The evolution of the coffee industry

Illy Caffe – Case Study
The evolution of the coffee industry
During the last 30 years, the coffee market has become extremely competitive. At the
beginning of the twentieth century the majority of production (between 75 and 90 per cent)
was controlled by Brazil (Lucier, 1988). From 1962 to 1989, the International Coffee
Agreement (ICA), signed by the main producer and consumer countries (Ponte, 2002),
regulated coffee prices and export quotas. Beginning in the 1990s, the market underwent a
profound change due mainly to technological development, the entrance of new producer
countries (for example, Vietnam) and the exit of the USA (the leading world consumer),
which broke the equilibrium previously established by the International Coffee Organization
(ICO). The glut of green coffee in the market (above all, Arabica coffee) had two effects; (1)
price collapse and (2) a reduction in average quality due to the poor quality of the products
from some new actors such as Vietnam (which was growing Robusta rather than ‘Arabica’
coffee) and to the reduced investment capacity of the growers, which caused them to lose
influence over the market (Muradian and Pelupessy, 2005). There are approximately 15
coffee species and about 100 typologies, but the Robusta and Arabica strains are the most
important species for production and consumption.
The denomination ‘Robusta’ comes from the resistance of the plant to parasites and illnesses.
However, this species produces coffee beans that are smaller, have more caffeine and a less
intense flavour, and these characteristics together create poor green coffee quality. In
contrast, the Arabica species comes from a plant that is more delicate and sensible to the
weather changes, and it produces coffee with a more intense and pleasant flavour. During the
first half of the 1990s, the power in the coffee supply chain – which we can subdivide into
five groups of actors (growers, local traders, international traders, roasters and retailers) –
shifted downstream. The producers lost their bargaining power (Talbot, 1997), while the
international traders engaged in vertical integration upstream with local traders and the
growers (Losch, 1999) (made easier by market liberalisation) and sometimes also
downstream via the acquisition of roasters. Traders took advantage of the oversupply of green
coffee, obtaining a lower purchase price for an inferior end product whose lower quality
would not be perceived by the consumer (Kaplinsky and Fitter, 2004).
Towards the end of the 1990s, the winning strategy in the market became coffee decommoditisation in hotels, restaurants and cafes and in big retail. The most important roasters
turned their efforts to the quality of the product as perceived by the consumer, suggesting socalled ‘specialities’, the coffee types that are not traditional industrial blends because of their
high quality (like espresso coffee) or because of their special flavouring and packaging
(Ponte, 2002). In this way, they aimed for the creation of a ‘consumer experience’. To support
this strategy, these companies implemented ‘branding’ policies (for example, Nestle and
Kraft) that fostered the diffusion of the coffee culture. With regard to coffee house
ownership, one successful strategy has been the creation of a ‘café atmosphere’, as in the
famous case of Starbucks.
The small- to medium-sized Italian roasters, which have historically offered espresso as
speciality in their local market (and sometimes in internationally), operated in a market that
was intensely transformed by the events described above without the financial resources to
realise full control over and the appropriate coordination of their own coffee supply chain.
This lack of control did not allow many of them to obtain the high profit margins necessary
for growth of the size required to penetrate the global market as their main international
competitors did. However; there are some successful examples of Italian enterprises in the
global espresso coffee market, one of which is the Illy Caffe Group (Illy), universally
recognised as an excellent and successful company. This case study illustrates how Illy
competes and wins in the market thanks to the exemplary implementation of its business
strategy, which is focused on the competitive prioritisation of quality through consistent and
integrated supply chain management practices. Illy’s operational integration via a medium- to
long-term contract with customers and suppliers is sustained via an innovative approach: the
diffusion of Illy’s knowledge, expertise and coffee quality culture along the entire value chain
from the green coffee growers to the final consumers.
Illy Caffe Group
The Illy Caffe Group (Illy), established in 1933, operates in the espresso market and has more
than 700 employees, with 480 working in the headquarters in Trieste (Italy) and the
remainder in its subsidiaries abroad. The manufacturing plant is located in Trieste, where the
coffee is processed and packaged after being shipped across the sea from more than 15
countries located mainly in South and Central America, Africa and India. Few enterprises
have the ability to increase profits and market share while maintaining their own strategic
direction as Illy has done; in fact, the company has always focused its strategy on high
product quality and customer service with the aim of giving coffee a much greater importance
than is normally associated with that commodity- dressing up a product that is normally
anonymous and de-commoditising it (De Toni and Tracogna, 2005).
