January 22, 2015

Mr Illy talks espresso and illycaffè

illycaffè Chairman & CEO Andrea Illy (photo: Stefan Nimmesgern)
Andrea Illy: "The massive consolidation in the global coffee segment doesn't worry us a bean"
Elegant and sophisticated, without palpable vanity; scrupulously polite, yet not stiff and formal; eloquent, but not glib – Andrea Illy has exactly the right blend to be the testimonial of the super-premium coffee brand he represents.

The Chairman & CEO of Trieste-based family company illycaffè is a formidable marketer and exudes the quiet confidence of a man who knows his product is on the global up.

Germans love their coffee with foamed, creamy milk; Americans like it black and weak; Italians prefer extra-strong espresso and ristretto; but one thing is for sure: the human race is becoming ever more addicted to the "black gold".

The aspirational lifestyle trend associated with coffee is percolating through mature western markets to consumers in emerging economies with a growing thirst for a hit of caffeine. Given that only one in five of the world's population drinks coffee, global sales could double within the next generation.

Around 2bn coffee capsules were sold in Germany alone last year, and a conservative estimate by the German Coffee Federation points to annual local growth of 10 to 20 per cent. 

Need one wonder why Andrea Illy is increasingly enjoying his visits to this country?

The surge in demand has stimulated an unprecedented wave of consolidation within the global industry over the last five years. This includes the mega-merger of D.E. Master Blenders and Mondelez last spring, creating a new global no. 2 to rival Nestlé.

Italian coffee roasters with their artisanal approach and rich tradition, from the first café in late-Renaissance Venice to the creation of the cappuccino in 1901, are in pole position to profit from these developments.

So illycaffè competes at home with the likes of Zanetti, Lavazza and Kimbo, but the company has global ambitions far beyond the Italian peninsula.

Bars, beans & machines

Illycaffè was founded in 1933 by Andrea Illy's Austro-Hungarian grandfather Francesco, who developed the modern espresso machine.

Today, the business distributes a signature blend of Arabica beans from four continents to nearly 100,000 restaurants and coffee houses in 145 countries. The supplier has also created a franchise chain of more than 230 coffee bars under the "espressamente illy" logo in over 30 countries. They are complemented by "Artisti del Gusto", an international network of 1,500+ independent cafés and baristas.

Activities in the hospitality segment are flanked by a broad range of related products from "Iperespresso" espresso machines to coffee cups. A distribution deal with the Coca-Cola markets ready-to-drink coffee under the "illy issimo" label; and "café-quality espresso with capsule convenience" is brought to offices in joint venture with Mitaca.

In 2013 Grupo illy employed 1,050 staff and posted gross revenues of €374m. The lion's share (around 60 per cent) went to hospitality, including HoReCA. Most of the remainder was achieved on the home or off-premise market, followed in importance by the workplace and coffee-on-the-go divisions.

Nearly two-thirds of annual sales were made outside Italy. German operations are run by Andrea Zappalorto from local head office in Munich.
 
illycaffè CEO & Chairman, Andrea Illy (photo: Christian Kruppa)
Booming market: "Younger Germans differ from older generations in that they are much more cosmopolitan, and their taste is very international"
Illycaffè is particularly proud of its sustainability and Corporate Social Responsibility credentials. These include a global Responsible Supply Chain Process Certification from Norwegian arbiter Det Norske Veritas (DNV). Growers are also provided with free hands-on instruction at the company's "University of Coffee", and the company states that they are paid above-market prices.

Currently the group is gearing up for an official partnership with Expo 2015 in Milan from May 1 to October 31. The project will celebrate Italian coffee culture via exhibitions, events and multi-media shows.

Super-premium leggerezza

The meeting with Andrea Illy (51) confirmed past experience that interviews with company owners are generally more revealing than with a manager on the corporate payroll. They don't have to constantly look over their shoulder at some Übervater figure every time they make a statement.

Illy is no exception. Like many execs, responsibilities may sometimes keep him awake at night, but the man has the satisfaction of running his own show. When a family owns 100 per cent of a business, their captain is much freer to say what he really thinks.

