Case Study Illy Cafe

About Illy Company background and description The history of illycaffe is linked to the lives of the company’s founder, Francesco Illy, and his family. Francesco in 1933 set up a business in the cocoa and coffee sector, and then decided to concentrate exclusively on coffee. Nowadays the illy group is made up of several companies located in North America, France, Germany, Spain and Benelux. Product Illy serves coffee to its customers. They insist on the fact that there are not selling basic coffees but the one which is a result of Scientifics’ research.

They want to serve the best coffee due to a result of a long experience, knowledge of coffee biology and chemistry, very good skill at roasting, enabling technologies, and also a family’s entrepreneurial passion. They are also selling products which fit to the coffee world like, machines, capsules and also accessories. Revenue In 2007 turnover amounted to $221. 000. 000. In 2011 the turnover was $342. 000. 000. There is a real increase over the years. Customers 70% of its sales circuit cafes, hotels and restaurants, 20% for individuals and 10% in companies, these are illy’s customers.

Illy has developed solutions for small restaurants, small hotels, cafes and other places of conviviality where coffee consumption is low but still want a perfect coffee. The company offers machines meeting the needs of its business customers. To match with its image of unique coffee Illy is increasing partnerships with the biggest names in tourism Meridien and Hyatt. The company also Illy customers offices, employees may have during their break espresso from the brand. To do this, Illy provides the I-Espresso and offers a complete range.

Also Illy own its own bars called “Illy bar”, so the customer can go there and have a coffee in the company’s atmosphere. It is also possible to buy coffee brand for personal use at home. The website offers the purchase of cafe, cafe machine but also derivatives (eg cups). Most of its customers are the professionals (served in more than 50,000 public places) but Illy is developing the “Illy’s bar” to create an atmosphere for the company. Location Illycaffe was founded in Trieste in Italy. Nowadays the Illy group is a multinational organization that operates in more than 140 countries across the 5 continents.

The main markets for Illy are US, Europe and Japan. Employees The company has about 700 employees. Industry With a turnover of € 695 million and a growth of over 30% per year since 2001, the European leader in espresso is Nespresso. The level of competition that Illy faces differs according to the sectors, for example in the Hotel, Restaurant and Cafe sector the main competitors are Starbucks and Lavazza. Whilst in the coffee machines and coffee capsule systems the main competitor is Nespresso from Nestle group. The competition in both sectors is quite intense with Starbucks and Nestle having global reach.

The advantages these companies have over Illy are their vast economies of scale, stronger brands and higher customer reach. Mission and vision The mission: produce and deliver the best coffee that nature can offer for connoisseurs and those who will appreciate it with a special attention to methods of growing and processing the most suitable and sustainable. They want to create an emotional experience through the degustation of their coffee. The vision: being an innovative company, proud of its history rooted in the contemporary and future-oriented.

Combine art, science and experience to offer the best products. They have for vision to be recognized as a world reference for coffee culture and excellence, ti be the first choice of professionals. The values: passion for excellence, the pursuit of perfection and ethics, the valuation of individual talent and teamwork. The desire to improve the lives of all those involved in the coffee chain. Attention to people and the environment. Illy Coffee: Alternatives Selection 1)Problem definition – how to become more responsible (=sustainable) coffee producer without losing the revenues/customers/quality.

The original goal of Illy was to provide best coffee to customers, but the good quality coffee does not necessarily mean responsibly produced coffee. So many coffee growing countries use unethical growing practices which reduces the price of 1 kg of coffee from the farmer, but jeopardizes the company? s ethical image. Thus now Illy needs to balance three aspects – quality, profitability and ethical aspect, which is a difficult problem, since it involves the whole supply chain and for the company of such scale of operation to solve this problem will be extremely difficult (140 countries on 5 continents).

Plus this challenge is also industry driven – all big coffee companies are moving towards sustainability of supply chain, and greater awareness of the customers about these issues nowadays can give a coffee company additional competitive advantage. 2)First of all before we outline alternatives and solutions, we need to clarify, what responsible coffee business means. Although “sustainability” has been defined in a variety of ways over the past several decades, the Brundtland Report (1987) has provided the most widely-accepted and enduring definition at the international level.

According to the Brundtland report: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.. In relation to coffee business Acting Responsibly involves a complex activity spread over whole supply chain: -Environmentally related: bear in mind environmental impacts of coffee production (“technified” or mono-culture growing practices impact, rain forests, pesticides, waste water and etc. -Social aspects: well-being of farmers and their families (minimum fair price limits, no price dumping, child labor prevention) -Business-wise: when all actions and decisions taken are analyzed in terms of long-term goals of the company, current and future benefits for stakeholders and preserving viability of the company. With responsible business and supply chain model in mind a multinational like Illy might choose one of few alternative pathways: – -Marketing based approach – market the idea under a good “sauce” to your customers.

