Penny Newman likes to do things a bit differently. QED that defiant, pink streak in her hair. But true rebellion for Newman is about subverting the rules of business. As CEO of Fairtrade coffee company Cafédirect, she's up against some of the biggest brands on the supermarket shelf, and she wants to beat them, but not by conventional means. "Sometimes, as you grow a business, you forget about the balance of things," she says.
"Because our system is focused on the bottom line, you forget there's another way—you forget that you can build a business that is beyond profit and is instead about driving benefits back to the community in which it operates."
The coffee growers of the developing world are Cafédirect's community. Newman's firm is one of a growing list that bears the Fairtrade mark—an independent consumer label, which appears on products as a guarantee that disadvantaged producers in the developing world are getting a better deal. But it's the slightly more prosaic combination of customer focus and tight cost control that has created the opportunity for Cafédirect's social return.
Even so, Newman fears pigeonholing, because to categorise Cafédirect is to assume that the category already exists. "I've always felt that there isn't a label for us," she says. "What we're trying to do is establish a different way of trading. I don't want us to be put in a box. Listen to what we're doing rather than trying to label us."
And you do listen—Newman is compelling company—but labelling is a harder job than she imagines. To start with, Cafédirect is a social enterprise, but it's also publicly listed. It's a charitable venture, pledging to pay a "fair" price to its coffee suppliers, but its brand competes avidly with the multinationals for shelf space. Growth is high on the agenda, but not to the detriment of Cafédirect's supplier farmers: if they want to trade with rival coffee brands, so be it. And at a time when many larger companies are squeezing supply chains to eke out extra margin, Cafédirect's answer is to hand its supplier network a share in the company. Try finding a label to fit all that.
That Cafédirect even exists is a tribute to the ever-expanding buying power of the ethical consumer, but the brand's roots were established back in 1989 with the collapse of the Coffee Agreement, a Cold War pact to fix global coffee prices above the agreed $1.20 per pound. When the Soviet empire began to crumble, the US pulled out of the deal and prices nose-dived. Chronic over-supply and an overstretched supply chain—which means that from grower to supermarket, a bag of coffee beans can change hands as many as 150 times—have combined to keep prices low.
All of which is great news for coffee buyers, but a disaster for those whose livelihoods depend on selling the stuff. And since over three-quarters of the global supply of coffee is produced by small, family-owned farms, most growers don't have the bargaining power, or the expertise, to negotiate a better deal with their multinational customers. As a result, many farmers sell their beans for less than they cost to produce. "And if you can't cover your costs of production, you can't invest in the business and there's no way you can diversify, which leaves you to the extremes of the free market," says Simon Billing, information manager at Twin Trading, one of a band of alternative trading organisations (ATOs) aligned to the Fairtrade cause—and a Cafédirect investor.
The documentary film Black Gold, released in the UK in June, explores the effects of globalisation on Ethiopia's poorest coffee growers. Even with a full crop, depressed prices are forcing malnourished grower families to abandon their farms and survive on government handouts. The poverty isn't confined to Africa. Raul del Aguila, of Peruvian Coffee cooperative Junta Nacional, says coffee farmers in Latin America are "suffering the worst crisis in 100 years".
Two years after the collapse of the Coffee Agreement, Twin Trading, Oxfam, and social ventures Traidcraft and Equal Exchange, founded Cafédirect in an attempt to establish a better deal for coffee growers. It pledged to pay its suppliers either the Fairtrade price—set at $1.26 for Arabica beans and $1.06 for Robusta—or 10 per cent above the market price, whichever was higher. Safeway and Co-op were the first retailers to trial the product and its success over 12 months made Cafédirect the first Fairtrade brand to gain a national distribution contract.
But as the company grew, so did the cost of staying afloat. Soon the company became starved of cash—and direction. Newman, who was regional product marketing manager at the Body Shop, was brought in as managing director in a bid to steady the ship. "It needed leadership," she says.
Her first job was to write a business plan, outlining the future of the brand. "I thought: this can't be another ethical business that doesn't reach its true potential," she recalls. "It needed to be positioned more as a business, and less as a charity. You've got to work at everything that every FMCG works at—the coffee needed to look good, taste good and run off the shelves. Its heart had been on the farmers' side, but unfortunately we were forgetting about the consumer side."
