Business Beyond the Reef

Perhaps it is a bias that comes from working with Hawaii companies. Way out here in the Pacific, we face high transportation costs to most anywhere, especially if we ship by sea, so it is natural for our companies to aim for the high end. Thus, I pay attention when those annual lists of millionaires are published, gleaning potential markets for my clients.

The Boston Consulting Group recently did a review of the twenty world markets with the highest density of millionaire households in their populations. I haven’t found the actual study, but Bloomberg/BusinessWeek has published the key findings. The list is topped by one of my favorite places to send companies inexperienced in international business: Singapore. I send them there because Singapore is a dynamite market in its own right, the economy is generally in good shape, newbies can operate in English, intellectual property is not a huge problem anymore, the business laws are understandable, and Singapore is a gateway to far larger markets.

Hmmm, why all the fuss about China? Plenty of others to pick from.

Is your coffee only fair?

At what point does “fair trade” become a rip-off? Trade blogger Scott Lincicome got me thinking about that with his post Monday about the “fair trade” movement and the dark liquid that Starbucks sells. Scott and I don’t agree about everything (I go for a large decaf with a couple shots of raspberry syrup, whereas his tastes run to venti triple skim lattes), but I follow along with what he said Monday.

Like Scott, I have tended to assume that the “fair trade” movement is a gimmick for selling overpriced coffee, but have not felt strongly enough about it to really look into it. I have also been in numerous stores that purport to sell “fair trade” knick-knacks from developing countries, insinuating that any knick-knack not sold by them is somehow not “fair” or profiting only big multinational corporations. It’s sort of being global while being anti-globalization. Notice that I put “fair trade” in quotes. That’s because so many people use it meaning very different things. Unions and politicians use it to justify trade restrictions, as if stopping trade is somehow “fairer” than expanding trade.

Scott’s post prompted me to look at what Starbucks has to say about “fair trade”, and it turns out that the company is talking about FairTrade instead. Quite different, though there is similarity in spelling and pronunciation. FairTrade is an organization in Germany that authorizes use of its name and logo for a fee – and fees apply to both big international companies and farmers in the developing world. Starbucks pays a healthy licensing fee and coffee coops in Indonesia pay a lower certification fee. What it amounts to is that FairTrade establishes production standards for farmers, sets minimum prices said to guarantee production to those standards, and charges retailers for the privilege of saying the products they sell meet those standards.

FairTrade strikes me as similar to the folks who thought up the Green Dot environmental symbol, which was sold as a guarantee of environmental quality and become indispensable to marketing in Western Europe. It also made the Green Dot organization immensely rich and powerful. FairTrade seems to follow the same pattern. That’s not to say FairTrade is useless.

FairTrade has established product standards for bananas, cocoa, coffee, dried and fresh fruit, fruit juices, herbs and spices, honey, nuts, oil seeds, quinoa, rice, cane sugar, soybeans and pulses, tea and grapes for wine – as well as a few non-food products: gold(!), flowers and plants, seed cotton, balls for sports, and timber.

Scott quoted extensively from an op-ed piece written for the NationalPost.com in Canada by Lawrence Solomon, owner and founder of GreenBeanery, a roaster and coffee shop in Toronto. Mr. Solomon, too, is in the “fair trade” business, but he refuses to use FairTrade or other competing operations and makes compelling arguments why. He quotes a study of “fair trade” by scholars at the University of Hohenheim in Germany, who have followed closely the growth of FairTrade and its competitors:

The study, which followed hundreds of Nicaraguan coffee farmers over a decade, concluded that farmers producing for the fair-trade market “are more often found below the absolute poverty line than conventional producers.

“Over a period of 10 years, our analysis shows that organic and organic-fair trade farmers have become poorer relative to conventional producers.”

Solomon and the Hohenheim study cite the certification fees as a prime reason for this counter-inutitive conclusion. While the certification fees may seem low to us, they are exorbitant for a subsistence farmer – and the costs of improving quality standards can seem other-worldly. FairTrade, according to its website, offers subsidies for standards improvement, but I am not in position to say these subsidies are adequate. The Hohenheim study suggests they are not. Thus, the FairTrade system – which claims to help poor farmers in the developing world – actually discriminates against the poorest farmers in those same countries, but probably boosts the income of more well-to-do producers who can afford their fees. In an aside, Solomon notes that the coffee produced by subsistence farmers is organic by default – they can’t afford the chemicals and fertilizers that would make them ineligible for an organic label, but they also can’t afford the cost of getting somebody to come certify their product as organic.

