Espresso Lane to Global MarketsRevisit the Espresso Lane to Global Markets case. Conduct a cultural, political, legal, economic, and socioeconomic analysis using information from the case. Based on your analysis which country or countries have the best potential for Espressamente? Further, what is the best mode of entry for each selected market?
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THE ESPRESSO LANE TO GLOBAL MARKETS
Ilan Alon and Meredith Lohwasser wrote this case solely to provide material for class discussion. The authors do not intend to
illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.
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Copyright © 2012, Richard Ivey School of Business Foundation
Espressamente is all about a perfect shot of dark elixir . . . Espresso is a miracle of chemistry in a cup.
Andrea Illy, CEO of Illycaffé S.p.A.
The global coffee industry was booming. From October 2010 to September 2011, world coffee exports
increased by 9.4 per cent to 103.1 million 60-kilogram bags.1 The International Coffee Organization
stated, Demand prospects for coffee continue to be promising, particularly given the growth of niche
markets in traditional consuming countries and the arrival of new consumers in emerging markets and
exporting countries.2 Christophe Reale, managing director of Espressamente at Illy, contemplated
Espressamentes place within the global market and the companys future growth opportunities. He knew
that a global route to market meant prioritizing markets, but where did the greatest potential for success
lie? And what kind of strategy should he pursue to take Espressamente to market?
Founded in Trieste, Italy, and inventor of the precursor to the espresso machine, Illy marketed a unique
blend of coffee drinks in over 140 countries and in more than 50,000 high-end restaurants and
coffeehouses. Over six million cups of Illy espresso were consumed every day. In Italy, Illy coffee is
widely recognized as the best coffee and is a must have in Italian restaurants. Over time, Illy became
known as a company based on quality and espresso culture. The company focused on premium travel,
business-to-business operations, fashion and culture.3
Illy was well known for producing the worlds finest tasting coffee, which it accomplished through
quality obsession and knack for innovative design. After beans were purchased, Illy-branded 60-kilogram
bags of coffee beans were shipped to Italy; bags were placed in shipping containers to maximize air
circulation, which reduced the risk of mould, condensation and unwanted odours. In Italy, the bags were
International Coffee Association, Monthly Coffee Market Report, www.ico.org/documents/cmr-0911-e.pdf, accessed on
February 13, 2012.
Espressamente Illy Company Report, 2011.
handled by an automated system and sophisticated machinery. The last selection is conducted by six bichromatic systems which electronically photograph each bean, detecting and eliminating any which do
not meet strict color standards an indication that the bean is not fully ripe, or is a stinker, a fermented
bean that can ruin a whole batch. If a bean was defective, it was removed, as were the beans that
surrounded it. Illys approach was one of zero defects.4
Illy built its brand upon its decadent coffee but expanded its product lines over time to include espresso
machines, cups and mugs.
Born in Illys unique Italian heritage, Espressamente was the companys own franchised coffee bar with
200 locations in over 30 countries. It served transit retail markets and began to expand to premium retail
markets. Espressamente, meaning clearly or expressly in Italian, was meant to purvey the original
Italian cult of espresso. CEO Andrea Illy wanted to create an exclusive destination with an emphasis on
quality and aesthetics. The Espressamente experience will be oh-so-Italiano, focused on coffee served
short and dark with the perfect crema, or foam, in a designed demitasse.5 (See Exhibit 1.)
In its 201012 strategic plan, Espressamente stated that its goals were to be recognized as the only
authentic Italian bar chain delivering superior customer satisfaction to premium transit coffee lovers, to
be profitable and to become a strong stand-alone brand. To achieve these goals, the company first focused
on premium transit, retail and service partners instead of private dealers, as well as consistency
development. In addition to premium transit locations, the company added luxury retail stores.
