Fair Trade as a Business Model

Don't look at fair trade as a charity - treat it as a business model, argues Paola Ghillani, former head of the Max Havelaar fair trade organization in Switzerland.

Q: How did you come to take over leadership of Max Havelaar in Switzerland after being at a big business multinational?

A: I wasn't the first choice, since I didn't come from the development cooperation field. Max Havelaar Switzerland was created in 1992 by six Swiss NGOs to show solidarity with smallholders in coffee production. In 1998, when the Director had been ill for two years and unable to lead the organization, it was decided to appoint a new director - but with the order to make Max Havelaar self-financing within one and a half years.

This gave me my chance, since I came from management and marketing. And the reason I applied was that I believed in fair trade as a business model. I knew that I did not buy fair trade goods myself out of a sense of charity, but because they represented value for money to me.

Q: What was your strategy?

A: I set myself the goal of introducing at least one new product per year onto the market, partly to make people aware of the new approach. Each new product exists in a different economic situation, with a different set of problems. We had to make people aware of this.

We started with cut flowers and organic bananas. Of course, you have no guarantee that your approach is going to be successful. But we found a market among people who wanted to buy fresh products and fruit they could safely give to their children.

The retailers were initially suspicious. It required some hard negotiations to persuade them to feature our products. But when they saw that fair trade products were growing by 30-40% per year, after two or three years they came to us and asked for new products to feature.

That's how we achieved the target of making Max Havelaar Switzerland self-financing within 18 months. It gave us the resources to take financial risks, which has not been the case in some other countries. As a result, we were able to develop other fair trade products and improve the income of new beneficiaries in developing countries.

Q:What does fair trade mean in your definition?

A: It means paying producers enough to cover the cost of sustainable production plus the value of their work (salary, wages) to enable them to develop themselves, their families and their communities. It does not mean what I call the extreme pricing model that we see today in, for example, coffee.

Q:What's wrong with that?

A: The average cost to produce a pound of coffee is 70-90 cents ($1.56-2 a kilo). The minimum price set for fair trade producers in 1992 was $1.26* and it hasn't changed. It is no longer in relation with the market price. It is no longer up-to-date and thus is distorted.

On the conventional world market, the coffee price for producers is 40-60 cents a pound. This is due to overproduction that is encouraged by the importers, because they can make higher margins, since the price of coffee to consumers has not gone down much. So that price is distorted, too.

I argue that fair trade producers could accept lower prices for their coffee beans - more in line with the fair trade production costs and the value of their work - and still come out ahead because they could sell a lot more coffee closer to market prices, rather than a small amount at a distorted price.

Q:But the consumer is still paying a premium price for fair trade goods…

A: Not necessarily. Fair trade bananas in Switzerland, for example, don't sell for any more than the conventional products. They are still profitable because fair trade cuts out the intermediaries.

Q:Another criticism made of fair trade is that it locks developing country producers into low-priced food commodity production, rather than helping them out of this low-margin sector…

A: That's why we introduced items such as cotton products. But maybe, with the rising cost of oil pushing up the expense of transport, we are not doing such a good thing in encouraging such exports. That's where I think ITC is doing such good work: it is helping countries to develop their own markets and export where there is some potential.

Q:What are the benefits of bringing NGOs into the trade equation?

A: NGOs can help ensure there is more transparency about what is happening in trade, particularly in remote regions where you cannot learn from companies or even the media what the situation actually is. But they are not able to manage trade. What they can do is help companies to find solutions.

But though the fair trade movement was created by NGOs, they did not see that fair trade could be a business model rather than a charity operation, and the charity approach has made some fair trade rigid and uncommercial in the way it operates.

Q: The business model of fair trade has worked in Switzerland, a small and prosperous country, but has it made any mark elsewhere?

A: When I was President of the Fairtrade Labelling Organizations (FLO) International, I argued for fair trade as a business model. It was accepted in the UK, which has probably the most successful fair trade system, then in Italy, France and the USA.

Q: But the model of the rich consumer buying food commodities from a poor country at a slightly higher price can't apply in a developing country.

A: That's why I say each country needs its own fair trade system. Fair trade is about economic, social and environmental responsibility. As a result, I'm in favour of encouraging local suppliers for local consumers.

That is as true of Switzerland as of any developing country. The farmers in both regions have the same interest. In Geneva now you can buy local products under a special label, Terre Avenir. And you can find them in the supermarkets as well as in the gastronomic specialty shops. In fact, you can apply fair trade principles wherever you live.

Max Havelaar is the title of an 1860 novel written by Eduard Douwes Dekker under the pen-name Multatuli that played a key role in changing the Netherlands' colonial policy in the Dutch East Indies in the 19th and early 20th centuries. In the novel, the hero Max Havelaar battles against a colonial government system in Java which is applying slavery and unfair trade policies.

Paola Ghillani was head of the Max Havelaar Foundation (Switzerland) from 1999 to 2005. She was Chairwoman and President of the Board of FLO International from 2001 to 2004, and now works as a fair trade consultant.

Peter Hulm, Trade Forum contributing editor, interviewed Ms Ghillani in June 2006.

*Ed. note: $1.26 is the minimum price FOB (free on board) at the port of origin of a well-defined Arabica type of coffee. Other types and other qualities have different minimum prices.

For more information on fair trade coffee, seehttp://www.thecoffeeguide.org , particularly section 03.06. This ITC site is available in English, French and Spanish.