1. Introduction
Fair trade has grown with the rise of ethical and green consumerism in the global North, and sustainable production and local development of the global South. Fair trade first started with trading of food products such as coffee, tea, bananas, rice and cocoas, and recently, it has been expanding to non-food products such as flowers, cotton-based products and even gold. According to Fair trade International (which was previously known as the Fair trade Labelling Organization, FLO) (2015), sales of Fair trade certified products were about 8 billion US dollars worldwide in 2014, and that figure keeps growing. In Korea, total sales of fair trade organizations were about 10 million US dollars according to Korea Council on Fair Trade Association (KFTA). While the sales of fair trade products in Korea have increased rapidly since 2008, the Korean fair trade market remains relatively small compared to those in Europe, USA, Canada or neighboring Japan. Yet, it is imperative to enhance our understanding on the fair trade market in Korea, as both public and private organizations as well as consumers are increasingly being involved in the fair trade market.
It is widely accepted that fair trade is institutionalized into two main ways: 1) the alternative trading organization (ATO) model, and 2) the Fair trade certification model. The alternative trading organization model, which has much longer history, has been developed based as a social movement. The main goal of this model is to uphold the values of fair trade and to realize social justice through trade (Raynolds & Greenfield, 2014). For example, among Oxfam Trading, Equal Exchange, Traidcraft, and Twin Trading, which are the leading ATOs in the UK, Twin Trading developed direct trade relationships with coffee farmers' organizations in 1990s. Its aim was "to develop the capacity of small-scale producers" and tried to maintain long term relationships with the producers, despite of producers' mistakes such as documentation problems or delays (Tallontire, 2000). On the other hand, the fair trade certification model focuses more on the relationship with retailers in the market and reaching consumers through retailers. This is currently a dominant model with the goal of mainstreaming fair trade products. In other words, the priority of the certification model is to have more certified fair trade products available in the market as much as possible such that consumers are able to buy the certified fair trade products more easily from retailers (Raynolds & Greenfield, 2014). Good examples of this model are Max Havelaar, which is the first fair trade label created in 1988, and FLO created in 1997, which enables setup and coordination of the worldwide fair trade standard, and sales of certified fair trade products became available in supermarkets and main stream markets (Bezencon, 2011).
In line with two main fair trade approaches aforementioned, Bezencon (2011) suggests two different distribution models in fair trade: 1) alternative distribution channels (the ATO-led system) and 2) fair trade mainstream distribution channels (the FLO-led system). [Figure 1] illustrates two distribution models and shows the differences between both distribution models. The FLO-led systems are more prevalent, and it is the mainstream distribution mechanism of fair trade products in larger markets such as UK, France, Germany and USA. On the other hand, the ATO-led systems are the main forms of distributions in the Korean fair trade market, although some producer cooperatives working with Korean fair trade organizations can be a part of the FLO's certification system. As [Figure 1] shows, there are interactions and trading between the agents of the two systems, and "the systems overlap and are not mutually exclusive" (Bezencon, 2011). For example, one of Beautiful Coffee's partners produces coffees based on the FLO certification and their products are sold in the Korean market through Beautiful Coffee, an ATO.
[Figure 1] General distribution channel types of Fair Trade
While the ATO-led distribution channel has been a dominant approach in the Korean fair trade market, there has not been much research on how it works and in particular what factors contribute to its successful implementation except the recent study by Cho et al. (2012). They, however, focus on the general marketing strategy of Beautiful Coffee in the Korean market, and do not examine the impact of the entire distribution channel on its success. Our study, on the other hand, examines the whole distribution channel to identify how the structural factors of the distribution channel benefits the channel members, Beautiful Coffee and the producers. Therefore, this paper aims to address the gap in the literature by examining one of the success factors behind ATO distribution channels, the successful partnership between producers and alternative trading organizations (ATOs). Specifically, this paper illustrates how the partnership between producers and ATOs has strengthened the fair trade and the performance of participants in the trade based on the example of the trading relationship between Beautiful Coffee, an alternative trading organization dealing coffee related products, and the coffee cooperative union (CCU), a coffee producing cooperative in Gulmi, Nepal. We first give a brief introduction of the ATO used in this case, Beautiful Coffee, in the next section. Then section 3 illustrates how the partnership has formed and benefited both Beautiful Coffee and the coffee cooperate union in Gulmi, Nepal. Finally section 4 concludes the paper discussing challenges of the distribution system.