Illy Caffe’s strategy in the espresso market
Illy has created a balance between a clear strategic vision, defined at the corporate level, and
competent business management focused on very effective supply, logistics, production and
distribution policies. These two levels, entrepreneurial and managerial, are connected in their
focus on ethics, excellence and the centrality of the customer. The competitive priority on
which the corporate strategy is based is the high level of quality of the product and of the
services offered to the consumer. Illy’s vision is as follows:
We aim to be the world reference for coffee culture and excellence. An innovative company
offering the finest products in the best places, growing to become the high-end segment
leader and creating superior stakeholder value (Illy Caffe internal documents). Likewise, its
mission is: Thanks to our enthusiasm, teamwork and values, we aim to delight people all over
the world who value quality of life by offering the best possible coffee nature can provide,
enhancing its perfection through the most innovative technologies, and inspiring emotional
and intellectual involvement by seeking beauty in everything we do. (Illy Caffe internal
documents).
It is fundamental to highlight the uniqueness of a particular strategic choice, Illy’s ‘one blend,
one brand’ philosophy: the company seeks to provide high-quality coffee that is identical all
over the world at any time (Andriani and De Toni, 2008). Consequently, Illy produces and
distributes a unique, 100 per cent high-quality Arabica coffee blend.
The three pillars of Illy’s competitive strategy are:
• The creation and development of a global identity for Illy’s brand as a synonym for quality
and excellence;
• A focus on the premium market segment;
• Product differentiation based above all on the qualitative excellence of the coffee in every
respect, which allows the consumer a unique experience.
Illy’s leadership in the espresso market
The Italian espresso coffee market is dominated by medium- to-large-sized roasters that own
more than 90 per cent of the market share, one of which is Illy, and by many
microenterprises. Illy is a leader in the Italian market thanks to its market share, while in the
international market, characterised by the presence of large players, Illy’s brand is famous
throughout the world for its high-quality espresso blend. Thus, Illy is the global leader of the
premium market segment. The company’s success can be evaluated based on its turnover
growth, €280 million in 2008 (+400 per cent in the last 15 years). The Illy Group distributes
its unique espresso blend, composed of 100 per cent of Arabica coffee, in 130 countries
through three strategic channels:
1. Hotels, restaurants and cafes;
2. Retail (large-scale retail and small-scale traditional retail markets); and
3. Vending machines.
The Illy coffee supply chain
There are different interaction levels in a coffee supply chain, some characterised by strong
integration performed by multinational companies and others fragmented with many
specialised network actors (growers, local traders, international traders, roasters and
retailers). The large multinational companies in the food industry use vertical integration to
raise profit margins, increase their control of part of the competitive environment and
especially (in the particular case of specialities) maintain the quality level of the product as
requested by the market. Illy bases its business strategy on product and service quality,
obtaining an evident competitive advantage in the espresso market thanks to the careful
management of its supply chain from the supply of green coffee and its direct relationships
with the growers to distribution and its indirect relationships with consumers. However, it
does this without implementing traditional vertical integration, which would be rendered less
effective because of the small size of the firm. Thus, from this perspective, Illy’s strategic and
operational management of the coffee supply chain (as in the Figure) has distinctive
characteristics that are aligned with its business model. However, this strategic choice does
not guarantee the quality of the espresso in the cup because the coffee beans can undergo
variations in quality from the harvesting phase through the entire supply chain. For this
reason, Illy has implemented a set of technical, social and cultural practices at every level of
the coffee supply chain.
First, to produce coffee of excellent quality requires high-quality raw materials (or green
coffee). Coffee grows in hot and humid or hot and temperate climates in the regions between
the two Tropics, where a rainy season follows mild rains. As a result, coffee growers are
located in continents far from Italy: Africa, Asia and Latin America (see Figure below). Only
through the careful selection of suppliers, it is possible to obtain high-quality green coffee
without the growers’ direct control. Therefore, in recent years, Illy has begun some initiatives
in green coffee-growing countries to select and motivate the growers (of which there are
almost 4000 in the Illy database) and enhance production quality.
In 1991, Illy instituted an award for the best Brazilian green coffee growers, the ‘Premio
Brasil de Qualidade do Cafe Para Espresso’, with the aim of encouraging a culture of
excellence in coffee growing; the prize was intended to combat the problem of poor quality
green coffee in Brazil, the main worldwide producer and exporter but also the country with
the highest percentages of batches rejected by Illy. As a result, the growers began to engage
in research into improving the quality of their own product, collaborating among themselves
and transferring knowledge. Illy fosters this phenomenon of cross-cultural fertilisation and
imports, transfers and shares practices and expertise developed in other countries (the crossfertilisation of knowledge and expertise).