It's a difficult balance to strike. While the founders wanted to stay true to their original blueprint, they needed to widen the net of potential customers which, for a small, socially-oriented venture, meant spending cash it didn't think it could afford to spend. Newman's arrival changed all that. "If the consumer doesn't drink the coffee you can't help the producer," she says. Newman set about growing the brand, adding more products to the portfolio, arranging strategic tie-ups and raising her own profile to try and lift the brand into the public consciousness.
At the same time, she wanted to improve the company's relationship with its growers. The Fairtrade mark is largely about the price paid to farmers, but the Cafédirect model is about developmental support. Some 86 per cent of the company's 2005 operating profit went on training. "What we've worked on is building a relationship with suppliers," she says. Newman is keen to distance her model from the concept of aid. "The farmers want to learn how to trade effectively. We teach them governance, how to turn from a farmer into a taster—so they can be more mindful of quality—how to market their product locally, and how to get into supermarkets in their own country."
A 2004 IPO was fully subscribed in under four months, with £5m raised, although shares are not traded on a public exchange. Instead buyers and sellers are linked up through Ethex, an exchange described by its creator, Triodos Bank, as "an ethical matching service to buy and sell genuinely ethical shares and bonds". The issue raised publicity as well as cash, and trading since has been brisk. Cafédirect is now the UK's largest Fairtrade drinks company, with a 39 per cent share of the Fairtrade coffee market. Its latest results, released this month, show a nine per cent rise in revenue, much of it attributable to a 41 per cent increase in out-of-home sales, a result of new relationships with distributor partners to get the brand into workplaces and schools—an important additional sales channel, given the high cost of competing on the supermarket shelves.
At flotation, Newman engineered a board review, giving executive positions to two grower-partners, plus a consumer representative. The founders now own 40 per cent, the growers own five per cent, and the public owns the rest. She understands the inherent conflict of interest in a social venture that suddenly becomes answerable to shareholders. "Somebody said to me yesterday 'you can't be a social enterprise and a plc', but I think we can because the vision is social—driving benefits as well as producing a profit."
Will Oulton, head of responsible investment at FTSE4Good, says a company needs focus in order to balance the two. "Cafédirect is a business with a clear mission, which is focused on one part of a very broad social agenda," he says. "It proves it can be done, but it doesn't prove that it's easy." He says there are some good examples of companies aligning profit growth with a sustainable agenda: "Look at the work that Stuart Rose is doing at M&S. His approach is that there is a benefit to being greener—as well as providing increasing growth for shareholders."
Starbucks is one company having trouble keeping all its stakeholders happy. The Seattle coffee giant is keen to build an ethical reputation, despite discrepancies between the price at which it buys coffee and the retail price. A cup of coffee made from Sidamo, a regional variety of Ethiopian coffee, fetches anything up to £2 in a Starbucks store. For their efforts, the farmers will be lucky to collect as much as two pence.
To add to the imbalance, Starbucks recently opposed the Ethiopian government's effort to trademark Sidamo. The two parties have since agreed a truce, with Starbucks not stopping the application, despite concerns it will open the floodgates to other grower nations seeking a larger share of the takings. It's an example of how incompatible ethics and big business can be. Even the most fair-minded CEO must be aware of the impact of his or her efforts on the firm's share price.
Ultimately though, it's up to investors and consumers. UK shoppers spent £290m on ethically-traded products last year, a 46 per cent increase on 2005. A growing proportion of that total can be attributed to larger multinationals, some of which are cashing in on the Fairtrade label's fortunes by adding a little ethical sparkle to their own ranges. In some cases, only lip service is paid to the concept of truly "fair" trade.
Newman says some of Cafédirect's growers are concerned that the so-called "big five" coffee roasters, Nestlé, Kraft, Procter & Gamble, Sara Lee and Tchibo, might muscle their way onto established Fairtrade territory, imposing their own interpretations of ethical trading. "Our rivals' products may carry the standard, and therefore the Fairtrade mark, but it's just for that product," she says. "Cafédirect does more than what it's asked to do by the standards. Running through the DNA of our company is fairness—in ownership, and governance."
Newman believes in her suppliers' ability to trade themselves out of poverty. She also believes that the laws of business aren't fixed. Perhaps our preoccupation with size will eventually dissolve, she says. "A lot of companies think that because they are large they are doing it right. Well that's wrong—all sorts of things might have made you the size you are. I think things are changing and we're more inquisitive about where things have come from. We're starting to say, 'you might be number one, but how have you got there?'"
