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Equal Exchange: Trading Fairly and Making a Profit Essay

I, Executive Summary

Equal Exchange is a for-profit Fair-trade worker-owned, cooperative company. Founded in 1986, it is the oldest and largest Fair Trade coffee company in the United States. Equal Exchange began with $100,000 as started up funds and a 2,000-quare-foot room in Boston’s South End. It purchased coffee beans from small-scale farmers at above-market price in Latin America. Initially, EE relied on other roasters and packers to prepare the premium coffee beans. It sold to natural food grocers, gourmet shops, restaurants, and non-profit organizations. The company’s founders wanted to help famers get a better, more stable price and, at the same time, take advantage of the growing consumer demand for higher-quality “specialty” coffee. However, after 25 years in business, and 10 of which were spent as the only fair trade company in the coffee industry, Equal Exchange’s tremendous success seemed to have come to a screeching halt. If the impact of price increases is excluded, for a second year in a row, its revenues have grown only 2 percent.

This is hardly acceptable comparing with the double-digit growth it had been through for the previous 15 years. Additionally, over the past few years, consumers have begun to show a strong desire to purchase products from local businesses, thus increased competition from local roasters. Moreover, there is a major push by companies to offer a wide variety of green, organic, and wholesome food products. There are so many new initiatives developing and it may be possible that fair trade products will not stand out so much anymore. As a result, Equal Exchange is likely going to fail into the red zone in next few years, if nothing is changed. Since EE has become a famous brand, I highly recommend EE’s staff to continue expand its potential in producing new products and starting to offer service, in order to solve listed problems.

More specifically, in business strategy, EE need to keep following its broad differentiation strategy. However, it needs to create more products in order to be able to compete with many competitors. EE has been taking customers’ trust in its products, so that producing new ones would bring its customers into experiencing them no matter what. There were still various fairly traded goods that EE did not offer, and they might become preferred products. In corporate strategy, if EE choose to start offering service, this would be consistent with the company’s mission such as ecotourism to coffee or cacao growing zones to support those communities.

II, Introduction

In 1983, Rink Dickinson, Jonathan Rosenthal, and Michael Rozyne were all recent college graduates and working for a food co-op warehouse in the Boston area. They began to question the system such as, “What if food could be traded in a way that is honest and fair, a way that empowers both farmers and consumers? What if trade supported family farms use of organic methods rather than methods that harm the environment?” Almost simultaneously they started to hear about groups in Europe who were doing Fair Trade. The advocates of Fair Trade wanted to ensure that the producers of products such as coffee, teas and chocolate would get a better price for their crops while supporting improvement in their environmental, social and political conditions. Rink, Jonathan and Michael liked the idea. According to Rink, they “were basically food co-op people, interested in connecting small, local farmers with consumers to change the marketplace.” It was not their intention to found a company at that time. They took the idea to the Board of Directors of the co-op warehouse.

Half of the board supported the idea and half voted against it. It became apparent to them that if they were going to pursue their vision, they were going to have to develop an organization. Over the next three years they met once a month to develop the plans and raise the capital for founding their own organization. During that time Rink said they used their jobs to learn about cooperatives, small farmers, entrepreneurship, marketing and “making mistakes, right and left.” The food co-op gave them “a great environment to learn some skills”. In 1986, Rink, Jonathan and Michael decided to launch Equal Exchange (EE). By that time, their ambition was “…to change the way food is grown, bought, and sold around the world.” The founders decided to meet once a week – and did so for three years — to discuss how best to change the way food is grown, bought, and sold around the world.

At the end of this time they had a plan for a new organization called Equal Exchange that would be: A social change organization that would help farmers and their families gain more control over their economic futures. A group that would educate consumers about trade issues affecting farmers. A provider of high-quality foods that would nourish the body and the soul. A company that would be controlled by the people who did the actual work. A community of dedicated individuals who believed that honesty, respect, and mutual benefit are integral to any worthwhile endeavor.

