Examination of Witnesses (Questions 200
- 219)
TUESDAY 27 MARCH 2007
MS SHEILA
PAGE AND
PROFESSOR DOUGLAS
HOLT
Q200 Chairman: Starbucks acknowledged
to us that the dispute with Ethiopia was damaging their corporate
image and their customer base in the sense that they a have built
themselves up as a company that does have strong relations with
producers and believes that they genuinely do have a fair trade
approach. It may not be acceptable to the Fairtrade Foundation
but they believe it delivers real benefit. I wonder whether you
accept that they have a case to make.
Mr Holt: It is not a black or
white kind of question. I think you have to give Starbucks credit
as an unintended consequence of their aestheticisation of the
whole category. They invented in some sense a mass scale, super
premium, gourmet sector. In that they scaled it. By so doing,
they increased the value of all those super premium coffees—in
Indonesia, Latin America, East Africa. All those coffees are worth
more because of Starbucks, and a number of other super premium
retailers. I think the US has led the way. When you go there,
the particular Harrar matters for some reason! They have done
that but it is an unintended consequence of a very particular
market strategy. Whether you want to give them credit or not,
it is fine; it has happened and they were a part of it, absolutely.
I would hesitate, though, to call them a fair trade company as
they are promoting themselves very aggressively today—"the
coffee that cares", selling Ethos water, et cetera—simply
because they are unwilling, I think, actively to promote the business
interests of their coffee producers. If they were, they would
be supporting this trademark case because it is an innovative
business strategy by the Ethiopians that has extraordinary potential
if it is done right. If you are truly a champion of the commodity
producers, you will be helping to innovate, just as Starbucks
innovated 25 years ago, in the coffee sector—wow, is this
not extraordinary. It is just live Divine Chocolate. Here are
these Ethiopian coffee makers trying to develop a brand that they
can extract more money from. This is what the more progressive
coffee retailers in the US are doing. There is Green Mountain
Coffee that has actually signed on and is actively trying to help
the Ethiopians. If Starbucks were leading the sector, they would
be acting like Green Mountain Coffee.
Q201 Chairman: You could argue the
other way round. The Fairtrade Foundation started out by offering
a fair price and social premium. Starbucks' problem was that they
developed a market and if they then have to give back the brand,
they have to take it off their margin and of course they did not
build it in in the first place. Presumably that is the nature
of their problem.
Mr Holt: Possibly but I would
argue exactly the opposite. What Starbucks is doing is taking
a public good, a brand that is Ethiopia's brand. Harrar, Yirgacheffe
and Sidamo are not Starbucks' brands. Starbucks piggy-backed on
them and helped to build their value. It is no different from
other companies like Nike taking the ghetto in the US and selling
it. They are selling Ethiopian culture to Americans and to Europeans.
While they certainly played a role in it, to say that therefore
it is somehow their brand is something that I certainly do not
agree with.
Q202 John Barrett: Can I turn to
the Ethiopian Government's strategy, Professor Holt, and how best
to tackle this. The committee, as you know, was in Ethiopia recently.
We discussed the issue of branding and trademarking. Some years
ago, I was out in Ethiopia looking at the coffee business and
visiting farmers. What we saw were, in the areas of highest quality
production, the farmers and children starving. The fields were
fertile; they were full of products. They could not change immediately
into producing anything else. Some had grubbed out the coffee
and they had put in khat, and narcotics were being grown. In the
main, they were battling on with coffee production. While increased
production is happening in Vietnam and other countries, is it
really time for the Ethiopian Government to say, "While we
want to get the best value for our farmers out of the existing
coffee, in the bigger picture we have got to start looking at
alternatives here. We are fighting a losing battle," or should
they be sticking with coffee. Is there a timetable for the overall
strategy to change?
Mr Holt: I do not claim to be
an expert at all in Ethiopian economics or export industry. Also,
I cannot give you a close-up view but I can give you an opinion,
which is that they make several of the best coffees in the world
and that coffee has extraordinary value. You are looking at starting
a business from the bottom up with no assets; there is no HR and
education, et cetera and so there are all sorts of problems in
doing anything other than commodities, getting outside of agriculture
and textiles. What are those other things besides khat? I do not
know. It seems as though you have to stick with the asset that
you have and figure out better ways to do business. There are
two better ways to do business. I have read some of the previous
transcripts and it seems that these two very different business
strategies that are going on in this sector become a bit conflated
in the proceedings here. It is interesting to distinguish them.
There is a Fairtrade strategy that is a third party mark that
adds some value to a lot of farmers potentially. There is also
a social justice branding strategy, more like the Divine Chocolate
strategy and more like what the Ethiopian coffee sector is trying
to today, which could add tremendous value. It is an innovative
strategy, it is newer. That is another complementary strategy
between the two. I think those two strategies give the best chance
of keeping those farmers in business.
