STiR coffee and tea magazine

46 STiR coffee and tea / Issue 4, 2018 (August / September) A By Dan Bolton Coffee Economics Andrea Illy, chairman illyCaffe S.p.A Growth is merely keeping pace with population gains says Andrea Illy: "Quality has been able to conquer even the most reluctant consumers. So, let's continue to improve quality, and we will have more consumption." ndrea Illy is gifted with the ability to see over the coffee horizon. His vantage as chairman of illycaffé SpA is that of a strategist perched above the daily fray, peering far ahead. What he sees globally is a coffee industry traversing a troubling course. Following his presentation at the Re:Co Symposium in Seattle last April, Illy sat with STiR to discuss his views on coffee economics, consolidation, financial sustain- ability, and a way forward. Illy's old world gentility is neither colonial or pretentious. It is grounded in the company's close ties to growers, initially in Brazil where illycaffé introduced rigorous science-based standards and began direct sourcing over 25 years ago. The Università del Caffè that Andrea established has graduated an entire generation of coffee entre- preneurs since its founding in Naples in 1999. The main campus in Trieste oversees 25 branches in coffee producing and con- suming countries and, since 2017, San Francisco. The program's 400-hour master's degree in coffee economics and science is highly rated and confers 60 university credits to qualified graduates in economics, agriculture, engineering, political science, math- ematics, and the natural sciences. Illy's first job with the company in 1990 was supervisor of quality control, a mission that continues to guide his stewardship of the $539 million grossing, family-owned ven- ture. In his broad view Illy, 54, sees the economics of coffee as topsy-turvy. As consump- tion rises, generating wealth among the 150 consuming nations along the supply chain, the 50 emerging economies that produce coffee receive proportionately less and less, he explains. Less than 10% of the global industry value is retained in producing countries. Illy explains that the number of coffee drinkers has more than doubled to 1.5 billion from 600 million 20 years ago. Yet, as quantities expand, market penetration remains flat. More people than ever drink coffee but individually, they drink less. The dominance of consuming countries in the value chain is "troubling," he ob- serves. Annual sales (excluding retail) are an estimated $300 billion, yet 20 million of the world's 25 million growers receive only $200 per year "which is much below the threshold of poverty established by the United Nations," he said. Farmgate prices barely cover the cost of production. Growers receive $20-25 bil- lion—about 6-8% of total value. While those up the chain apply handsome mark-ups and enjoy high margins, coffee as an agricultural commodity is experiencing deflation. Financial markets are another concern. Trading is highly volatile and there has been a "decoupling" of the physical stocks from prices. Prices remain low despite the fact that physical stocks shrunk from 55 million 60-kilo bags in 1990 to 21 million bags in 2016. Coffee is sustainable Consumers have increased their per capi- tal spending on coffee by 30% in the past 10 years, says Illy. Fortunately, per capita spending is growing at the same rate as consumption. "That means that quality drives con- sumption, not price. This is a very, very important message for the coffee commu- nity because it demonstrates that we have a strategy that is sustainable," said Illy. "The better the quality, the more sus- tainable the coffee, the more positive the coffee outlook as more people will drink it," he said. Cafés have been one of the main drivers, growing 6% and doubling the number of units, triggering an increase in consumption. This is most evident in emerging markets, he explains. Expect that growth to accelerate, led by the Chinese economic boom. In every country coffee consumption in- creases proportionately to disposable income, he said. Value is closely tied to specialty of- ferings. The market share of specialty is significant in North America but accounts for only 10% of market value in Europe, he notes. "Western Europe is now second to Asia—and Asia just started," says Illy. Korea, Indonesia, Japan, Vietnam, China, Australia, every country on the Pacific Rim is "adding value in an impor- tant way. Because they sell quality, they don't sell cheap coffee." Photo by Dan Bolton/STiR

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