January 8, 2010

Talk with Eataly founder Oscar Farinetti

Oscar Farinetti, CEO Eataly Distribuzione S.r.l. (photo: Eataly)
Oscar Farinetti: The founder and CEO of Eataly in Turin gives Slow Food a good name
There was a time when only fashion icons had philosophy.

Over the past decades, the pages of our fashion sister publication TextilWirtschaft have been replete with interviews where the Armanis, Saint Laurents and Versaces of this world pepper their brand-speak with "Zeitgeist" and "Weltanschauung".

By contrast, most German food retailers have remained strangely reticent on any message they may have, except, of course, for the hard discounters who permanently praise their own low prices.

Recently, this has begun to change – at least among an avant-garde of "food philosophers".

What unites this disparate bunch is their stand against the global fast food or food-as-fodder industry and their preference for local, seasonal, and/or organic produce.

These new thinkers criticise the utilitarian approach which typifies our mass consumer markets. They defend local food traditions, crop varieties, artisan methods of production and sustainable agriculture.
They also see good food as neither elitist nor frivolous, but as a collection of nutrients and an essential component of human culture. Eating to them is pleasure, conviviality and social communion.

One should certainly count Oscar Farinetti, the owner and founder of Eataly ("eat" + "Italy"), among their number.

In good company

These food philosophers include such diverse figures as Slow Food founder Carlo Petrini; the US nutrition ideologist Michael Pollan ("In Defence of Food") or consumer guru Professor Simonetta Carbonaro.

It was fun to talk with Farinetti (54) in his modest office. Looking like one of the characters for the good straight out of "The Lion, the Witch and the Wardrobe", this is a visionary entrepreneur.

The man is too polite and modest to throw down the gauntlet to anyone, so perhaps one should do it for him: Most German food retailers are choking on their reluctance to communicate adequately. They justify their reticence by claiming that consumers only want the lowest price. What a poor excuse...

"I'm hoping for a food Renaisssance"


Signor Farinetti, how does a former consumer electronics (CE) retailer, new to food, achieve dynamic revenues growth in a severe recession and an ebitda margin of 15 per cent within less than two years of start-up?


Your very question belies what I am all about. I am an entrepreneur, but I don’t run Eataly for the money, and I have never paid myself out of our profit. Everything we earn is invested in the service of the public.

Meaning?

For instance, we invite around 2,200 children to tour our stores every year and give them a free meal. We also let more than 700 old age pensioners eat here free of charge. In addition, we organise several hundred conventions and conferences etc. at our own expense.

Last but not least, we support our smaller suppliers financially and we are generous to our staff who received 15 months' salary in 2009.

But even generosity and social responsibility have to be paid for. You buy the very highest quality food, but sell it at "sustainable and reasonable" prices only slightly above ex farm level. How then do you achieve your ebitda margin of 15 per cent?

Many small high-quality food suppliers in Italy are forced to sell through wholesalers and distributors, which greatly increases the cost. We buy directly from our suppliers and cut out up to two layers of cost by eliminating the middle-men.

How do you organise logistics?

All the freight contracts we negotiate with our suppliers are on a free house delivery basis. These are relatively inexpensive because here in Turin, for instance, around 50 per cent of our lines and 70 per cent of our revenues come from local Piedmont suppliers.

You have a big (11,000m²), high-ceiling building to heat, light, clean and maintain in Turin, doesn't this considerably increase cost?

We are not operating a hotel! Obviously, we employ energy-efficient systems. Building-related costs amount to €500,000 per year, which is insignificant in relation to store revenues of around €40m.

But if you want to know our overall cost base, it’s not a state secret: total costs make up around 25 per cent of our annual turnover.

But selling as you do at "reasonable" end consumer prices, where do you get the money to achieve your 15 per cent ebitda margin?

Don’t forget that we have a higher margin via our gastronomy which accounts for around 30 per cent of annual revenues.

Our business as a whole achieves a gross margin of around 40 per cent of annual revenues. If you subtract our costs of around 25 per cent, you are left with an ebitda margin of approximately 15 per cent. So what we do is neither magic nor rocket science.

You seem to be very at home with figures!

