Willingness to pay for Fair Trade products: Analysis and implications

CONTENTS

1. INTRODUCTION

2. FAIR TRADE AND ETHICAL CONSUMPTION
2.1 Fair Trade criteria
2.2 The development of Fair Trade
2.3 Fair Trade in Germany

3. WILLINGNESS TO PAY FOR FAIR TRADE PRODUCTS
3.1 Economic approach
3.2 Social psychological approach
3.3 Summary of the research questions

4. METHOD
4.1 Article search
4.2 Methods in the research on WTP for FT products
4.3 Sample types
4.4 Country of origin
4.5 Fair Trade products

5. RESULTS
5.1 Willingness to pay the FT price-premium
5.2 The level of the FT price-premium
5.3 Moderators of the willingness to pay for FT products

6. DISCUSSION

7. REFERENCES

APPENDIX

1. INTRODUCTION

Fair Trade is growing. Global sales of Fair Trade products almost tripled between 2004 and 2007 (Krier, 2008) and the growth still continues. Similarly, the number of certified producer organizations and individual farmers who benefit from Fair Trade sales increased enormously in the last decade. Some scholars even suggest that Fair Trade products could follow the growth of the organic food industry and become a multi-billion dollar industry (Wright & McCrea, 2007). Broadly speaking, the Fair Trade movement aims to bring more money to the world’s poor and it seems to succeed (Nicholls & Opal, 2005). Fair Trade is an organized social movement and market-based approach to help producers in developing countries to obtain better trading conditions by paying them a “fair price” for their products (Yang, Hu, Mupandawana, & Liu, 2012). Although they might be some discussions about how fair this “fair price” is (cf. Sutcliffe, 2004), the rise of Fair Trade improves trading conditions for individual workers and farmers as well as it offers new opportunities for trading companies such as developing new markets and competitive advantage (Bauer, Heinrich, & Schoenmüller, 2012).

Not surprisingly, Fair Trade products are somewhat more expensive than similar conventional products (Bauer et al., 2012). For example, I pay about 0,70 Euro more for my favorite Fair Trade chocolate at the supermarket, as compared with other chocolates I use to buy. This positive price-premium may reflect the higher rates paid to producers (roughly 10% higher than the market rate; cf. Sutcliffe, 2004), enhanced costs for trading companies (e.g., certifications, promotions, transport), and psychological factors like the price credibility (Bauer et al., 2012). The growing popularity of Fair Trade products noted above suggests that people are generally willing to pay this premium for Fair Trade products. However, empirical evidence on consumers’ willingness to pay fails to provide consistent results regarding the level of price-premium (cf. Andorfer & Liebe, 2012; Basu & Hicks, 2008). How much extra are people willing to pay? The present thesis seeks to review the prior research and answer this question. In addition, factors that underlie the willingness to pay for Fair Trade products are studied.

Accordingly, the aim of the present thesis is to analyze consumers’ willingness to pay for Fair Trade products. The thesis provides an overview of the published research on this topic and analyzes the recent empirical results. Specifically, the work focuses on (1) the prevalence to pay a premium (i.e., how much percent of people were willing to pay), (2) the average premium paid in samples tested (i.e., how much extra they were willing to pay), and (3) the related factors that moderated the willingness to pay (e.g., demographic factors and differences in individuals’ motivation for Fair Trade consumption). Based on the findings, implications for marketing are drawn.

2. FAIR TRADE AND ETHICAL CONSUMPTION

Fair Trade products are closely related to ethical consumption, as they represent classical ethical products (Langen, 2011). Ethical consumption refers to a purchase based on an individual’s sense of responsibility toward society and personal concerns about ethical issues such as health conditions, labor standards, social justice, sustainable production methods, and animal welfare (Harrison, Newholm, & Shaw, 2005). Among these issues, Fair Trade products consider especially suitable working conditions, the absence of child labor, and fair and stable prices all of which are guaranteed by labeling organizations like the Fairtrade Labeling Organizations International, the International Fair Trade Association, the European Fair Trade Association, the Network of European World Shops, or the Fair Trade Federation (Nicholls & Opal, 2005).

