Reaching for a bigger share of the market
Jan 31st 2008
From The Economist print edition
TIMES have not been sweet lately for Cadbury Schweppes, the world's biggest confectioner by sales. Nelson Peltz, an American activist investor, is waging a campaign for more influence over the management of the British company. Prices for raw materials are at record highs. Policymakers are stepping up their campaigns to warn consumers about the dangers of obesity. And Cadbury is uncertain about how to proceed with its plan to demerge its fizzy-drinks business, given the turbulence in the financial markets.
So the company's announcement of its “Cadbury Cocoa Partnership” on January 28th provided a helpful distraction from such problems. Cadbury will spend £44m ($87m) over ten years to finance the partnership, starting with a £1m investment in a seed fund this year, and increasing to £5m a year from 2010. The aim of the venture is to show cocoa farmers how to increase yields using fertilisers and by working with each other. It will also help them to find additional sources of income by encouraging them to plant red peppers and mangoes, which can grow beneath cocoa trees, and coconuts, which can grow above them. Moreover, Cadbury has commissioned 850 water wells, serving 150 to 200 people each, which will give women and children liberated from water-fetching duties time to do other things. It intends to finance schools, teachers and libraries.
Is there another motive for the ostensibly philanthropic venture? Without cocoa supplies from Ghana, Cadbury would be in big trouble. The west African country provides all of the cocoa for Cadbury's British operations and 70% of its worldwide supply. Cadbury says Ghanaian high-quality cocoa gives Dairy Milk, Creme Egg and other Cadbury treats their distinctive taste. It buys one-tenth of the crop produced in Ghana, which is the second-biggest producer after Côte d'Ivoire.
Alarm bells started to ring at the firm's headquarters when a Cadbury-financed study by the University of Sussex and the University of Accra found that the average production of a cocoa farmer had dropped to 40% of potential yield, and that the children of cocoa farmers did not want to work in the family business any more. Ghanaian farmers have six children on average and farm tiny plots of land of around two hectares. Some have annual incomes of as little as £450.
So Cadbury decided to do something that it hopes will secure its supply—and make it look virtuous. It could have signed up to Fairtrade, an international social movement that promotes the payment of above-market prices to producers of agricultural commodities in developing countries by setting a floor price, with an additional premium that goes to farmers for reinvestment and social projects. “But we found that productivity, not price, was the problem,” says Alex Cole of Cadbury. Ghanaian cocoa trades at 10% above the average world price of £1,176 per tonne. So Cadbury devised a scheme of its own that is similar to Fairtrade in some respects, but gives it greater flexibility over the terms. (Cadbury does use Fairtrade cocoa from Belize for Green & Black's “Maya Gold”, a niche chocolate brand.)
Other firms have done similar things. Starbucks has a scheme called CAFE through which the coffee-house chain encourages farmers to improve quality and supports social projects. (It also buys some coffee on Fairtrade terms.) Mars, the biggest American chocolate-maker, does not sell any Fairtrade products in spite of loud clamouring from campaigners, but last year pledged $4.5m over three years for a scheme to improve cocoa farming in west Africa, run in partnership with four non-governmental organisations and a development agency.
This week Fairtrade campaigners gave Cadbury's scheme a guarded welcome. “We welcome Cadbury's initiative to support Ghanaian cocoa farmers and their communities, and we will be looking to the company to ensure that principles of sustainable production and fair trade are embedded at the heart of their initiative,” says Barbara Crowther of the Fairtrade Foundation in London.
Fairtrade and large corporations do not sit naturally together. Fairtrade's price-adjustment mechanism is intended to insulate small producers from volatile commodity markets and the free-trading, no-holds-barred capitalism that multinational companies espouse. But firms are finding ways to improve the lot of small farmers, and burnish their own reputations, without signing up to Fairtrade's rules. Are such “Fairtrade lite” strategies a rejection of Fairtrade's approach—or are they a backhanded compliment?
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Apr 4th 2007
From The Economist print edition
FUN though it is to pretend that a magic bunny provided the chocolate in your Easter basket, it is much more likely to have been grown by smallholders in West Africa, the region that produces 70% of the world's cocoa. The crop is an important source of income for many countries—the largest producer, Côte d'Ivoire, earns over 20% of its export revenues from cocoa. But although global sales of chocolate amount to some $75 billion a year, growers capture only a tiny fraction of this: around $4 billion a year from the sale of cocoa beans.
Reaching for a bigger share of the market
The money, in short, is in chocolate, not cocoa—and African farmers are not really in a position to expand into chocolate-making. Or are they? Divine Chocolate, founded in Britain in 1998, counts cocoa farmers as its biggest group of shareholders. Kuapa Kokoo, Ghana's largest co-operative, with a membership of 45,000 cocoa growers, owns 45% of Divine and has two seats on its board. The chocolate is made in Germany and sells alongside more familiar chocolate brands, “and not at a super premium price,” says Sophi Tranchell, Divine's boss. The company's sales were £9m ($18m) last year, and this year Divine launched an American affiliate that is one-third owned by Kuapa Kokoo.
This is a startling expansion of growers' purview. Before becoming owners of Divine, most members of Kuapa Kokoo had never tasted chocolate, and many had never even heard of it. But commercial skills honed in local African markets seem applicable to Divine's business and the farmers take a keen interest in their company: the design of Divine's new packaging was a recent topic of conversation in villages across Ghana's cocoa-growing regions. “The farmers are very proud that they own something like this outside Ghana,” says Erica Kyere, Kuapa Kokoo's head of research. “And they are very proud that they employ some white people—that makes them laugh.”
Could this step into the consumer market expose growers to unanticipated risk? Not so far. Divine bought 1,200 tonnes of cocoa from Kuapa Kokoo last year, all of it on Fairtrade terms. But 98% of the co-op's production is sold at commodity prices to Ghana's state-run marketing board. So Kuapa Kokoo's cocoa finds its way to supermarket shelves under many brand names besides Divine's.
Ms Tranchell says Divine's structure has proved its strongest asset, distinguishing it from competitors, attracting high-profile endorsements and mobilising activists to insist that supermarkets sell it. It has also unlocked non-traditional sources of finance. Divine has received investment from charities and development lenders and loan guarantees from aid agencies. Without Kuapa Kokoo, says Ms Tranchell, “it would have been implausible to set up a chocolate company in this very competitive, very mature market with so little money.” (In Britain, Cadbury, Nestlé and Mars account for over 80% of the market.)
Other companies are pursuing similar strategies. Agrofair, a tropical-fruit distributor based in the Netherlands, is half-owned by producers. It in turn owns a part of Oké USA, which markets Fairtrade bananas in America. Pachamama, a federated co-operative of Latin American coffee growers, has just completed its first year roasting coffee in America. With the help of in-kind loans of green coffee from its members, the firm has not had to solicit outside investors at all. And Coffee Pacifica, a coffee importer that is publicly traded in America, is one-third owned by the Papua New Guinea Coffee Growers Federation, which represents 120,000 farmers. In 2006 the firm's sales doubled to almost $3m in America and Europe.
But Anna Laven, a researcher at the University of Amsterdam who has studied Kuapa Kokoo, cautions that this approach is not always possible for producers. Without support and advice from charities, formal organisation and reliable export channels, she says, moving upstream through “functional upgrading” is not feasible for most farmers. Divine, however, is a busy exception to this rule. And this month the Easter bunny may even bring something for the members of Kuapa Kokoo: at a meeting in a few weeks' time Divine's board expects to announce its first-ever dividend.