It gets worse, says Solomon:

… it’s an open secret that the certification process is lax and almost impossible to police, making it little more than a high-priced honour system. Although the certification associations have done their best to tighten flaws in the system, farmers and middlemen who want to get around the system inevitably do, bagging unearned profits. Those who remain scrupulous and follow the onerous and costly regulations … lose out….

There’s more, but you should read them for yourselves. In sum, FairTrade and its competitors are simply selling a bill of goods, or perhaps a label that makes unthinking companies and their customers feel good for a moment about spending an absurd amount for a cup of coffee. In Hawaii we have a word for that kind of business. It’s a “shibai”. It comes from Japan, where it means a play or dramatic performance. But in Hawaii, shibai connotes untrustworthy, less than truthful, perhaps a scam.

Barbie couldn't make it. Photo: CarrieBee

A couple days back, the Washington Post ran an article about how tough things can be for American retail stores trying to catch on in China. There are some great lessons in the article, which focuses on the demise of Shanghai’s Barbie Store and cutbacks in China plans by Home Depot and Best Buy. To be fair, the article also talks about what other retailers, such as KFC and Walmart, are doing right.

Even more interesting, however, are comments from my friend Mike Sacharski, CEO of Pacific Enterprise Capital. Mike spent 27 years living and working in China – and I am still indebted to him for the Sunday he sacrificed to give me an inside look at Beijing’s empty and not-so-empty shopping malls and then a taste of the overrun auto dealerships. Mike has an expert’s view of retailing in China and the hazards faced by newcomers. Here’s a selection of what he has to say:

“Localizing” American products for sale in China is obvious but a bit overblown in its value. (Is anyone in Honolulu looking for a Hawaiian version of Chinese food?)

Also, the remark in the article that US manufactures have “tried to ram their made-for-American products down Chinese throats” is “so 1980’s”.  Contemporary US product providers are very sensitive to addressing local tastes.  Having said this, the greatest appeal of American-made products for Chinese consumers is that it is indeed made in America for American consumers. Chinese want the same high performance and quality standards Americans enjoy – partly for functionality and partly for prestige.  I have not heard a single one of my Chinese friends say they want an iPad with Chinese characteristics. They want the same iPad one can purchase in Honolulu.

American product suppliers can be successful in China, but they must be aware:

1. Don’t target the “China market”. Target very narrow, precise market niches. Niches in China can number several tens of millions

2. China’s consumer market is still highly fragmented by geography and life-style tastes. Last year a foreign product supplier identified 110 separate and distinct markets in China for its product. Their next job was to narrow down to the top 10 markets to concentrate their resources, channel partners, marketing and advertising

3. Don’t try to compete on “cheap price”. You don’t want these customers, they are in crowded, highly competitive market segments. If a company successfully completes its niche marketing study, their customers will be willing to pay full-price for the value they perceive they are receiving. A Chinese friend was more than willing to pay full Honolulu retail price for his iPad before it was available in China. He thought it was a bargain because of his value perception of the benefits the iPad would deliver to him. I get requests to bring iPads from the US at full retail price since they can be authenticated as the “real thing”. There is suspicion that anything sold in China contains bogus parts somewhere in the device architecture (No, I do not plan to become an iPad runner).

4. The nature of retail sales in China is changing from the old store-centered model to a hybrid:  traditional store/shelf space, mobile showroom – sales vehicles and online sales. There simply is not enough store/shelf space available to accommodate the hundreds of millions who want to shop. The entire system for displaying, selling and delivering product is changing in China.

5. Distribution channels are not as sophisticated in China as in the US where a manufacturer can deliver product to a distributor who will take over shelf-stocking, promotion and marketing from there. US product providers in China have to proactively move further down the supply–retail chain to insure success. This requires a dedicated person or two and capital to cover the additional development and operations cost

6. Know China’s limitations. There is NO cold chain outside a few major cities. I know a famous American processed meat provider who will not fill requests for deliveries outside of Beijing or Shanghai because there is no cold chain. Retail stores in China’s interior want his product, but they also want him to pay for the cold lockers and display cases in their stores (not to mention transporting the product to these locations) His response?: ”We are in the meat-processing business, we are not in the refrigeration business”

7. Using the localization of US fast-food restaurants in China as an example of market sensitivity for manufacturers to follow, in my view, is not a valid comparison. The fast food providers have not changed their American menus. Chinese consumers still want that Big Mac or the Colonel’s great chicken. What fast-food providers have done is add local food items to their American menu for a combo menu. The added local items bring more customer traffic through the door. And as every fast-food owner knows, if you can maximize your floor space usage, maximize throughput capacity of your kitchen equipment system and top-out productivity of employees (by adding congee to the menu), you do it. A Big Mac, fries and a side of congee, umm, great combo. Fast-food in China is an entirely different proposition than selling ukuleles and iPads.