5
The Market for Certified Products

Certification is a market-based tool, and so it is critical that the market for certified products is well understood. This involves giving up front thought as to why a certification program might be important, who would support it, and whether there is a need to create or stoke demand. Since the entire process is voluntary, and tangible consumer demand is not yet apparent, this area bears more careful consideration if certification is to play a role in transforming markets. Workshop participants discussed the various aspects of the current marketplace, and identified several themes that reveal opportunities to enhance certification’s impact: differentiating between business-to-business and consumer markets, recognizing the limits of consumer demand, tapping the potential of large-scale purchasers, and identifying rewards in the marketplace to help build the market.

TWO MARKETS FOR CERTIFICATION

Voluntary certification programs derive their primary authority not from governments or regulations, but from the marketplace. In theory, there are market incentives for a producer to comply with standards and become certified. However, most participants asserted that there are two distinct markets for labels, each with different informational needs that are also communicated differently. Household consumers typically want a simple, emotional connection to products. They do not need to understand the science, or be fully cognizant of production practices, but they want to feel good about what they purchased (e.g., Fair Trade products, Box 4). The commercial and business market, on the other hand, is different. There



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5 The Market for Certified Products Certification is a market-based tool, and so it is critical that the market for certified products is well understood. This involves giving up front thought as to why a certification program might be important, who would support it, and whether there is a need to create or stoke demand. Since the entire process is voluntary, and tangible consumer demand is not yet apparent, this area bears more careful consideration if certification is to play a role in transforming markets. Workshop participants discussed the various aspects of the current marketplace, and identified several themes that reveal opportunities to enhance certification’s impact: differentiating between business-to-business and consumer markets, recognizing the limits of consumer demand, tapping the potential of large-scale purchasers, and identifying rewards in the marketplace to help build the market. TWO MARKETS FOR CERTIFICATION Voluntary certification programs derive their primary authority not from governments or regulations, but from the marketplace. In theory, there are market incentives for a producer to comply with standards and become certified. However, most participants asserted that there are two distinct markets for labels, each with different informational needs that are also communicated differently. Household consumers typically want a simple, emotional connection to products. They do not need to understand the science, or be fully cognizant of production practices, but they want to feel good about what they purchased (e.g., Fair Trade products, Box 4). The commercial and business market, on the other hand, is different. There 

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0 certIfIaBlY sustaInaBle? BOX 4 Fair Trade Certification In an effort to reverse the negative impacts imposed on small farmers and artisans due to the nature of the globalized economy, the Fair Trade certification scheme attempts to “undo” what the market has done through an alternative market mechanism—certification. Specifically, fair trade certification, attempts to create socially and environmentally just global trade relationships (Jaffe, 2007). The Fair Trade system uses labeling to certify that products and trade practices are, indeed, socially and environmentally just/responsible. The “Fair Trade” label, certifies that consumers can buy sustainably produced and traded coffee, tea, herbs, cocoa and chocolate, fresh fruit, flowers, sugar, rice, and vanilla. While the main goal of Fair Trade labeling has much to do with regulating production, Fair Trade certification through alternative trading organizations (ATOs), attempts to improve international trade relations, as well as foster the complex interactions among producers and consumers (Raynolds, 2002). The Fair Trade certification movement began in the late 1980s with the first standard, the Max Havelaar label, certifying fair trade standards for Mexican coffee growers. Most Fair Trade initiatives operate within the regulations of Fair Trade Labeling Organizations (FLO) International. TransFair USA is one of 20 members of FLO. Some of the main principles of TransFair USA include, environmental sustainability, fair prices for farmers, fair labor conditions, direct trade, community development, and democratic and transparent organizations. Before certifying a product, TransFair USA follows a product from farmers to importers to manufacturers to distributors in order to assure that all Fair Trade principles have been met. There are many environmental, social and economic dimensions that arise among various stages of the Fair Trade certification pro­ cess. For example, economic and trade agreements are one of the many hurdles that small famers must overcome before certifying their products in the market. Stakeholders As Fair Trade practices attempt to foster sustainable relationships between producers and consumers, it is not surprising that stakeholder relationships are very crucial to long­term sustainability. Due to the globalized nature of agri­ cultural production, stakeholders along a supply chain can exist across many different geographic regions. Such stakeholder groups include small farmers, advocacy groups, importers, manufacturers, retailers, etc. Fair trade not only protects farmers from commodity price fluxes in the market, but it also offers small farmers the opportunity to engage in sustainable farming practices by keeping those commodity prices at a manageable level. This protection is par­ ticularly important for farmers in the developing world who sell their products to distributors and manufacturers in the developed world (Jaffe, 2007).

