STiR coffee and tea magazine

STiR coffee and tea 47 178x61mm Graphics courtesy Illycaffe Consolidation from the ground up Ten years ago Brazil and Vietnam accounted for 46% of coffee production. Their combined share has since grown to 53%. The very soil on which coffee is grown is getting scarce. By 2050 a combination of heat and irregular rainfall will reduce the land suitable for arabica production by half. Africa is emerging as a major producer. China is already the seventh largest arabica producing country in the world. The entire industry is literally reshaping. During the past five years there have been $43 billion in coffee mergers and acquisitions (m&a), says Illy. "This is the first time in history that such a huge amount of capital has flooded the market in order to consolidate the industry," he said. "This industry consolidation is probably led by disruptive technology tied to growth of the portionate [single-serve] systems," he surmised. When customers shift from roast and ground to single- serve it means traditional coffee brands are not growing any longer. This is why you have consolidation through m&a, put- ting brands together to gain market share, he explains. This is being done by a big German group JAB Holding, which is now number one in volume, and number two in value in just five years," he said. Consolidation provokes a reaction by other competitors, changing the strategy from organic growth to external growth. "All the industry is in a kind of turmoil," he said. "Either you feel that you are prey; that you are at risk of becoming prey, or that you should become a predator," he observed. Press accounts name illycaffé as an acquisition target for Nestlé or JAB Holdings. "I'm not too concerned because you have at the same time differentiation and fragmentation of the industry." Direct sourcing The Illy family began sourcing direct in 1991 – long before Third Wave shops touted their relationships at origin. Virtually all the company's coffee is purchased direct. Vertical integration has been financially successful, he says. "Direct sourcing is a core element of our strategy. We work hand-in-hand with coffee growers, transferring the knowledge needed to produce coffee specifically for us and applying quality standards above the official market standards, and, of course, paying them a premium," he said. "This gives us better quality traceability, creates loyalty with the coffee growers, and gives us the ability to narrate the product story we sell to customers," he said, adding, there are plenty of positive effects, one of the most important of which is that it encourages differentiation. The way forward The way forward was paved in Milan at Expo 2015 during a great celebration of coffee attended by 13 million visitors with 40 producing countries participating, Illy explains. "Why do we drink coffee? It is for the wellbeing that it gives us. It's about pleasure, and it's also about health. It makes us live better and longer," he says. The concept is described in the Milan Coffee Legacy, an official document filed with the United Nations. "In it we acknowledge the existence of a virtuous cycle that connects the wellbeing that coffee delivers to consumers with the development of coffee growers," he said. Integrating downwards creates more value and opportunity for growers who are closely tied to a whole ecosystem of roasters, he said. The result is better quality coffee—and more consumption. Coffee prospered the last two decades because of quality and greater differentiation which brings curiosity and engage- ment, says Illy. "Differentiation is one of the strategies to increase the value of the coffee industry that you see in beer and wine," he observes. There are 300,000 different beers and only 30,000 coffee brands. "Wine has 1,000 varietals and one million brands," he said. "Coffee is a relatively young industry that has to learn from other industries how to really make itself sustainable and create value," he said. Growers ~$20-25bil Trading ~$35-45bil Roasters ~$65-75bil Retall ~$85-105bil Consumer ~$65-80bil off pr. ~$240-280bil on pr. Differentiation in beverage offerings Coffee Beer Wine Varietals 36 +480 +1,000 Brands 30,000 +300,000 +1,000,000 Retail Price (retail) $2.50-3.50 $5-7 $10-12 Source: Re:Co Symposium Presentation illycaffe

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