Case HIVOS

2014-12-22 True Price Cases online HIVOS

The Dutch based NGO Hivos is an international development organisation that aims to contribute, together with local civil society organisations in developing countries, to a free, fair and sustainable world. This objective can for example be achieved by making supply chains more sustainable. Hivos has used true pricing in its campaigns to initiate positive engagements with horticulture companies in Kenya, giving them actionable advice on further improving their financial, social and environmental performance.

In the coming five years, Kenyan rose farms will be susceptible to rising costs of water, materials, energy and labour, international competition and regulations to comply with workers’ rights standards. This is challenging for farms, because current small margins compared to revenues leave little absorption capacity for further cost increases. At the same time, costs can be reduced by investing in innovation, like sea freight, renewable energy and skills training for workers. This is a sticky paradox: the small margins create both a necessity and barrier to invest. How can rose farms overcome this paradox to achieve resilient and sustainable companies in 2020?

A true price analysis was conducted to identify a business case for sustainable rose farming. The study covered T-hybrid roses of 20 grams from Lake Naivasha, Kenya and compared roses produced at a conventional farm to those produced at a sustainable farm. Mapping the supply chain showed that the retail price of roses produced on both types of farms are on average the same (€0,70). Since roses are mostly sold through the Dutch auction, where it is not so easy to distinguish sustainable from conventional roses, especially with regards to social standards. The true price on the other hand was much lower for the sustainable rose (€0,74) than the conventional rose (€0,92). This difference in true price mainly stemmed from the environmental impact associated with transporting the roses through airfreight and the social impact regarding income.

The results allowed Hivos to identify various projects to reduce environmental or social costs, without reducing the margin (see Figure 18). They could map the costs of each project and their effect on the profit and loss of an average farm. For example, an intervention of training on health and safety would generate about €4.500 profit per hectare while switching to transport by sea would increase profit by €5.000 per hectare. By speaking the language of flower farm owners, the organization could demonstrate how better social standards for horticulture workers and more environmentally friendly growing and transport techniques are financially feasible, without negatively affecting their bottom line.

Some improvements in social standards, such as paying a living wage to workers, were less feasible if farm owners would have to incur all the costs. Based on an economic value chain analysis, Hivos could show how providing a living wage could be possible when a fraction of the costs are borne by wholesale, retail and consumers. This strengthened Hivos’ negotiation position in the process of lobbying for better social and environmental standards.