THE GLOBAL COFFEE INDUSTRY
Coffee, after oil, was the most heavily traded commodity in the world.6 As of 2005, coffee sales each year
amounted to over US$70 billion. The International Coffee Organization emphasized that the importance
of coffee to the world economy cannot be overstated. Recently, demand had grown in both developed
and emerging markets. Specialty coffee was projected to increase worldwide; in the United States alone,
specialty coffee sales were forecasted to increase by 20 per cent each year.7
Coffee sales across the globe were greatly affected by disposable income and the general economic
environment: Coffee manufacturers depend on a healthy economy and strong consumer spending to
drive sales, as consumer spending drives demand for higher priced specialty products.8 As the middle
class grew in emerging markets, so did prospects for a successful coffee market where the expectation for
a premium product was particularly strong. Additionally, the coffee market was characterized by high
saturation and aggressive competition. In developed nations, there were thousands of coffee shops, both
chains and independents, that competed for space. As a result, many of the larger retail chains looked to
international expansion for growth. Emerging markets with growing middle classes, such as in China and
India, were experiencing high competition among coffee retailers as Western companies expanded.
www2.illy.com/wps/wcm/connect/us/illy/, accessed February 17, 2012.
Basta with the Venti Frappuccinos, Bloomberg Businessweek, 2006,
www.businessweek.com/magazine/content/06_32/b3996057.htm, accessed February 13, 2012.
Global Exchange, Coffee FAQ, www.globalexchange.org/fairtrade/coffee/faq, accessed February 14, 2012.
NACS Online, Fact Sheets: Coffee Sales,
www.nacsonline.com/NACS/News/FactSheets/MerchandiseandServices/Pages/Coffee.aspx, accessed February 14, 2012.
First Research, Industry Profile: Coffee Shops,
1?accountid=11311, accessed February 14, 2012.
Although there was still room for growth in these markets, competition was aggressive. High levels of
competition in the premium coffee industry forced players such as Starbucks, the Coffee Bean & Tea
Leaf, Costa Coffee and independent coffee shops to continually innovate and adapt their products and
offerings to compete in these concentrated and saturated markets.
A variety of environmental and legal issues surrounded the coffee industry as well. Sustainable coffee
production and human rights issues that affected the supply side of coffee became essential to the future
of the industry. The world coffee market was characterized by a coffee paradox: there was a coffee crisis
in producing countries with trends towards lower prices and declining producer incomes while there was
a coffee boom in consuming countries characterized by rising sales and profits for retailers. Suppliers had
very limited power; in 2005, when coffee sales amounted to over $70 billion, producers only received
about $5 billion.9 Some legal issues arose as a result of increased coffee sales in emerging marketplaces.
For example, developing nations had fewer laws related to copyright and other regulatory measures.
The coffee industry was highly competitive. Espressamentes main competitors worldwide included
Starbucks, McDonalds McCafé, Costa Coffee, Lavazza, Tchibo, Segafredo and the Coffee Bean and Tea
Leaf. Each had different competitive advantages, and all continued to expand internationally (see Exhibit
Reale considered international expansion and, based on an analysis of Illy sales (see Exhibit 3), internal
analysis of documents, executive knowledge of external markets and sales potential, decided to focus on
the markets with the highest potential: Brazil, China, Germany, India, Japan, the United Kingdom and the
Brazil, the largest grower of coffee in the world, was the second largest consumer coffee market behind
the United States. Coffee consumption in Brazil rose rapidly in line with increased interest in premium
varieties and the opening of new, American-style coffee shops, which presented opportunities for coffee
retail companies. Brazil was one of the fastest growing markets by sales in the specialty coffee shops
industry, with growth rates always exceeding 30 per cent.10 Additionally, the coffee market in Brazil was
one of the most dynamic in the world and increasingly attracted foreign direct investment.11 Starbucks
was highly successful in Brazil, highlighted by the growing demand for higher value gourmet coffee
varieties. It was projected that the continuation of this trend meant that value sales would increase at a
faster rate than volume sales over the next five years.12
Although consumption was rising due to a larger and wealthier middle class, consumption per capita was
still quite low compared to mature markets. Despite this, it was possible that Brazil would overtake the
United States in terms of overall coffee consumption sometime in the next few years as increased wealth
in Brazil drove a rise in locals thirst for espressos and cappuccinos.13 As the eighth largest economy in
Geoff Riley, Market for Coffee, http://tutor2u.net/ economics/revision-notes/as-markets-coffee.html, accessed February
Business Monitor International, Brazil: Food & Drink Report Q4,
the world, Brazil weathered the global economic crisis well and positioned itself as a regional and global
power; it is expected to grow to become the fifth largest economy in the next five years. Growth in
exports and social programs lifted tens of millions of Brazilians out of poverty, and a majority of the
population became a part of the middle class. As a result, purchasing power parity increased dramatically,
and domestic consumption became a driver of Brazilian growth.