Q203 Ann McKechin: This question
is directed to Sheila Page. You have been at times a bit critical
about the notion of the fair trade concept. I wonder if you could
comment on whether you consider it is a good method to offset
market fluctuations to farmers or should we encourage farmers
to produce commodities only if they can do so profitably?
Ms Page: There are two questions.
On the question of fair trade, it is not that I would say that
it is bad or unfair; it is that it is one possible strategy. I
slightly take issue with what Douglas Holt has said about sticking
to what you are good at. The whole history of all developing countries
and developed countries before them was in fact of moving into
other areas, other commodities, into industry, into services,
or whatever. While there is certainly a case for staying in the
premium brands of coffee for Ethiopia, given the advance of countries
like Vietnam, which has moved from nowhere to now the second or
third coffee producer in the world within a very short time, it
is hard to see Ethiopia keeping its large share of the total market
as it has in the past. It will have the premium market. I think
my issue with fair trade is the idea that you should stick with
what you are good at and do it better and more fairly, whatever.
I think you should look at all of your possibilities. One of them
might be to stick at what you are good at. One of them might be
to move into something else. It is the focus that I would question.
On the question of prices specifically, it is important to realise
that minor fluctuations, the sort that any farmer knows happens
from year to year, are not that serious a problem for most farmers,
whether in developing countries or developed countries, but they
do add to the real cost of farming. If the farmer is not bearing
them, coming back to the first question, then he is being subsidised.
I do not see any particular reason to subsidise a farmer, whether
he is in a developing country or in a developed country. He should
be encouraged not to have excessive costs of trading and if he
can be helped with better supply, better ports, better transport,
training to market, and so on, those will bring his costs to a
level of an existing farmer, and that seems a reasonably sensible
thing to do for a new entrant to a market, but simply to remove
the cost of fluctuating prices is to remove a normal expected
cost of farming.
Q204 Ann McKechin: Against that,
particularly in coffee and you also see it in the field of bananas
and other produce, the world market price has literally dropped
like a stone over a period of years, where in fact farmers cannot
make a living. It is a question of natural justice. Should there
be a minimum price on which people can be expected to live and
should we be trying to use a concept like fair trade to try and
promote that, or do you see fair trade really as being something
which increasingly is being used to promote the premium brands,
which we have talked about in Ethiopia?
Ms Page: I think where it has
been most helpful has been in promoting the two senses of branding:
the premium branding and the overall Fairtrade as a brand in itself.
When a price is dropping like a stone, then that is a signal to
get out. Fair trade can give you perhaps a breathing space of
a year or two to get out. There is absolutely no reason to encourage
someone to stay in an industry that is declining, whether it is
bananas or some of the industries which this country has lost.
Q205 John Bercow: According to consumer
surveys, 52% of the UK public recognise the Fairtrade brand. What,
in your judgement, can the Fairtrade Foundation do to increase
this level of recognition in a market where many companies are
now claiming their ethical credentials?
Mr Holt: That assumes that that
should be the primary goal of the Fairtrade Foundation. Coming
from the US to the UK two and a half years ago, it is extraordinary
how developed fair trade is here. There is a remarkable difference.
In the US, fair trade is a little niche, not well known. I bet
if you surveyed Congress people, less than 10% have even heard
of fair trade. I bet that figure is 99% in the UK. It is in the
media all the time. It is known to 45 to 52%. Getting to 60% to
me seems like a less important objective in a country where fair
trade is on the table; it is part of consumer culture; buying
ethical content certainly in foodstuffs is something that has
become normalised. Dodging your question a bit, I would push back
and say: the objective for the Fairtrade Foundation should be
to expand the reach of fair trade into other sectors where you
do not have that really strong competition as we see in the grocery
trade with Marks & Spencer, Sainsbury and Waitrose competing
to be more ethical than the other. There is not much more you
have to do. They are fighting tooth and nail to be the ethical
retailer. In other spaces, in textiles, you do not have that yet.
Nike, et cetera, pretend to be a little bit ethical in their supply
chains but it is nothing like the fair trade generated competition
in the grocery sector. To me, the real interest is moving sector
by sector and pushing the fair trade model into other spaces where
you can get that very virtuous competition going amongst the leading
retailers and leading manufacturers.
Q206 John Bercow: That is true up
to a point, but I think only up to a point. Very few people would
strongly disagree with the objective. It does seem to me that
at least in part, if you will forgive me saying so, Professor
Holt, you offered us a statement of the blindingly obvious. The
issue is not the desirability of extending fair trade products
but of extending recognition in a market in which lots of other
people are trying at the very least to give the impression that
they are doing the same. It is arguably a great tribute to the
Fairtrade Foundation and to others that everybody now wants to
be or to be thought to be behaving properly, but we all know the
problem of the phrase that says, for the sake of argument, "no
extra additives". The significance is not in "no"
or "additives" but the use of the word "extra".