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 tHe market for certIfIed Products Competitors and Parallel Certification Efforts In addition to Fair Trade Labeling Organizations (FLO) International, four addi­ tional Fair Trade “umbrella” certification organizations exist. Those include the Network of European World shops (NEWS!), which mainly provides certification of Fair Trade retail products across Europe, the European Free Trade Association (EFTA), the Fair Trade Federation, which supports products with the TransFair label in the United States and Canada. Another organization, Shared Interest, also acts as an umbrella organization for producers of Fair Trade products, but is not a trade organization. Last, supermarkets, worldwide, are beginning to engage in their own certification of fair trade products without the involvement of trade organizations or umbrella organizations, such as the FLO, bringing the Fair Trade movement into mainstream consumer purchasing (Moore, 2004). Rainforest Alliance (RA), while similar in structure to TransFair USA, certi­ fies coffee, cocoa, and bananas as well as citrus, flowers and timber, while TransFair USA certifies coffee and cocoa, fresh fruit, tea and herbs, rice, sugar, flowers, honey and vanilla. A main difference between the competing certification schemes deals with the guarantee of above­market prices for producers. Market Share and Impact It is difficult for nonregulatory agreements such as Fair Trade to achieve success in the market. Without more stringent national and international laws, which emphasize minimum standards for economic, environmental and social practices, the sustainability of the Fair Trade label will continue to be questioned (Jaffe, 2007). Importers of Fair Trade products are generally paying the costs to provide certified goods to consumers. According to TransFair USA, the increase in Fair Trade prices is not always used to increase crop production. TransFair USA has found that farmers often invest Fair Trade revenues into improving their homes, sending their children to school, and on farming methods and equipment that improve crop quality, rather than increasing production. In contrast to government mandated pricing or subsidies, Fair Trade is a voluntary, market­based mechanism, by which farmers only receive Fair Trade minimum prices and premiums when buyers express a demand to buy Fair Trade products at the associated price. This affords pro­ ducers, companies, and consumers an opportunity to choose to participate in the Fair Trade supply chain or use conventional market mechanisms. Fair Trade, as a movement and market mechanism, asks consumers to change their purchasing behavior and demand that Fair Trade products be offered in the market. Requesting that consumers exhibit a demand for Fair Trade products means that they must feel a sense of “social responsibility.” Many certifying orga­ nizations and Fair Trade advocacy groups attempt to elicit this response through public outreach campaigns and awareness programs (Levi, 2003).