Brazils franchise sector was growing on a large scale: in 2010, 1,855 franchises operated 86,365 units
and employed 777,285 people.14 Only 11 per cent of franchises were foreign-based franchisors and there
was natural fierce sector competition.15 Entering the Brazilian market meant localizing products and
services to better compete in a market in which the strength of local brands was a major challenge.
Foreign-based franchisors developed relationships with non-competing businesses because of the
challenge of finding suitable master franchisees in Brazil; additionally, joint-venture partnership tended to
appeal to Brazilian partners because it meant risk was divided between the two partners.16 Breaking into
this market requires thorough research on the viability and uniqueness of the services and products.17
Brazils capital, Brasilia, was approximately 9,054 kilometers away from Rome, Italy. The flight time
from Brasilia to Rome was approximately 12 hours.
Chinas beverage industry was one of the countrys fastest growing sectors. Tea and coffee were
established product categories there and were expected to experience modest growth between 2011 and
2015? coffee consumption was projected to increase at a compound annual average growth rate of 10.7
per cent. The relatively modest growth forecasts can be attributed to the saturated and mature nature of
the market.18 Despite saturation and maturation, large coffee industry players such as Starbucks, China
Resources Enterprise and Gourmet Master had plans for aggressive expansion to capitalize on the
growing café culture in China.19 Coffee drinkers in China often enjoyed food while they drank coffee,
which resulted in minimal to-go sales. However, on-the-go consumption of coffee was increasing.
Historically a tea drinking culture, coffee had become an established product category as well. China
boasted a huge population, 43 per cent of which lived in urban areas. After the economic downturn,
consumptions role in the economy declined even though real wages increased in China 12.5% a year for
a decade . . . 20 As a result, the country experienced decreasing rates of consumption. Despite the threat
of decreased consumption, rising consumer income and increasing standards of living, as well as the
awareness of better-off lifestyles, especially among the growing number of middle-class consumers, have
boosted the demand for high-quality products.21
Brazilian Franchise Association, Economic Impact in Brazil Reaches New Heights in 2010,
df, accessed February 17, 2012.
Paulo Rodrigues, Brazil: Franchising, http://franchise.org/ IndustrySecondary.aspx?id=45562, accessed February 17,
Bachir Mihoubi, Dealing with the Complexities of International Expansion, www.franchise.org/Franchise-Industry-NewsDetail.aspx?id=53325, accessed February 17, 2012.
Business Monitor International, China: Food & Drink Report Q1,
accountid=13584, accessed February 14, 2012.
International Trade Centre, The Coffee Sector in China, www.intracen.org/WorkArea/DownloadAsset.aspx?id=37584,
accessed February 17, 2012.
