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
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