Fair Trade (hereafter also FT) has been defined as a trading partnership that seeks greater equity in international trade and sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers – especially in the South (EFTA, 2006). Hence, FT represents a market-driven commercial model, rather than charity or aid mechanisms. It addresses three interlinked objectives (cf. Nicholls & Opal, 2005, p. 25): The first is to alleviate extreme poverty through creating market access for the most disadvantaged producers in developing countries. The second objective includes empowering workers and farmers to use trade relationships and develop their own businesses in order to enhance their (social) capital. Last, Fair Trade aims to support the wider campaign for global trade reform and trade justice. The FT model thus operates in stark contrast to the conventional trade relationships (i.e., free trade) that focus on maximizing profit on buyer institution’s side through declining the purchase prices on suppliers’ side.

2.1 Fair Trade criteria

Fair Trade is specifically defined by a series of social and environmental criteria all of which have to be guaranteed to allow labeling a product (cf. Nicholls & Opal, 2005, pp. 6-7).

- Agreed minimum prices, usually higher than the market minimums: Prices that covers the cost of production, provision for family members, and farm improvements are calculated and guaranteed. Hence, these prices are above the cost of production and allow producers to invest in their business, which promotes sustainability.
- Supporting development via the payment of an agreed social premium: The social premium paid to suppliers, which is often 10% or more of the cost price of goods, allows them collectively to implement larger developmental projects in health, education, or training area such as building schools. To receive this extra premium, farmers and workers must form an association that decides democratically how to use the money.
- Direct purchasing from producers: FT seeks to minimize the influence of brokers, consolidators and other agents in global supply chain. Compared to other trade, the goods passes through remarkably few hands on its way from suppliers to consumers. This also applies to the money on its way from consumers to a poor farmer.
- Transparent and long-term trading partnership: FT creates long-term relationships between purchasers and producers, which allows producers to plan ahead and invest in the future (e.g., new technologies, new planting).
- Co-operative, not competitive, dealings: FT fosters purchaser-producer relationships based on mutual respect.
- Provision of credit when requested: Importers are required to pre-finance up to 60% of the total purchase of seasonal crops when requested. This enables farmers to pre-finance production without the necessity to raise a loan with high rates.
- Provision of market information to producers: Full information about market movement and about how the market price of a good is determined in the different transactions.
- Farmers and workers are organized democratically: Farmers and workers must form a democratic organization with “one farmer, one vote” system.
- Attention to the environmental sustainability of productive processes: Resource management plans are required. Moreover, certain pesticides are prohibited and farmers are fostered to invest in organic certification.
- Interventions to improve working conditions: No labor abuses may occur during the production process. This also includes the prohibition of child and slave labor abuse.

Hence, Fair Trade may be broadly characterized as the market-based approach to help producers in improving their living condition by building a fair trade conditions. FT guarantees prices above the cost of production, promotes sustainability, enables investments and business development through the long-term trading relationship, improves working conditions, and fosters social responsibility.

2.2 The development of Fair Trade

According to Nicholls and Opal (2005), the growth of Fair Trade can be seen as developing in four waves. Although the history of social-labeling dates back to the pioneering “White Label” initiative in USA in 1899 (Basu & Hicks, 2008), the commercial growth of the Fair Trade market began to spread after World War II (i.e., the first wave). Many Fair Trade initiatives such as Oxfam or Self Help Crafts originate from this period. Charities in Western Europe (e.g., Oxfam) began to sell handicrafts made by Chinese refugees and by producers in Eastern Europe in order to support their economic recovery. Similarly, in the Unites States, Ten Thousand Villages (formerly Self Help Crafts) started buying needlework from Puerto Rico in order to accelerate their economic growth and decrease poverty.