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 certIfIaBlY sustaInaBle? is a need for more credibility, information, and sophistication with regards to a certification program. Retail is described as being “customer-facing,” and what this means practically for certified products is that retailers are focused on commu- nicating with their customers, and the communication must be simple. For many products, participants pointed out that label space is of concern because the number of messages it can communicate is limited. Advertise- ments are short, and packaging is relatively small, so retailers think about communicating “in 5 seconds at 5 feet.” This sort of thinking may favor something like a seal or symbol that is easily recognizable (and marketed), but that also directs interested consumers to other sources of information. Still, retailers generally need and want detailed information about certifi- cations they support even if they do not convey all of that information to consumers. While the mass consumer market may not think long-term or strategi- cally about sustainability issues, major companies often do. They may see a potential competitive advantage, they may be concerned with the viability of critical resources, and they may include sustainability concerns in their long-term thinking about vulnerability. This scenario applies not only to resource-intensive industries, but also to certain tertiary industries like banking and tourism. Private firms have a vested interest in reducing risk and liability (e.g., a boycott over labor practices) and so service industries, from insurers to retailers, are paying more attention to ways that they can manage this sort of risk. WEAK CONSUMER DEMAND The state of consumer demand might be summed up by one partici- pant’s response, “Demand? What demand?” Consumers may be demon- strating more interest in and awareness of sustainability issues, but as many participants emphasized, price and convenience do still seem to be the top factors driving decisions on consumption. Customers may expect a certain level of performance from retailers they support, but they may not expect to pay extra for it. Price premia for certified sustainable products are not regulated, and the value is not standardized, making it difficult to discern what sort of value consumers might place on such goods. Put another way, there appears to be willingness but not concrete demand from consumers. A primary concern for retailers is still whether or not certified sustainable products will sell. Research on consumer attitudes suggests that consumers buy ‘sustain- able’ labels for health reasons (NMI, 2008). This might mean that consumers care less about the environmental and social outcomes that their purchases support, but it might also mean that health is the point of differentiation

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 tHe market for certIfIed Products that marketers look for. It is unclear that “sustainability” as a general term is a point of differentiation which could be branded. Many participants sug- gested that more consideration be given to health concerns and connecting those to the potential benefits of green products. As a few participants pointed out, the value proposition is an impor- tant consideration, and beyond the small market segment that is primarily concerned with the welfare of “the commons,” the value to an individual consumer buying sustainable products can often be too diffuse to be easily identifiable. Health is a personal value, whereas many of the impacts of sustainably produced products relate to distant ecosystems, producer com- munities, or the global commons. In areas where certification seems to enjoy more uptake, e.g., business-to business transactions, the value is more related to reliability and risk reduction than to concern about the commons. Typically value of the commons is the subject of collective deci- sions, meaning government. This may suggest that if the consumer market is to be significantly changed, some type of government intervention will be required through mandates, tax structures, or incentives. Finally, there may be an information deficit influencing consumer pref- erences. Still, whether through marketing or simply better information disclosure, certification systems could be doing a better job in communi- cating the benefits of purchasing sustainable products and services. Most certification schemes are focused on the “push” element, i.e., working with producers to enact and support a standard, but what is probably needed are schemes with a “pull” element, educating consumers to specifically demand sustainable products and provide clear incentives for producers to pursue certification. While marketing can be used to tell consumers what they “need”—an example being the fabricated “demand” for ruffled potato chips—many participants voiced concerns over having complex issues boiled down to marketing campaigns. The FTC, though, does focus on what consumers think about a company’s claims on a product, and it does have jurisdiction to regulate claims that are deceptive or overstated. ROLE OF LARGE-SCALE PURCHASERS Market share for certified sustainable products has been built not on consumer demand, but on negotiated agreements with companies, govern- ments, and other large-scale purchasers. This approach does offer several advantages, most notably that the commitment of several large firms can allow a certification program to reach scale rapidly. Governments, for example, are large procurers and have taken a lead in requiring sustainably sourced products and mandating LEED-certified government buildings. Retailers, too, are playing a substantial role in supporting or even mandat- ing that the products they sell be certified. Wal-mart is the oft-cited example