I give that purely off the top of my head as an example. We have
to become canny consumers, do we not? Forgive me; I do not dismiss
the significance of what you have said. I come back to this question
of not whether or when, or even in different sectors with what
speed, but how.
Mr Holt: I take your question
but what you are talking about is not an awareness question; it
is a qualitative question to recognise the authority and authenticity
of a particular mark that has particular standards against these
sorts of imposture marks that suggest the standard enough that
consumers will buy into and assume it is fair trade. Is that correct?
Q207 John Bercow: Yes.
Mr Holt: I cannot come up with
a cookie cutter answer to that. I think you would have to have
a very developed marketing strategy for that. That is not just
fair trade. I think activists are involved in that and I think
government is involved in that and all the people in this sector
are involved in training. It is a pedagogical challenge that you
are talking about, which is going into the schools. There are
lots of components to it. An involved marketing strategy of which
you and the Fairtrade Foundation are a part, I think would be
sensible.
Ms Page: I would agree that it
is a marketing question. I am not sure the Government is particularly
directly involved in it. In a sense, the Fairtrade imprimatur
derives its value from the particular organisation which has set
it up and from its standards. It is not an official one. It would
be quite a change to make it an official one.
Q208 John Bercow: What you are really
saying is: that is a matter for them.
Ms Page: Yes, and they have done
quite well so far, so I do not think that is belittling them in
any way.
Q209 Mr Davies: Professor Holt, can
I come back to the issue of Ethiopia for a moment? You are very
damning about Starbucks, are you not? If I can just quote you
a couple of sentences from the paper you sent us: "The more
syrupy drinks and sugary cakes Starbucks sells, the more it needs
to aggressively promote its `roots' in the artisanal, decommercialized
world of African coffees to act as a counterbalance to its fast
food-like offerings." Again, "Sidamo and Harrar feature
prominently in this line. In the US, Starbucks has retailed these
coffees for $24-26/lb, instead of the $10-13/lb for the standard
whole bean coffees, a doubling of their prior price, executed
simply by positioning them as even more special, exotic, and scarce."
You are really accusing Starbucks of bamboozling the public, are
you not?
Mr Holt: I am not accusing them
of bamboozling the public. I am accusing them of being a marketer
like any other. They are commodifying culture just like Nike,
just like Coca-Cola, just like anybody else, so they are no different
from anybody else. They are very effective at it. One of the points
I wanted to make there is that the raw materials that they are
working with—Africa, this pre-industrial craft good that
has this 2000-year-old history that is associated with Ethiopian
culture, the music, the design, et cetera—is becoming increasingly
valuable in the world. Starbucks has been very good at cultivating
this in the store, in the packaging, in the communications, and
attaching it to this coffee. That is great except that a lot of
the value, in my view, of that culture, of the history of the
coffee, of the Ethiopian culture belongs to the Ethiopians and
it would be great if they could enjoy some of the benefits of
that $24 per pound.
Q210 Mr Davies: You are an expert
in marketing and you know better than anybody the importance of
brands. Brands are created, are they not? People have to invest
in brands. They invest in brands both in terms of promotion and
advertising but also, like in politics, you want more than a short-term
success. You cannot just limit yourself to image-making. You have
to provide substance. They also have to invest, for example, in
verification, in quality control. You are acknowledging I think
that it is Starbucks that have made that investment; they have
actually paid for building up the brand and they have had the
strategy to build up the brand. Is that right?
Mr Holt: I think it is not just
Starbucks. It is the whole super premium sector of which Starbucks
is a part that has been instrumental in developing, as I said
before, and aestheticising the whole category, and so creating
value in the US from Folgers and Maxwell House selling for 30
cent a cup of generic coffee to people paying, as you know, $3
or $4 for a cup of coffee. So they created a new category of people
where there are $2 margins in a cup of coffee. They did do that.
The question, as I said in the paper, is not that Starbucks deserves
this because they helped build it. It is a question like in any
other market that there are different actors in the value chain
and it is a question of market power. Value has been created.
The Ethiopians are part of it. Starbucks are part of it. Other
people are part of it. Who gets the rents? Right now, Starbucks
is taking the vast majority of the rents.
Q211 Mr Davies: Just a moment, Professor.
I have just quoted a sentence from your report. The increase in
value from $10 to $13 per pound to $24 to $24 per pound was entirely
created by Starbucks. The Ethiopians did not contribute to that
increase in value; it was the Starbucks' investment in the brand,
was it not? Is that a fair point?