Around 1991, Equal Exchange established itself as a Fair Trade specialty coffee company, offering loyal food co-op customers a store bin system with a full line of beans, decaf coffee, different roasts, and flavored coffees. By the end of the year what had once been the “pipe dream” of reaching $1 million in sales had become a reality. By 1994, Equal Exchange was a worker-owned cooperative with 20 members—with departments, managers, and a growing number of outside investors.

A pivotal early investment by the Adrian Dominican Sisters helped to alert others that this undertaking, however risky, might be worthy of outside financial support. Another exciting chapter in our history started in 1996, when Equal Exchange joined with Lutheran World Relief in a path-breaking collaboration to launch what has now become our Interfaith Program. This major initiative helped Equal Exchange create partnerships with communities of faith throughout the U.S. Over the next seven years more than 10,000 congregations across the U.S. began using our Fair Trade coffee.

III, Assignment Question

1. Question 1

What are the strategically relevant components of Equal Exchange’s macro-environment? Are socio-cultural, environmental, economic, and other components of the macro-environment favorable to the sellers of fair trade food and beverage products? Does the industry offer attractive opportunities for growth? a) Strategically relevant components of Equal Exchange’s macro-environment Political factors: There were no laws in the U.S restricting the use of the term “Fair Trade” on a product labels. This makes it is a little difficult for EE to prove themselves overwhelming their competitors. Economic conditions: In 2010, Fair Trade USA reported that there were over 9,500 fair trade-certified consumer products being offered by 700 industry partners in more than 600,000 retail locations.

Paul Rice, the president and CEO of fair Trade USA, said that in 2010 the fair trade retail sales market was $1.4 billion in the U.S and $3 billion in Europe. Socio-cultural forces: EE developed advertisements, implemented public education campaigns, partnered with religious organization, and created a school fund-raising program. EE also offered a wide variety of fair trade product. Technological factors: EE was effective in creating messages about the origins of products and where consumer dollars went.

For example, it used logo and labels that suggested consumers could have a great cup of coffee or bar of chocolate while feeling good about them. It also created a website as a place for consumers to connect to the farmers who grew the products they bought. Legal and regulatory factors: Fair Trade USA has certain guidelines for participating business to follow, including EE. Fair trade certifiers agreed on eight basic principles, which are:

+ Long-term direct trading relationships
+ Prompt payment of fair prices and wages
+ No child, forced or otherwise exploited labor
+ Workplace non-discrimination, gender equity, and freedom of association
+ Safe working conditions and reasonable work hours
+ Investment in community development projects
+ Environmental sustainability
+ Traceability and transparency

b) Are these factors favorable to the sellers of fair trade food and beverage products? This depends on the product itself, though these factors do make products are increasingly imported over more than a decade from 1998 to 2010. Some products have great growth rate, such as tea (38%), sugar (60%), cocoa (67%), and vanilla (97%). On the other hand, some products are not favorable to consumers, such as produce (2%), flower (0%), and wine (-63%).

c) Opportunities for growth

The far trade movement caught on in 2000 when many companies began to follow the same path as EE – more specifically, into the business of fair trade coffee. Basically, the industry still offer very attractive opportunities for growth due to its growth rate, but it is quite difficult to reach those opportunities due to rivalry.

2. Question 2

Explain the competitive pressures facing the fair trade food and beverage products industry. What does a five-force analysis reveal about the nature and strength of the competitive pressures facing Equal Exchange? Which of the five forces is the strongest? Which of the five forces is weakest?

a) The competitive pressure facing the fair trade food and beverage product industry. Fair trade coffee was EE’s primary product, accounting for 80 percent of sales in 2010. At that point, there were over 300 companies in the U.S that provided fair trade coffee. EE managers admired the social mission of some of these companies and even considered those who were truly committed to far trade to be friends. However, they were also competitors.

