Why a coffee company isn't bullish on coffee right now
It’s a bittersweet time of the year, time to dig up the coats buried deep in your closet and brace for the impending winter chill. But cold weather does make some warm treats more enjoyable, like steaming cups of coffee. And illycaffè is a major benefactor of the trend.
Illy’s unique blend, made of 9 Arabica selections from around the world, is available in 140 countries at 100,000 locations worldwide. President and chairman Andrea illy says the company serves the blend in more than 7 million cups per day. After Italy, illy’s biggest market is the United States. Its fastest growing is China.
Founded in 1933 by Andrea’s grandfather, Ernesto Illy, the company remains 100% owned by the Illy family. Illy says he’s not resting on the company’s legacy or laurels. Last week, the coffee maker announced a 38 million euro investment in its brands outside of coffee, which include Agrimontana (jams), Domori (chocolate), Dammann Frères (tea) and Mastrojanni (wine).
The company is diversifying, in part, in response to the growing threat climate change is posing to the world’s coffee supply.
“We’re proud of being family owned. But we also started diversifying in other industries because our philosophy is art and science for the best quality. If we focus on only coffee one day we’ll need to compromise on quality for bigger volumes, which we don’t want,” Illy told Yahoo Finance. He expressed that he would rather proactively diversify beyond coffee than be in a position where he’s not able to keep up with the demand.
The need to expand beyond coffee
Illy is diversifying away from coffee not by choice, but by necessity. Beyond impacting quantity and productivity coffee, climate change is hurting the quality of coffee, according to Illy. Higher temperatures associated with climate change have taken a toll on coffee crops, as has the emergence of more resilient pests, according to the Union of Concerned Scientists.
“There might be as low as 50% of the currently suitable land still available by 2050. But because consumption is growing, by 2050 we will also need to produce twice the amount of coffee as today. So multiplying productivity by four is quite a challenge,” he said.
So what exactly are companies like illy doing to adapt to the reduction of suitable land to grow coffee beans?
Illy is changing its agronomical practices in order to make irrigation, shadowing, and more precise agriculture. The company is also developing new cultivars because the natural genetic variability of the Arabica plant is too narrow.
“Besides trying to change the ecosystem … it’s something that nobody can do on his own. This requires public-private partnership and collaboration between consuming countries and producing countries,” he explained.
Because of the insatiable demand for coffee, he believes there is plenty of room for multiple players, even giving a hat tip to Starbucks (SBUX) for popularizing gourmet coffee.
“In the last two decades, coffee has been de-commoditized. So it’s an experiential product nowadays,” he said. “Starbucks is our colleague, not competitor. I think they are strong in distribution, very strong in communication. But I believe we’re stronger in the product, so what, [competition] is good for building the market.”
When asked about trends like the pumpkin spice latte, which Starbucks introduced in 2003, Illy said he’s still a traditional man but is interested to see what products consumers are gobbling up.
“[These things] are not for me to judge. It’s the consumer who judges,” he said. “If one day we all drink pumpkin coffee, why not? I doubt it. I prefer the espresso.”
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