Saturday, February 26, 2011

Defining "Competitive" in Local Markets

Recently Kate Meakin commented about Southern Fair Trade Networks expanding local markets... 

Hi, interesting to hear about an initiative that hopes to grow the internal market for fair trade- a very important move for all producer countries I think. 

However I also thought it was worth mentioning a similar initiative in India that I came across at a conference called Shop for Change. Although the idea is great I found out that one of the things they have done to make the products more suitable for the internal market (in other words cheaper) is get rid of the guaranteed minimum price which I'm sure most people would recognise as the corner stone to fair trade.

Growing internal markets for fair trade is really important, but not at the expense of fair trade itself! 

What Kate found in India is an important issue for Fair Trade to address as a global movement, and for the Southern Fair Trade Movement to ponder. What she observed is Shop for Change wanting to be competitive in a local market, but  they are overly centered on cutting costs. Unfortunately for the producers, the primary cost-cutting measure they employ is a reduction in the wages of the poor. However, there are alternative measures that need to be explored. 

Admittedly, Fair Trade products retail higher than non-Fair Trade products  (in the South, I estimate 5-10% higher) and there are a few key reason for that. Firstly, the producer is paid a fair wage, not a subsistence level wage. Secondly, the nature of working with small producer groups entails higher costs per product versus large scale manufacturing which can reduce costs and overhead through mass production. Also large production will decrease transportation costs per piece and so on.

What those in the North seldom perceive is the immense pressure in the South for FTOs to reduce prices in order to be “competitive” on local markets. Competitive in the South is not comparable to competitive in the North. Firstly, pressure exists because of the need to establish a foothold in the marketplace where little-to-no knowledge of Fair Trade exists. In the previous posts, I presented the importance of advocacy for trade justice parallel to retailing Fair Trade in the South as a showcase on how established principles can be incorporated as a business model, thereby localizing Fair Trade.

Secondly, products beautifully displayed on a self in the North may be unique amongst the store full of global crafts and traditional handmade products, but in Southern communities where those products are crafted, sorry to disappoint, but they rarely standout as unique. In the realm of crafts, many artisans are utilizing local traditions. The only notable differences found between their products and the same non-Fair Trade products flooding local markets are the unseen principles instituted behind the craftsmanship. 

Visit to a craft village: 

Crafts are made by locals and often sold to buyers or agents who represent the bottom rung in a long chain of middlemen leading to larger companies, which wholesale locally or export. There is a power relationship that exists between local artisans and the buyers, many of whom the Fair Trade producers have had some degree of experience in dealing with. In short, buyers dictate the price in a take-it-or-leave-it offer. For buyers, there is no room for discussion on ethics or utilization of child labor; they are there to collect select products and transport them out of the village. 

To remove our rose-colored glasses, a Southern producer group may be certified Fair Trade, but when global crisis hits and orders to the North are drastically cut back, those bulk buyers may be offering the only deal in town, and once again producers take a hit, Fair Trade or not. 

What is happening in the local markets of the South?

For those who venture south and go to the local markets, you will soon be inundated with locally made handicrafts. It is easy to get caught up in the haggling over a few cents, even in supposedly “hassle-free” shops. Ask where the product came from they can give you a location. Ask who made it and the discussion ends; such a question doesn’t register and eyes gloss over… Why care? It is only a handicraft. “Final price, you buy?”

The retailer is just trying to make a living in a highly competitive market. Buy low, sell high is his mantra. Questions regarding fair wages, environmental concerns surrounding production or assurances that the supply chain is free from exploitation are far from the concerns of a shop owner. His immediate worries center on his being able to irk out a living in a system based on exploitation. From his perspective, why should he concern himself with the needs of others while he is struggling to make it himself? There is no room for sympathy in this environment. Here, the definition of “competitive” is to buy at the lowest price possible, then turn around and get what you can in a single sale. The concepts embraced by Fair Trade, such as fixed prices despite a fluctuating free market, empowerment through traceability to producer, and transparency are far from the immediate realities of most markets in the South. 

What about the products that are exported to Northern markets? 

In 2007, I conducted a Needs Assessment in a craft village in rural Vietnam for a UN project. Following the value-chain from producers to exporters, I found 7-12 layers of middlemen; the further up the chain, the nicer the mode of transportation – motorbike at the low end, imported Lexus at the top. When I had an opportunity to travel to Japan, I found the same product for sale in a popular department store with the label “Made in Vietnam.” Having done the value-chain assessment in Vietnam, I did a quick calculation: the producer received just 0.5% of the retail price. To generalize from experience, if you peruse the fashionable import shops in Northern cities or the Wal-Marts of America, it is not difficult to estimate the realities of Southern artisans.