I have always believed in the supremacy of mathematics. In whatever business you are in, if the figures don’t add up, you aren’t going to get any farther in life.

You mentioned the important role that gastronomy plays in your concept. Do you consider yourself more of a retailer or a restaurateur?

What we run here is a market. For me a market is a mixture between selling food, gastronomy and didactics, i.e., teaching food. Perhaps this didactic element is the most fundamental of all.

Why? Most people in the trade are only interested in making a buck and not in teaching...

Our didactic work is absolutely fundamental to our business because, even in Italy, most people don’t eat high-quality products. Less than 15 per cent of Italians don’t even know in what season local foods are harvested, and 35 per cent can’t tell the difference between durum wheat and any other type of wheat.

In fact, they usually know a lot more about mobile phones, flat screen televisions and PDAs than they do about food.

Why do you think this is?

Today's culture is more related towards appearance and the exterior than to what we feed ourselves physically and spiritually.

These are noble thoughts, but you also have to be a hard-headed businessman in order to survive. Where is the business advantage to your didactic efforts?

If consumers do not even know that there are high-quality food products, which taste better and are healthier than the lower-quality ones they are familiar with, then they will not buy them.

First, you have to stimulate awareness before you can sell something. Simply putting high-quality products on a shelf is simply not enough.

How about the synergies between gastronomy and your food shelves?

We have created eleven monothematic restaurant areas within our store. Where we sell cheese, we only offer cheese dishes in the equivalent bistro area; and where we sell meat, we only offer meat dishes.

Also each bistro-restaurant primarily cooks the products our relevant store department sells. It’s all very logical and simple and provides a lot of marketing synergies.

We are in permanent communication with the customer about our products in both the gastronomy and food retail areas where they can be both seen and tasted.

Thus, we create an environment where people can eat after they have done their shopping and where they can feel at ease and socialise in an informal way.

A second major synergy between gastronomy and retailing exists in terms of food logistics. We don’t need one set of storage for retailing and another for our gastronomy because our restaurants can use the products on our shop shelves.

For instance, fresh fish is normally good for three days, so we display it on our fish counters the first day and, if it is not sold by the evening, we cook it in our restaurants on the second day.

Your Turin branch opened in January 2007. Have you been obliged to modify your concept since then?

We have been very lucky in that we have only ever needed to do some fine-tuning. After investing around €20m ($30m; £17.9m) in the store, I was worried at first that combining food retailing, gastronomy and didactics wouldn’t work, but it has.

What did you have to fine-tune?

At first, the cake shop and bar didn’t run so well. We also had to streamline the way we sell cheese by placing greater emphasis on “take away” products.

Primarily, however, we have greatly expanded our events activities. We now put on around 400 events, including seasonal events, tastings, special subject evenings, lectures by local growers etc.

In addition to your first store in Turin, you have now opened outlets in Bologna, Milan, Pinerolo and Tokyo. What are your future plans?

We intend to open a big store with 200 staff in New York in July 2010. To date, our expansion in Italy has been with smaller stores because we needed to figure out how we could run our company on a larger scale. We now feel able to open other stores as large as our 11,000m² (118,400 ft²) one here in Turin.

During the first two years of our international expansion we deliberately began with the world's most difficult market, i.e., Japan. We have two stores in Tokyo, including one in a Mitsukoshi department store, as well as a 120m² (1,290 ft²) bread shop at the main station.

Doing business in Japan posed some real logistical challenges, and we made quite a few mistakes, but we have gradually worked out how to transport goods world-wide.

The multiplication of a concept may create economies of scale, but can also cause its own problems. For instance, can your small suppliers keep pace with your expansion without losing their soul?

The objection that quality and production output somehow have an inverse relationship is based on a misconception.

Before we started our first store in Turin we toured Italy’s small regional producers for over three years. In our opinion, these food artisans are like huge oil reserves lying frozen beneath the ground.

On average, around 50 per cent of the food we sell comes from local suppliers. Thus, if I open a store in Bari, half of the produce will be from the Apulia region, and, if I open a store in Rome, half will come from Latium.

The other half consists of small suppliers who have no problem increasing their scale to match our expansion.

