Fabio De'Longhi talks coffee machines
Fabio De'Longhi: "All manufacturers would love to be monopolists!"
The headquarters of De'Longhi are in an equally favorable situation and lie in tranquil Treviso in the prosperous Italian region of Veneto.
On the 30km ride from Venice airport the visitor has a first inkling of what to expect. All the houses, gardens and roads are in pristine condition and redound with efficiency, as if to confirm the frequent comparison between Veneto and Swabia.
By way of introduction Nicola Serafin, "Comfort, Floor Care & Kitchen Platform Director", guides company guests with evident pride through the local production facility that turns out 5,000 coffee machines a day.
This is all a prelude to meeting CEO and Vice-Chairman Fabio De'Longhi (45), one of Italy's richest men.
Local Hero from Veneto
At least signor Serafin's pride is justifiable for De'Longhi enjoys a competitive edge over many rivals by making its own machines and even tooling.
On the immaculate factory floor a flexible balance is maintained among the assembly lines between capital-intensive automation and manual labour enabling a customised portfolio of product solutions.
This is Northern Italian artisanery to technical and logistical perfection. It has made De'Longhi, founded in 1902, a world-famous maker of coffee machines although the company only moved into the business in 1990.
They now account for the lion’s share of annual revenues (2012: €1.53m) with Germany the largest world market. Global sales also include a joint-venture with Nestlé for the "Nespresso" coffee capsule brand.
De'Longhi, however, has steadily diversified in recent years with the purchases of UK kitchen appliance maker “Kenwood” in 2001 and P&G’s “Braun” brand name for ironing and floorcare appliances last year.
De'Longhi went public on the Milan Stock Exchange in July 2001, but still remains under family control (67 per cent). Over the last six years, De’Longhi has been a star performer with share prices increasing by more than 250 per cent, making the owners billionaires.
Fabio De'Longhi (45) has been CEO since 2005 and continues to work closely with his father Giuseppe who acts as Chairman.
Signor De'Longhi, Germans love foamed, creamy milk in their coffee. As a true Italian how do you prefer your coffee?
I like short, extra-strong espresso and ristretto in the typical Italian way.
So did you have to rethink the way you market your coffee machines to Germany, your largest national market with around 12 per cent of annual sales?
When one talks about coffee, it is important to understand that it is not just one drink. There are strong ristrettos, lunghos, and espresso-based milk drinks such as lattes or cappuccinos. So our machines deliver a variety of drinks with an easy and convenient one-touch solution.
But Germany isn't an easy and convenient market. How, for instance, do you react to Aldi Süd’s new K-fee capsule system and “Expressi” coffee machines?
All manufacturers would love to be monopolists! But, as the coffee market grows in size, it will inevitably attract more competition. There is nothing unusual about this process, it happens every day and for every product throughout the world.
That’s a very philosophical stance to take when one of Germany’s largest retailers is encroaching on your patch?
Aldi’s move simply mirrors the fact that the coffee market is growing and confirms that we made the right decision years ago to enter this fast-growing segment. As a company we want to be in growth segments; no one is interested in being in small, declining ones.
But doesn’t Aldi also represent a very serious challenge on price?
We have a very strong selling position and will fight on quality rather than price. We invest far more than the competition in marketing, R&D and factory technology.
This winning combination has made us world leader in espresso as well as in fully-automatic and traditional coffee machines. We are also the no. 1 partner of Nespresso and have recently started in Germany with Nestlé Dolce Gusto.
A propos, how do you react to German hypermarket operator Globus selling your “Piccolo Nescafé Dolce Gusto” coffee machines for only €19.99 in a recent special offer? Isn’t this merely destroying value-added?
It’s a very strong offer and shows that German retailers are really having to fight on a very tough market. They all want to get their share of the pie and hope to stimulate sales with such special offers.
You may understand their situation, but surely it can’t make you happy?
I think that sometimes special offers are too extreme, and we really don’t like to see them all the time, but we also realise that it is part of the game and that all retailers need volume. However, we know that retailers also need value, which is what we try to give.
Aren’t you just expressing a pious sentiment?
Not at all, if you look, for instance, at the prices of fully automatic coffee machines in Germany last year, you will see that they declined on average, whereas De’Longhi increased its prices and still managed to maintain market share.
This is clear proof that we created value via product innovation and that we surprise customers in a positive way.
But don’t such special offers hurt your overall value image?
No, I don’t think so. We would only be damaged if we started offering poor-quality products.
Also, you shouldn’t underestimate consumers’ intelligence. Most of them know, for instance, that we joint-venture with Nestlé on certain special products and that retailers sometimes use capsule-based machines for special offers.
To the detriment of your margin…
There is nothing special about this, it happens to all other manufacturers. The difference with us is that our products really drive volume. Others could do exactly the same offer and drive no volume because their system is not as good as ours.