Despite the difficulty to enter local markets, the most basic principle of Fair Trade, to provide a living wage, cannot be offered up to the sacrificial alter of “competitive pricing”. I encourage the FTOs of India to re-define the term “competitive.” To be competitive does not mean to enter the global race-to-the-bottom in wages espoused by Free Trade ideology and which Fair Trade directly opposes. The Shop for Change of India really must rethink their strategy, and consider viable alternatives to this impoverishing and self-defeating measure! 

What is Competitive?

For Fair Trade advocates, to be competitive must incorporate more creative solutions than asking the poor to take a pay cut as a means to enter the local market. Competitiveness also incorporates value-added measures; diversification of products;  focus on providing high quality products; and targeting appropriate markets for Fair Trade goods. To this list of competitiveness, I like to add the need for effective advocacy to raise public awareness of trade justice

Keep in mind that Fair Trade is not a charity, it is a business model. Producers don't want your sympathy, they want empowerment through opportunity! 

Value-added measures: When we visited the mountain provinces of the northern Philippines, we saw firsthand an example of  value-added measures. I wrote about our visit in Introducing Fair Trade high above the Clouds. Rather than selling coffee beans at fluctuating free market prices (30-60 Pecos per kg), the farmers cooperative was buying the beans of their members at a fixed price of 100 Pecos per kg, roasting, packaging and serving coffee from their fields in a cooperative cafe. Not only did they value-add, they localized Fair Trade; they made Fair Trade tangible to the community. The end product was selling for 400-500 Pecos per kg and the dividends are utilized in community development projects and divided amongst the members.

In crafts, value-added measures are limited only by your creativity. For example, pair up with another cooperative to make decorative packaging from handmade papers or natural fibers. I worked in a bamboo and rattan craft village in Vietnam and found a young and dynamic couple that had gone to the nearby ceramic producing craft village and in collusion with other artisans, they created award winning products combining ceramics with woven bamboo and rattan. The value-added measures here also contributed to product diversification.

Diversification of products: Many FTO's I work with are constantly researching foreign and domestic markets for inspiration in their efforts to diversify products. The FTO in Cambodia I wrote about in the Sound of Silence was not diversifying product. As a matter of fact, it hadn't introduced a new product design for several years. Nor was it empowering producers by encouraging them to explore markets and generate new ideas. They were simply producing the same items they had made for the past several years. Complacency and lack of innovation is the death of an artisan.

In contrast, when we met with Reaching Out in Hoi An, Vietnam, the young, bright and English speaking salesman featured in the post, People with Different Abilities, was vital to the organization's success. He funneled customer comments and suggestions directly to the artisan for them to consider in future products; feedback from buyers directly links a producer to his or her market. In fact, in Reaching Out foreign and domestic buyers could meet the producer directly to discuss product design. 

Focus on Providing High Quality Products: Admittedly, retail prices of Fair Trade products can be 5-10% higher than mainstream products, whether other products are mass produced or made in the next village. For the average consumer, there has to be  a recognizable difference in quality. If Fair Trade producers are making the same low-quality nick-knacks found everywhere, then I question if you are really selling a product that qualifies as Fair Trade. For Fair Trade to function as a sustainable business, it must offer quality products. Again, Fair Trade is not a charity, it is empowerment through opportunity. 

In cases where Fair Trade products compete directly with major industries such as soaps or everyday, consumable products as alternatives to the mainstream, the industry has the advantage of mass production to reduce costs and overhead. However, personalizing the products to the consumer is a form of advocacy, but it also serves as a personal guarantee from the producers themselves - something a mass producing industry cannot offer beyond a tag declaring, "Inspected by #18." 

Targeting Appropriate Markets for Fair Trade Goods: Know your market! Gigi Labradores in the Cebu Fair Trade Shop, Philippines knew her market - she knew exactly what sold to locals, what interested foreigners and how to generate interest in those products. 

Localizing Fair Trade in communities also means having appropriate products. Chou and I met with a family business in Mindanao, Philippines. Go Bananas are producing banana chips for the local market, and over the past few years, they have become increasingly popular!  What started out as a hobby, turned into a venture that is on the cusp of becoming an international export. Locally grown bananas, "organic by neglect" as Mr. Manuel describes them, are bought from farmer groups he organized to ensure local and neighboring communities benefit from the trade. 