2. Beautiful Coffee as a Representing ATO in Korea
Beautiful Coffee is a social enterprise in the form of a not-for-profit foundation in Korea. Originally, it started as a small team in the Beautiful Store, which was established in 2002 as the first fair trade business in Korea. The main fair trade items Beautiful Store dealt with from 2003 to 2005 were handcrafted products, such as small purses, bags, paper crafts and ceramics, which were made by women from South East Asian developing countries (Kang, 2013). As one division of the Beautiful Store, the Beautiful Coffee team had started selling fair trade coffee in 2006 with producer partners in Nepal. The first product it launched was the "Gift of the Himalayas." After a successful rollout, Beautiful Coffee became an independent organization in 2013. Since its departure from its parent organization, Beautiful Store, it has been expanding the product lines it carries and now dealing with a wide range of fair trade products including coffee, chocolate, tea, nuts and sugar. Currently, Beautiful Coffee manages over 40 brands across different product categories. There are four Beautiful Coffee cafes as of now, which are under direct management by Beautiful Coffee. Not only do the cafes sell coffee and other related products, but also they have been successfully promoting fair trade and increasing awareness among visitors and Korean consumers. The sales have been increasing and the sales across all 4 stores have reached about 3 million US dollars in 2014 (Han, 2014). [Table 1] shows total sales of Beautiful Coffee from 2008 to 2012.
[Table 1] Total Sales of Beautiful Coffee and Beautiful Store in USD (million)
Source: Coopy Cooperative (2013).
2.1. Organization's Mission and the Current Strategies
“Changing Trade to Change the World.”
We work for supporting producers in developing countries to become more self-sufficient and we provide consumers with the experience of improving the quality of life by ethical consumption and cultivation of righteous and sustainable world through changing current structure and social practices that enforce poverty and inequality.
Above statement (Beautiful Coffee, n.d.) reveals the core mission of Beautiful Coffee, which is to promote sustainability by bridging consumers and producers via consumption of fair trade products. To achieve its mission, Beautiful Coffee has provided opportunities in sustainable trading relationships to producers by guaranteeing sustainable minimum price and social premium. Also, it has been trying to develop relationships with a larger number of producers from various regions, in order to offer more diverse fair trade products to consumers (Beautiful Coffee, 2016). Such efforts are in line with Beautiful Coffee's main goals of enhancing the life quality of producers of fair trade products and increasing their sustainability, as well as improving consumers' quality of life through its healthy relationship with producers. In order to achieve its goals, Beautiful Coffee has utilized three major strategies:1) pursuing self-sufficiency of producers and social development for developing countries, 2) increasing profits and sustainability for producers, and3) improving Korean consumers' awareness on poverty issues on developing countries.
2.2. Stakeholders
Beautiful Coffee is categorized as a Type 3-Volunteerbased fair trade organization according to Huybrechts' 5 categories, which is shown in Appendix 1 (Coopy Cooperative, 2013). Beautiful Coffee has about 10 main producer partners, each of them being a coffee cooperative itself (Beautiful Coffee, 2016). In general, coffee producers in those regions are mostly small farmers who are financially vulnerable, and as a result, coffee cooperatives were formed to improve the quality of lives of local farmers. Among the producer partners, three partner cooperatives in Peru, Uganda, and Indonesia have adopted FLO certification systems as they have commercial relationships with other fair trade organizations from EU or USA. (Currently, KFTA neither requires any certifications nor provides ones.) Agrarian Industrial Cooperative Naranjillo Ltda in Peru exports its organic chocolate products to Beautiful Coffee since 2010. COINACAPA (Cooperativa Integral Agroextractivista Campesinos de Pando) provides Brazil nuts, and Gumutindo Coffee Cooperatives in Uganda, one of the representing fair trade coffee producers working closely with Twin Trading since 1998, is the source of coffee for the product called "Gift of Kilimanjaro". Among the producer partners, the Coffee Cooperative in Nepal, which is its first producer partner, has been the main focus of Beautiful Coffee, and thus Beautiful Coffee has undertaken various supporting activities for the Coffee Cooperative in Nepal. For example, Beautiful Coffee recently orchestrated a series of funding activities to support the members of the cooperative for relief and restoration from the 2015 Nepal earthquake (Beautiful Coffee, 2016).
