In order to create a niche market, a quantitatively significant group of consumer in developed countries must be willing to purchase Fair Trade agricultural products instead of mainstream products. Consumers' role in international trade is to create demand for a given product, as without it a market dynamic cannot exist. As consumers act upon their personal interest (usually referred as consumer preference), they have to prefer Fair trade products relative to others to purchase them. In mainstream economic theories, consumer preference is always the result of a trade-off between price and quality, the only two characteristics of regular products. However, Fair Trade model has imposed a new and additional characteristic for its product, and has thus modified the regular price/quality market dynamic. Certified Fair Trade products are always more expensive than regular ones, though the difference differs among the commodities' categories. However, apart from the logo on the package, Fair Trade products are not distinct from any other products.
[...] For example, on its official Website, a whole page is dedicated on the Fair Trade movement and how Starbucks is contributing to it, also explicitly mentioning that it has purchased 18 million pounds of Fair Trade coffee in 2006.[9] Therefore, while this quantity only accounts for approximately of its overall coffee purchases (i.e.: thus keeping operational expenses relatively low), it creates a positive image for the company as a whole[10]. This positive image can in turn be transformed into profits by raising quantity sold (i.e.: more consumers might prefer going to Starbucks due to its ethical image) and as higher profit margins can by imposed on all of its beverages, even the one made with regular coffee and thus outside the niché market. [...]
[...] Based on a range of surveys, Nicholls notes that in Europe “[e]thically sensitive consumers are no longer a small, if vocal, pressure group: rather, a third of the public now see themselves as ‘strongly ethical'.”[2] In terms of geographic trends, ‘ethical consumption' is clearly the strongest in Europe, but is also significant in the United States and Canada (despite their dominant interest in environmental issues), and is existent in Australia, New Zealand and Japan.[3] Some scholars have argued that Fair Trade consumers do not act upon a consumer preference but upon a moral obligation (comparable to a religious prohibition), and thus implying that “there is no trade-off between these principles and consumer preferences.”[4] While this analysis does hold theoretically, the fact that all consumers are by nature financially restrained, albeit to a different extent, automatically creates a tradeoff in consumption decisions between price on the one hand, and quality and ‘ethics' on the other hand. [...]
[...] Within that market structure, Fair Trade products can be used as a ‘product leader' helping supermarkets to differentiate itself over its competitors. A product leader is a product that is use to draw customers into a store where they are likely to make other purchases, and is either a rare and distinct product or a product sold at a low price. Therefore, the availability of non-conventional Fair Trade products will enable to attract new Fair Trade customers, who will now make all of his purchases there, and avoid losing its current customers that have become Fair Trade customers to other supermarkets selling Fair Trade products. [...]
[...] Buying Fair Trade products evidently seem to contradict the natural interest of private businesses in a constantly growing competitive environment, where retailers' interest lies in obtaining the lowest price commodities and the control of the supply chain, as well as maximizing operational flexibility to quickly react to market changes (price, quantity, and demand). However, unlike characterizing Fair Trade as a new ethical business approach or as part of the currently growing concern towards Corporate Social Responsibility the willingness of profit-seeking retailers to offer Fair Trade products should be interpreted as a traditional business and marketing strategy to further increase the corporations' overall profit through a rise in market share and profit margins. [...]
[...] In the highly competitive retail industry, the profitability is mainly based on the quantity sold, as profit margins are very low for the majority of their products. Therefore, the size of the consumer market is highly correlated to the business potential profit. Although, within a niché market, the business strategy is the opposite, as retailers enter a market with less demand but where competition is by definition significantly lower. In that context, while consumption rates are by definition relatively low, retailers can impose higher profit margins, thus creating profits within that niche market. [...]
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