Given the success of Nestlé’s “Nespresso” outlets, could you ever imagine starting your own chain of “De’Longhi” coffee shops?
No, it’s not a direction we would want to go. However, we are very proud of our flagship stores in Milan, Paris and Shanghai. They enable us to display our full range and to convey to consumers the full sense of our brand.
In Milan’s via Bergognone, for instance, we demonstrate our coffee makers in a store of around 1,000m² and a chef holds cookery classes using our Kenwood products.
Could you open more flagship stores in the future?
Yes, but our main priority is to execute better at our retail customers’ outlets and to strengthen our in-store presence.
What proportion of your annual revenues goes to specialist stores vs. mass retailers, and which sales channel would you prefer to push?
A rough estimate for our De’Longhi and Kenwood brands would be around two-thirds to specialist retailers. As specialists ourselves we obviously prefer supplying specialists.
However, since our purchase last year of the rights to the household division of Braun our group will become more present in mass distribution.
Your machines usually retail from €150 to more than €2,000. To what extent does your business model depend on world prosperity?
Obviously some external conditions will always remain beyond our control, but there are a number of things we can do to reduce our dependency on global economic developments.
Firstly, we can diversify geographically. Already 35 per cent of our sales are in S.E. Asia, Latin America, and Eastern Europe, while business in mature markets such as Western Europe continues to provide a solid anchor.
Secondly, we can launch more new products, which is why we are increasing our R&D. Thirdly, we are a lean, cost-conscious company and invest in a highly-competitive industrial platform.
Did you buy the brand rights to Braun then last year to reduce your dependency on coffee?
We are not concerned about our dependence on coffee as we are very bullish on this category long-term. We bought Braun and before that Kenwood because we think they could be an accelerator for us in other product ranges and geographies.
Where’s the next big national market?
We are growing well in China, Asia and Australia, but the US is an area where we really want to do more, particularly in cappuccino and latte.
How come, when there is now a Starbucks on virtually every street corner?
At home Americans are quite conservative and still drink a lot of black coffee, but the success of Starbucks and others proves how much they love cappuccino. We therefore see a tremendous opportunity.
Your brand has profited from the lifestyle aspirations connected with coffee and espresso. If the number of coffee machines sold per year is set to double to 100m by 2023, isn’t there a danger that the segment could become commoditized?
A danger? We see only opportunity, and our real challenge is how to capture it. If the market doubles by 2023, it means that we are in the right business. But I don’t see that coffee will ever become a commodity. It will always remain something social and a highly desirable product.
The rapid expansion of De’Longhi means that less than a sixth of your global sales are now in Italy. How big can you get without losing your Italian soul?
Today we are a small multi-national with an international management team. I think our “soul” comes from being a family company focused on many Italian-style products.
Although one might make out a case for there being a good and a bad Italy, coffee and food is indubitably part of the good. Obviously, we must maintain our positive Italian identity, but this cannot mean being closed and looking at the world from an exclusively Italian angle.
Since 2001 you have shifted well over two-thirds of your global production volume to China. Why then did you open your latest factory in Rumania last year?
Cost reduction is generally a virtue, but can be pushed to extremes. It is not only important for our products to be competitive on costs. They must also be close to the markets where they are purchased.
Manufacturing in Rumania avoids customs duties and reduces transportation costs to Western Europe. In fact we can deliver to Germany, for instance, in only one day which makes us much more flexible.
Will you therefore reduce production levels in China?
That will depend on how competitive the Chinese are.
You are one of the few manufacturers in the coffee business who still make their own machines. What are the advantages?
It helps us to retain the know-how, and you cannot innovate effectively if you don’t understand the processes involved.
Do you also make machines for other companies?
We do OEM for some other coffee machine makers, but the percentage is very small.
Your family now owns only 67 per cent of De’Longhi shares and voting rights. Does any other shareholder have a minority stake strong enough to block your decisions?
Non-family share holdings are very broadly based, and I am not aware of anybody with more than 2 per cent.
Do you regret losing full control?
No, I think that a listing forces us to achieve results, have a very clear strategy and to be stricter on such important parameters as working capital etc.
I think that De’Longhi is so successful on the market today and one of the best performers on the Milan stock exchange because we understand the advantages of being listed while maintaining our values as family entrepreneurs.
Would your family ever consider selling its majority stake?
We love what we do, and it is not something which I could envisage happening.
What are the disadvantages of running a family company?
Families tend to be more conservative and often want to maintain control at all costs. This means that they sometimes miss good business opportunities.
Although I think that it is a mistake to be too short-term-minded, some family entrepreneurs can have too long-term a vision. After all, you can’t wait for ever for results.
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 51, 20.12.2013