The hedonic price of pair trade coffee for the Italian consumer

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1 The hedonic price of pair trade coffee for the Italian consumer Maietta O.W. in Mattas K. (ed.), Tsakiridou E. (ed.). Food quality products in the advent of the 21st century: production, demand and public policy Chania : CIHEAM Cahiers Options Méditerranéennes; n pages Article available on line / Article disponible en ligne à l adresse : To cite this article / Pour citer cet article Maietta O.W. The hedonic price of pair trade coffee for the Italian consumer. In : Mattas K. (ed.), Tsakiridou E. (ed.). Food quality products in the advent of the 21st century: production, demand and public policy. Chania : CIHEAM, p (Cahiers Options Méditerranéennes; n. 64)

2 Ornella W. Maietta Università degli Studi di Napoli Federico II, Italy Consumers in developed countries are increasingly interested in the consumption of products incorporating ethical aspects, particularly fair trade products. They are usually distributed in a network of World Shops and more recently also introduced in supermarkets and shopping centres. The fair trade product with the highest share on the total is coffee. This study aims to ascertain the implicit price paid by Italian consumers for the fair trade content of coffee. The sample utilised is based on the purchase data of a representative sample of supermarket and shopping centre consumers observed from 1998 to Since scanner data are used, the analysis can allow for the numerous coffee attributes described by the labels: branded, organic, decaffeinated, fair trade, soluble, and so on. The empirical approach followed is the calculation of hedonic prices for the fair trade content and other attributes of coffee. hedonic price, coffee, fair trade, scaner data, Italian consumers. 1. Introduction Arecentfeatureofconsumerdemandindevelopedcountriesistheincreasinginterestinthe consumptionofproductsincorporatingethicalaspects[26,27].amongthelatter,fairtrade productsareprobablyofparamountimportance[16,17].forthisreason,theyhaverecently becomeobjectoftheoretical[1,12]andempiricalinvestigation[15,23]. FairtradeproductsareusuallydistributedbyAlternativeTradeOrganisations(ATOs),non profitfirmswhoseaimistopromotetheeconomicandsocialdevelopmentofparticularly underprivilegedpopulationsthroughtheinternationaltradeoffoodandhomemadeproducts. Europeanconsumershavebecomefamiliarwiththeseproductssold,withcertifiedlabels,ina networkofworldshopsand,morerecently,alsointroducedinsupermarketsandshopping centres. Coffee,whichisthesecondmostwidelytradedcommodityintheworldafteroil[10],isthefair tradeproductwiththehighestshareonthetotal:ithasreachedasignificantshareonthetotal domesticmarketincountrieslikeluxemburg,switzerlandandthenetherlands.initaly,fair tradeorganisationshavebeenlessactivethaninothereuropeancountriesbutmarketshares arerapidlyincreasing. MarketstudiessuggestthatItalianconsumersareinterestedinfairtradeproductsforquality, solidarityandequityreasons[16].theseconsiderationsprovidethebackgroundfortheanalysis performedinthepresentstudy.moreparticularly,thisstudyaimstoascertaintheimplicit pricespaidbyitalianconsumersforcoffeeattributes,includingtheethicalcontent.thesample utilisedisbasedonthepurchasesofarepresentativesampleofsupermarketandshopping centreconsumersobservedfrom1998to2002.sincescannerdataareused,theanalysiscantake account of the numerous coffee attributes described by the labels: branded, organic, decaffeinated,fairtradecontent,espressocoffee,arabicavariety,andsoon.theempirical Cahiers Options Méditerranéennes n o 64

3 approachfollowedistheestimationofthehedonicpriceforthefairtradecontentandforother attributesofcoffee. 2. Fair trade coffee Fairtradeisatradingpartnershipthatseeksgreaterequityininternationaltrade.Itcontributes tosustainabledevelopmentbyofferingbettertradingconditionstoandsecuringtherightsof marginalisedproducersandworkers,especiallyinlessdevelopedcountries[3]. Fairtradeinstrumentsare: fairprice:abonusbeyondtheworldmarketpriceandaguaranteedminimumprice; directpurchase:theproductalwayscomesdirectlyfromsmallfarmersorganisations; prefinancing:credituptoamaximum60%ofthesellingpricegrantedastheharvest starts; security: annual contracts stipulating the purchase of the product and longterm collaboration. FairtradeproductshavebecomefamiliartoEuropeanconsumers,reachingnotinsignificant shareonthetotaldomesticmarket(table1). Market shares of some fair trade products TheyaresoldinanetworkofWorldShopsandmorerecentlyalsointroducedinsupermarkets; products,likecoffee,arealsoservedinmanycorporateheadquartersanduniversitiesaswellas 46

