Striving for more sustainability in the chocolate
industry: the role of private governance in
global value chains
Abstract
In January 2021, Carol Davis is given the daunting task of producing
recommendations for improving the impact of her organization's Fairtrade
International sustainability program as many major chocolate brands turn away from
their certification to create their own sustainability programs. This case depicts the
chocolate global value chain and the challenges faced by cocoa farmers. The case also
depicts the challenges that Fairtrade is facing to stay a relevant player. It invites
students to follow Davis' journey as she attempts to identify the roots of the issues that
prevent sustainable labor conditions in the chain. It provides a rich context to
understand both the goals and shortcomings of various private sustainability
initiatives that attempt to improve sustainability along the chocolate value chain.
1
Introduction
In January 2021, Carol Davis, a sustainability officer at Fairtrade International
(see appendix 1 for a description of the organization), was relocated to the African
office in Nairobi, Kenya. The regional manager summoned her to discuss the pressing
sustainability issues that threaten the cocoa value chain (see appendix 2 for a snapshot
of the industry). The livelihood of many of the eight million smallholder cocoa
farmers worldwide remained precarious and new programs were needed to help
secure better terms of trade. A case in point: despite numerous attempts to make the
cocoa value chain more sustainable, the majority of cocoa farmers earned about USD
$0.78 per day, significantly below the poverty line of $1.90 set by the World Bank
(Fountain & Huetz-Adams, 2018). Chocolate also was regularly in the news for issues
related to child labour and modern slavery. And cocoa plantations were destroying the
rich biodiversity of West Africa’s forests.
To address these issues, Fairtrade has put in place a range of tools to support
cocoa farmers. It has unfolded training programs for farmers on yield, plantation
management, household income management and child awareness. It has developed
premiums that can be reinvested to support certified farmers and enable the
construction of social infrastructure such as wells and schools (Fairtrade, 2021b). It
has initiated advocacy campaigns to raise awareness among consumers, governments
and businesses of the plight of children and farmers. It has developed the Living
Income Strategy that publishes Living Income Reference Prices for producers
depending on their country. These price references allowed them to set the minimum
"sustainable" price that producers should receive to have a living income and to raise
awareness of fair prices (Veldhuyzen, 2019). And it has developed a mass balance
approach where companies can increase their engagement by mixing certified and
2
non-certified cocoa beans during the shipping and manufacturing of chocolate bars
(Fairtrade, 2021e). All in all, Fairtrade certification offers smallholder farmers a
minimum price to protect them against market price drops but also provides access to
credit and an additional premium to invest in commercial or community projects. The
Fairtrade certification has enabled 440 226 producers (Fairtrade, 2021d) to receive
more than 37€ millions of premiums to cooperatives and communities in 2020,
Overall, Fairtrade certified farmers report an 85% increase in income, living above the
extreme poverty line (Fairtrade, 2021c).
The recent decision of several leading chocolate companies to drop their
collaboration with Fairtrade International and develop their own in-house
sustainability standards were therefore met with surprise and consternation. The
world’s leading chocolate company Mars Inc. decided in 2018 to launch their own inhouse Cocoa for Generations sustainability program, following the path of Mondelēz
International with its Cocoa Life certification. Does the move towards in-house
standards undermine Fairtrade International’s efforts to support smallholder cocoa
farmers? Will other companies follow Mars’ lead and develop their own internal
certification programs as well? The prospects were daunting with the persistent
sustainability challenges in the cocoa value chains. This trend has consolidated in
other industries, a prominent example being Starbucks in-house ethical sourcing
program in the coffee value chain.
Davis and her team understood that no company, government, or NGO had the
capacity to drive all the changes needed to build a sustainable cocoa supply chain by
itself. But to be able to act, there was an urgent need to better understand the
bottlenecks that impede sustainable global value chain in the cocoa sector.
3
The roots of challenges in the cocoa value chain
To begin her investigation, Davis decided to meet the actors involved in
different steps of the supply chain (figure 1), from beans to bars, starting at the “first
mile”: the small cocoa producers.