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 certIfIaBlY sustaInaBle? of a company that has the leverage to essentially require its supply chain to “go green,” and certification is an important tool in managing this. The reality for large businesses is that their supply chains must be sustainable, whether or not their consumers care or are willing to pay. Large retailers are practicing stewardship—they are not waiting for their consumers to demand sustainable products. Some retailers, such as Whole Foods, are also creating their own brands which they can market as being sustainable. However, participants noted that retailers are often as confused as consumers, and so despite the potential to move the market, there is still a steep learning curve for large companies seeking to become engaged. Some participants remarked that the entire process to green supply chains is not consumer driven, it is retail driven, but retailers are still struggling with how to green their supply chains. Certification certainly has a role to play, but it is not the only tool available. Many corporate efforts to green their supply chains or become more sustainable as a business have been an outgrowth of their corporate social responsibility (CSR). As firms document and report their progress in reduc- ing environmental impacts or improving social outcomes, they have sought to identify more of the impacts that they can have outside the four walls of their facilities. Almost by necessity, this has required cooperation with outside entities, more transparent reporting, and lifecycle assessments for certain products. Existing certification standards have, in some instances, become a useful proxy to report on these activities. A participant noted, though, that existing certification programs are not necessarily compat- ible with CSR efforts—the Fair Trade scheme, for example has not fit into companies’ CSR strategies well because it is perceived as being weak on environmental issues. BUILDING ENDURING MARKETS While there will continue to be interest in building or expanding the market for certified sustainable products, several participants emphasized that the most important question is: How can these become enduring markets? Producers will often need to invest in process improvements in order to obtain certification, and this can be a risky proposition if the market changes course rapidly, or disappears altogether. Marketers typi- cally emphasize a single message, such as price or effectiveness, as the point of differentiation among products. Many participants expressed skepti- cism that conventional marketing would be sufficient to communicate the nuanced information behind a certification standard. It would also require marketers to emphasize sustainability attributes at the expense of advertis- ing price or efficacy attributes. Other participants pointed to the experience with health information and food labels—providing data and information

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 tHe market for certIfIed Products makes consumers more aware, and may influence purchasing decisions, but it is much more difficult to link this to behavioral changes or positive health impacts. That being said, the marketplace today is different than it was fifteen or twenty years ago. There are new drivers, such as climate change, that have entered the public consciousness and raised awareness, to some degree, of how consumption patterns affect the environment. Participants also noted that generational differences may explain, in part, the rising demand for some certified sustainable products. Companies are now seeking to build sustainability into their brand attribute. This eliminates the need for a company to market a “sustainable” product versus its own conventional product. Though competition for sustainability credentials may lead to more greenwashing, it also signals a possible shift in consumer values. Social marketing may also be a valuable tool in shaping consumer preferences to favor sustainable products. Some participants pointed out the efficacy of social marketing efforts to reduce cigarette smoking or encourage HIV testing. This sort of marketing does not rely on differen- tiating one product from another, but involves routinization and tapping into consumers’ core values. Social marketing is not the domain of private industries, but if it were effective, it could lead to longer-term shifts in con- sumer preference to favor more sustainable products, thereby contributing to an enduring market. To understand what might motivate producers to elevate or improve their practices, it is helpful to think about the various rewards in the market- place. As has been noted, in some instances certified sustainable products could command a price premium. This is an obvious incentive, but it is not yet demonstrated for most products, and it may also make a product vul- nerable during an economic downturn. Beyond a price premium, producers may also be able to access new markets, and retailers carrying certified sus- tainable products may be able to expand their market share (e.g., drawing in more “LOHAS”1 consumers). Less tangible incentives include increased public acceptance and visibility if producers are perceived as being good corporate citizens. Much of the discussion of the market for certified sustainable products focused on consumers in the United States and other developed nations. However, as several participants pointed out, consumerism is growing rapidly in the developing world, but demand for certified products is not. Therefore, over the longer term, it will be important to find ways to incentivize developing countries to adopt and purchase certified products. 1 LOHAS is an acronym for Lifestyles of Health and Sustainability and is used to describe a segment of the consumer market that focuses on, among other things, personal health and the natural environment.

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 certIfIaBlY sustaInaBle? Currently, domestic demand appears to be a limiting factor in developing countries’ uptake of certification schemes—a stronger domestic demand could act as insurance for producers against volatility in the global market. Moreover, in some instances certification is perceived as a new constraint on access to developed-world markets. These voluntary standards are not considered globally accepted standards, and so participants noted that some developing-world producers consider certification a new “hoop” they must jump through in order to export their products to the United States and Europe. The World Trade Organization (WTO) does discourage member countries from using environmental standards as trade barriers, but, certi- fication schemes have typically been exempted because they are considered voluntary, rather than government-imposed requirements. There is likely to be much more investigation into how third-party certification regimes may act as technical barriers to trade as defined by the WTO.