In the second wave, market-oriented alternative trading organizations (ATOs) arose with the aim to stimulate beneficial trade models for producers in developing countries, for example by offering trade conditions without the control of middlemen who would inevitably squeeze prices at the beginning of the supply chain (cf. Nicholls & Opal, 2005, p. 20). ATOs like Traidcraft in Britain, Gepa in Germany, or SOS Wereldhandel in the Netherlands (now known as Fair Trade Original) were founded. However, the sales volume of FT products was rather small as they were sold mostly in catalogues and world shops during this period.

The third wave was characterized by promoting FT products to a larger consumer base. Various ATOs began to cooperate with many non-governmental organizations, launched more mainstream product categories, and developed notable brands like Cafédirect, Divine Chocolate, Max Havelaar, or Green & Black's Maya Gold chocolate. During the same period, FT also managed to attract attention at international political fora and established FT certification marks. The first certification scheme was introduced by a Dutch ATO Solidaridad in 1988. The certification guaranteed that a labeled product meets basic environmental and labor standards, and simplified the interface between producers and customers. Consequently, the certification set the basis for the future successful entry of Fair Trade into mainstream distribution channels (Boonman, Huisman, Sarrucco-Fedorovtsjev, & Sarrucco, 2011).

From that period onwards, moving into the fourth wave, FT hardened its growth in the mainstream. The success of FT has encouraged the market entry of more traditional companies such as Tesco, Costa Coffee, Sainsbury’s, or Starbucks, and the market for FT products increased enormously. Over the last ten years, there has been a huge increase of FT sales internationally (see Figure 1). Global sales of FT products almost tripled between 2004 and 2007 (Krier, 2008). The worldwide turnover exceeded 2.3 billion Euros in 2007 and the sales continued to grow reaching 4.9 billion Euros in 2011, which conforms to the increase of 12% compared to 2010 (Fairtrade International, 2012).

illustration not visible in this excerpt

Figure 1. Fair Trade sales worldwide 2004-2011 (Fairtrade Deutschland, 2012a)

Nowadays, there are over 2,700 certified producer organizations and partner organization worldwide and FT products are sold in 120 countries. Europe has emerged as one of the biggest markets, with an estimated 65% of all global sales (cf. Cailleba & Casteran, 2010, p. 613). Major FT markets include UK, USA, Germany, France, Switzerland, Canada, and Netherlands, but the sales volume in other countries is still growing (see Figure 2). The market shares of FT products achieved approximately 4% of the overall consumer market (cf. Mahé, 2010, p. 301) with major commodities including coffee, bananas, cocoa, cotton, sugar, tea, and flowers (Fairtrade International, 2012). Hence, FT is no longer a niche market (Bauer et al., 2012; Cailleba & Casteran, 2010) and some scholars predict that Fair Trade products could follow the growth of the organic food industry and become a multi-billion dollar industry (Wright & McCrea, 2007).

illustration not visible in this excerpt

Figure 2. Fair Trade sales by country (Fairtrade International, 2012)

2.3 Fair Trade in Germany

In Germany, FT products are sold in more than 800 specialist shops (so-called "world shops") as well as in conventional stores like Aldi, Tengelmann, or Rewe. There are two main FT organizations in Germany, Fairtrade Deutschland and GEPA, and a number of somewhat smaller companies like Weltladen, DWP, Oxfam, and El Puente (see Figure 3).

illustration not visible in this excerpt

Figure 3. Examples of Fair Trade organizations distributing products in Germany

Among FT products sold in Germany, coffee has the longest history and largest sales volume followed by flowers, chocolate, bananas, textiles, and ice crème (Fairtrade Deutschland, 2012b; see Figure 4). In 2011, 8,807 tones FT coffee was sold in Germany, which corresponds to the increase of 22% compared to 2010 and accounts for nearly 2% of the coffee market. The price-premium represented over 3 million Euros.