4 municipal,nationalandeuropeanuniongovernmentoffices,likethecoffeehousesofthe EuropeanandoftheItalianParliament,theinstitutionalmarketspresentedintable2 1. Percentage of sales by market and by EFTA organisation in 2001 Finally,thetrendofretailsalesseemstobeincreasing(fig.1). Retail value (ml Euro) of fair trade organisations in Europe 1 EFTA data presented in tables 2 and 3 and in figure 1 are unpublished and have been kindly provided by Danilo Tucconi, CTM Altromercato. 47

5 CoffeehasformedthecoreoffairtradeinitiativesinEurope(table3)andNorthAmericaand remainsthemostwidelyavailablelabelledcommodity.fairtradecoffeesaleshavelevelledoff inmuchofeuropewherelongrunningcampaignshavesuccessfullyacquiredasizeablemarket presence. Fair trade coffee held an average of 1.2% of European national markets in 2000 and has capturedroughly3%ofthemarketinluxemburg,switzerland,andthenetherlands(table1). MarketscontinuetogrowrapidlyincountrieslikeNorway,ItalyandFrancewhereithasonly recentlybeenintroduced. Morerecently,thecrisisincoffeemarketmakesthiscommodityasymboloftheinequalities betweenthenorthandsouth:coffeepriceshavefallenbyover50%overthelastthreeyears,to thelowestpriceinrealtermsforatleast100years,andseemlikelytomaintaintheirrecent increasedvolatility[14,28]. Percentages of total sales by product for some fair trade organisations in Europe in 2001 Thepricedecreasehasbeendramaticforover25millioncoffeegrowersinover50developing countries where coffee is a crucial source of rural employment and foreign exchange earnings[14,20]. The crisis is mainly due to the collapse in 1989 of the quota system established by the InternationalCoffeeAgreement(ICA)thatensuredthestabilityofthemarketthroughfixed exportquotas.consumingandproducingcountriescouldnotagreeontheconditionsofanew agreementandonthedistributionoftheexportquota.thatmeantderegulationofthemarket. Thecoffeeproducingcountriesalmostimmediatelydumpedthestockstheyhadaccumulated onthemarket.theresultwasadramaticfallinthecoffeeprices,witharecordbottompricein theautumnof1992whenarabicacoffeereachedalevelsimilartothatofthethirtiesinthestock marketinnewyork[20,28].echooftheconsequencesofthiscrisishasreachedtheconsumerof thedevelopedcountriesthroughthemassmedia 2. 2 See for example, Caffè scorretto dal Vietnam, La Repubblica, 15/2/

6 3. The hedonic price model and its empirical specification Inthispaper,thehedonicpriceoftheethicalcontentincoffeeconsumptionisestimatedforthe Italianmarket.Thehedonicprice[21]isusedtoexplainthepriceofadifferentiatedproduct(or factorofproduction)andtoestimatetheimplicit,shadowpricesofitsqualitycharacteristics[5, 9,18,19,24]. Theproductwillbesoldbyanumberofmanufacturesusuallysupplyingmorethanonemodel, eachmodelhavingdifferentcharacteristics.thehedonicpricefunctionis: P = f (z) (1) wherezisthevectorofcharacteristicsfortheproductexamined. This hedonic price equation represents the equilibrium price schedule determined by the interactionofconsumersandsellersinperfectlycompetitivemarketsorwherearbitrageexists. Infact,theutilityfunctionforarepresentativeconsumeris: U = Ux (, z) st.. y= wx + f( z) (2) whereyisincome,xisacompositegoodwhichrepresentsallgoodsexcepttheproduct examinedandwisitsprice. Maximisationofutilitysubjecttothebudgetconstraintsgivesrisetoavectorofdemand functions,g,forcharacteristics: Uj( x, z) fj = = g( y P, z) (3) Ux( x, z) f U where:fj =,Uj = and zj z U U x = j x Therepresentativeconsumerwillusezjuptothelevelwhereitsimplicitmarginalprice,fj,will beequaltothewillingnesstopayforzj.equation(3)alsoshowsthatfjisproportionaltothe marginalrateofsubstituion,i.e.theratioofthemarginalutilityfromthecharacteristicjandthe marginalutilityfromtheconsumptionofalltheothergoods. Asetofj=1,..,mcharacteristicscanbeidentified,ifdataoverk=1,,nmodelsarecollectedfor aregressionofthepriceofmodelk(pk)onthelevelsofitscharacteristics(zkj). Iftheempiricalspecificationislinear,assuggestedbyArgueaetal.(1994)andFeensta(1995): P k = β m + β z + ε 0 j kj k (4) j=1 thejareestimatesofthemarginalvalueofthecharacteristics.ashasbeenmentionedbefore, inthisworkthelinearspecificationisrejectedbythedatainfavourofasemilogarithmicform. Coffeecanbedescribedasaheterogeneousgood[11,25].Infact,consumers(androasters buyers)areconcernedaboutwhatvariety 3 ofcoffeetheyacquire.sellersalsodistinguishtheir 3 Varieties are typically divided into robustas, which are more acid and higher in caffeine, and arabicas, which are milder and fragrant. Arabicas are further subdivided into Colombian milds (from Colombia, Kenya and Tanzania), unwashed arabicas (mainly Brazilian) and other milds (mainly from Central and South America). 49