Beautiful Coffee currently operates only in Korea. In particular, it operates four cafes under its direct management in Seoul and Gyeonggi area. The B2B market has been Beautiful Coffee's focal market, and the B2B customers are called Beautiful Partners. There are approximately 500 Beautiful Partners, including 40 Offices, 200 Cafes and 260 Retail stores. Retail stores include 120 Beautiful Stores and 140 HomePlus stores (Beautiful Store, 2016). Through its relationship with the Beautiful Partners, which are the major outlets to roll out its products, Beautiful Coffee was able to successfully start out, and the partners are still the main source of revenue. Beautiful Coffee also operates in the B2C market, although the B2C market has not yet been a significant part of Beautiful Coffee's business. As it is the mainstream market of coffee industry, thus, Beautiful Coffee is currently trying to penetrate into the B2C consumer market, which is heavily saturated by gigantic coffee franchises such as Starbucks and Cafe Bene.
The number of Beautiful Coffee's employess is approximately 30, which is obviously not enough at all to successfully move various projects forward that Beautiful Coffee is working on. However, besides the small number of paid full-time employees, Beautiful Coffee has a large pool of volunteers who are responsible for a significant part of the projects Beautiful Coffee is working on. Including both full-time employees on the payroll and volunteers, Beautiful Coffee's workforce is divided into two main working groups: Market Impact Group, which manages overall sales and marketing of their products, and Social Impact Group, which promotes consumer awareness with advocacy and deals with producers in the developing countries concerning improvement of their lives. Market Impact Group consists of marketing team, distribution team, and roasting center task force, while Social Impact Group consists of producer partnership team, advocacy team and Nepal center. The composition of working groups, therefore, reflects the institutional characteristics of Beautiful Coffee, a social enterprise seeking both economic and social impacts.
Beautiful Coffee competes against many coffee brands including multinational coffee brands such as Starbucks and Cafe Bene and a number of local coffee stores, which are usually operated by individual owners. Because of the rapid growth of the Korean coffee market, many large companies have entered into the coffee industry such as Angel-in-us by Lotte and Hollys by Hanwha as well as a number of global brands like Starbucks. These coffee brands usually have a strong brand reputation with a huge number of retail stores both in the form of direct ownership or through a franchising system. Moreover, in order to attenuate the impact of intense competition among different coffee brands on their brands, coffee brands have tried to differentiate from each other by adopting various strategic actions. For example, Starbucks implemented a new technology called "Siren Order", which enables customers to make an order before getting to the store and receive their beverage right away once they get to the store, to speed up and make its service more efficient. Cafe Bene, on the other hand, teamed up with Soo Hyun Kim, who is one of the most popular Korean celebrities in Asia and is trying to reach foreign markets in the East and Southeastern Asia.
In case of Beautiful Coffee, being a social enterprise gives Beautiful Coffee an strategic advantage that differentiates it from most of the other coffee brands, which do not operate as social enterprises. On the other hand, there is an increasing number of coffee brands, though it is still small, operating as social enterprises, inluding iCOOP, Dure APNet, Korea YMCA Peace Coffee, and Happy Sharing, etc. The most direct and strongest competitor among these coffee brands is iCOOP, a consumer cooperative that has a national distribution channel and a relatively large number of its own stores. Its total sales of fair trade products were about \($\)3 million in 2013 (Coopy Cooperative, 2013). Moreover, the major coffee brands (those not operated as social enterprises) have recently started launching CSR campaigns that significantly weaken the strategic advantage of social enterprises by diluting the differentiation between social enterprises and the other non-social enterprise coffee brands.
3. Partnerships of Beautiful Coffee
3.1. Nepal Gulmi Project
Beautiful Coffee started selling fair trade coffee sourced from Gulmi, Nepal in 2006 with the launch of "Gift of the Himalayas" (more information on Gulmi is provided in Appendix 2). This new partnership was initiated with help of Nepali Bazaro of Japan, a specialized fair trade NGO working in Nepal for more than 20 years. Nepali Bazaro, which was experiencing oversupply of coffee beans at that time, introduced Gulmi cooperative to Beautiful Coffee so that, not only Gulmi cooperative expanded its partner network, but they could also resolve the oversupply problem (David & Kim, 2010). In fact, organic coffee farmers in the Gulmi District had also received a great deal of assistance from HELVETAS Swiss Intercooperation Nepal (HELVETAS), an international aid NGO from Switzerland, since 2003. With the Coffee Promotion Programme (CoPP) by HELVETAS, small farmers including women and most deprived members of the communities in the area have been able to generate reliable income from their coffee production and processing. Overall, there were several NGOs involved in the Gulmi region to help the coffee farmers improve their living condition.