Figure 1. Chocolate industry value chain
Source: Adapted from Fountain and Huetz-Adams (2020)
From beans
Early in March, Davis flew to Ivory Coast to meet prospective cocoa farmers
that were not certified by the Fairtrade certification. When she arrived in the remote
village of the Bangolo department, the rich smell of cocoa overwhelmed her with a
familiar sensation (Ryan, 2019). It was harvest season. Every year, two million
farmers across West Africa collected the cocoa pods during this period, opened them,
collected the beans and let them dry in the sun (Ryan, 2019). Like so many other
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cocoa villages, the community had a dire lack of health and educational infrastructure
(Aglionby & Atkins, 2018). Davis met Moussa Ibrahim, who invited her to visit his
small farm of less than two hectares (Fold, 2001). He and his family lived in a small
mud house with no running water or electricity (Ryan, 2011). During the day, the
whole family contributed to the cocoa harvest, including the children (Hebbar, 2007),
to harvest the cocoa pods by hand (Voora, Bermùdez, & Larrea, 2019). Ibrahim
explained that they lacked financing service to make improvements on their
plantations, nor did they have disease-resistant agricultural alternatives (Hebbar,
2007). Davis knew from her own research that each year 30-40% of the world’s cocoa
production was lost to disease (Ryan, 2011). Ibrahim’s harvest was very small,
amounting to an average of 4 bags of cocoa beans per year (Pilling, 2019). As a
sharecropper, Ibrahim had to return 2/3 of his harvest income to the owner of the land
(Ryan, 2011).
The visit of Ibrahim’s farm confirmed Davis’ concern that many cocoa
smallholder farmers’ livelihoods remained precarious. Ibrahim explained that he had
no choice but to rely on his children’s help on the field because farming was labor
intensive yet paid manpower was too expensive. His children, like many others on
cocoa plantations, started working on his plantation at the age of six or seven, and had
been using sharp objects, such as machetes, since the age of eight. Children were
unfortunately injured regularly while working on cocoa plantations (Aglionby &
Atkins, 2018). Through further research, Davis ascertained that child labor was very
high in the cocoa sector, with an estimated 2.1 million children working on
plantations in Ivory Coast and Ghana alone (Fountain & Huetz-Adams, 2018).
At the end of the harvest, Ibrahim would go to the nearest buying station to
sell his few bags of cocoa (Ryan, 2019). The beans were never bought directly from
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brand-name confectionery companies but rather purchased by intermediaries, i.e. local
trading companies (Fold, 2002). Since there were only two buyers in his isolated
village, Ibrahim sometimes had to travel further to reach a large center where there
were about twenty buyers (Ryan, 2011). The price that Ibrahim would receive from
the traders was each year a source of tension. He knew that a low price would imply
little income and therefore a loss of means to take care of his plantation and his
family. Several years of low prices could lead to a vicious cycle as lack of investment
in cocoa trees increased the risk of disease and productivity declines (Fold, 2001).
Cocoa smallholder farmers were constantly threatened by price volatility.
To traders
Davis next traveled to a larger trading center in the region of San-Pedro, closer
to the port, where there were about 20 buyers to understand how cocoa prices were
set. She met local trader Jean Kouassi. In these cocoa beans buying stations, the price
that traders like Kouassi offered to smallholder farmers depended mainly on the world
market price of cocoa which fluctuates greatly from year to year. But because the
competition was fierce between traders, many offered more to attract farmers. These
extras often involved machetes, pesticides, loans, etc. (Ryan, 2011). However, since
2019, the Ivorian government set up a minimum price for cacao beans to protect
farmers from this fluctuation and global drop in prices. This initiative was well
received by organizations like Fairtrade, as they were themselves trying to fight this
downside of market mechanisms (Fairtrade-Canada, 2020a). But 2 years later, the
government announced a drop of 17,5% of this minimum price (Conseil du CaféCacao, 2022).
6
Intermediaries as Kouassi played a strategic role between farmers and
chocolate makers, as they were the link between the big companies and the millions
of farmers in the country. Kouassi explained to Davis that to be able to buy
sustainable cocoa from farmers and respond to chocolate manufacturers demand,
traders were responsible to promote sustainability initiatives such as Fairtrade to
farmers. Indeed, large manufacturers would sign contracts with them with
specifications that traders and exporters need to fulfill (Gboko, Ruf, & Faure, 2020).
In doing so, traders sometimes even gathered farmers into cooperatives to get a
specific type of beans (e.g. Fairtrade or organic beans). It’s a volume business, stated
Kouassi, so they need to purchase large volumes of cocoa to make a profit (Ryan,
2011). Kouassi was buying different type of cocoa beans to expand his income, i.e.
organic cocoa and certified sustainable cocoa (like Fairtrade) but also conventional
cocoa. Once traders have met their certified or organic cocoa volumes for chocolate
manufacturers, they would continue to purchase conventional cocoa. This situation
led farmers to sell their certified cocoa as conventional when the market demand for
certified cocoa was reached. Therefore, farmers would not benefit from a higher price
for their higher quality cocoa beans. Kouassi claimed that it was a common
occurrence for farmers.