Might involve working with few sustainable/ organic pilot farms and making public aware of this, or introducing your own quality standard, like own CAFE standard of Starbucks. This alternative does not involve additional costs, or reengineering of supply chain, it is more like exploitation of Responsible practices idea. But it might create additional revenues due to the fact that company can sell “responsible” coffee with even bigger price margin. Time wise this idea might be implemented quite quickly. -Supplier related approach.

This involves responsible purchasing strategy – control and assessment on the level of bigger supply chain units – cooperatives/processing plants/exporters. Does not require complete reengineering of whole supply chain or additional costs related to separate farmers support/educational programs. More time consuming – selection, assessment of existing and new suppliers might take time. Does not really fit with Illy, since its strategy has always been close work with separate farmers. -From bottom to top strategy – every level of supply chain needs to be re-thought.

Company needs to realize the importance of each individual farmer (f. ex through payment of Fair trade or responsible farming bonuses to ensure the sustainable existence of farmer communities), not only use quality control (Illy is already working with ISO quality control standards) but rather keep an eye on whole production and processing process. Moreowever, the efficiency of packing, logistics and transportation should be analyzed and improved – which will result in eliminating or reducing the costly, non-environmentally-friendly steps.

But doing this Illy might incur additional costs (because now it will have to pay more for raw material), which can however be offset not at the expense of the “responsible” customer (who is ready to pay more for responsibly produced coffee), but rather through improving the efficiency of the whole supply chain, which will reduce the average COGS. This strategy involves extensive cooperation with all other stakeholders in coffee business – working on and adhering to commonly accepted quality and sustainability standards (like Fair Trade label, Utz coffee, RA and etc. , cooperation with local research institutes to introduce better and more sustainable farming practices for growers, or even bringing together all main players like Sara Lee, Nestle and the European branch of Kraft did in 2002 by creating of the Common Code for the Coffee Community, a multi-stakeholder initiative aimed at increasing sustainability and responsibility awareness in the coffee sector. 3)While choosing the alternative, we have been guided by Illy? s strategy, code of conduct and long-term benefits of the decision to the company.

We do not want any satisficing decision, we want to optimize the whole system – company has a lot of strengths, we can use them to build up more powerful structure. We want our customers to get only the best coffee, but we also want to do it responsibly. If there is any decision to be taken, which will involve not only additional costs or revenue growth, but also extensive long-run improvement of the whole business model, we will chose this decision. Meaning, that we will opt for alternative number 3. 4)Implementing the decision.

Improve the technology and introduce Integrated Process management to cut production and logistics costs and reduce business complexity to offset the costs of high quality coffee. The company buys coffee beans directly from farmers that reduce the higher prices in the spot market. The shipping and the supply of coffee beans from farmers to the company is carried out by company under strict supervision and inspections. This shows that the bargaining power of suppliers is low with company’s commitments to provide higher quality coffee to the customers.

There is a need to create a strategy for the developing economies especially the BRICs (Brazil, Russia, India and China) which will in future become key markets. A safe bet would be to create an alliance with a local partner who has expertise in the local markets, cultures and politics for example in India and China which are very big geographically, population-wise and culture-wise the local partner will add immense value in launching and growing the Illy products in a way that best suits that particular market. 5)Results Evaluation – might be performed in several steps.

On one hand, we will analyse the actual performance – if the revenue and market share is growing, if COGS are decreasing due to better efficiency, this means the strategy has been chosen and implemented right. On the other hand we need to understand the degree of customer awareness of our strategy – that means answering the question: did all these changes happen because we turned to more responsible business, or it was just due to other favourable factors…In this case customer opinion must be collected and analysed.

Competitors’ reaction and Illy’s response: What can the competitors do? There is a wide variety of ways – from fair competition by improving the quality or reducing the price to unfair battle, consisting for example of running a systematic smear and defamatory campaign against a competitor, both directly and indirectly (on the internet and through certain machine distributors), designed to put consumers off buying Illy? s coffee.

Some competitors try to do their own investigation to uncover the unsustainable practices within supply chain (sometimes a company itself has no idea what sub-sub-suppliers are doing) and make sure that it leaks to social networks. Illy should in its turn double-check the standards and practices within its supply chain to avoid bad rumor spread, and be proactive – have active campaign in social media to create awareness of its brand and customers’ loyalty. SWOT Tangible Product: The product which is coffee is very fine.

So the foundation of the brand which is the basic product is solid Basic Brand: Illy brand is is a red background with white lettering. You will also find Illy in plain bold red lettering. I believe is to attract the attention of the people. This logo has been used since (1980). The core elements for Illy are a strong brand name, high quality, attractive packaging and design The Augmented brand: Illy has added value to their brand by selling fresh beans in sealed cans, also giving the consumer the option to have it grind whether they want it bold, decaffeinated, caffeinated. hey also have tablet which goes inside espresso machines sold in any illy location. . The main factor is that along with high quality the brand is also associated with high price and hence is getting restricted to a niche market only The Potential Brand: When consumers only rely their morning coffee on the Illy brand than Illy has made their mark, even though in many other key markets like Italy it has been a major success, but it still needs to win other important key market like Japan and China.