Measures for Effective Advocacy: Utilizing Shop-Based Advocacy is a powerful tool to introducing Fair Trade in Southern markets. Simply opening a shop and expect locals to pay fixed prices for products they are used to bargaining in the street for is a fast way to give Fair Trade a bad name. Advocacy must go hand-in-hand, even in a nation like India where poverty is rampant, to enter the local market you must parallel Shop-based Advocacy with high quality goods. Read Catalysts for Social Change and Franchising Fair Trade for ideas on effective advocacy.

For Small Producer Groups or Cooperatives...

A cooperative must learn what businesses understand so clearly. Firstly, if you are looking to cut costs, look internally and analyze the processes and systems utilized. Check for what time saving or energy saving measures you can make. To operate like a business is not to depend on charity, but to self-mobilize.

Secondly, cooperative members need to understand that they need reinvest in training and appropriate technologies. To reinvest in their own production, whether it is to cut material processing costs, or save time or reduce wasted energy, they need to take the same measures as a business without sacrificing jobs or wages. The producer groups that are proactive are the most likely to succeed.

Lastly, for cooperatives that are in need of purchasing equipment, there are ways to raise funds within your organization. If your cooperative is in need of funds for a costly purchase and a loan is not possible, take the approach of Dr. Muhammad Yunus, founder of Grameen Bank. However, use his approach as a means to generate capital versus paying back an existing loan. Simply asking each member to contribute a small amount once a week over a period of a few months will generate a substantial amount of capital. Producers investing in their own cooperative; that is empowerment and that is Fair Trade!

It is my personal hope that this post will stimulate a discourse on what it means to be competitive in Southern markets and how it differs from competitive in markets of the North. If you have any ideas or suggestions, please feel free to comment below.


Mitch Teberg, MA


  1. Another excellent post, thanks Mitch. As a Fair Trade producer the points raised are VERY helpful. An additional challenge we have with our partners is explaining the end price/retail price of products they produce, as obviously this is a lot more than what they actually receive. Often as a producer we have little control over the final retail price, and we have to accept that shop rents in places like Tokyo where our products are sold can be very high. We are transparent in providing our partners with a breakdown from purchase price to wholesale/retail price, however it is a challenge to explain all of this and not have them feel exploited.

  2. While we gave the example of Tokyo retail rentals in our previous comment, the same also applies to our local market as well, where retail rentals are VERY high, and we have the same challenges. From our experience we have had local end-retailers want mark-ups of 300% which puts the retail price well beyond local consumers, and as a producer these retail prices are not sustainable as they do not encourage a reasonable turnover of product. We agree, many local retailers are simply interested in profit and not the ethics of the product, which I suppose is understandable in a market like Malaysia where Fair Trade is almost non-existent.

  3. Hi, I'm really glad to see my comment produced this blog post! It's a very interesting and useful discussion on how to grow internal markets for fair trade without damaging producers. I was especially interested to hear the information about adding value and using enterprise and creativity to make a more successful business.

    In the UK the original Alternative Trading Organisations like Cafe Direct and Divine were set up to enable producers to move up the value chain, including ensuring that the producers owned half the business (although in the case of Cafe Direct this is no longer true as it's now owned by shareholders). At the time this was seen as a key part of a fair trade business. At the present it seems that this model is being nudged out of the way by instead chasing high volumes with mainstream businesses e.g. Cadbury's

  4. I’d say this is some comment bait of a blog…you outdid yourself this time Mitch…
    Yes, competitive pricing becomes a balancing act for southern fair traders. Months after opening “our” Fair Trade shop (note how advocates tend to claim ownership here for investing the kind of intangibles that you don’t find in the balance sheets), we found out that the shop is getting a reputation as a pricey store selling expensive products. Local buyers are not well-off and the shop could not as yet rely on died-in-the-wool fair traders alone for sales. They had to lower retail prices but not at the expense of producers and workers. So where did they cut costs? ---they did away with middlemen. The Fair Trade shop now does consolidation: filling orders of other distant shops and institutional buyers. They did away with 2-3 levels of middlemen in this case and substantially increased their sales even with the lowered retail prices in the local shop. This is not as easy as it sounds. In fact, some FT BDS providers got cut off in the process. Transparency and dialogue, sometimes heated, had to come into play often.
    This approach of giving a big chunk of the value to the farmers is in the heart of plans for coffee roasting & branding in several provinces in Mindanao as well as current efforts to consolidate rice through farmer clusters who get to own their products until these reach the buyers.
    Difficult? ---YES. Possible? ---DEFINITELY.