Add to this a good dash of Italian charm with some challenging thoughts on the positioning of super-premium-brands at mass market retailers, and the journalist has all the flavour ingredients for a tasty brew.

 

"We don't need a Clooney!"


Signor Illy, your family coffee dynasty hails from Trieste. Are there reasons beyond family loyalty for keeping your head office there today?

Trieste has a strong cultural heritage and is very cosmopolitan. Wherever you go, you will hear people speaking Italian, German etc. and also Slovenian, as we have quite a large Slovenian minority. The city came under the influence of Vienna and Venice at various periods and was the official port of the Austro-Hungarian Empire. To incentivise trade, the emperors favoured the liberalisation of religion, which attracted merchants throughout the Mediterranean.

Trieste still has an important commercial and geopolitical advantage in that it is situated at the northern end of the Adriatic and is therefore the nearest seaport to central Europe. So business and many of the positive aspects associated with coffee, i.e. culture, art, enlightened liberalism, and cosmopolitanism, are all embodied in our hometown.

And when you drink coffee there, how do you prefer it?

Regrettably, international business means that I am only in Trieste around 80 days a year, but wherever I am, I like a straight espresso in all its purity because you have more than 1,000 flavours in just one little cup. Why then add anything? For most people it is just a tasty beverage, but espresso is also an extremely complicated physical system containing an emulsion, a solution, a colloid suspension, and effervescence.

Your grandfather founded illycaffè, but he probably didn't know all that either, when he developed the first high-pressure espresso machine at the beginning of the last century?

But he had a dream, and that was to make the best coffee in the world. It led him to make a number of strategic choices that laid the paving stones for our future success. For instance, he decided to use just one bean, the Arabica, and that our Arabica beans would be sourced directly from the best growing areas in the world.

Why did he decide on a blend?

High-quality agrifood products have three main attributes: complexity, balance, and consistency. These can only be attained by blending, which is why illy coffee uses nine Arabica beans. Having a blend from 20 countries enables us to substitute, where necessary. This is a deliberate strategy because nature itself is not always consistent. So, should bean quality fall in one region for climate or agricultural reasons, we can compensate even on a month-to-month basis by using beans from elsewhere.

How do you ensure the quality of your blend when it comes from so many sources?
We work hand-in-hand with the coffee growers and offer them an educational programme. This enables them to improve their agronomic practices and reach our extremely high quality standards. This allows us to obtain the best ingredients in a sustainable way. The beans are then processed using our state-of-the-art, proprietary technology.

But doesn't a blend increase complexity and risk undermining consistency?

Complexity is the number of contending elements within one system. In our case, increased complexity means more flavour. You could compare this with adding instruments to an orchestra. In fact, the organoleptic profile of our signature coffee blend is very rich: Some of our ingredients will have pronounced "asperities", which give character to the blend; other flavours will be more chocolate, bitterer, more flowery, acidic, fruitier or balanced.

Do you also cater for those customers who prefer to compare purely regional tastes, such as Kenyan and Columbian coffee?

Yes, about three years ago, we decided to extend our offer with "Monoarabica", representing the single ingredients behind our signature blend. We have six of them so far and will be increasing the range to nine soon. So customers can try our single-origin coffees and compare the individual tastes with the holistic result achieved in the blend.

And how do your customers react?

Sometimes they drink a single-origin variety on a particular occasion or "coffee moment" and the blend for so-called "normal usage". Usually, however, people will go back to the blend, once they have tried the single-origin.

How important an export market is Germany for you, and will its relative importance increase or decrease over the next few years?

Germany is probably our no. 4- or 5-country worldwide, and it is likely to become more important. Obviously this will depend on our own efforts in terms of marketing and distribution, but equally obviously on the consumer as well.

Clearly, the market is moving in our favour. Younger Germans differ from older generations in that they are much more cosmopolitan. Most of them speak English, and their tastes are very international. So I see considerably more opportunity for a more sophisticated product like illy now than only a decade ago.