The knowledge and expertise transferred among the different growers allows them to reach
Illy’s quality standards and, substantially, to self-select; growers with poor-quality products
decide not to submit green coffee batches for the competition, reducing Illy’s efforts in terms
of supplier selection. Moreover, Illy guarantees for its best growers (even the ones not
awarded prizes!) a premium price at least 30 per cent higher than that in the New York
Coffee Stock Exchange when they demonstrate that they have attained the requested level of
quality. The knowledge and the know-how accumulated by the enterprise, based on many
years of experience and continuous research and development, has been transferred to the
coffee growers (especially in Brazil and India) through academic courses (the University of
Coffee). The aim is to teach the best techniques and technologies for harvesting and postharvesting as well as business management. An example of the effect of this knowledgesharing has already manifested itself in the first phase of coffee-processing: cherry harvesting
from the plant. There are two main methods of harvesting: picking and stripping.
The first is the process of hand-picking only the mature cherries from the branches of the
coffee tree, guaranteeing a higher-quality harvest. The second method refers to the
mechanised or manual picking of every cherry on the branch, with no regard for its maturity,
so that the harvesting process is more efficient in terms of time and cost but produces a
lower-quality result. Thanks to cultural diffusion and to knowledge sharing practices, Illy
technicians have been able to push their growers to adopt the picking technique.
After the harvest, as shown in the figure, the cherries are sent to ‘parchmenting’ factories
where the green coffee beans, after a processing phase, are divided from the rest of the
cherry, dehydrated and sent to the market. During this phase, the technicians, selected and
trained by Illy, pick the first sample (called the ‘offer sample’) from batches that can be
potentially bought by the firm and send them to the laboratories for analysis, where a
preliminary screening or a final evaluation of the sample being submitted for acceptance and
the corresponding batch takes place. The laboratories only fulfil a screening function, are
located in the growers’ countries and are not owned by the Italian company, so they have
limited responsibility for the sample pre-selection process, working from Illy’s evaluation
criteria and parameters. The laboratories commissioned for the final evaluation of the
samples have a greater degree of responsibility and are either owned by Illy (the laboratory in
Trieste) or are engaged in a permanent collaboration with the company (the laboratory in
Brazil). When the offer sample is approved by one of these two laboratories, Illy signs the
supply contract with the grower in question.
Green coffee transport to Illy’s plant
When the contract is signed, the green coffee is transported under the grower’s supervision
from the plantation to the dock, where Illy takes a second sample, called the ‘shipping
sample’, from every batch and tests it in the same manner as the previous sample was
analysed. If there is a complete match between the beans and shipping samples, the batch
obtains shipping authorisation. The process of loading the batch onto the ship represents the
transfer of the property from the grower to Illy. Owing to the main characteristics of green
coffee beans (their flavour and the possibility of degradation), the transportation process is
critical for the quality of the final coffee because it can influence its degeneration in two
ways:
1- Through container pollution caused, for example, by water, light or the remnants of
products with other flavours (for example, cardamom) from the previous transport
process; or
2- Through the position of the container on the ship, including proximity to containers
containing flavouring products or positioning over the deck; in fact, the shipping
lead time of about 3-4 weeks, of which two are near the equator; exposes the green
coffee to thermal shock, making it taste ‘woody’. Although Illy does not have the control over
the transport process, it shares its knowledge about these critical potential issues with the
shipping companies (diffusion of awareness) to safeguard against from the potential negative
effects of container type, container position and lead-time. From a technological point of
view, Illy began the use of plastic bags containing one ton of green coffee that could be
moved by machine. These are called ‘big bags’. The advantages of this innovation are:
• The reduction of personnel costs;
• Materials handling is less onerous for a healthy individual (with no more than 60 kg of
manual weightlifting required);
• Increased materials-handling speed; and
• Better thermal insulation from humidity and temperature changes, which permits better
product preservation during the transport process.
Green coffee storage, transformation and packaging
Once the coffee has arrived at Trieste’s seaport, Illy conducts the third and last quality test.
After the green coffee has passed all three quality tests, it is stored in a suitable warehouse for
a period of 7 to 12 months. For this purpose, Illy has acquired an area of 60,000 square
metres near the Trieste port where all of its logistical activities are carried out. It was
necessary to build a clean warehouse with a high rate of insulation and a steady temperature
(T = 15°C) and humidity level (50 per cent); this allows both a storage period of 12 months
(versus 7 months in the previous warehouse) and a reduction of 50 per cent in the amount of
faulty coffee beans discovered.