illustration not visible in this excerpt

Figure 4. Sales volume of FT products in Germany (Fairtrade Deutschland, 2012b)

The growth of the overall sales volume in Germany is similar to the developmental trends observed worldwide. Figure 5 presents the sales volume of FT products in the last decade. In 2011, German consumers spent about 400 million Euros purchasing FT products, which is approximately 18% more than in 2010. The overall turnover of FT products increased over eight times since 2002, and more and more certified products are being sold. Thus, as in other European countries, FT market continues to grow. The growing consumers’ interest in FT products provides huge market opportunities to German sale companies and the FT label may become a competitive advantage (Bauer et al., 2012). However, FT certification and labeling are linked to enhanced costs (e.g., promotions, transport, price-premium paid to producers) that result to the increase of products’ prices. Consequently, the prices are higher than those of free trade products (Bauer et al., 2012). Therefore, the analysis of consumers’ willingness to pay for and their motivation to purchase FT products appears very important in order to develop effective marketing strategies. The next section provides theoretical background regarding consumers’ willingness to pay for FT products.

illustration not visible in this excerpt

Figure 5. Sales growth of FT products in Germany (Fairtrade Deutschland, 2012b)

3. WILLINGNESS TO PAY FOR FAIR TRADE PRODUCTS

The present thesis addresses the willingness to pay for FT products. Willingness to pay (hereafter also WTP) may be characterized as “the maximum amount that an individual states he or she is willing to pay for a good or service” (DFID, 1997; in Wedgwood & Sansom, 2003, p. 5). As discussed above, FT products are often more expensive than similar conventional products. Hence, the question arises whether consumers are willing to pay the enhanced price and which highest amount of the price-premium they would accept. Already in 1997 European Commission let investigate EU consumer attitudes and WTP for fair trade bananas. The analysis reported that about 37% of consumers were willing to pay 10% more than the normal price for FT bananas and about 11% were even willing to accept a 20% price-premium (cf. Hira & Ferrie, 2006, p. 110). It may be expected that this number significantly increased in the last decade due to the improvement of FT awareness and FT acceptance. For example, the awareness of FT products reached about 60% by consumers in developed countries in 2011 (and of those, 90% trust FT; Fairtrade International, 2012), as compared to approximately 7% in the USA and 30% in the EU in 2002 (Hira & Ferrie, 2006). The first purpose of the present thesis therefore is to analyze the WTP for FT products as estimated in the most current empirical research studies.

However, there may be discrepancies between the claimed and the actual purchase behavior; some people might claim that they would be willing to pay a premium but they do not behave accordingly. As defined above, the term “willingness to pay” primarily reflects self-reported interest to purchase a product, but not automatically an actual purchase. Nicholls and Lee (2006) indeed discuss that only a minority of consumers that describe themselves as willing to pay for FT products actually purchase those products. Therefore, the increased WTP as estimated in interviews and surveys need not predict an actual buying behavior. On the other side, the discussed attitude-behavior gap seems to contradict the sales volume increase in the last years (see the previous section). The turnover increase indicates that consumers are not only willing but also actually purchase FT products.

Perhaps the most evidence on actual behavior comes from related field experiments. For example, Prasad et al. (2005) manipulated the price of plain white socks at a department store at the University of Michigan. One batch of socks was labeled as made under fair labor condition and no child labor whereas other socks were unlabeled and priced at $1.00 a pair. The price of the labeled socks varied from $1.00 to $1.40. The results showed that 26.5% of consumers actually paid more for the labeled socks. Similarly, Hiscox and Smyth (2005) carried out a field experiment in a major New York City retail store. They picked two brands of towels and two brands of candles that were labeled as being produced under good working conditions. The researchers first recorded the weekly sales of the towels and candles without labeling any of them. After three weeks, the products were labeled, which resulted in an increase of 11% for towels and of 26% for candles relative to sales of the unlabeled brands. The demand for the labeled products also rose with price increases of 10-20% above the baseline unlabeled products. These findings have been supported by the most current field experiment performed by Bauer et al. (2012). Bauer and his colleagues observed the purchase behavior of 52 persons who had previously claimed they would buy a cup of FT coffee despite its 17% higher price than non-labeled coffee. They found that overall 46% of persons tested claimed they are willing to pay a premium, but even 58% of all persons actually purchased the FT coffee. Similarly to Hiscox and Smyth (2005), Bauer et al. suggest that the higher prices made the products' fair-labor claims more credible.