If one looks at the average coffee shelves of a German food multiple, one obviously finds Nescafé and Jacobs as well as own label. But one often also sees Segafredo and Lavazza there. Why are you pursuing a different distribution policy to your rivals?

We are quite selective with mass consumer retailing. It is a sales channel that generally looks for big volume, high stock rotation, and short-term profit, leading to an overemphasis on price. Seen from their particular glasses, the value proposition of our brand, which sells to the "home" market at around twice the average price of mass retailers, is quite expensive.

We also don't agree with commercial policies that demand slotting allowances and key money as well as big investment in promotions and price cuts. All this is not to the benefit of the consumer or the brand. So we generally prefer leave this trading environment to the fmcgs.

illycaffè CEO & Chairman, Andrea Illy (photo: Michele Lamanna)
Aesthetic approach: "We actively promote the arts in order to express the beauty of the coffee world"

However you are listed at various Edeka and Rewe independents, regional multiple Tegut, as well as Karstadt and Kaufhof department stores. Why this choice?

The best independents are personally committed to what they are doing and excellent ambassadors for our brand. They are often more open and understand the need for variety within a category. It is far more difficult to communicate product differences to mass consumer retailers who often only stock one or two lines from a few big suppliers.

That said, we also do business with selected multiples in some locations, where they are able to offer a broader product range via, for instance, a coffee speciality section. This is often the case in more sophisticated neighbourhoods where customers are more discerning on quality. So we adopt a case-by-case approach, which includes a test we have been running with regional multiple Kaiser’s Tengelmann over the last three months.

Why do you believe that the commercial policies of some German multiples are "not to the benefit of the consumer or the brand"?

Permit me to challenge your trade readers with two provocative thoughts on the destruction of value-added. Germany used to be the no. 1 super-premium coffee market in the world until around 25 years ago. Then one day the quality declined for historical and technological reasons. A big increase in the consumption of Robusta coffee, which has to be steamed during processing, meant lower prices, but less quality. How did local customers react? There was a big decline in overall coffee consumption!

My second contention is that consumption is now on the rise again precisely because quality is returning to the category. All over the world, coffee is becoming more of a speciality, there is more 100-per-cent Arabica, and there are better preparation technology systems.

However, you remain critical as to the way many German mass retailers merchandise coffee on their shelves?

I cannot understand why even mass retailers don't create a type of shelf ladder with super-premium prices at the top and commodity-type products at the bottom. This creates a price umbrella with an upper reference point, which will also help the retailer sustain the lower price points. Last but not least, the inclusion of super-premium products will increase total customer satisfaction and upgrade a retailer's overall image. You might call this a "wow!" effect.

But don't super-premium brands (your espresso is marketed on the shelf for c. €32 per kilo) have a slow stock turn?

On the contrary in the UK, where we are listed at selected locations with, for instance, Waitrose, J. Sainsbury and Tesco, the coffee category continues to grow and grow.

You also offer espresso machines and capsules. Does this help or hinder your relations with mass consumer retailers?

It certainly adds another level of complexity. Currently, the whole business is in transition from packaged roast coffee to portion systems, where the market dynamics are totally different. No standards have been set yet for the capsules segment, and business models are still blurred as regards how brands choose their route-to-market. This situation doesn't exactly create a category from a mass consumer retailer's perspective.

The fast development of portion systems is also causing consolidation and decreasing returns within the traditional coffee roasting industry. This means that resource allocation from the trade has to be even more selective.

By comparison, we are insulated from many possible shocks to the market because we produce our own espresso machines and have a long tradition of developing our own preparation technology equipment. Our "Iperespresso" machines are designed, produced, and factory-checked by us. We retain the intellectual property and have our own engineering department, so we are very adaptable.

How can you make German mass consumer retailers think more in terms of value-added when marketing coffee on their shelves?

The problem doesn't only exist in Germany. In Italy we organise annual educational sessions for buyers and category managers to help them appreciate the richness of coffee culture and understand its subtleties and the differences. This is not just l'art pour l'art. We can prove that our merchandising strategies do not only dramatically accelerate illy sales, but those of the whole category as well.

So how can more collaborative category management be achieved?