When the green coffee is dispatched for the blending, roasting, cooling and milling phases, it
undergoes innovative technical processes that are meant to ensure quality (for example, the
process of cooling the air and pressurising the coffee using nitrogen). The more critical phase
is the blend preparation phase because if the Arabica coffee batches have heterogeneous
characteristics (even if they arrive from the same grower), the coffee still has to meet the ‘one
blend, one brand’ requirement to be considered high-quality: a clear strategic priority of
Illy’s. For this reason, during this phase, there is an additional test carried out that only
requires tasting the coffee. The firm has organised three years of internal tasting courses for
this purpose (versus courses of a duration of only 3-6 weeks at other companies). As a result,
Illy has a high number of internal experts involved in the tasting process. In the final
packaging phases, the quality of the coffee is maintained via so-called ‘active packaging’, the
introduction of nitrogen under pressure inside metal cans. This technique has three main
objectives:
Preserving quality: the techniques and materials used for the packaging protect the properties
of the coffee from the atmospheric agents for a longer period of time:
• Quality improvement: during the first two months after packaging using nitrogen, there is a
notable improvement in the product’s qualitative characteristics;
• Image: the fashionable silver design of the can is soon noticed on supermarket shelves.
The coffee cans are then stored in the warehouses both in Trieste and in the main commercial
subsidiaries for about three months. In the other 100 countries, the local retailer stores them.
Coffee distribution and sales
The two channels on which Illy focuses its major efforts are the hotel, restaurant, coffee shop
channel (with significant attention to the needs of cafe owners) and retail. These channels
require different modalities based on the specific needs of the customer. The hotel, restaurant,
café channel is characterised by its selling network and the capillarity of the service offered.
Therefore the Illy strategy, besides offering high-quality blends, is to assure a high level of
service through a high rate of visits and deliveries, technical and commercial customer
support and particular payment terms for its coffee machines. To satisfy the need for efficient
and reliable deliveries, Illy chooses an express courier even if this method is more expensive;
the choice allows for knowledge-sharing regarding the measures that the courier must take to
guarantee the service level requested by the customer (diffusion of awareness). Retailers’
requests are very different. Illy uses retailer distributors who offer a tailored and less
expensive service than express couriers. For example:
• The express courier delivers the product in 24 hours, but delivery speed is not a priority of
the retailer, so for them, the arrival of the material is scheduled for 3-4 days after order
confirmation;
• The multi-product trucks arrive at the multi-product retailer warehouse, so the customer
enjoys logistical and operational advantages in managing a smaller number of trucks;
• Costs decrease by one-third compared to those charged by the express courier, thereby
permitting economic compensation.
Coffee sales
Finally, Illy not only employs a typical branding strategy but also diffuses the culture of its
coffee on a downstream network level. In the opinion of the firm, the quality of the coffee is
in fact due 50 per cent to the blend quality and the transformation/packaging processes and
50 per cent to the way in which the drink is prepared and consumed. In fact, consumerperceived quality is partly a result of objective factors such as the water used, the cleanliness
of the cup, the ability to properly use the espresso machine, the flavours in the consumer’s
mouth. However, it is also partly a result of perceptual factors like, for example, the kindness
of the personnel and environment reception. If some factors can be overseen by the cafe
owner; others depend on the consumer. There are three initiatives that Illy has implemented
to help the customer (cafe owner) and the consumer understand product quality:
• Illy’s specialised technicians visit cafes to teach to their owners the art of making a good
coffee and the importance of kindness and professionalism in satisfying the consumer.
• Illy has developed the ‘coffee university’, intended not only for the cafe owners but also for
anyone else interested in deepening their knowledge of the coffee world.
• ‘Espressamente Illy’, a cafe concept created by Illy, is intended to produce a particular
atmosphere in which consumers can have a pleasant experience.
Conclusions
The figure below synthesises the practices implemented by Illy in a framework that illustrates
the supply chain management areas (purchasing, inbound logistics, firm, distribution and
sales) and managerial levels (quality management, knowledge/know-how and cultural
diffusion) where the company operates to achieve its strategic purpose: high product and the
service quality.
Illy’s quality management and knowledge/know-how diffusion along the supply chain
As highlighted in the first part of the case, many researchers have already proven how the
overall integration of quality management practices along the supply chain has a positive
effect on the quality of products and services. This topic is central in the food industry and
particularly in the espresso coffee market. Consequently, it is necessary to implement quality
management practices at every link in the supply chain from the producer (in our case, the
green coffee grower) to the consumer. However, to manage quality efficiently and
effectively, it is necessary to control and coordinate the entire supply chain.