7 productsbyhighlightingtheircountryoforigin,byemphasisingtheirparticularcharacteristics orbyshowingacommitmenttoorganic,shadegrownorfairtradepractices.then,nicheor speciality coffees, new types of coffee drink sold at a premium, have been successfully introducedinthemarket. 4. The data Inthiswork,scanneddataareused;theyrefertothetotalobservedpurchasesofallbrands supplyingroastedcoffeeinitaliansupermarketsovertheperiod fromiriinfoscan 4 source.brandsusuallysupplymorethanonemodel(inthisstudyitiscalledreference)with differentcharacteristics,mostofthemdescribedinthelabel.priceandsalevolumeforeach referenceisknown;finally,thisinformationisgivenforbigterritorialaggregates.thenumber ofreferencesincreasesovertime(seetable4). Fromthisanalysis,theItalianmarketappearshighlysegmentedsinceproductsofthesame brandcandifferforalargevarietyofpackagingchoice(andthenprice);also,blendrecipesare responsivetochangesinconsumerstastes(andrelativeprices)andnewcharacteristicsare offered,likeethicalororganiccoffee.thesectoriscomposedbyfewleadersandbyalarge numberofsmallfirms;competitionisstrongineachsegment.duringtheperiodexamined marketingstrategiesforbigfirmshavebeenthedevelopmentofnewpackaging(liketheeasy opensystem),thelaunchofnewproducts(forexampleespesso,whichisasolidespresso)or theimplementationofanetworkofcoffeehouseswithitsownbrand.marketingstrategiesfor medium firms have been: fulfilment of high quality standard and product differentiation throughspecialitycoffee,likefairtradecoffee,organiccoffeeorcoffeewithspecificationofarea ofplantorigin[7].finally,smallfirmstrategieshavebeenessentiallylowpricesandlocal penetration,particularlyinthesouthofitaly. Datarelatedtosharesformoka,espresso,decaffeinatedandfairtradecoffeesoldinItalian supermarketsarereportedintable4.mokaisanitalianspecialbrewerusedtopreparecoffee 5. Espressocoffeeispreparedbyahighpressuremachinelikethoseusedinthecoffeehouses. For each reference, the information contained in the label was processed and several characteristicswerederived Italian coffee is very different from the instant or filter coffee that is a long beverage. This latter is not very widespread in Italy and is mainly consumed by young people. 50

8 references price minimum maximum st. deviation Variables sale volumes moka espresso branded private label decaffeinated fair trade coffee North-West North-East Centre-Sardinia South Italy Euro/kg Descriptive statistics t % % % % t % No Therelatedvariablesarereportedintable5. Variable list 51

9 Distribution of coffee price (Euro/Kg) in 2002 in the sample used for the hedonic regression 5. The results Regressionofpriceonallcharacteristicshasbeenperformedwithrespecttothesampleof referencesreferringtothesamequantity:250gmandonepack.thenumberofobservationsis 3678.TheresultshavebeencorrectedforheteroskedasticitywiththeBreuschPaganprocedure (Chisq.= with20degreesoffreedom).OLSestimatesarereportedintable6.Onthe basisoftheresettest,thelinearspecificationisrejectedandthesemilogarithmicformis accepted. Theregressionfitisgood:theadjustedRsquaredis0.594.Allvariablesrelatedtocharacteristics aresignificant.thesignispositiveexceptforthetasteindicationvariablewhichisnegative;itis probablyaspuriouseffectsincethedummyincludesallreferenceswithindicationoftaste (strong,delicate,rich). 52

