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For Wal-Mart, Fair Trade May Be More Than a Hill of Beans
Retail Giant Looks at Link With Coffee Farmer

By Ylan Q. Mui
Washington Post Staff Writer
Monday, June 12, 2006

POCO FUNDO, Brazil -- Rosevaldo Jose Pereira has never been to Wal-Mart. The name doesn't mean anything to the lifelong coffee farmer in this remote village in southeastern Brazil.

But Wal-Mart Stores Inc. knows who he is. And the world's largest retailer is changing his life.

Wal-Mart is in the midst of overhauling its tightfisted image to win over shoppers searching for more than low prices. That effort has taken the company that built an empire on the principle of high volume and low costs into previously uncharted territory, into the realm of trendy apparel and organic food.

Now, with the help of Pereira, it is embarking on one of its most radical undertakings to date: fair trade.

Pereira, 40, is part of a small cooperative of growers living here in the heart of coffee country, where the rolling mountains are lush with trees. The late afternoon sun is strong. Pereira wipes the sweat from his brow with his forearm as he works his six acres. Dirt is jammed deep underneath his fingernails. He has been picking coffee cherries since 5 a.m., stripping them off the branches with his bare hands. They will be dried, and eventually only the pit will be left -- the coffee bean.

Pereira gets a premium for his harvest. His co-op is one of only seven in the country that is fair-trade certified, charging above-market price for beans because it meets certain social and environmental standards.

Wal-Mart is considering bringing Pereira's beans into its namesake stores. It would be a novel arrangement for a company infamous for squeezing pennies out of its suppliers -- and a test of how deep its makeover will really go.

For Pereira, the deal could mean more money, new computers for the co-op or a bigger school for the village. Already some children talk about college and life away from the farm. But it would also inextricably bind the co-op's fortunes to the company from Bentonville, Ark. -- putting all its beans, so to speak, in one basket.

Wal-Mart executives are planning to visit Poco Fundo at the end of the month before making a decision. It's part of the new corporate philosophy outlined by chief executive H. Lee Scott Jr.: "Doing well by doing good."

It is a work in progress.

Wal-Mart Meets the Co-Op

Wal-Mart discovered Pereira and his co-op five years ago when Mark Hoffman, a buyer for its Sam's Club membership warehouse stores, visited Brazil on a scouting trip. There was nothing particularly philanthropic about his visit.

Hoffman worked for the company's global sourcing team, a now-defunct group that traveled the world finding ways to buy products for less money. The Brazil list included beef jerky, cashews and, of course, coffee.

Brazil produces roughly 30 percent of the world's coffee, exporting 26.4 million bags weighing 132 pounds each in 2004. About half of that is grown in the southeastern state of Minas Gerais, known for its iron mines and orange-red earth.

Pereira's village is there, the farms connected by dusty dirt roads. Donkeys plod along the cobblestone streets of the town center next to cars. About an hour and a half away is the air-conditioned headquarters of a company called Cafe Bom Dia.

Bom Dia is Pereira's link to the global economy, buying beans from the co-op and selling them to Wal-Mart. It counts itself among the five biggest coffee roasters and exporters in Brazil. Much of its production includes organic and fair-trade coffee from small growers such as Pereira.

Bom Dia buys beans directly from farmers and roasts them, eliminating a middleman. The company, run by the wealthy Marques de Paiva family, also grows, roasts and exports beans from its own farm.

To Hoffman, that all meant one thing: cheaper prices.

"I really didn't think five years ago when I was down there that I'd be talking about a national organic or fair-trade program," he said in an interview from Bentonville. "That had not crossed my mind."

Sam's Club already was selling fair-trade coffee from Millstone Coffee but wanted to work directly with Bom Dia to create a new line that could undercut the prices of the big names, controlling a supply chain from the ground up.

"Here was a company that first of all made a fantastic product," Matt Kistler, vice president of product and packaging innovation at Sam's Club, said in an interview from company headquarters. "But also it was a really direct-to-the-farmer opportunity for us. It eliminated or bypassed some of the traditional layers."

Supporting fair trade presents a paradox for Wal-Mart. It is a tacit admission that there is a point at which no more efficiencies can be squeezed out of the system without harming the people who make it work. Fair-trade beans are sold at a minimum of $1.26 per pound, compared with the world average last month of 90 cents. But Wal-Mart is still determined not to pay more than it must.

The company has forged partnerships with hundreds of social and environmental groups to develop sustainability initiatives. TransFair USA, which certifies farms as fair trade, is working with it on Pereira's coffee. The Rocky Mountain Institute is helping reduce the fuel consumption of its trucking fleet.

But Wal-Mart remains a lightning rod for criticism, and some groups are stepping carefully. The National Resources Defense Council has quietly worked with the retailer on everything from consumer electronics to alternative fuels over the past eight months. But a few weeks ago, organization President Frances Beinecke reminded staff in a memo that the group's name could not be used publicly in association with Wal-Mart without express approval.

"Trust is built over time," Andrew Ruben, Wal-Mart's vice president for corporate strategy and sustainability, said in an interview from Bentonville.