Isn’t it somewhat unusual to be talking about expansion in a world economic crisis which has hit Italy particularly badly?

No, not at all, when you consider that we Italians purchase around €750bn ($1,100bn; £671bn) worth of goods per year and that only €120bn ($175bn; £107bn) worth of this sum is spent in food retailing and €60bn ($90bn; £54bn) on eating out.

The maximum expansion we intend to achieve is around ten stores with annual sales of around €40m ($60m; £36m) each. So our total of around €400m ($600m; £358m) would only be a fraction compared with these figures.

In Germany over the last decade, food sales have generally stagnated while, until very recently, CE sales have boomed. Why did you sell your family CE business to Dixons (now DSG International) for €500m in order to move into food?

That’s very easy to answer because I see tremendous growth potential in high-quality food over the next 20 years. I am convinced that there will be a change of consciousness and that consumers are going to change gear.

They will begin to understand that food is the most important product of all because it is the only one which one puts into one’s body.

To what extent is this a marketing problem?

(Grabs one CE advertising flyer and one food advertising flyer from his desk and holds them up together) There are 191 different types of cell phone, but did you know that there are 232 types of apple in Europe? You probably didn't because of the lack of professionalism in the way they are usually advertised.

If you look at this typical advertising for cell phones and flat screen TVs, the consumer is provided with a host of technical details. We are told what the resolution is, the number of inputs, the contrast, sound and light details etc.

Now compare this with the way these food products are advertised. We see here a bottle of olive oil, but all we have in terms of information is the price in huge letters.

No one seems to believe that the consumer needs to know where the product is grown and under what circumstances. There are absolutely no product details. This is absolute madness and, in my opinion, very bad marketing indeed.

Small wonder that few are prepared to pay for good food. Both food retailers and food producers must communicate very much more professionally in the future.

Isn’t the trend in the current recession away from luxury items towards a new era of sober modesty and value-for-money where price is everything?

High-quality food is not a luxury. There is only a difference of 40 cents per kilogramme between cheap pasta and top-quality pasta from Gragnano. I believe that more and more people will begin to change their lifestyles by eating better and feeding their children better.

The very thought that you would buy your children trendy shoes by saving on meat without vitamins and full of additives is surely a perverse one.

In fine, in the same way I believed 30 years ago that it was time to invest in consumer electronics, I believe that the market for top-quality food will explode over the next 20 years.

In the northern hemisphere we spend about a quarter of our disposable income on food. From what you were just saying about shoes, you would seem to want to increase that share at the expense of fashion. Is this not a revolutionary stance coming from the world’s most fashionable country?

I say: a lot less fashion, a lot less luxury and a lot more substance. Let’s spend less on immaterial fripperies and more on material things such as bodily health which is a tangible good.

Listening to you, you make your business model almost sound like a “Weltanschauung”?

I believe that the crisis we are currently going through is as nothing to that which we are going to experience over the next 15 years. I am convinced that this future crisis will also be accompanied by major social changes.

I believe that in this crisis people will begin to spend less on immaterial fripperies and will invest in bodily values. There is nothing more physical than food, yet we greatly neglect its real value.

Do we really?

Look, everyone knows what it costs to park your car in town or at the airport, everyone knows how much petrol costs or what it costs to buy a car or a cell phone, but do we really know the price of good food? And even if the recession leaves us all with less money in our pockets, we can still decide to spend more on food if we once recognise its real value.

We started this interview with you as an entrepreneur with a head for figures, but in reality you are more of a visionary…

Me?! I could have gone into politics because I believe that the art of politics is one of the noblest arts that a man of honour can aspire to on this planet, but one can see little evidence of this among our current political caste.

Sadly, today’s political arena is characterised by mediocrity, where politicians are too often motivated by self-interest rather than what they can do for the people they are paid to represent.

Therefore, I decided to use my experience and skills to create something harmonious; and I strive to create harmony on all fronts, whether with staff, suppliers or in the creation and marketing of the products themselves.

I believe that work should try to unite both duty and pleasure, and I have tried to achieve this at Eataly. Hopefully, I have created an anti-model for many of the things we have today, but an anti-model of harmony.