Usually category management is either done by the chain itself or by the leading supplier in terms of market share, so specialists are seldom asked to be partners. Also the organisational structures of most retail multiples are not as open as they should be to partnerships. This is why suppliers need to nurture relationships with the trade in order to help them understand how much value they could potentially extract from the category.

Why do the organisational structures of big retailers lack openness?

Often the buying, category management, and marketing departments work in silos and have nothing to do with each other, which is crazy!

So, most of the time, buyers only negotiate on price, as per their mandate, with the one aim of getting as many rebates as possible from the supplier. This simply reduces the margins for the whole industry. It also means that vendors can’t allocate any more margin at the POS to drive consumer response. At the end of the day, either you squeeze the money, or you invest in the consumer experience.

All most big retailers do is kill themselves with price wars and then try to blackmail the supplier in order to recoup their losses. As a result, many mass-market German retailers don’t have the money to differentiate themselves from their competitors and look mutually interchangeable.

How could Germany’s big grocery multiples market their coffee more effectively?

All they need to do is look at the coffee segment. Until around 15 years ago, coffee used to be a commodity where all the products on the shelves looked the same, had similar prices and were of the same generic quality with little differentiation. The result was a total lack of excitement in the stores.

Today coffee is becoming more of a speciality due to better ingredients, processing and preparation. There are also more exciting recipes, for instance with milk, and ambience has generally improved in the cafés and bars where coffee is consumed. The result is more pleasure for all!

I believe that this revolution will continue and that coffee could become as sophisticated as wine. We used to drink just red or white wine, now it is nearly impossible to find any two bottles with the same description.

So could your illy coffee one day indicate provenance and domain in the same way as wine labels do?

In addition to our Monoarabica line extension around specific origins, we scout for what I call "coffee heavens" or "paradises of coffee", i.e., the places where we can find the best niche and the best people. We have already identified around 40 global production regions. We are also developing some niche products with proprietary varietals, these include "idillyum".

Would you ever consider buying your own plantations as, for instance, Segafredo has done?

I'm not against the idea on principle, but to date we have generally found that the best way to obtain the quality we need is to work hand-in-hand with the growers. Having our own plantations would be a much slower approach, but maybe in the future we will complement the two approaches.

One of your Italian rivals, Massimo Zanetti, has called going public a "natural development". Why have you resisted the temptation to do so to date?

He may have talked about it, but has he done it yet?! One tends to go public, when one has a specific growth story. Illy has been the fastest-growing private coffee roaster over the last 20 years with a sustainable self-financed business model. We have also been able to fund major diversification in the luxury food business on the strength of our cash flow alone.

However should market dynamics change dramatically, or there was a window of opportunity requiring substantial financial resources, then this could create a growth story. In such a case, we would not exclude opening up our equity capital on principle.

What was the strategic logic behind the diversification of your group?

Since December 2005 our family holding, grupo illy, has taken both majority and minority stakes in international luxury food businesses. These include tea (Dammann Frères), chocolate (Domori), and wine (Mastrojanni). We want to stick to our unique positioning and excellence, which nobody else can do. So our participations amount to a collection of super-premium niches.

We decided a few years back that, should there be a slowdown in the growth of coffee over the coming decades, we would not stretch the illy brand with more volume, and thus risk damaging the brand equity. Instead, we prefer to start growing in other categories which harmonise with espresso.

To do this well, you have to learn each trade from the very beginning, which is why we have already made a start for the future. Your readers might also be interested to know that we combine our coffee, tea and chocolate offers in our "illyshop"s in Trieste and elsewhere in Italy.

The big growth prospects in the global coffee segment have accelerated M&A activity over the last five years. Food giants Nestlé, Master Blenders & Mondelez, Keurig and even Coca-Cola are investing huge amounts in the market. Where does this leave the Italian specialist?

The massive consolidation doesn't worry us a bean, even though we are a relatively small player. In fact, one could even argue that the more consolidation there is on the mass market, the more our niche will stand out. Increased concentration will certainly affect those suppliers who, unlike us with our selective approach, depend for their survival on a listing with mass-market retailers. Such vendors will have to fight increasingly hard for investment on the shop shelf. 