The complex nature of conducting business in China resulted in the establishment of foreign companies
through partnerships or master franchising. In 2007, the Chinese Ministry of Commerce changed and
clarified many laws that made doing business difficult for foreign companies. Importantly, the two-plusone-requirement stipulating that prospective franchisors own at least two directly operated outlets in
China for at least a year was amended.22 Although China was slowly changing, franchising there was
still complicated: The concept is still new to China with many Chinese unfamiliar with it. Moreover,
collecting royalty payments from your mainland franchisee and ensuring that the franchisee maintains the
integrity of your brand is also a challenge.23 Additionally, foreign franchisors were not allowed to
directly purchase real estate property located in China unless it was for personal use. In 2008, China had
3,500 franchised businesses and more than 300,000 franchisees.24
As a result of the complexities of running a business in China, importance was placed on establishing
different regional partners to successfully and respectfully navigate the Chinese coffee market.
Partnerships also allowed companies to gain insights into Chinese tastes and preferences. Additionally,
cafés were frequented by young, affluent, fashion-conscious, urban Chinese, as well as expatriates and
foreign travelers. Chinese patrons of premium coffee shops preferred lattes, cappuccinos and mochas to
espressos, which they considered bitter. Finally, Chinese frequented coffee shops for music and
ambience, branded wares and the variety of fresh pastries and cookies offered and were usually business
people in meetings, friends meeting or couples on dates.25
Chinas capital, Beijing, was approximately 8,147 kilometers away from Rome, Italy. The flight time
from Beijing to Rome was approximately 11 hours.
Coffee was an established product in Germany, which ranked second in the world in pounds per coffee
consumed per person. Per capita consumption of coffee in Germany had been in decline over the past 15
years, in part due to the unfashionable and unhealthy product reputation it held. This trend had recently
begun to change due to the rise in popularity of specialty coffee and an increase in U.S.-style coffee
chains. The German Coffee Association reported a shift in consumer behavior, with a clear trend toward
the fresh preparation of specialty coffee. In 2010, average German coffee consumption was 150 litres per
person. Business Monitor International predicted that the coffee industry in Germany would grow by 10.5
per cent between 2011 and 2015. It was possible that this growth will be inhibited by continued world
economic difficulties; however, it was not affected in 2009 when espresso drinks and single portion
coffee drinks demonstrated strong growth.26 The German coffee industry was characterized by fierce
competition and high concentration.
Germany had about 1,000 franchise systems that operated 64,000 units with the help of 470,000
employees.27 The German Franchise Association had a great deal of power; although it was only partly
U.S. Commercial Service, Country Commercial Guide, China, www.buyusainfo.net/docs/x_8054544.pdf accessed May
Beijing Tian Yuan Law Firm, Franchise 2011: China,
www.franchise.org/uploadedFiles/Franchise_Industry/F2011Chinachapter.pdf, accessed February 17, 2012.
International Trade Centre, The Coffee Sector in China, www.intracen.org/WorkArea/DownloadAsset.aspx?id=37584,
accessed February 17, 2012.
Business Monitor International, Germany: Food & Drink Report Q4,
d=13584, accessed February 14, 2012.
Heiko Stumpf, Franchising in Germany,
any2011.pdf, accessed February 24, 2012.
recognized by the courts, membership in the association was regarded as an indication of quality for a
reputable franchise business.28
Germanys capital, Berlin, was approximately 736 kilometers away from Rome, Italy. The flight time
from Berlin to Rome was approximately two hours.
Although historically known for its tea culture, India was the sixth largest producer of coffee in the world.
Interest in coffee in India, particularly the transition to sophisticated coffee bars, began in the 1990s.
Specialty and gourmet coffee shops increased in prominence for a few important reasons: first, Indians
had increased exposure to international lifestyles and global trends; second, income rose and a middle
class emerged; third, there was an increase in disposable incomes as well as in the number of working
women; and fourth, the number of young people grew significantly.29 Historically, Indians showed little
interest in coffee, but changing lifestyles and the rise of high-end coffee shops increased consumption.
Companies such as Café Coffee Day, one of the best known coffee shop brands in India, extended upward
to target upper income consumers. Coffee consumption was likely to expand at a rapid rate . . .30 In
2002, there were 200 cafes in India holding sales of $10 million compared to 1,500 shops in 2011. Coffee
consumption in Indi …
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