In the beginning, from 2006 to 2008, Beautiful Coffee's relationship with producers in Gulmi was similar to that of traditional channel relationship where its involvement with Gulmi farmers was minimal. For example, Beautiful Coffee had regular visits, made purchasing contracts and provided a minimum level of aid if any. Despite of the minimum level of interaction, the relationship with Beautiful Coffee was beneficial for the coffee farmers in the Gulmi region as the amount of fair trade coffee from the area had increased by 30% annually until 2009. On the other hand, Beautiful Coffee faced some problems such as low production of wet processed beans, which have higher quality compared to naturally processed beans, and delays in delivery. These problems led Beautiful Coffee to engage more seriously in the relationship with the Gulmi coffee farmers, and, as a result, it undertook several investigations to find out what caused the problems. For example, Beautiful Coffee conducted a thorough self-evaluation on the site with a group of experts consisting of consultants from Fairtrade International, other international fair trade experts and organic coffee farming experts, from 2010 to 2011. One of the problems revealed through the evaluation was a lack of specialization in handling of coffee produced by the farmers. When farmers produced the coffee products, it was the District Cooperative Federation (DCF) of Gulmi that handled the distribution of coffee to the buyers and of the income from the sales to the farmers. Since DCF dealt with not only coffee but also other agricultural products such as dairy products, the profits from coffee trading were aggregated to those of other products and the total profits from all products were distributed back to all the members of DCF. The expert group indeed diagnosed that the practice of how the profits were distributed could lower the motivation of coffee farmers. Another problem revealed by the expert group was producers' lack of knowledge and motivation on marketing and promotion. Producers merely focused on cultivating coffees and selling them without understanding the whole process of the value chain. Further, they overlooked the importance of quality control and value added processes such as organic farming and roasting. After realizing such problems, Beautiful Coffee initiated several actions to resolve the problems. First of all, Beautiful Coffee and the coffee farmers in the Gulmi region established Coffee Cooperative Union (CCU) and decided to break off from DCF to focus on coffee production. Moreover, through conflict management among members in DCF, coffee farmers in the Gulmi region obtained institutional competitiveness along with other seven districts in Nepal (KOICA, 2015). The results of these actions have been becoming more apparent, as CCU transparently shared information and profits, thus leading to the more active involvement of coffee farmers. Yet, the establishment of CCU could not automatically make farmers increase coffee productions as well as improve quality of coffees. The partnership with KOICA played the important role to achieve capacity building among farmers and set up the systems on managing productions and quality control.
3.2. Public-Private Partnership with KOICA
One of the strategic actions Beautiful Coffee had undertaken was forming a partnership with the Korea International Cooperation Agency (KOICA), which supported Beautiful Coffee financially. Beautiful Coffee formed a partnership program in Gulmi with KOICA in 2013, a project titled "Sustainable Community Development and Business Capacity Building Project in Coffee Growing Area in Gulmi" (See Appendix 3 for its summary). Total budget on this project was \($\)132,000, divided between KOICA which paid 47% of the total budget (\($\)61,000) and Beautiful Coffee, which paid the other 53% (\($\)71,000). The beneficiaries included 1,208 coffee farming households in Gulmi.
There were several issues hindering coffee farming and local development. Gulmi is located in the remote part of Nepal having little access to the market, and it has a barren soil. Also, the productivity of coffee farming in the region was very low based on a low productivity of coffee crop and a poor quality of coffee beans. In addition, coffee farmers were not motivated to enhance the productivity, since most of them are small farmers cultivating less than 100 coffee trees, and pervasive arrogation of middlemen and complicated distribution channels prevented farmers from getting proper returns of selling coffee beans (KOICA, 2015). These were the main issues the partnership project between Beautiful Coffee and KOICA aimed to address.
The project aimed to add value to coffee production, and to build capabilities in business. This includes strengthening the partnership between Beautiful Coffee and the regional counterparts (DCF and CCU) as mutual business partners, avoiding unilateral assistance from Beautiful Coffee toward the region and making them more independent. The project was done in coalition with HELVETAS. Beautiful Coffee as a social enterprise focused on capacity building in marketing and promotion of fair trade coffee products while HELVETAS worked mostly on farming organic coffee crops and quality control. On production, as a result, there was a minor but immediate increase in the production of coffee beans in 2013 compared to the previous year. However, considering the number of newly planted coffee trees, the increase was not enough, mainly due to wide-spreading of White Stem Borer (WSB) as we can see in [Figure 2]. Yet, Beautiful Coffee believed that the efforts on WSB prevention campaigns as well as building an additional warehouse and replacing old pulping machines would positively affect for the future productivity (Global Civic Sharing, 2014).