There are in all six products that will be analysed here, premium coffee, coffee pods for machines, ready to drink canned coffee, Agrimontana, the confectionary products, Domori the chocolate business and Dammann Feres the tea brand. Leader: Coffee Try Harder: All the small brands come under this sector but mainly the pods of coffee business Double or Quit: Coke has partner up with the Illy brand to make up a canned coffee business in which the coffee will be sold to the consumer.

Custodial: Is similar to the cash cow concept in BCG, this would be the chocolate business Cash Generator: this is undoubtedly the premium coffee business Phased withdrawal: this is a difficult one to point but it seems the confectionary business is the most likely candidate as it is not generating as much growth or profits as it should Divest: Again a difficult one but once again the wine or confectionary products in the Illy portfolio

Key Points Analysis “Illy has a strong brand and is associated with high quality and premium pricing! ” The company has shown impressive growth despite recession The key strategic partnerships like the one with Coca Cola company for canned coffee are proving to be the real winners The group needs to focus its attention on the sister brands and needs to extend the well-established Illy rand image to these sister concerns There is an urgent need to improve the sales and awareness of the sister companies The company applies to its R, supply chain and marketing expertise to grow its coffee products like coffee pods and machines There is a need to create a strategy for the developing economies especially the BRICs (Brazil, Russia, India and China) which will in future become key markets The company needs to constantly re-invent the ways to sustain customer interest in its brand and its products, just like the Universita del caffe. ” Strenghts: Strong retail store operations:50,000+: events in which illy is involved annually worldwide and more than 6 million cups are consumed each day. -Wide geographic presence: 140: countries where illy is available -Top-quality final product: 4: major certifications for quality and sustainability, 4: company-founded research facilities, 4 of 8: major worldwide coffee industry innovations, This is a known and appreciated throughout the world for high quality and unique taste. The company has followed a strategy, which has a high focus on quality and consistency of their products -Experience: created in 1933 Innovation : The first,pressurized packaging, came in 1934, just one year after the company’s founding. By adding inert nitrogen gas under pressure, an oxygen-free environment forms as illy cans are sealed, preserving essential aromas and promoting mingling of coffee’s naturally occurring oils. Result: coffee that not only stays fresher longer than under any other packaging method, but whose flavor is actually enhanced over time by its surroundings. The second, came just one year later, in 1935: the Illetta, precursor of the modern espresso machine that, for the first time, separated pressure and heating elements.

Result: espresso that is consistently round, rich and balanced, not bitter or burnt-tasting. 1974 saw illy’s third revolutionary invention: pre-tamped, pre-dosed, expertly ground espresso in single serve paper pods. Result: delightful espresso in reach of anyone, anywhere – at home, at the office, or at a or restaurant. The system, called ESE (Easy Serving Espresso) became an industry standard. – Another strength is the strong supply chain right from the coffee bean farmers to the suppliers, Illy has maintained strict quality control and good relations creating value for everyone involved.

Weaknesses: sluggish growth rate / Investments needed (coffee machines that support the proprietary Opportunities: -Business expansions: Gruppo illy includes: •Domori – premium chocolate (acquired July 2006) •Dammann Freres – the legendary French purveyor of tea (March 2007) •Mastrojanni – critically lauded winery in Montalcino, Italy – (September 2008) •Agrimontana – high- quality jams and marron glace (stake acquired December, 2005) -Rising hotel and food service industry in Italy : Rising trends in coffee exports : 56%: share of illy coffee enjoyed outside of Italy, 200+: espressamente illy coffee bar locations worldwide -10% rate growth market -Been recognized from the market as the dominating market -Scientific research : genetics, agronomy, botany, physics, mathematics, chemistry, biochemistry, biology, engineering, physiology and psychology. All areas explored in the four laboratories illy. -Quality and sustainability : Sustainability has three-fold implicationsat illy: economic, social and environmental. Ready to drink coffee business partnering with Coca Cola will attract global customers and create newer segments for the company’s products -There is a need to create a strategy for the developing economies especially the BRICs (Brazil, Russia, India and China) which will in future become key markets. Threats : -Highly competitive market : Key competitors : Caffee Negro Group, Luigi Lavazza, Segafredo Zanetti, Starbucks Corporation -Risk of battle in dominating the market by multinationals : Nespresso -Economic crisis : Most of the global markets including nearly all the major markets that Illy perates in have suffered from recent credit crisis and economic downturn -While expanding globally the major risk involved is the supply of high quality premium coffee beans -The inconsistency in the growth of the sister brands and their chare in the portfolio creates a real threat of losing these brands at some point if they get totally overshadowed by the coffee business. At this point, Illy needs to consider the growth rate and growing strategies of these newly acquired brands to keep them profitable.

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