A value chain is a systematic process or activity whereby a business or company adds more value to an item, in processes of production, marketing, and later in the provision of after-sales services (World Bank 2008, p.136). It can be regarded as a chain of processes that firms or plants operating in a particular industry perform so as to deliver goods and services that are of a higher quality (Marc 2008). The value chain represents a high-level model of how a business receives raw materials as inputs, adds some value to the raw material through various processes, and finally, sells finished products to consumers. This paper aims at analyzing the value chain activities for Just Coffee, a producer of fair trade organic coffee. From the information in Illustration Capsule 4.1 concerning the average costs of producing and selling fair-trade coffee, the average cost of producing the coffee from coffee grower cooperatives is $2,30. The import fees, costs of storing the coffee and freight charges amount to $0,73 while labor cost of roasting and bagging equals to $0,89. The costs of labels and bag totals to $0,45 as the average overhead costs amount to $3,03. From the above accounts of costs, the total costs incurred by the company amounts to $7,40. The average retail markup over company costs, that is, the company operating profit totals to $2,59. This yields $9,99 as the average price to consumer at retail.
If a company that do not sell fair-trade coffee buys coffee directly from small farmers for as little as $0,75 per pound, and if the company additionally pays substandard wages so that the labor costs of roasting and bagging coffee is reduced to $0,70 per a pound of coffee while reducing their overhead costs by 20%. As a result, the total company costs equals to $3,874. If this company sells its coffee at the same average price as Just Coffee ($9,99), then its average retail markup over company cost or the company’s profit is $6,116. Comparing the above company operating profit with the Just Coffee Company’s markup, it is obvious that Just Coffee has a lower profit margin than the other companies. This is mainly due to the fact that the other companies do not deal with fair trade coffee and its processes are rather exploitative in nature while Just Coffee uses all the right channels to acquire, produce, market and sell its coffee all over the world.
From the above calculations, it is clear that fair trading of coffee is somehow unfair to the companies using that kind of system. Most people feel like fair trade does not aid economic development or growth (World Bank 2008, p.136). The system is felt to be operating in order to keep the poor in their place while sustaining uncompetitive small scale entrepreneurs on their land and holding back mechanization, diversification, and movement up the value chain. This disallows future generations the opportunity of a better life. Every day, the world market becomes flooded with low-quality, cheap coffee from places where over-production has occurred, for instance, Vietnam (Berndt 2007, p.111). The few small scale farmers and companies that still adhere to traditional methods stand no chance of competing in the market and are often left in a bad state of devastation. A company, especially up and coming firms, will do just about anything to gain competitive advantage even if it means unfair and unlawful trading (International Trade Centre 2011, p.246). There are various measures that can be taken to assist those companies trading fairly. A sure remedy for this issue is the Fair Trade Act. All Fair traded coffee is bought directly from cooperatives thus middlemen who might take advantage are eliminated. Additionally, compulsory auditing is carried out to root out cheats. Just Coffee may choose to sensitize the public on the issue through advertisements and other media channels. Recently, the company opted to stop using the Fair Trade USA label on their bags since it was felt that the agency favored large scale coffee producers and therefore, giving them advantage. The most suitable response will be to follow suit in the current trend. However, with a mission to make lives better, the company will have to take a more “mature” step in the fight for competitive advantage. The company has formed a new agency (together with other small scale farmers and roasters) that does not favor big names and stands for the original purpose of fair trade act as drafted in 1998. Just Coffee Company was the second North American roasting and coffee trading company to register with the Small Producers Symbol that serves to fight the big names in the industry that promote unfair trade. This is a valuable competitive asset that can help it respond to the threat of being kicked off the industry by unfair trading. With this strategy and assets, the Just Coffee Company does not necessarily require acquiring more assets in the struggle for fair trading. The strategy will maintain the quality and fair trade within the company while maintaining the company’s value chain (Davies and Crane 2003, p.84). Fair trade emerged from the coffee crisis of the 1990s. This crisis was not in any way a free market failure. Governments attempted to manipulate the free market through the International Coffee Agreement and even subsidized over-plantation of coffee with the support of well-meaning, but ill-advised aid agencies (International Trade Centre 2011, p.246). The collision in prices was the unavoidable consequence of this intervention by the government, but coffee prices have for the most part recovered since then. Although the free trading system is felt to be a drawback, it is the only protection that small scale coffee roasters have. Therefore, agencies should work on making the system fair in order to keep everyone on their place.