Italy coffee dynasty Illy percolates success
LONDON // The Adriatic port town of Trieste in Italy has a long history with coffee.
It was here that coffee first entered Europe and it was here that Francesco Illy developed the modern espresso machine.
Hungarian-born Francesco Illy travelled to Trieste after World War I. He then moved to Vienna and Hungary before returning to Trieste where he founded the eponymous coffee company in 1933.
Illy now operates in 140 countries around the world but is still run and owned by the Illy family. Andrea Illy, the company’s chief executive and president, is the grandson of Francesco.
Andrea’s brother, Riccardo, is the vice president and his sister, Anna, works with coffee growers. Their father, Ernesto Illy, died in 2008 but his wife, Anna Rossi Illy, serves as honorary president of the company.
“Most of the family members are in the governance [of the company],” says Andrea Illy. “One of my nieces is involved in product development and my nephew is involved in Illycaffe.”
Other family members work for Gruppo Illy, the holding company that owns 100 per cent of Illy. Gruppo Illy, which was also founded by Francesco sells tea, wine and chocolate and holds stakes in other companies.
Andrea and his three brothers own 90 per cent of Gruppo Illy, while their mother has 10 per cent. Their stakes will be passed on to their children. “It’s our legacy,” says Andreas.
“The fourth generation – my children and their cousins – are still young. I predict that they will gradually start working in the business in some form or another,” says Andrea Illy. “There is nobody in the family that decided not to be involved in the business … It is because we are passionate.”
Illy has grown significantly over its 82 years in operation. Sales in 2014 stood at €390 million (Dh1.62 billion). Sales of its coffee to cafes, restaurants, hotels and other establishments account for about 60 per cent. Roughly 25 per cent of its business is in coffee to be consumed at home and the remaining 15 per cent in office and “on-the-go”.
Illy plans to grow the on-the-go portion of its business. “We are developing a new business unit, “business-to-consumer”, by opening up our own cafes and shops and e-commerce in different countries,” says Andrea. The company will open 40 new cafes this year. “This is an area that we invest,” he says.
However, expanding Illy’s café business has been far from smooth thus far. “[Illy’s] cafes haven’t really taken off,” says Jeffrey Young, the chief executive of Allegra World Coffee Portal. “There’s a specific expertise that’s required to run cafes and it’s very different to roasting coffee. Very few companies are good at both.”
Other Italian coffee brands, such as Lavazza, have followed the same strategy with limited success. “[They] have mostly gone in with local partners or as franchises,” says Mr Young. “They’ve not really invested their heart and soul in [their café businesses]. It’s been more of a branding exercise to get their name in cities.”
Illy’s geographical expansion plans may prove more successful. It intends to invest in new territories and emerging markets. “We are the most global coffee company in the world,” says Andrea. “As a global brand, you have to look at opportunities everywhere. However the market with the greatest growth outside of the US is China.
“To go to China is an exciting adventure. We are present in 20 cities with around 2,000 customers. We see that the Chinese coffee market is growing every year. It’s very interesting.”
Mr Young says: “China has the perfect customer base for Illy because luxury and recognisable brands are appealing there. “Illy is a very strong and well-constructed brand.”
There are some challenges associated with expanding into new markets, according to Andrea. The company needs to train baristas and, more importantly, help to develop a coffee culture.
In its home market of Europe, where the coffee culture is well developed and there is a lot of competition, Illy tries to differentiate itself. “The Illy strategy is to be unique in every aspect,” says Andrea. “We have a unique product. We are the only company in the world to sell only one blend of coffee. The blend is unique – the coffee is made exclusively for us by the growers.”
The blend is composed of nine different types of Arabica coffee sourced from more than 20 countries. “There are several reasons why there is only one blend,” says Andrea. “Firstly, the blend has to be the best and only one blend can be the best. A brand is a promise and of course the value proposition with coffee is the taste. How can you have one brand and several tastes? It’s only confusing for the customer. If you want to have another taste, you have to create another brand.”
While Illy’s strategy to produce a single blend or limited selection of coffees is common among big traditional brands such as Rosso and Tchibo, it may be risky.
As the European market becomes more sophisticated, consumers are increasingly picky. “Illy is a fabulous brand but people that want to discover and constantly taste new coffees and flavours will not be drawn to traditional coffee brands like this,” says Mr Young.
The growing preference for small-batch roasting and “down-to-earth” marketing is a threat to classic Italian brands. “They’re not at the forefront of the new era of coffee,” he says.
“This is very much like the French wine industry when the New World wines came out. It’s now about New World coffees.
“There are thousands of very high quality roasters around the world now. If, for instance, you were opening a trendy restaurant in New York you’re going to want something that is much more local, personal and experimental. I think that the concept of ‘craft’ is very important,” he says.