What would you call what you do here at Eataly. Is it money, hobby or a mission?

Eataly is my life and the project of my life. Earning money has only been a means to an end. I believe that capitalism is in crisis because people have confused ends and means.

We humans are imperfect beings, which is good so, because otherwise we would be very boring. As imperfect beings we tend to create imperfect social systems which, eventually, crumble and stumble into crisis when their defects start to become prevalent and to outweigh their merits. This is as true of communism as it is of capitalism.

Capitalism, however, has far outlasted communism…

The aim of capitalism ought to be happiness and the means whereby this is meant to be achieved is by earning money within a meritocracy. In my opinion the means have become confused with the end over the last ten years or so.

Making money has become an end in itself, which inevitably leads to derivates, or financial weapons of mass destruction, financial crashes, banditry, the sale of contaminated food and a host of other social evils.

Such delinquency will cause the whole model to crumble. This was why I chose to create my own anti-model based not on size and scale at any cost, but on harmony, creativity and a respect for other people.

When you sold the family consumer electronics chain why didn’t you live a playboy lifestyle like Berlusconi? After all, life is short…

That type of life quickly palls. At the end of a day, even yachting around Sardinia with beautiful girls is only an illusion of happiness, and I think that you journalists have a lot to answer for by concentrating so much on the so-called pleasures of being rich.

One wouldn't mind at least a little try…

I have always found that real happiness in life consists in setting yourself worth-while projects which are achievable, but which also stretch you. Even if we have millions in the bank, we are no one at all, if we have no project in life. In trying to achieve projects I have experienced fear, doubts, hope and a sense of truth, in fine, I have felt human.

Your business style, including the way you treat your people, is very informal. In Germany most senior retail managers walk around in expensive suits. You, however, look comfortable in an open-necked shirt and a pullover. The sign on your door also says: "Don’t knock, just walk in." Why so informal?

For me being informal is an absolutely natural thing. I don't think I could be formal if I tried. Formality doesn’t create happiness. All formality does is create barriers between people. At the end of the day, I don’t even think that it is even good business practice.

I don't know about you, but I am fascinated when I meet really powerful people who are still capable of being informal. It’s a really interesting combination, especially if it is mixed with a dash of self-irony.

In fact, I love unusual combinations, for instance, why cannot one be cunning and honest at the same time. People say this is not possible because, in their black-and-white view of the world, only crooks are cunning and only fools are honest. But why can’t both exist? I hate all black-and-white thinking.

And how can one free one’s self from groupthink and a black-and-white view of the world?

Watch less TV for a start! Then read more and think more. In order to overcome my own preconceptions, I try and imagine being a Martian who has just landed on Earth.

What would he think about what he saw today? I think he would find it all very strange. He would be astonished how we make hotels so beautiful, where we stay when we are well, yet make hospitals so ugly and poor for when we are sick and need comfort the most.

He would be equally astonished at the way most humans seem to care more about the clothes they wear on the outside of their body than the food they put in it. He would be puzzled by the relatively low value we give to food and the lack of recognition we accord to the peasant farmer who grows it.

As a purveyor of high-quality food what do you think about the German hard discounters Lidl and Penny in your country?

I can only return to their advertising. All I can see from this is that their olive oil costs one euro, or that their tomatoes or sugar cost such and such a price. I can’t find anything on protein content, or glutens, or where the products come from or what their ingredients are.

And beyond this lack of essential information about something as beautiful and nourishing and important for health as food, I see no emotion. Even Coca-Cola, the purveyor of a mass consumer product, puts its advertising in a bar or on a beach and portrays some form of information.

This food advertising here is just about price and is dead. It lacks all creativity and shows no respect for food. If you have no creativity, the only plane you can work on in business is price.

It all sounds very sad…

Well, it certainly gives people like me a huge niche to work in. There have been many dark ages in the course of human history and this is one of them. However, here in Italy we also had the Renaissance and fascinating people like Leonardo da Vinci to shake things up a little.

So let’s all hope for a new Renaissance in food…

Yes, and, who knows, maybe next time you come to me it will be in a pullover and not in a suit!
 
  
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 51, 17.12.2009. Original Italian interview available on request.


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