[Figure 2] General distribution channel types of Fair Trade
On quality control, Beautiful Coffee and its evaluation team concluded that activities to enhance quality of coffee beans such as education to farmers on roasting, hand-sorting, and cupping motivated them. As CCU equipped with hullers and grading machines provided by the project, members could more easily sort out defective coffee beans by hands. Coffee farmers also became aware of the process at the retailing sites such as how their coffee beans turned into a cup of coffee through experiences on roasting and cupping. They realized that the uneven quality of coffee beans influences the taste of coffee and it might affect their products' competitiveness in the market compared to specialty coffees from other parts of the world like Brazil, Colombia, etc. Moreover, their coffee was certified as Korean Organic Agricultural Products, and this has been a positive marketing factor in the Korean market. Note that as one condition of the certification, CCU needed to monitor themselves through Internal Control System (ICS) and it turned out that, along with keeping farmer's diary and having inspectors, the ICS in the Gulmi CCU increased members' capabilities in production.
Lastly, through this project, the partnership between CCU in Gulmi and Beautiful Coffee becomes more sustainable and visible. After CCU separated from DCF, members in CCU gained more earnings per household from \($\)1,969 in 2013 to \($\)2,211 in 2014. More importantly, with their continuous efforts on productivity and quality control, both parties could build trust and mutual cooperation in the long-term perspective.
"Through the project, Beautiful Coffee has gained national recognition in Nepal. Coffee farmers and organizations in other regions in the country want to work with Beautiful Coffee after they witnessed how Beautiful Coffee assisted producers in Gulmi." (Beautiful Coffee Final Project Report in 2013 as cited in Global Civic Sharing, 2014)
Furthermore, all these activities and efforts become the basis for obtaining the FLO label in the future. None of coffee producers and CCUs in Nepal has the certification for the FLO label yet (as of 2014). While it is sold in the Korean market by the ATO, Beautiful Coffee, successfully, having the FLO label would provide competitive advantages especially in sales not only in Korea but also in the international market, since customers likely trust more based on the international fair trade principles and standards.
4. Concluding Remarks
Summary - The case of Beautiful Coffee discusses the success factors behind ATO-led distribution in fair trade industry to which the past studies have paid little attention. As one of the success factors, this case demonstrates how the partnership between producers and alternative trading organizations (ATOs) has benefited the fair trade partners by using the case of Beautiful Coffee. This case shows how Beautiful Coffee's partnerships with a NGO working in the local producing area, HELVETAS, and a government aid agency, KOICA could strengthen the relationship between the producers and the ATO, and thus contribute to the whole distribution channel (as you can see in [Figure 3]). Specifically, Beautiful Coffee in the partnership with HELVETAS empowered small coffee farmers by a successful institutionalization of Coffee Cooperative Union that consolidated the distribution channel to become more efficient. Also, Beautiful Coffee and its partnership with KOICA have increased productivity of the coffee production and quality of coffee beans.
[Figure 3] The alternative distribution channel of Beautiful Coffee and Partnerships
Current Challenges - Some concerns remain such as reliable production, consistent quality, certification, and organizational capacity, which were pointed out as the key challenges for business-NGO alliances in the coffee industry (Linton, 2005). Another key challenge Beautiful Coffee is currently facing comes from the intense competition in the coffee industry. As the Korean coffee market is rapidly becoming saturated, Beautiful coffee's long term sustainability has been affected adversely. For example, the decrease in the average coffee price in the industry has been pressuring the pricing of Beautiful Coffee that is likely to result in poor sales performance. This is a critical problem for Beautiful Coffee that needs to be dealt with immediately.
Suggestions - While this case is on fair trade market in Korea, its implications can be extended and applied to other contexts such as the Korean local agricultural cooperatives that seek policy priorities for distribution systems (Kim & Hwang, 2015) or Creating Shared Value (CSV) on Social Economy and Consumer Perspective (Lee & Kim, 2015). Furthermore, we may expand our research focus to in-depth diagnosis of the current ATO-led distribution channels in the Korean fair trade market and possibility of adopting the FLO-led mainstream model.
This work was supported by the Ewha Womans University Research Grant of 2016.
Appendix
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