Some customers, however, will continue to be drawn to brands such as Illy on the basis of their heritage, particularly those that are “trading up” from instant coffee. “Illy has a phenomenal brand cache. It has many years of heritage and its coffee brand is very clean and sophisticated. It’s in the Italian tradition of coffee,” says Mr Young.
As Illy only uses Arabica coffee, the commodity’s steep price rise in early-2014 hit the company. Illy buys coffee from long-term suppliers that have been trained by Illy at its “University of Coffee” centres, which cut its bargaining power during the rise as it was tied to a small pool of suppliers.
“Of course [rising Arabica prices] had to be managed,” says Andrea. “We have to maintain quality so we absolutely stuck to our standards, so this meant that we had to pay the grower more. In order to absorb the cost difference we used management practices to try to hedge the purchases, to have medium term contracts with some of the growers, to increase prices whenever it is necessary and cut costs to absorb the shock whenever it happens.”
Arabica coffee is most at risk from rising temperatures, he says. Brazil is the largest arabica grower.
Farmers are already making changes to adopt to rising temperatures, says Jean-Marc Duvoisin, the chief executive of Nestlé’s Nespresso. The company sources coffee from parts of Latin America, Asia and Africa.
“I visit farms quite often, and the farms are always going higher in the mountains, higher in the mountains,” Mr Duvoisin says.
“Warming has a negative impact.”
Long-term price trends are a key concern for Illy.
“The market is becoming very volatile because of very low stock levels and production can be cut off without warning, but this is our reality,” says Andrea.
q&a relative values behind securing family’s fortunes
Have you always known that you would work for the family business?
I chose to study chemistry at university with the aim of getting the best possible background to improve the quality of the [Illy] product. I wanted to lead product development, quality assurance, innovation and so forth. When I finished my studies I was basically involved in running the company. Having studied chemistry, quality assurance was my number one job. I had the chance to participate in a total quality management programme … Then I expanded my responsibilities to the rest of the product, production, the supply chain and all of the technical aspects. My brother had responsibility for the commercial side. I spent so many years only working on the technical side of the company and then later on I had a chance to take over. I started leading the company in 1994.
Who will lead the company after you?
There are no such designations. Everyone is encouraged to develop in terms of studies and experience in different positions. Each part of the family is represented in the governing of the company. They will agree upon the different positions between themselves. We will not be making any decisions for them. But they are still young … I have three daughters. They have six cousins; five girls and one boy. Each of them will be involved. Each of the family branches will inherit the shares of my brothers and myself. My daughters will receive my shares.
Are you worried that tensions may arise within the family for leadership of the company?
No, absolutely not. We work as a team. The shareholders are at the service of the company, not the other way around. This means that you do the best that you can and not use the company for financial and professional objectives. The priority is the customer.
How does the family aspect affect the development of the company?
Your investment capacity matters. Being a family business that is 100 per cent self-financed we are growing as much as we can. Our technologies are a source of competitive advantage. If you have another company with much bigger resources and market share they can probably gain a greater market share, but we don’t care about this. We are not aiming for market share because with our [single coffee blend] strategy we can buy as much as 1 per cent of the total amount of coffee produced in the world. That means that we don’t do big volumes and big market share by design. Also, we want to nurture our brand and stay exclusive. We don’t want to make the brand massive, otherwise we will destroy the equity in the brand. We are well balanced. I think that the strategy we have is sustainable. It is long-term oriented. We still manage to grow. Illy was the fastest-growing family coffee company over the last 20 years.
Many of Italy’s largest companies are still family-run. Why is that?
Italians are individualistic. They don’t want to open up the company systems whatsoever. They want to have management continue to be family-operated. They don’t want to open up the equity because they want to control 100 per cent of the shares. It’s an anthropological feature of our country that I hope will change because global competition is too strong to allow for this closed mentality. The complexity needs more collective intelligence. A one-man-band can only handle complexity that is equal to the complexity of the man. Frankly speaking, often the complexity is greater than the man. The only possible way to react to this problem of complexity is to use collective intelligence, with more brains working together. The very first step is to create a managerial company – one that is managed by many, not just one man. Secondly, for the financial needs of the company you have to open up to other shareholders in order to have the financial leverage to develop the business. Thirdly, you need to open up to your colleagues in the industry to create a network of partners in the world with whom you can collaborate and develop business.
What do you want your legacy at Illy to be?
I see myself as serving the past and the future. I served the past, which is my father’s legacy. He was a great man with unbelievable knowledge. He was considered to be the mentor of the coffee culture. My aim – my desire – is to not only preserve but enhance this legacy with knowledge and technology. I want to try to create something bigger for the next generation that is sustainable with a terrific reputation and image so that history can continue with the fourth generation.
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Updated: October 20, 2015 04:00 AM