Or, as Kirsten Moller, executive director of the nonprofit group Global Exchange, which supports fair trade, puts it: "Wal-Mart is probably the last place in the world that we would recommend anyone shop. That makes it complicated."

Switching Brands

When Hoffman tried to bring Bom Dia coffee to Sam's Club, the first question he got was, "Well, what are you getting rid of?"

The answer: Millstone Coffee, owned by Procter & Gamble.

The brand's Mountain Moonlight Fair Trade Certified blend sold on its Web site recently at $8.99 for a 10- to 12-ounce package of whole beans, or about 75 cents to 90 cents per ounce. Bom Dia's fair-trade coffee sells at Sam's Club for $11.77 for 40 ounces -- about 29 cents per ounce.

"Just look at the cost," Hoffman said. "They couldn't come close to what we were trying to accomplish."

Hoffman's efforts to switch coffees were two years ago. Sam's Club is now Bom Dia's largest customer and one of the top three U.S. retailers of fair-trade coffee, TransFair USA said. The companies have an arrangement that displays both brands -- Bom Dia's Marques de Paiva and Sam's Club's Member's Mark -- on the packaging.

Pereira says his profit has doubled since the co-op became fair-trade certified, and he expects to sell his entire harvest of 40 sacks of beans.

Pereira sat in front of the TV recently in his new house with tile floors and a spacious kitchen after a long day harvesting coffee cherries. He converted his old house into a fertilizer warehouse. His daughter Mariana Karina, 15, has braces on her teeth. Pereira has a cellphone.

The poorest coffee farmers in northern Minas Gerais have no electricity or running water, much less the satellite dishes sitting near several of the homes in Poco Fundo.

"We dreamt to have a good house," Pereira said.

At the end of the month, Wal-Mart dry groceries buyer DeDe Priest and 11 colleagues are to visit this small town at the bottom of the global supply chain. Fair-trade coffee is carried in about 1,000 Wal-Mart-brand stores. Millstone is its leading brand. But that can always change.

The Fair-Trade Label

The first thing Joe Alcantara, president of Cafe Bom Dia's North American operations, does every morning is check his coffee sales at Sam's Club. Before the deal, Bom Dia worked with several retailers, including Walgreens, selling conventional coffee. Now its strategy is "to optimize our relationship with Wal-Mart globally," Alcantara said.

That is why the Bom Dia packaging room is filled with pallets of Marques de Paiva coffee ready to ship to Sam's Club. Wal-Mart's code of conduct for suppliers is posted at the entrance. The nutty aroma of roasting coffee lingers outside the building.

If Bom Dia expands from hundreds of Sam's Clubs to thousands of Wal-Mart stores, Alcantara estimated, sales could easily double.

At Wal-Mart, executives say a rebirth is occurring inside their no-frills headquarters. "Sustainability" and "trend-right" have entered the corporate lexicon alongside "everyday low prices." Chief executive Lee Scott drives a Lexus Hybrid.

Greg Spragg, executive vice president for operations and the No. 2 guy at Sam's Club, has christened Bom Dia's coffee his "volume producing item," which means everyone down the ladder is focused on boosting sales. "I really felt like it was important to be able to put the words that we had been using around sustainability [and] kind of bring them to life in an item," Spragg said from Wal-Mart headquarters. "What we had in these products were really great quality items at an extraordinary value."

It remains to be seen whether shoppers will buy the story.

The Organic Consumers Association posted a notice on the Web about the fair-trade and organic coffee at Sam's Club that urged shoppers to patronize independent cafes and roasters instead. Ronnie Cummins, the group's national director, said the most common complaints about Wal-Mart -- that it runs out small businesses and lowers prices and wages to unsustainable levels -- do not disappear just because the merchandise changes.

Marketing consultant Simon Sinek, who teaches at Columbia University, said labels such as "organic" and "fair trade" may work against Wal-Mart because they are losing resonance with shoppers. "Wal-Mart is the absolute pinnacle of mass market appeal," Sinek said. "If Wal-Mart is selling it, then it's not a big deal."

There is a saying that Cafe Bom Dia's Alcantara likes to repeat: "When you're working with the world's largest retailer, you can never win. You can only be winning."

Pereira's co-op depends on Bom Dia and Wal-Mart for fair-trade prices. For most fair-trade farmers, finding a willing buyer is the most difficult part of the process. About 35 to 45 percent of fair-trade-certified coffee is actually sold at fair-trade prices, according to TransFair USA. The rest goes for market value, undistinguishable from regular coffee.

If Wal-Mart has a change of heart -- if Bom Dia goes the way of Millstone -- the effect could be devastating. Wal-Mart acknowledges that.

"I think whether you say it or not, you're putting all of your eggs in one basket," Mark Hoffman said.

Alcantara has a packed itinerary for the Wal-Mart executives. A tour of Cafe Bom Dia's headquarters. A horse ride through a hillside farm. Passion fruit caprinhas and music.

But perhaps the most effective pitch will be trips to coffee farms. Pereira's home is on the agenda. Wal-Mart will come right to his door.

Pereira is not sure what he will say to the company that could determine his future.

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