NEW YORK (TheStreet) -- Back in the 1960s, the concept of fair-trade coffee was confined to do-gooder churches and charity shops, which believed that the poor would benefit from it. Today, fair trade wears the garb of an opportunistic culture that several corporate bellwethers, including Starbucks (SBUX) - Get Report, Whole Foods Market (WFM) and Keurig Green Mountain, (GMCR) are embracing.
The strategic positioning of fair-trade-certified products has catalyzed a wave of stupendous marketing success that has big-league retailers jostling one another to get a piece of the pie. There's only one problem. The fair-trade program, originally designed to help 1.24 million farmers around the world, now fails to provide them any deliverance from the shackles of poverty.
For every dollar spent by an American consumer to purchase a fair-trade product, only 3 cents is transferred to the producer in the country it came from. That is the calculation of Senegalese development economist and former Fair Trade International employee Ndongo Samba Sylla, in his book Fair Trade Scandal: Marketing Poverty to Benefit the Rich. The remaining 97 cents either flows into the pockets of the big-brand retailers or ends up in the hands of the wrong country.
While fair-trade practices in the U.S. have expanded to accommodate a suite of products, including chocolate, tea, sugar, flowers, spices, mangoes and wine, coffee currently accounts for 80% of all fair-trade premiums, with a sales volume of $30.8 million. These premiums are supposed to be transferred directly to farmers. But that clearly isn't happening.
A groundbreaking body of research evidence from a U.K. government-sponsored study conducted by SOAS, University of London, (formerly known as the School of Oriental and African Studies) found that coffee growers in Ethiopia and Uganda, which are among the world's leading coffee export markets, continued to earn meager wages in spite of fair-trade certified exports. The research also found that these agricultural workers were more impoverished than producers who worked in sites that were not fair-trade certified.
Producers in countries like Mexico are getting record lows of 56 cents for every pound of coffee they export. Jeremy Simer of Fair Trade USA says that these farmers in some cases receive a scanty 20 to 30 cents per pound of coffee.
Given the increased efforts at marketing fair-trade coffee, revenue has escalated significantly in recent years. Sales of products carrying fair-trade labels in key markets across the U.K. and Western Europe rose from $1.1 billion to $6.6 billion.
In the U.S., products that won Fair Trade USA's seal of approval for meeting requisite ethical, environmental and sustainability standards, saw a sales jump of 75% last year over the first quarter of 2011, according to a report by SPINS, a retail research firm based in Illinois.
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Mary Jo Cook, a chief impact officer at Fair Trade USA, emphasizes that the entry of big brands into the fair-trade market has been attributable to increased consumer interest and the ensuing sales jump.
Although bigger coffee chains represent 30% of all retail coffee outlets in the U.S., a majority of the green coffee market remains in the hands of small family businesses and independent owners like Paul Odom, a fair-trade champion, who runs Fonte Coffee, a Seattle-based micro coffee roaster and a specialty U.S. label, which is best known for shipping freshly roasted coffee within hours to top-tiered buyers like Four Seasons and the Peninsula.
"There's a lot of misinformation about what fair-trade coffee is," said Odom, who sources coffee from farmers across Ethiopia, Uganda, Kenya, Colombia, El Salvador and Guatemala, among other countries.
Odom says that another spoke in the wheel for coffee farmers is the lack of financial benefit from the rise in coffee prices this year.
Coffee prices were increased in consultation with various farmer-producer groups after farmworkers completed the sale of their crops last year. The settlement with farmers came along with promises of financial gains.
Odom expects that this extra money will elude producers through the next harvest. "Those that have been cashing in [on the coffee price rise] are speculators," he said. "The guys that are making all the money are the ones wearing neckties. They're not the ones wearing the cowboy hats," Odom observed.
Since the beginning of 2014, traders have run green coffee prices up by 100%. They're now harvesting those contracts by selling their positions, with no intention of taking delivery.
Meanwhile, criticisms are being leveled against Fair Trade USA for its inefficiency in ensuring that the extra cash that consumers pay for fair-trade-certified coffee percolates down to its intended beneficiaries -- the poor farmers who are living from hand to mouth and looking for a long-term solution to their poverty.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates STARBUCKS CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate STARBUCKS CORP (SBUX) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in net income, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 8.4%. Since the same quarter one year prior, revenues slightly increased by 9.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Hotels, Restaurants & Leisure industry average. The net income increased by 9.4% when compared to the same quarter one year prior, going from $390.30 million to $426.90 million.
- Net operating cash flow has increased to $418.40 million or 37.09% when compared to the same quarter last year. In addition, STARBUCKS CORP has also vastly surpassed the industry average cash flow growth rate of -21.57%.
- The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
- STARBUCKS CORP has improved earnings per share by 9.8% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, STARBUCKS CORP swung to a loss, reporting -$0.01 versus $1.79 in the prior year. This year, the market expects an improvement in earnings ($2.67 versus -$0.01).
- You can view the full analysis from the report here: SBUX Ratings Report
TheStreet Ratings team rates KEURIG GREEN MOUNTAIN INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate KEURIG GREEN MOUNTAIN INC (GMCR) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, good cash flow from operations and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- GMCR's revenue growth has slightly outpaced the industry average of 3.2%. Since the same quarter one year prior, revenues slightly increased by 9.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
- GMCR's debt-to-equity ratio is very low at 0.08 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 2.84, which clearly demonstrates the ability to cover short-term cash needs.
- KEURIG GREEN MOUNTAIN INC has improved earnings per share by 18.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, KEURIG GREEN MOUNTAIN INC increased its bottom line by earning $3.16 versus $2.28 in the prior year. This year, the market expects an improvement in earnings ($3.79 versus $3.16).
- The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Food Products industry average. The net income increased by 22.4% when compared to the same quarter one year prior, going from $132.42 million to $162.08 million.
- 47.54% is the gross profit margin for KEURIG GREEN MOUNTAIN INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 14.69% is above that of the industry average.
- You can view the full analysis from the report here: GMCR Ratings Report