Fair trade label retains purchasing power despite recession, study shows

Researchers from the University of East Anglia and the University of Manchester in the UK explored the performance of ecolabels during a recession. In the study,​ entitled “Ecolabels and the economic downturn”, released on 4th December 2023 in PLoS ONE, the scientists analysed consumer purchasing behaviours of goods with fair trade and organic labels on their packaging.

Examining ethical purchases using market data from a major UK supermarket chain, the research indicated that even when consumers’ budgets are stretched and disposable income is reduced, consumers are more likely to continue to make expensive ethical buys like shopping for fair trade products.

The researchers explored the 2008 economic recession and its impact on consumer expenditure on eco-labelled food products. Using UK supermarket loyalty card data, the researchers showed that the recession had vastly different effects on the spending share of various eco-labelled groceries.

Ecolabels as a strong sustainability signal​

The scientists’ specific research question was motivated by an interesting observation in trade reports that claimed that organic grocery sales in the UK had fallen while in contrast, fair trade sales had held up during the 2008 economic downturn.

“This seemed contrary to intuition as we know that during an economic downturn, consumers become more price sensitive—so, we decided to test if this was indeed the case,” Dr Jibonayan Raychaudhuri, lead study researcher and Associate Professor in International Economics at the University of East Anglia, told FoodNavigator.

With the belief that sustainable consumption is essential for creating a more equitable, resilient, and environmentally friendly world, the researchers sought to explore ethical labels’ impact on improving sustainability. “We felt that this research was important since ecolabels are now seen as an effective policy tool to change consumption to more sustainable levels.”

Economics plus social psychology explains findings​

During the study, the researchers from the University of East Anglia and University of Manchester analysed the sales volumes of fair trade products and organic items. They found that while fair trade product sales increased, organic product sales declined. However, the reasons for this remain elusive when using typical financial measures.

“We found that traditional economic theory could not explain our results,” said Raychaudhuri. “We would expect sales to fall across all eco-labelled products because these products tend to be more expensive than their non-labelled counterparts.”

However, the researchers found that recent behavioural economics models combining economics with social psychology could offer valuable insights. They found two models that could suggest a plausible explanation for their findings: The “model of salience” and the “model of reputation signalling”.

“The salience model states that consumers evaluate products by comparison and focus on product attributes that are most noticeable or important to the consumer.” As a result, these attributes are thus ‘salient’.

“The recession led to a negative shock in all consumer budgets,” added Raychaudhuri. The salience model anticipates shoppers becoming relatively less price sensitive and focusing more on products' public good qualities. “Hence the rise in expenditure shares of fair trade products.”

Moral motivations and identity play a crucial role in consumers’ decision-making in the signalling model. “Consumers derive utility not only from the direct consumption of a good but also from moral costs or rewards associated with the public good features of the product,” explained Raychaudhuri. Therefore, the signalling model also directly implies a non-reduction in fair trade expenditures.

Social image considerations offer a further explanation. In the context of food shopping, the influence of social norms is through social distinction or reputation as a motivation for prosocial behaviour.

“Because food consumption is, for the most part, not a public activity, social reputation is considered (in general) less compelling in explaining food consumption than theories of identity or morality.” However, more recently, insights suggest that for eco-labelled food and fair trade in particular, social norms play a role, the researcher relayed.

Fair trade versus organic products​

The researchers’ results highlight fair trade’s recessionary staying power compared with its organic counterparts’ declining nature. Following this gap between two seemingly prominent labels in the environmental food space, the industry may wonder what this suggests about consumer preferences for fair trade labels compared with organic labels.

However, the industry does not yet have these answers. “Despite the large market share of these eco-labelled products, there is still no clear understanding about how consumers make choices in this market.”

The food sector does know though, Raychaudhuri added, that as well as price and quality, consumers also evaluate a product’s “public good” features. “They might be concerned about the environment when deciding to buy a low carbon footprint product, concerned about their health when buying an organic product, or about social justice when deciding towards a fair trade product.”

With the above caveat of “might” in mind, one implication of the researchers’ results is that consumers’ preference for buying eco-labelled products may be socially embedded. Therefore, the utility consumers gain from purchasing an eco-labelled product may comprise two parts, Raychaudhuri said. The first part refers to “functional” utility, which includes product attributes such as taste and price, while the second part is the “supplementary” utility associated with the ecolabel.

“Supplementary utility includes altruism and ‘warm-glow’ utility gained from buying a good that has positive effects on the quality of life of others, on the natural environment or on animal welfare.” In addition, consumers may gain supplementary utility from the esteem they gain from buying the product.

Organic losing market appeal?​

Another reason for the researchers’ results indicating the flagging popularity of the organic label on food products may be a natural downward shift away from the ecolabel.

“Our results seem to go in hand with anecdotal evidence which suggests that the organic label was losing its market appeal. Much of this decline was driven by a public debate over whether organic food is actually healthier than conventional-grown farm produce from a nutritional perspective,” explained Raychaudhuri.

Beyond organic labels, though, the broader eco-claims market presents confusion and uncertainty in the economic space. “The market for ecolabels is far from being clearly understood by economists.”

Responding to price premiums​

Attention thus turns to how environmental labels impact the economics of food and affect product pricing. The researchers state that their results have particular significance for the industry during recessionary times.

“We can view the use of ecolabels on products as a manifestation of corporate social responsibility (CSR).” As with other CSR initiatives, food product labels can limit recessions’ negative impact on brand performance. “This is important as even small changes in consumer demand can have a sizable impact on brand profitability and can alter market dynamics.”

In the specific case of the researchers’ study, the sales of fair trade products do not fall in a recession. In general, however, Raychaudhuri detailed CSR activities, of which labelling is an instance, create a more favourable consumer perception of the brand.

“Therefore, when businesses engage in these labelling schemes, they align both social and managerial interests.” As a result, “the use of labelling schemes as a form of CSR can be a valuable tool for managers to insulate their brand during recessions while at the same time delivering a public good congruent with CSR values.”

Connections between food labelling and subsequent pricing need further analysis.

“Future work should involve a more detailed analysis of the specific situations under which ecolabels can command a price premium or lead to increased sales."