At this point, Davis and Kouassi joined the other traders setting out for the
port to send their beans to the storage centers (Ryan, 2011). On the way, Davis
learned more about the cocoa route and the processing sector of the chocolate
industry. Kouassi explained that the local processing plants don’t store the beans
because of the risk of infestation by insects or the deterioration of the beans due to the
humid tropical climate (Fold, 2002). Instead, trading companies export cocoa to
specialized storage centers in places like Amsterdam, which was one of the most
7
important warehouse centers in Europe. Overall, most of the cocoa from West African
countries was exported to the European chocolate industry, making farmers in West
Africa extremely dependent on the demand from Europe (Fold, 2001). Globally,
Netherlands was the largest importer of cocoa beans with USD 2.4 billion, followed
by the United States with 1 billion and Germany with 777 million in 2020 (UN
Comtrade, 2021). Netherlands imported that year 895 thousand tonnes of cocoa and
91% of it was from West Africa. The country placed itself as an important European
hub, as it re-exported cocoa beans and semi-finished cocoa products to other
European countries (CBI, 2021). Over the decades, the number of international
trading companies had decreased considerably, from 50 small- to medium-sized
enterprises to the very few that remained (Fold, 2001). This was the result of changes
in economy of scale and the centralization of the processing segment. The largest
processing companies now had their own supply subsidiaries in the cocoa-producing
regions (Fold, 2002), allowing Ivory Coast to become the leading cocoa processing
country in the world in recent years (ICCO, 2021) and placing Netherlands in second
place (CBI, 2021). The market was highly concentrated as it was dominated by 6
large and well-known companies, the largest processing and chocolate manufacturer
being Barry Callebaut (Fountain and Huetz-Adams, 2020). These processing
companies deal with grinding the beans into butter, powder, and liquid.
To chocolate bars
Davis next explored the downstream segment of the chocolate industry's value
chain: chocolate manufacturers. They had grown in size and power over time. Carol
noted that it was hard to distinguish between the processing and manufacturer sectors
because large companies had vertically integrated their value chain (Fold, 2001).
8
Apart from recognizing the packaging in supermarkets, few people – including herself
– knew this industry. Chocolate manufacturers were large companies from the North,
mainly European and American. The market was dominated by 5 major players,
namely Mars, Nestlé, Mondelēz, Hershey and the Ferrero Group (Candy Industry,
2022). These companies were only involved in production and marketing of global
brands. In the United States, the market was even more concentrated: these 5
companies shared almost 80% of the market in 2020 (Hershey’s, 2021). The
concentration of chocolate production companies was partly due to the slow growth of
the global market. The only way for companies to grow was through acquisitions and
mergers of small companies with strong local brands in national markets (Fold, 2002).
This was why multinational chocolate companies wielded great power throughout the
value chain.
When it comes to the last step in the value chain, Davis simply had to go to the
closest supermarket to her home. Indeed, 55% of chocolate products were sold in
supermarkets (Ryan, 2011). She learned there that, despite the appearance of choice,
the majority of products on the shelves belonged to the biggest companies.
Supermarkets thus exercised great control over the sale and prices of the products
because the market was highly concentrated and shelf space was expensive. This
made it difficult for a small chocolate company with little bargaining power to gain a
foothold in a supermarket (Ryan, 2011).
The rise of in-house standards
Equipped with a better understanding of the cocoa value chain, Davis grasped
more clearly the importance of Fairtrade certification to achieve farmer resilience in a
market with very volatile prices. However, many downsides in the system still
9
prevailed. One big issue Davis witnessed in the field is the limited reach of the
Fairtrade certification among producers. So far, Fairtrade certified cooperatives in
Ghana brought together only 87,907 farmers, which represents 10.2% of the total
number of farmers (Fairtrade-Canada, 2020b). Many farmers saw no point in
engaging with third-party certifications and complying with the extensive
requirements because the priority for farmers was to receive cash as soon as they sold
their beans (Ryan, 2011). Sometimes the prices paid by the certification (even though
more attractive) took longer to arrive. The cost of certification itself was also a barrier
to reach small, isolated farmers. Many couldn’t afford the cost in the first place.