There were two groups of competitors to EE. One class consisted of larger companies that competed in the high-end, organic coffee market, but also got involved in fair trade coffee. The other one were small, local, and regional competitors operating in different areas off the U.S. There are a lot of name can be pointed out, such as Starbuck, Green Mountain Coffee, Deans Beans, and Thanksgiving Coffee. With this much rivalry, EE sure had a great pressure in the industry.

b) Five-forces analysis

Threat of new entrants: Since fair trade food and beverage products industry is a profitable market that yield high returns, new firms would be attracted. But this is not a problem for EE to concern, because it knows those farmers and their struggles. Nevertheless, when it came to rivalry, EE’s values provided a much different outlook than a typical business. Threat of substitute products: Coffee is a special product with hardly substitute product, so this is not really a threat for EE. Bargaining power of customers: EE partnered with fair trade advocacy organizations, such as Global Exchange, to create a nationwide public education campaign. In 1996, EE partnered with Lutheran World Relief to create something that later became known as the Interfaith Program, and it raised relief funds for farmers in Nicaragua who were hit hard by Hurricane Mitch in 1998.

These partnership helped EE generate revenues, create goodwill within communities, and create awareness among consumers about fair trade products. Bargaining power of suppliers: EE’s promise to provide consumers with reasonably priced, good quality food, all while fairly paying the farmer who produced the goods was quite unlike most other companies. Intensity of competitive rivalry: As mentioned before, there are many strong competitors against EE, both as small and large ones. Addition, the fair trade industry is open, so competing is unavoidable. Though EE do not mind too much having many competitors, those ones still create barrier for them to reach more customers. To be concluded, threat of substitute is the weakest force and intensity of competitive rivalry is the weakest force.

3. Question 3

What are the key elements of Equal Exchange’s strategy? Which of the five generic strategies is the company pursuing? How has the cooperative integrated corporate social responsibility into its business strategy?

a) Key elements of Equal Exchange’s strategy

EE wanted to change traditional purchasing habits and make consumers more aware of where products came from and who was responsible for making them. At the same time, it wanted to encourage consumers to buy more fair trade products. To do that, EE use advertising in packaging and labels, website, and public awareness. Also, it created interfaith program, applied fundraising program and outbid their competitors in terms of product variety.

b) Generic strategy

EE follows broad differentiation strategy. EE’s promise to pride consumers with reasonably priced, good quality food. Though it tried to keep their price lowest as possible, it still fairly paid farmers quite a lot even if coffee prices in the world’s commodities exchanges dropped below the fair trade minimum price. It also focused on keeping their quality on products in any condition.

c) Cooperative integrated corporate social responsibility

EE worked with financial institutions to give farmers pre-harvest loans with affordable 8 to 9 percent short-term interest rates. Brokers typically offered loans at much higher rates of 25 percent. EE also guaranteed a quarter of each pre-harvest loan. It thus shared the risks associated with misfortunes, such as hurricanes, that could destroy a cooperative’s crops. EE bought the coffee beans once a year, as soon as they were harvested (even though this tied up its capital in inventory). In terms of employee, EE wanted to cultivate excellent working relationships with its employees. Its managers believed that a democratic work environment in which employees shared responsibility for decision making would lead to higher levels of job satisfaction, morale, and productivity.

It made sure that the pay gap between the highest-paid manager and the lowest-paid employee was reasonable. Besides, EE sought to reconnect consumers with the farmers who grew their food. When consumers saw a brand-name product in the supermarket, EE wanted them to realize that there was often a person toiling away for little pay behind it. By raising such awareness, the company hoped to direct consumers towards products for which farmer got paid higher prices so they could better support their ways of life.

4. Question 4

What are Equal Exchange’s competitively important resources and capabilities? Which of its resources have the greatest competitive power? Are any of its resources and capabilities able to pass all four VRIN tests for sustainable competitive advantage? Explain. a) EE’s competitively important resources and capabilities Worker co-operative model: EE believed strongly in creating better, healthier relationships with the Earth, with farmers, its workers, and with the consumer. Worker-owners enjoyed many rights and responsibilities and democratically controlled the workplace. At EE, a co-executive director, a roaster, a packer, and a customer service representative were equal, with one share and one vote per person. This makes every employee of EE want to contribute their best to the company.