Small- to medium-sized enterprises encounter significant challenges in obtaining this type of
control because of the practical unfeasibility of vertical integration. Moreover, in the coffee
sector, this dynamic is heightened by geographical distances, the great number of potential
suppliers and the barriers created by international traders. The Illy case study shows how a
small- to medium-sized enterprise can overcome all of the issues above by becoming a supply
chain coordinator (SCC) and control quality at every link through the adoption of quality
management practices and the systematic application of knowledge to the whole supply
chain.
Cultural diffusion towards a supply chain learning (SCL)
In section A, we pointed out the voluntary and participative nature of SCL and the need for a
real effort and an extended use of resources in SCC, but we also noted how trust and the
diffusion of a shared culture can sustain learning processes. In the Illy case (figure below),
the relationships of quality culture diffusion (even with non-essential suppliers) are
fundamental for the coordination of the supply chain and the improvement of product and
service quality. The cultural initiatives implemented by the company have a positive effect on
quality output along the whole supply chain, from the quality of the raw material to the
product quality perceived by the final consumer. Furthermore, the effect of cultural diffusion
is to mitigate the Illy effort to maintain continuous improvement because it creates emergent
behaviour in the different actors that is self-aligned with the Illy vision. During the last 20
years, Illy has exposed its entire supply chain to the knowledge, know-how and coffee quality
culture developed inside the company in numerous countries (via the cross-fertilisation of
knowledge and know-how) to obtain the best quality coffee possible. If adaptive learning is
the ‘doing what we do better’, the Illy cultural strategy has created real generative learning,
defined by Bessant and Buckingham (1993) as the ability to step back and reframe the
problem. All of these events have helped to improve and sustain the knowledge diffusion
processes performed by Illy from a SCL perspective.
Discussion
The group has chosen to directly address the grower, bypassing the international traders and
managing upstream activities. This choice was feasible only because the enterprise enjoys an
in-depth knowledge of products and processes. As a matter of fact, the diffusion of
knowledge, expertise and quality culture as performed through many initiatives (guidance
regarding picking methods, the Premio Brasil de Qualidade do Cafe Para Espresso in Brazil,
the foundation of the coffee university and so on) has allowed the emergence of virtuous
behaviour among green coffee growers like supplier self-selection, thereby considerably
improving coffee quality. In relationships with shipping firms and express couriers, the
diffusion of expertise and the quality culture is translated into the sharing of awareness,
which indirectly guarantees high quality.
However, it is within the walls of the firm that knowledge, expertise and a coffee quality
culture originate, develop and are diffused; these can only become sources of company
competitive advantage and supply chain coordination through their constant renewal. The real
‘engine’ of this diffusion of knowledge, expertise and culture about coffee is Illy’s effort to
deepen and create better comprehension of product and production processes. In this regard,
the company has promoted many research and development projects in collaboration with
Italian and international universities. For example, some projects are focused on the
relationships between taste, perception and genetics, seeking to ascertain how coffee features
arise from its genes.
The key to Illy’s success can be found not only in its strategy of marketing an excellent
coffee that is identical all over the world (summarised as the ‘one blend, one brand’
philosophy) but also in the careful integration and coordination of quality management
practices along the whole supply chain. This coordination allows Illy to obtain very high
standard product quality from the green coffee to the cup. If internal and external quality
management practices and cultural diffusion in the downstream network are typical of the
espresso coffee sector, its extension to the whole supply chain provides a persuasive and
innovative explanation for the success of Illy.
Knowledge diffusion and cultural diffusion as drivers of SCM integration in the pursuit
of product quality
The Illy Caffe case study suggests how a medium-sized enterprise can compete and win in
the international market by integrating quality management practices along its supply chain
and, above all, by becoming the supply chain coordinator through the systematic diffusion of
knowledge, expertise and culture to the actors involved in pursuing product quality.
Original source: De Toni, A.F., Franco, R.D., Li., J., Li, Y., Nassimbeni, G., Sartor, M.,
Zhao, X. and Xu, X. 2011, International operations management – Lessons in global
business, Burlington, VT, USA: Gower Publishing Company.
Using evidence from the Illy Caffe case and your own research, address the following
questions:
1. Outline Illy Caffe’s core competencies and capabilities. (5 marks)
2. Explain the relationship between capacity planning and location and their importance
to Illy Caffe. (5 marks)
3. Assess the specific measures of quality used at Illy Caffe. (10 marks)
4. Consider sustainability challenges in relation to Illy Caffe’s supply chain.
Recommend three UNSDGs Illy Caffe could include in their supply chain strategy. (10
marks)
5. In graphical form, show how innovation and development ultimately proceed from
the competitive strategies of Illy Caffe, and how they enhance the performance of the
firm. (10 marks)
6. Discuss present and foreseeable challenges for Illy Caffe. (10 marks)