vary among plants, leading some farmers to harvest both ripe and unripe cherries at the same time. This, and other elements such as growing conditions, can create quality variations among producers. After harvesting, the coffee cherries are dried and hulled, then separated by hand to be packaged. Bulk cherries are then typically sold to a local distributor who then transports the beans to a port for export. While some producers may roast the beans prior to export, many retailers such as Starbucks and Green Mountain Coffee conduct their own roasting operations. After roasting, the prepared coffee beans are shipped to retail outlets for preparation in beverages or to be sold in

6 Fairtrade International. (2011). Fairtrade Standards for Small Producer Organi- zations . Bonn: Fairtrade International. 7 Calo, M. and Wise, T. (2005). Revaluing Peasant Coffee Production. Global Development and Environment Institute. 8 National Geographic. (n.d.). Major Coffee Producers. Retrieved from www. nationalgeographic.com .