Archive for the ‘starbucks’ Category

Small is beautiful

January 5, 2007

espressamente illy represents illycaffe’s growth and extension of its premium coffee brand and effort to double revenues over the next five years.  Nothing more. 

Although illy already operates more than 100 espressamente illy coffee bars (including more than 50 outside of Italy), it nevertheless created a little bit of a media stir over the year-end holidays when Mr. Andrea Illy discussed the company’s plans to extend its brand.  No less than the New York Times, International Herald Tribune, Business Week, Economist, as well as several blogs, including Slashfood, the shot, the client side have written about Mr. Illy’s grand plan. Even one of the major business publications from India (where tea is preferred over coffee) featured an article about Illy’s plans for growth. What made the story interesting for the media is the comparison of Illy and Starbucks (does David and Goliath come to mind?) and the implication that Illy would compete with Starbucks, although most went to great lengths to stress that this was not about Illy vs. Starbucks.  Mr. Illy “publicly” acknowledged Starbuck’s role in growing consumer awareness and taste for premium coffee, with his counterpart Mr. Howard Schultz, Chairman of Starbucks, offering a “no comment”.

So let’s take a look at Starbucks and Illy, and what drives their business.

Starbucks Corp. (SBUX) is a publicly-listed (since 1992), global retailer with $7.8 billion revenues (+22%), net income of $564 million (+14%) and a market value of more than $26 billion. It has more than 12,000 coffee outlets (about 8,800 US locations and 3,600 international locations) and employs 135,000 people. Starbucks opened 2,200 stores in 2006 and plans to open a further 2,400 stores in 2007 on its way to 30,000 coffee shops (Mr. Schultz’s goal). Can you say “Walmart”?

Illycaffe, on the other hand, is a privately-held, family-run business founded in 1933 in Trieste, Italy and run by Mr. Andrea Illy, the founder’s grandson. It has estimated 2006 revenues of $330 million and profit in the $20-$30 million range. That’s tiny compared to Starbucks! Even if it manages to double revenues to $600 million over the next 5 years (Mr. Illy’s goal), it will still be the “hill of beans” compared to Starbucks. But is that a relevant comparison? Surely not.

Illycaffe is one of three major Italian coffee makers, along with Lavazza and Segafredo Zanetti, but it is the acknowledged leader in branding and marketing coffee as a luxury good. It has a growing business of commissioning and selling artist designed cups (Julian Schnabel, Jeff Koons, others) and collaborating with Italian espresso machine manufacturer FrancisFrancis! and architect Lucca Trazzi to design and sell espresso machines.  But illy’s core business is and remains the roasting and distribution of a single blend of arabica coffee (arabica beans are higher quality than the robusta beans, and ideal for brewing espresso) to more than 40,000 hotel, restaurant and coffee shops globally, as well as to the retail consumer market.  Today, illy exports to more than 144 countries, with exports accounting for more than 50% of revenues.  More than 6 million cups of illy espresso are served every day!  Sale of illy coffee is growing at 30% annually at such upscale US markets as Whole Foods, Williams-Sonoma and Sur La Table.  And Mr. Illy believes that the growth in the market for gourmet coffee has just begun.  No wonder then that illycaffe is interested in extending its brand and expanding its reach with espressamente illy.

So what are illy’s plans? As already mentioned, illy operates more than 100 espressamente illy worldwide (including more than 50 outside of Italy). According to illy’s website, espressamente illy are “Italian-style coffee bars in their setting and offer, with different atmospheres and roles during the course of the day, involving the customers’ senses and emotions, through communication and cultural events.” illy continues: “Lifestyles are changing, and stopping off at a coffee bar for a cup of coffee has become much more than just a quick break. It is an experience involving the senses and the spirit, and overflows from the cup into the café as a meeting place for communication, in accordance with the most genuine Italian-style coffee houses. It is a place offering the openness and liveliness of the street and the comfort and coziness of home. A place where people stop for something to eat, to read, or to share ideas with friends and colleagues.” Illy will offer the espressamente illy experience in several flavors, based on function and location, including core bar, landscape bar, transit bar, community bar, and corner bar. espressamente illy has opened in such diverse locations as Terminal 1 of Frankfurt airport, the perimeter wall of a bull fighting arena in Lisbon, and most recently (December 18, 2006) in the Nihonshibashi fashion district in Tokyo (3,500 square feet including a 33 feet long coffee bar). illy will ensure the consistent interpretation and application of its brand to the espressamente illy coffee shops with advice on architectural design (in collaboration with three Italian star architects), coffee, food and beverage, setting, culture and environment, training, communication, and financial advice.

Illy will also rely on its ability to pursue perfection in the coffee cup througth technical innovation. For example, illy is credited with the development of the paper pod delivering a single dose of pre-ground coffee for espresso machines, and is working on a two-stage espresso-making process to intensify the drink’s aroma and make it smoother. With a single roasting plant in Trieste, Italy and plans to open 500 espressamente illy coffee bars worldwide, it may also want to think about how to assure consistent freshness in every cup no matter where it is served.

We know that Starbucks had good intentions when it started its expansion in the early nineties (consistent, premium quality coffee and relaxing ambiance to meet friends and business associates – sounds familiar?), but with shareholders eagerly anticipating every quarterly earnings report and wondering how Starbucks would continue to maintain its double-digit growth, that initial concept was compromised. Provided illycaffe maintains its focus on its core strategy of extending and growing its premium coffee brand, we don’t expect to see illy opening 30,000 espressamente illy coffee bars anytime soon.

Small is beautiful.