Hence, it seems that consumers’ WTP for FT products reflects their actual buying behavior. However, several scholars found that there are important factors that influence consumers’ WTP. For example, Auger et al. (2008, p. 184) discuss a study performed by Elliot and Freeman who found that people were willing to pay 28% more for $10 items, but only 15% more for $100 items. Similarly, Basu and Hicks (2008) found that WTP exhibits an inverted U shape in the sense that people are willing to pay a premium, but only up to a critical price level. The second purpose of the present thesis therefore is to specify how much extra people are willing to pay for FT products.

The additional third purpose of the present thesis is to analyze consumers’ characteristics and motivation to purchase FT products. Why should some individuals be more concerned than others to purchase FT products? Consumers’ living conditions such as income or education as well as they ethical values may play a role. To allow identifying possible factors, two main theoretical approaches - economic approach and social psychological approach - will be discussed (cf. Andorfer & Liebe, 2012).

3.1 Economic approach

The basic economic model states that consumers “make choices between alternative courses of action that will maximize their expected utility” (Andorfer & Liebe, 2012, p. 417). Accordingly, actions like the purchase of a product should primarily depend on the product price and consumer’s budget restriction. Within the budget restriction, the consumer purchases the product alternative that brings the highest utility per cost unit. Given that FT features for the consumer buying FT products are important, this person gain additional utility from these features and hence purchase the product. Consequently, product price and income should represent significant factors influencing WTP for FT products.

The product price deserves mention. In general, the higher price the less WTP. However, Bauer et al. (2012) found that consumers accept a positive price-premium for FT products. Moreover, when there was no price-premium, 52% of sample tested perceived FT label as being incredible. Hence, it may be also expected that WTP for FT products is associated with the increased product price.

Another potentially important factor is functionality of FT products. Auger et al. (2008) examined purchase intentions toward variously labeled ethical products and, as expected, they found enhanced WTP for these products. However, ethical features did not compensate for weak functional attributes (i.e., low comfort of athletic shoes). These findings indicate that consumers are willing to pay a premium for ethical products, but “they will not sacrifice product functionality” (p. 189). Hence, with regard to classical FT products such as chocolate and coffee, functionality (e.g., flavor, taste) could influence consumers’ WTP for those products.

3.2 Social psychological approach

Theoretical models based on social psychology are not primarily interested in consumers’ product choice with regard to utility maximization. Rather, they focus on the context in which purchase intentions are formed as well as on variables that moderate the development of those intentions. Andorfer and Liebe (2012) discuss three crucial issues within social psychological approach: consumer attitudes, FT information, and consumer values. Regarding consumer attitudes, perhaps the most known theory is Ajzen’s theory of planned behavior (Ajzen, 1991; in Andorfer & Liebe, 2012, p. 418). This theory proposes that consumers’ behavioral actions depend on three factors including attitudes, the perception of social pressure, and the perceived control over intended action. Accordingly, a consumer will purchase a Fair Trade product if he/she has positive attitude toward FT and the FT product, perceives social pressure to buy the product (e.g., from the own personal norm or from significant others), and feels in control over his/her behavior (e.g., there are no obstacles to buying the product such as insufficient supply or long walking distance to FT shops). Improving consumers’ FT attitudes should hence result to behavioral facilitations and higher WTP for Fair Trade products.

[...]