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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.

Case Study Cafédirect: The Marketing Evolution and Market Penetration for Fair Trade Products By Bob Doherty, lain A. Davies, and Simon Knox Bob Doherty is an associate professor at Liverpool Hope University, United Kingdom. His research interests ethical marketing and fair trade business models. Contact: dohertb@hope lain A. His Davies research is a interests lecturer include in marketing ethical at Bath University, marketing and business United Kingdom. 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 sustainable 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 Kingdom’s mainstream coffee market based on ethical positioning. The case explores how Cafédirect’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.’ 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 International Coffee Agreement, brokered at the United Nations.” 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 524 Case Stupy Cafédirect: The Marketing Evolution and Market Penetration devastating effect on the incomes of small-scale coffee farmers globally.” Small familyowned farms were producing three-quarters of the global supply of coffees and many of them could no longer earn a subsistence income from their coffee beans. The cost to provide In coffee beans response to this far exceeded crisis, the Oxfam, a revenue being British-based generated. non-government (NGO), and three alternative trading organizations (ATOs)—Traidcraft, Equal Ex- change, and Twin Trading—got together in 1991 and formed Cafédirect as 4 branded “fair trade” coffee company to ensure adequate wages for those providing coffee beans.* Each of the four partners owned 25 percent of Cafédirect. Cafédirect’s specific aim has been to pioneer fair trade products into the mainstream United the UK’s Kingdom largest (UK) fair trade hot beverage market. By 2007, Cafédirect had become hot drinks company and the fourth largest hot beverage company in the UK with annual sales of £21.8 million.’ Its fair trade brands include Cafédirect (drinking chocolate), which are Coffee, Teadirect, and Cocodirect sold through major supermarket chains and alternative channels of distribution, including 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 Fairtrade® commodity products, in- cluding minimum prices for specific types of coffee beans, and FLO-CERT conducts supplier audits to ensure compliance with these standards.’ To dards further assist coffee growers, by paying an additional Cafédirect exceeds FLO minimum price stan- 10 percent above the Fairtrade Certification price. Cafédirect refers to this as its “Gold Standard.” When in 2004 and 2005S, 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.® 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 investment 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 limited unsustainable health, income levels; poor working conditions; exploitation; and safety, and environmental protection for coffee growers.? A major contributor to these problems are international commodity markets, which often set prices that fail to provide growers with a sustainable The most recent coffee crisis (2000-05) was so extreme that coffee prices and farmers’ incomes were depressed to such an extent that many coffee farmers faced starvation and the loss of their land."! The cost of production was twice the price whe n Market Pe vid the if . standard the coffee producers market industry suffered wo mechanism. lost chronic their hunger, A migration, For jobs The la nd ck the S o In 30,000 small ound trade ai contrast, fair aims to be a transformative tool for mic model toward more social ends." Fair trade has been 3 of farms prompted Poverty belts a najor citles- no Caragua, 245 00 familie of income Increasing the ety 525 eNetration example in Ni a trading partnership, based on dialogue, Tae modify descr; transpar N Ing described the eco- as secks greater equity in international trade, It contribute, and respect that relopment by offering better trading conditions to a ad to Sustainable de- oh marginalized producers and workers—especially in th securing the rights (backed by consumers) are engaged sete Fair Trade producers, awareness raising and in campaigning for chan, ne Supporting and practice of conventional international trade.'3 ges in the rules Fair trade differentiates itself from the standard market m echanism according to everal key principles and practices, e direct purchasing e the ¢ long-term * co-operative, ¢ access payment of to from both producers a fair relationships not capital, trade and supply competitive, such as minimum the price and a social premium contracts dealings provision with of producers credit, for producers when requested, usually in the form of pre-financing provision of market information to producers ¢ ¢ democratic organization of producers and practicing sustainable production In 1991, the Fairtrade Foundation charities, including Oxfam, ment. The ufication foundation’s Mark, a created in the UK by a number of Christian Aid, and the World Development Move- primary product was responsibility label informing was to oversee consumers that the a Fairtrade product’s Cer- supply chain complies with the Fairtrade standards established by FLO.’ The Fairtrade standards aim to ensure both better working conditions and more sustainable farming practice in grower communities. The standards establish minimum prices 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. : example, in November 2006, the Fairtrade minimum price for Arabica coffee For cans Was US $1.31. When world market prices go above these minimum prices, nae of Fairtrade an additional certified “social products are premium” of guaranteed between 5 a higher-than-market cents and 15 cents per Pending on the product. For coffee, this equates to paying tne Cents per pound. Through minimum market prices and socia vee) 10 Fairtrade Pat o Certification aims to guarantee a long-term sustainable commitmt ig them more opportunity to plan for the future and a giv- in their farms and Marketing h quality control throug! initiatives, ality brand with retail remium qu competiuon. its first profits ail in 1995 and heralded As Evolution and Market Penetration 527 a result, Cafédirect achieved recognition as prices 20 percent to 30 percent higher than its the start of Cafédirect’ ously fuelled by new product launches, During this era, Cafédirect’s sales relied heavily on product distribution through its ATO founding partners Traidcraft and Equal Exchange. Employees were often from these ATO organizations. Cafédirect depended heavily on ATO marketing campaigns to increase consumer awareness about its products. The company’s primary marketing efforts had been through public relations, journalism, and print advertising. Marketing success was achieved through the skilled use of partners, and network associates, Market Development: Marketing Quality, 1999-2002 There is a perceived limit within the fair trade community as to how much market share a mate “core ethics” that socially marketing strategy can gain a company. conscious consumers account for a small Market experts esti- percentage of the buying public, just 3 percent of the cocoa and coffee market in Europe. Other fair trade initiatives such as Max Havelaar, Transfair, Rattvisemarkt, 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 smallscale coffee farmers, the new Cafédirect advertisements focused on its high-quality product offerings. Its premium coffees were shown related to the pristine environmental scenes in which they were produced. The company even changed the name of Ca- fédirect Instant to 5065—the average height at which its coffee beans were grown—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 Cafédirect’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 Cafédirect’s new advertising and packaging was to move the focus away from the experience of the producer (or the “core ethics” 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 Percent greater barrier, brand During awareness. this growth Cafédirect’s stage, market share rose above the Cafédirect began to rely less 3 on the Cunding partners for sales and distribution and secured significant supermarket distribution, a gee tae eer Case - Stupy Cafédirect: The Marketing Evolution and Market Penetration As each product was rebranded to reflect this new positioning, the to have a new problem. Fair trade competitors began to follow oaby Ca edt expense was rebranding and adopting product-quality messages, SO more markerng needed to differentiate Cafédirect from other fair trade companics. now Each osts needed its own marketing and sales support, which led to rapidly increasing ti i New competition ize on increased arose consumer from mainstream demand for fair coffee trade gni companies oducts. to capital- wanting The fair P trade a mar et pr experienced a vast increase in the number of fair trade brands on the shelf, including premium coffees from major roasters, own-label brands be permarkets, fair trade lines from Nestlé, and similarly branded fee from Kenco. Cafédirect’s competitive advantages from the of. oft “core et o product were being eroded. With trusted brands bringing out quality pro he paar’ product quality message was no longer as effective. Cafédirect’s revenue gro began to slow down. Internal market research attributed some of the stagnant growth to consumers not being aware that Cafédirect’s coffees, teas, and cocoas came from the same company. Asa result, Cafédirect had been unable to leverage the success of its coffee to sell newer 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, 2004-09 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. Cafédirect’s uniqueness embraced both innovation and ethical products. Cafédirect 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 Cafédirect’s effort to raise £5 million by offering shares of stock through an initial public offering (IPO) on Triodos Bank’s “ethical exchange” Ethex.'” The IPO provided Cafédirect an opportunity to extend a financial ownership stake in the company’s ethical business model to its consumers. IPO press releases emphasized that Cafédirect invested 70 percent of its pretax profits in growers’ organizations. Within just two months, Cafédirect raised the £5 mil- lion. Sixty percent of Cafédirect was now publicly owned. Cafédirect’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 partners—accounting for 4.9 percent of the company’s equity—in order to give producers a role in the governance of Cafédirect During the nasbeen Mass-Market Era, the vast majority of Cafédirect’s advertising events and big extravaganzas, such as the Glastonbury Rock gh Fringe, a large arts festival in the Scottish capital city. CASE STUDY =Cafédirect: The Marketing Evolution and Market Penetration 52! afédirect also used the London Eye for an event in 2005 and provided entertainent in each pod of this Ferris wheel. Three other noteworthy changes have occurred during this phase. First, Cafédirect expanded its social concerns from fair trade to include climate ange. Second, Cafédirect expanded its employee base. The company initially recruited iployees from its ATO partners, such as Equal Exchange. Cafédirect now recruits rmer sales Third, and marketing Cafédirect has managers made from major blue-chip significant changes in the companies. types of companies with rich it networks. Cafédirect now forms partnerships with more traditional businesses sell and represent its brand in the mainstream market. As the range of partners that works with increases dramatically, the company is beginning to look more e any other trade small > fair > commercial aspects Issues ifédirect has tea business. movement as urrent e coffee market been in a of it Cafédirect makes the is concentrating more traditional business and on advocating connections to for advance firm. huge marketing success story. 