Certification was a long process which took several years of work before having the
seal and the right to sell on the sustainable market. In between, the farmers had to
invest considerably in their production to meet the Fairtrade requirements and pay for
the audits that would evaluate them (Van Dijk & Trienekens, 2012). Moreover, once
they obtained the seal, smallholders didn’t have the guarantee that they would be able
to sell their certified cocoa on this sustainable market, because its size was still
insufficient to absorb the sustainable cocoa produced. Thus, producers often did not
recover their investments and their production costs exceeded their sales. Another
issue was that the certification of cocoa beans was a difficult process to monitor and
was open to manipulation (Aglionby & Atkins, 2018). Davis heard many stories of
“decoupling practices” cases where local farmers and producers dissimulated
compliance with the requirements of the certification without necessarily fulfilling the
requirements. One such case is child labour, which, in some countries, it had become
a common practice for decades. Davis saw in the ground that the initiatives of local
governments to prohibit child labor had limited reach so far because local people still
10
culturally accepted the practice. The numbers of farmers involved, often in remote
locations, made ensuring full compliance impossible.
Davis was aware that Fairtrade International was not alone in trying to build
resilient supply chains in this industry. Leading companies, especially, were
developing CSR initiatives and their own in-house certification programs. In-house
certification were policies and programs created by companies to regulate themselves
without any intermediary involved (Jaffee, 2012), raising therefore suspicion among
public and civil society actors. For example, one of the key market leaders Mars Inc.
has implemented a series of programs to improve productivity, diversify incomes, and
increase opportunity in farming communities. Mars committed to being 100%
sustainable by 2025. To achieve this goal, they have partnered with local cocoa
farmers' cooperatives and NGOs – such as Fairtrade, Rainforest Alliance and UTZ
Certified – to certify cocoa beans as free of child labor and to improve the living
conditions of farmers. They offered such benefits as a premium price for farmers'
cocoa beans, running water, harvesting equipment, schools and loans for farmers
(Ryan, 2011). Mars also launched its own in-house sustainability program, namely the
Cocoa for Generations in 2018 with a $1 billion investment (Mars, 2021). They set up
several measures to tackle the social and environmental challenges of the value chain.
Part of their broader Sustainable in a Generation Plan, Mars had considerably invested
in and shifted their supply chain and sourcing management strategy. In that sense,
their Next Generation Supplier program was dedicated to make the supply chain more
sustainable by engaging their first-tier suppliers in improving their sustainability
performance (Mars, 2022). To do so, they put in place an industry-standard approach
with third-party compliance audits to identify issues and risks.
11
Mondelez was also switching gradually all its brands to its own in-house
sustainability programs Cocoa Life, with the promise to source 100% of cocoa
through their program by 2025 (Cocoa-Life, 2022a). At the end of 2020, Mondelēz
brands were sourcing 68% of their cocoa through Cocoa Life. Their program was
based on three pillars, i.e. sustainable cocoa farming businesses, empowered cocoa
communities and conserved and restored forests. To monitor their impact and
progress, they relied on two independent third-party organizations, FLOCERT and
Ipsos, who conducted research and performed audits (Cocoa-Life, 2022b). In sum, the
biggest players in the industry were all gradually switching to their own sustainability
program and certification, engaging in activities on the ground with producers and
collaboration with many different organizations. In addition to Mars and Mondelēz,
Davis noted key other players were following the same trend, such as Lindt &
Sprüngli with its Farming program, Nestlé with its Cocoa Plan and Barry Callebaut
with its Cocoa Horizons program.
Despite years of commitments to different programs and initiatives, companies
still struggled to make significant improvements along their value chains. It appeared
then that they lacked the resources or the capacities of transforming their practices
beyond their walls, as sustainability was not their primary reason-to-be. Moreover,
considering their position in the value chain, these companies were often blamed for
not really engaging in sustainable commitments and use their CSR initiatives more as
marketing strategies that real willingness to change. Some would further say that they
managed to impose their interests to third-party organization (Jaffee, 2012).
In witnessing the rise of in-house sustainability certifications in the sector,
Davis was worried with the effects of the proliferation of in-house certifications and
12
CSR initiatives. In particular, there were concerns that this new trend of in-house
standards would create confusion in the market for sustainable cocoa products and
reduce the potential impact that multi-stakeholder certification might have.
Consumers didn’t understand the meaning of multiple labels. From the point of view
of producers, they confided to Davis that they would probably face reduced market
benefits as there will always be “yet another” standard or CSR to which they must
conform, not necessarily reaping any benefits from it. Moreover, they would also face
reduced market access as they were becoming dependent on the company’s
certification whereas third-party certifications were internationally recognised labels
purchased by many companies.
There were also growing concerns regarding the legitimacy and credibility of
in-house sustainability programs as they are managed internally, thus reducing the
transparency of their practices. Indeed, one of the biggest differences between inhouse certification and third-party certification is that both the standards and the
conformity assessment processes of the latter is led by third parties that are
independent of interests (Potts, 2017).