Mr Holt: It is not investment.
It is communication through the packaging—
Q212 Mr Davies: The communication
is part of the investment, is it not?
Mr Holt: What they are communicating
is Ethiopian-ness.
Q213 Mr Davies: Just a second, Professor.
They are using the same raw materials they were when it was $10
to $13 per pound. That has not changed at all. What they have
added is what you describe as communication, what we might call
the PR, the promotion. They have added the brand value and they
have brought it up, and you quantified it in your paper to us,
from $10 to $13 to $24 to $26. That is value created by Starbucks,
is it not?
Mr Holt: First of all, it is not
quite apples to apples because they went in and selected the very
best estate coffee in Ethiopia.
Q214 Mr Davies: But that was in the
$10 to $13 value already, was it not?
Mr Holt: No, compared to the $13
version, it is the best lot of that, so it went for an extra 30
cents.
Q215 Mr Davies: Is it not the same
coffee or is it not the same coffee?
Mr Holt: It is an estate that
probably would have been incorporated into the $13 but it is the
very best that they had to pay an extra 30, 40 or 50 cents per
pound for.
Q216 Mr Davies: You have come from
the Harvard Business School, and so we have rigorous academic
standards here! You say: "In the US, Starbucks has retailed
these coffees for $24-26/lb, instead of the $10-13/lb... ."
I read that as the product is the same and the price has changed.
You are telling us that the product has changed. Your paper to
us is a little deceptive.
Mr Holt: This used to be a 6000
word paper and it is now 3000 words. You have to simplify something
and that is a very small simplification but it comes from the
same lot.
Q217 Mr Davies: When you are dealing
with simple politicians, you have to simplify, is that right?
Mr Holt: To your main point, Starbucks
created this value. I am more than happy to give you that. The
question is: should the Ethiopians be allowed to compete for a
piece of that value or should Starbucks be able to put a legal
stranglehold through their influence on the trademarks system
in the US not to allow the Ethiopians to compete?
Mr Davies: I think we have established
the fact that Starbucks have created the added value. Starbucks
have created the brand. The Ethiopians could have decided they
had some nice coffees. They could have copyrighted the brand years
ago. They could have promoted themselves and they would have then
been entitled to the full enhancement of value. In the present
situation, Starbucks have created the brand but it might be sensible
for them, and quite nice of them as well but also good for their
image long-term, to share some of that enhanced value with the
Ethiopians. I think that is the case that both you and Ms Page
are making and to which I have some sympathy.
Chairman: I am not sure that Sheila Page
is agreeing with you.
Q218 Mr Davies: I will come to you
in a moment. Can I put it to you that there is another aspect?
Mr Holt: I am not sure it is sharing
the value either. It is market competition, it is who owns the
intellectual property.
Q219 Mr Davies: On a purely market
basis, I think you would agree that the Ethiopians did not in
any way register those brands and the brands were created by Starbucks.
This is something I discovered in Ethiopia myself when we were
there. The market is actually regulated in a rather extraordinary
way in Ethiopia. I wonder whether you think the Ethiopians are
serving their own best interests by doing this. Apparently the
coffee merchants are a limited number of people; they have an
exclusive right to go and buy coffee from the producers in Ethiopia,
so you and I cannot go to Ethiopia ourselves and just simply bid
the best price for the best coffee that we want to buy. Only Ethiopians
can apply for this rather privileged position of being a coffee
merchant in Ethiopia and there is more than a suggestion that
this is a matter very largely of political influence. So we have
both an element of excessive regulation in the market and an element
possibly of corruption in the market. Surely that cannot be in
the best interests of Ethiopian producers. Would it not help the
cause of the coffee farmers that we are both concerned about if
the Ethiopians deregulated this so you and I could go directly
to the producers and we could have an open market?
Mr Holt: Is that a question to
me? Again, I am not an expert in the Ethiopian coffee market but
I can tell you what I have learnt since I have been working on
this case. I think your point is correct that there are extraordinary
not just inefficiencies but problems with the way in which the
market is organised in Ethiopia, as there are in probably every
country if you went in and studied it. Fixing those problems is
just as important as making coffee fair trade. I certainly take
your point. However, the idea that the answer is deregulation
point blank, from what I know, that is not the answer. What I
have learnt so far about the local market is that there are exporters
in the market who are organised to control the market. There are
a number of them that try to control the coffee market and the
countervailing force to those exporters who are trying to extract
the most market rents in the local market are the co-operatives.
The co-operatives actually by legal mandate, so by regulation,
are charged to give a much higher margin to the farmer than the
exporters. I would say rather than deregulation what is very important
in the local market, at least in Ethiopia, is to support the co-operatives,
to grow the co-operative sector of the market so that more of
the profit can trickle down to the farmer.
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