10 OLS estimates. Dependent variable ln (p) Thecoefficientontheethicalcontentisnotonlysignificantbutalsolargerinsizethanthoseon theotherattributesexceptforthegiftpackagingvariable,gift.thisvariableprobablyreflects thehigheravailabilitytobuycoffeeduringholidays[13]andtopayforitspackaging. The implicit price for the ethical attribute in coffee consumption (Euro/Kg) Finally, since the linear specification is rejected by data, the implicit price for the ethical attributeincoffeeconsumptionisnotconstantbutvarieswithprice.themarginalvalueofthe ethicalcontentincoffeeconsumptionisreportedintable7:onaverage,itis2.36euro/kgbutthe valueislowerforthesouthofitaly.noticethatafterintroducingtheincomevariable,no significantareadifferencesinthecoefficientforfairtradecontentisnoticed;then,noterritorial differencesremainintheimplicitpricepaidaftercontrollingforincome. 53

11 6. Conclusions and policy implications Theobjectiveofthisstudyistoascertainthemarginalvaluefortheethicalcontentincoffee consumptionaftercontrollingforothercoffeeattributes,accordingtotheitalianconsumer preferences. The data used refer to the purchase data of a representative sample of supermarket and shoppingcentreconsumersobservedfrom1998to2002.thecoffeeattributesanalysedarethose described by the label: branded, organic, decaffeinated,fair trade, espresso coffee, arabica variety,andsoon.theempiricalapproachfollowedistheestimationofthehedonicpricefor thefairtradecontentandforotherattributesofcoffee. Theresultsshowthatthecoefficientforfairtradecoffeeissignificantandhigh.Themarginal valueoftheethicalcontentincoffeeconsumptionisnotconstant;itis2.36euro/kgonaverage butthevalueislowerforthesouthofitaly.finally,aftercontrollingforareaincome,noarea differencesinthecoefficientforfairtradecoffeewasnoticed.thissuggeststhatfairtrade brandsshouldadoptastrategyofpricedifferentiation,similartothatadoptedbyconventional brands,inordertoincreasetheirmarketshare. Acknowledgment TheauthorwishestothankGianniCicia,TeresadelGiudice,PierLuigiRizzi,FabioVerneau andangelozagofortheirhelpfulsuggestionsanddanilotucconiforprovidingunpublished EFTAdata.Theusualdisclaimerapplies. References [1] Adriani, F., Becchetti, L. (2005), Fair trade: a third generation welfare mechanism to make globalisationsustainable,forthcominginj.whalley(ed.)globalisation,mitpress. [2] Arguea,N.,Hsiao,C.(1994), EconometricIssuesofEstimatingHedonicPriceFunctions:Withan ApplicationtotheU.S.MarketforAutomobiles,J.Econometrics,Vol.56,pp [3] Bowen,B.(2003), Let sgofair inefta,fairtradeyearbook2001, [4] Carrigan,M.,Attala,A.(2001), Themythoftheethicalconsumerdoethicsmatterinpurchase behaviour?,j.consumermarketing,vol.18,pp [5] Combris,P.,Lecocq,S.,Visser,M.(1997), EstimationforaHedonicPriceEquationforBordeaux Wine:DoesQualityMatter? EconomicJ.,vol.107,pp [6] EFTA(2001),FairTradeinEurope,Maastricht. [7] Fabro,D.(2002), Nondisoloespresso,Food,Vol.12,pp [8] Feenstra,R.C.(1995), Exacthedonicpriceindexes,R.EconomicsandStatistics,Vol77,pag [9] Freeman,A.M.III,(1995), Hedonicpricingmethods,inD.W.Bromley(eds.),TheHandbookof EnvironmentalEconomics,Blackwell,Oxford. [10] Gallenti,G.,Prestamburgo,S.(2001), Commercioequoesolidaleesvilupposostenibile:alcune riflessionisulmercatomondialedelcaffè,proceedingsofthexxxviiconvegnosidea,edizioni AvenueMedia,Bologna. [11] Goddard, E. W., Akiyiama, T. (1989), Unites States demand for coffee imports, Agricultural Economics,Vol.3,pp [12] Immordino,G.,(2002),Fairness,NGOactivismandthewelfareoflessdevelopedcountries,Workingpaper CSEF. 54

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