Looking ahead
Despite the work of companies and NGOs, many children are still working in
the fields (Aglionby & Atkins, 2018) and the living conditions of many farmers
remain under the poverty line set by the World Bank: “The problem is too complex to
be solved by a simple consumer initiative. Simply paying registered farmers more for
beans won’t make them better producers” (International Cocoa Organization
representative) (Ryan, 2011).
13
Chocolate industry experts, companies, governments and various stakeholders
have all been looking for different solutions to resolve the socio-environmental issues
of this global value chain. How can Fairtrade International and other certifications
work to scale their impact to continue being relevant players in the field? Maybe even
more importantly, how can the different players support each other to bring the
systemic changes that are needed? What about government interventions? With these
questions in mind, Davis started producing recommendations for Fairtrade
International certification and its partners to increase their impact on the sustainability
of this industry.
14
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Appendices
Appendix 1
Fairtrade international: certifying sustainability initiatives
Fairtrade International (Fairtrade, 2021a) is a non-profit organization that aims
to make trade fairer, especially for farmers and workers in developing countries. To
achieve this, Fairtrade specializes in the creation of standards and product
certification. In particular, Fairtrade International works to provide a code that
encourages farmers to change their behaviour and adopt better, more responsible
production practices in exchange for an equitable and reliable market for their
products.
The Fairtrade system has different branches, starting with Fairtrade
International, which creates the Fairtrade standards and coordinates the activities of
all its organizations. Secondly, the system is composed of 3 regional producer
networks: the Latin American and Caribbean Producers' Network, the African and
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Middle Eastern Producers' Network, and the Asian and Pacific Producers' Network
(CLAC, Fairtrade Africa and NAPP respectively). These regional associations have
the mission to support certified producer organizations. Today, Fairtrade is made up
of approximately 1700 producer organizations, representing 1.7 million farmers and
workers. The Fairtrade system also has over 25 national Fairtrade organizations that
market and promote certified products in consumer countries, seeking to educate
consumers to pay the "fair" price.
Normally, in setting up their certification requirement, Fairtrade certifications
align to existing national laws but also pushes beyond, adding more steps and
requirements that push supply chains to more sustainable practices. To ensure
compliance with the standard, Fairtrade partners with FLOCERT, an independent
certification body that inspects producers and traders. Because third-party
certifications are voluntary commitments of producers and companies to the
adherence to certain standards, enforcement of the rules is not an easy task. Fairtrade
is thus a complete system that, to achieve its goals, mobilizes various actors and
stakeholders.
Fairtrade logo
Appendix 2
A snapshot of the chocolate industry
Chocolate is a widely consumed product throughout Western societies. Indeed,
the European and American markets are the biggest consumers of chocolate (Fold,
18
2002). Global chocolate consumption was 7.25 million metric tons in 2014 (Gallo,
Antolin-Lopez, & Montiel, 2018). Overall, the chocolate industry has a retail market
value of USD 106.19 billion in 2017 and consumes 43% of the world’s cocoa
production. The cocoa sector market itself is projected to grow by 7.3% to reach a
value of USD 16.32 billion in 2025 (Voora et al., 2019).
At the base of the chocolate industry’s value chain are the farmers, who
produce the essential component of chocolate: cocoa. At the other end of the chain are
the consumers (Fountain & Huetz-Adams, 2018). In between, a multiplicity of actors
function to sell cocoa, transform it and turn it into a value-added product. The value
chain of the chocolate industry is roughly divided into two segments (Fold, 2002).
One consists of the cocoa processing companies, which are responsible for
transforming the beans into liquid, powder or butter. The other segment is made up of
the chocolate manufacturers, which use the processed cocoa products to create a
value-added product.
Thus, manufacture of chocolate begins with the production of cocoa, which is mainly
located in tropical and humid areas (Gallo et al., 2018). West Africa is by far the
leading cocoa producing region, accounting for about 70% of world production, with
40% coming from Ivory Coast, 15% from Ghana and 5% from Cameroon and Nigeria
(Hebbar, 2007). Over the decades, this region has earned a reputation for the quality
of its cocoa, due, in particular, to its drying technique (Fold, 2002). Today, however,
90% of West Africa’s forests have disappeared, having given way to cocoa
plantations (Fountain & Huetz-Adams, 2018). This represents the biggest
environmental issue in the sector. The rest of the world’s production comes from
South Asia, South America and Central America (Hebbar, 2007). Worldwide, the
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cocoa sector provided income for 40 to 50 million people in 2012, including 5 million
farmers (Voora et al., 2019).
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