1998 less the chocolate-drinking The company market in expanded 2002. into Cafédirect in- »duced many gourmet single-source-of-origin coffees (some of them organic), and range of ‘come the mpany, ade an the premium UK’s and fifth Empire shown in fair coffees trade largest coffee Officer of the British As instant largest bestowed 1, speciality drinks brand. Order of the Exhibit and hot In 2008, British teas. company, the By 2007, fourth Cafédirect largest Cafédirect’s Empire, a prestigious hor former had beverage CEO was award for service by the queen of England Cafédirect has consistently grown faster than the total arket, although not necessarily as fast as some competitors. xhibit 1 Market Share ompany ala (Lyons) (by Value) 2003 pe of Coffee 2005 by Manufacturer: 2007 2003-07 2003-07 2005-( 530 Exhibit 1 Case Stupy Market Share Cafédirect: The Marketing Evolution and Market Penetration (by Value) Food Brands Group of Coffee by Manufacturer: 5 5 104 122 5 8 (Percol) Own-label inued 2003-07 473 Source: Adapted from Mintel, 2008. However, in 2006, the company experienced its first after-tax loss since 1995 (see financial results in Exhibit 2). During 2007, retail sales actually fell 4 percent for the first time in the company’s history to £17.0 million, and down again to £16.8 million in 2008, which must be viewed with some concern because 70 percent of total annual sales is via the retail channel. Fairtrade Certification coffee Exhibit 2 Cafédirect’s Financial Results 25,000 Tumover 20,000 Gross Profit Operating Profit 15,000 5 10,000 5,000 1998 1999 2000 2001* 2002 Year *Adjusted from 18 month to 12 month reported period 2003 2004 2005 2006 2007 sales Case si Cafédirece TThe Marketing Evolution and Market Penetration 531 continued to grow at 33 percent total volume and 24 percent through retail However, Cafédirect does not seem to be capitalizing on this and is experiencing the effects of the increased competition. For instance, 64 percent of the fair trade coffee sales are now accounted for by supermarket own-label fair trade brands.'* Forecast data for Fairtrade Certification coffee do not look encouraging with a steady slowing of growth, which could re- duce even faster if the 2006-07 trend continues (see Exhibit 3, long-dash line). Since 2005, Cafédirect has actually underperformed in terms of growth compared to fair trade in general (6 percent to 7 percent versus 8 percent) and has grown conserva- tively compared to the rest of the coffee market. A problem also exists in the target age group for coffee consumption among the demographic group called the Thirdage (hashed line of Exhibit 3), people age 45 and older. There on Cafédirect is a predicted fall because fair trade in this age bracket. This may have a double impact products are more attractive to Thirdage consumers than to other demographic Rival certification systems are now also entering the market. For instance, Rainforest Alliance labels coffee products produced without rainforest destruction, a cer- tification system used by Kenco. The coffee industry’s 4C code, created by the world’s four largest coffee roasters and grinders, promises many of the same advantages as Exhibit 3 Market Growth Forecasts Relevant to Cafédirect 2003 2004 2005 2 2007 2008 Year Source: Mintel, 2008. 2008 2010 2011 2012 he:ee b= oe eas Wak 2 ear RAE yg 2 gg le ig AS : Cast Stupy ion Cafédirect: The Marketing Evolution and Market Penetratlo n which to judge Fairtrade Certification but without any auditing or requirements © compliance. As a . response to trade brands, own-label rect embarked on a tition from other fair the falling retail sales and supermarket brands, further rebranding (a the new compe | labels, and competing ethica fourth fair trade marketing Pleo’ 2 2009. The new branding identified as promoting Cafédirect’s “Provenance vertising its heritage as a longstanding fair trader, to help protect share from these competitive products. It remains Cafédi- hase) in May or ad- market or his turn to to be seen whet! sl consumption proximity-to-farmers type branding will pay off for Cafédirect. “ications are theory would suggest it should fail because of market size limits. 