Marketing strategies: EE wanted to change traditional purchasing habits and make consumers more aware of where products came from and who was responsible for making them. This leads to many well-crafting strategies, such as interfaith program and fundraising. Supplier: Unlike other companies, EE wanted its suppliers, farmers specifically, to be paid more, not less. So, it sought out fair trade-registered co-operatives that enabled small-scale farmers to pool their resources, increase their power in the market-place and share the costs of upgrading their operations. These farmers were trained in how to acquire information on market trends and in how to cultivate high-quality crops

. b) Unique resources and capabilities

The only resource or capabilities that is able to pass all four VRIN test for sustainable competitive advantage is worker co-operative model. Value: It is difficult to find good employees, but it is much harder to keep good employees to work for the company. That is the reason why building relationship between employees is very important, and critical. EE’s worker co-operative model is showing its precious value for this part. Rare: Treating everyone the same is really rare. Normally, the higher-ups receive much more respect than lower staffs do, but EE deals nothing like that. This hardly can be found in any other company, which makes it a unique component. Inimitable: Human relevant is the only one that is inimitable. EE’s worker co-operative model makes its workers feel comfortable, as everyone is equal.

Therefore, employee loyalty is guaranteed and untouchable from external conditions. Non-substitutable: EE built up its image with equal employees, and no other capability can replace this. EE likely is said to stick with its worker co-operative model at anytime, and the way around. It is hard to find another company which can apply this model better than EE. 5.

Question 5

What does a SWOT analysis reveal about Equal Exchange’s ability to seize market opportunities and nullify external threats?
Experienced in the market
High social awareness
Technology up-to-date
Unique work model
Good financial performance
Lack of consumer awareness
Unsatisfactory working condition
Farmer exploitation
Expanding business
Offering new products
Many wealthy competitors
Unstable market
Table 1: SWOT analysis of Equal Exchange

EE can use its strength to seize opportunities and nullify threats. More specifically, due to high social awareness and with technology up-to-date, EE can easily expanding its business into other activity, such as services. Otherwise, it can produce new products that have not been offered in fair trade market. On the other hand, with experience in the market, EE can find a way to compete with competitors in the fair trade market using its good financial performance. 6.

Question 6

What is your assessment of Equal Exchange’s financial performance and condition? Is the company in good financial shape? Why or why not. Use financial ratios in Table 4.1 to help support your assessment.

Figure 1: Equal exchange sales growth

Since importing its first coffee container in 1986, EE had become the leading fair trade brand of food and beverages in the U.S. This helped the co-operative achieve a trend of double-digit revenue growth. However, the recession that struck the U.S changed the outlook for business. The financial data for the fiscal year of 2006 through 2010 demonstrated EE’s growth and showed whether the co-operative was able to weather the economic downturn. Figure 1 demonstrates EE’s growth of sales from fiscal year 2006 to fiscal year 2010. In 2006, success in many areas defined much of EE’s 14 percent increase in revenues, which translated into an additional $2.86 million in annual sales.

In particular, sales were exceptionally strong in the West Coast region. Another key contributor to sales was EE’s chocolate products, which were a hit in 2006 because the quality chocolate market was seeing growing demand, or a “renaissance”, as EE called it, similar to what occurred with specialty coffee 20 years prior. While this was occurring, EE simultaneously expanded its chocolate line to products such as organic dark chocolate, organic mint chocolate, and organic chocolate syrup. This expansion allowed the company to ride the growing demand for quality chocolate. EE also introduced three new tea bagged products, which helped increase tea sales 35 percent.

Till 2010, it is a hard time as coffee and chocolate prices continued to rise. EE was faced with a difficult challenge of helping farmers during this time, providing customers with stable prices, and maintaining a profit margin consistent with the co-operative’s goals. Sales totaled $36,525,856. This growth of roughly 2 percent was relatively flat for the second year in a row. The growth experienced was due in part to the notable increase in EE’s direct sales to food co-operatives. This is something the co-operative did to avoid the use of distributors.

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