We are also protected by our unique positioning within the niche, our high degree of internationalisation, and group diversification.

Everyone knows George Clooney and Nespresso. Can one win the global marketing game without a testimonial?

Let me ask a question in return: Do you think that the personality of those brands who use a testimonial is the personality of the brand or the personality of the testimonial? The day you change the testimonial, you have no brand anymore! Using a testimonial also runs the risk of becoming lazy because you don’t have to express yourself. So we are naturally opposed to the idea.

If we had to give a face to the brand, here is my face! I'm a family member representing the third generation of the family business and put myself candidly in front of the media or the consumer. But we prefer to build our brand on our own criteria rather than on somebody else. That is one of the reasons why illy is so active in promoting the arts in order to express the beauty of the coffee world.

But doesn't George Clooney have more sex appeal?

Why go to the expense of a Clooney? Our brand awareness is already far higher than our market share and rivals that of the big brands. There is a kind of empirical rule that one’s market share is essentially equal to the "top of mind", which is always dominated by super-premium. Take for instance, Ferrari. Everyone knows the name, but it has only a fraction of the car market because nobody can afford the price.

We therefore want our products, which are based on international prestige, quality and excellence, to speak for themselves. We don't need a Clooney or anyone else when we have a whole range of natural testimonials speaking for us. Our coffee growers, staff, trade partners, and consumers will all give testimony of their passion for the excellence of our brand.

Last but not least, we have many partnerships, including Expo Milano this year from May 1 through to October 31, which I would like to tell your readers about before I go, because it is a real testimonial!

Go on!

For the first time in its history, Expo Milano 2015 will be exclusively devoted to food under the mottos "Feed the Planet" and "Energy for Life". Food will be treated from many different angles, including nutrition, sustainability, security, social responsibility etc. Given the importance of coffee within the food industry, the Italian export authorities have decided to dedicate an entire pavilion to coffee, which is why we are the official partner.

For the last two years, we have been working intensively with the Italian government and the International Coffee Organisation in order to create the greatest celebration of coffee in history. The pavilion is big with 4,500m², and we expect some 20m visitors over the six months’ period. It will certainly represent the greatest reunion between coffee-growing and consumer countries.

We will present the past, present, and future of coffee in its three cultural dimensions: the product, from plant-to-cup; the culture, coffee being the beverage of inspiration and art etc.; and, last but not least, the exoticism. The show will have six or seven touchpoints in Milan and another two in both Venice and Trieste; so we will activate all the north of Italy. Your readers should come and visit us!


Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 4, 23.01.2015



3 Comments (Write a comment)

  1. Tim Harrap
    Created 22 January, 2015 21:13 | Permanent link

    Long live family businesses!

    So interesting to read of the illy experience from Andrea Illy. It is good to once again see a specialist challenge the strategy of the big retailers who have lost the plot on theatre and experience -- a little less price pressure and a little more heart seems to be the story here.

    As to testimonials -- yes, that seems very old school, 20th century marketing.

    Two distinct conclusions are of note. One: the German consumer is younger, more vibrant, and they have an international outlook giving scope and opportunity for overseas suppliers to break down hidebound German buying policies.

    And two: Love the recognition in print from your interview that consolidation by the big players, far from cornering the market, is providing better opportunities for SMEs who are fleet of foot and can outmanoeuvre the Goliaths preoccupied with quarterly results.

  2. Frank Brown
    Created 25 January, 2015 16:47 | Permanent link

    Likeable Gentleman

    Your interview with Andrea Illy was more interesting than I ever imagined the subject of coffee could be. Mr Illy sounds a very likeable gentleman. His forward-thinking in business seems to have kept him well clear of the daily competition by the large supermarkets.

    Thank you for an excellent piece of journalism, and I cannot wait to taste a straight espresso having more than 1,000 flavours in one cup!

  3. MG
    Created 10 January, 2017 14:26 | Permanent link

    Costly spare parts

    To get the spare parts for the Illy machine is very costly outside of Italy.

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