9 » Howev that sales of Cafédirect have been consistently shrinking since June 200 it is impossible at the present time to define whether this fall uct brand The or unfavorable company also economic has to in sales 1s due to p conditions. deal with fair some negative publicity about trad fair products that appears in the media from time to time that questions the standar . and processes used to determine that a product is really fair trade. Cafédirect itse has been accused in the media of protecting coffee growers and damaging free trade across the whole coffee market.2* This argument is weak, however, because it assumes that It wasn’t. the standard market mechanism had been working Small-scale coffee farmers had been receiving less in the first place. for their product than it cost them to produce sustainably.” Cafédirect: Where To Next? Cafédirect managed to achieve a competitive position in what is regarded as a highly competitive sector despite limited conventional resources. In its brand management, the company has combined core product ethics (being fair trade) with product qual- ity, corporate identity, strong distribution, and consumer awareness. Cafédirect now faces three new major challenges. First, how can Cafédirect maintain its unique ethical edge? Cafédirect’s owner- ship and engagement with supply chain development issues through its Producer Partnership Programs and Gold Standard suggest that its claim to be the authentic voice for small-scale coffee producers remains strong. However, Cafédirect is currently more heavily sales driven than the charities and ATOs that founded the organization, Cafédirect’s structures and processes for selling its products are not particularly different from any other mainstream consumer business. Cafédirect movement, now such as competes against own-label other organizations supermarket fair trade within brands, the that fair adhere to the minimum fair trade standards and do not invest in Producer Partnership trade onl P grams.”* To a certain extent, this forces the company to adopt a defensi to help protect its consumer goods econd, brand. It marketer is telling skilled in that the CEO protecting hired market in 2008 is share experienced rather experienced at growing an ethical business. selling in mainstream markets. j édi sr Man an doning the fair trade movement and its former partie on inappropriately abanfair trade business Divine Chocolate, Caf adi » to other organizations for their . Cafedirect own-label does not production opportunity for mainstream organizations in its 1 directly Catédir mace, Unlike license its | the d products the ~ Case Stupy Cafédirect: The Marketing Evolution and Market Penetration §33 Third, can consumers different; (i.e., the new ethical labels) by as Cafédirect, experts and fair trade t also between Products from the fair trade pioneer multinational brands, corporations? such Some believe that consumers are not messages on ethical or sustainability issues. For i that pesticide-free organic pro y Savvy to comprehend multiple nstance, consumers often assume ducts are fair trade products. Fair trade activists are calling for fair trade businesses to demonstrate greater unity in fair trade messag- ing to ensure its survival as a distinct product offering. QUESTIONS eee 1. Identify the tangible and intangible resources 3. utilized by Cafédirect to support its competi- Should Cafédirect become more involve the fair trade movement again? tive position in the UK hot beverage market. 4. 2. Cafédirect is a successful archetype for an competitive pressures from you think companies in an company be getting involve its core purpose? tradi- 5. tional businesses providing similar products. Do the climate change discussions or is this dilu “ethical business,” but it is now facing some extreme Should Assume you were appointed the new | keting director of Cafédirect and given ethical niche cific instructions to get both profits and : have to compromise their ethics to compete back successfully in mainstream markets? would you pursue? on track. What marketing strati NOTES ' Most of from two the in the data used longitudinal, management Cafédirect and in this case exploratory study studies implementation over the periods of come * into and 3 Review Barratt of Brown, African “Fair Political accessed Trade with Economy, Africa,” 34, 112 Barratt Brown, Fair Trade: Reforn Rachel Slater, Global Food “Small Systems: Producer Policy Development Participati Opportunitie Policy Revieu 5-6 (2003), 641-654. Cafédirectcompany website, availableathttp://www cafedirect.co.uk/index.cfm, accessed 8/3/10. Mintel International, Coffee—UK (London: “Fairtrade” as one word refers to ee Hira and Jared Ferrie, “Fair Trade: Thre of Business Ethics, 63, 2 (2006), 107-118; P Tiffen, “A Chocolate-Coated Case for Alter Fairtrade a Anil Challenges for Reaching the Mainstream,” Min- tel International Group Limited, 2008). * Michael Constraints,” ' 5 and don, Eng.: Zed Books Ltd, 1993); Sheila Pag 8/3/10, (2007), 267-277. 4 Report Realities in the International Trading System http://www.ico.org/history.asp, Michael ple International, 2005). * 1999-2008, respectively. 2 Cafédirect Statements 2003-2004 (London, Eng.: Baker of strategy 1999-2004 Cafédirect, Label- nee A International 19 Business 2 Rr A Models,” 209 Developm 20°7
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TeacherAli
School: Rice University

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Running header: CAFÉDIRECT CASE STUDY

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Market Evolution and Market Penetration for Cafédirect
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CAFÉDIRECT CASE STUDY

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Market Evolution and Market Penetration for Cafédirect
Question 1: Tangible and Intangible Resources Utilised by Café-direct
The choosing of Fairtrade Labelling Organization (FLO) for the establishment of its
trade makes Cafédirect support its position in the UK hot beverage market. Cafédirect saw to
it that the standards for fair trade products such as minimum prices for certain varieties of
coffee beans, and FLO-CERT carry out supplier audits that observe compliance with the
principle modules in the market. The development of the ‘Gold Standard’ that assist coffee
growers helped the company realize potential growth. The fi...

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