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Case Study

Andrea Illy is CEO of the global premium coffee company that bears his familys name. As one might expect, he is passionate about coffee its science, its health benefits, its taste, its beauty. Illy also has a dream that someday soon the coffee market might be transformed into something approaching the market for wine. Where connoisseurs discuss the fine points of various origin coffees and blends, where customers are willing to pay a premium for the finest examples of the coffee-making art, and where the growers, roasters and baristas will be compensated fairly for the expertise they contribute to every cup.

Unfortunately, the current coffee market differs from such an ideal. Coffee growers in most parts of the globe work at a barely subsistence level. One bad harvest (made all the more likely by the ravages of climate change) or a sudden decline in the commodity price of coffee can drop them below subsistence to hunger. Even in good times, growers have little incentive to improve their operation they have minor contact with the roasters or customers and no knowledge of how their crops get translated into the cup. This disadvantages not only the grower but also the consumer coffee sourced from good quality beans is hard to find.

llly believes that the solution to the sad state of affairs is to initiate a virtuous circle that draws the grower, the roaster, the barista, and customer together. Growers with better knowledge of the market will work to improve their crops or experiment with new varieties. Roasters and preparers will educate their customers as to the qualities of various beans, roasts, and preparations. Customers, in turn, will be willing to pay more for the best beans and that premium will be sent back up the chain to pay for even more quality and variety. And so on.

Certainly there have been some positive signs. Indeed, many observers argued that a third-wave of transformation in the coffee market was already starting. (The first wave is said to have occurred when Maxwell House and Folgers made coffee a mass commodity, the second wave when Starbucks initiated a move to quality and higher prices.) Specialty coffee roasters had worked to build cafes and brands around origin- based beans sold directly to the roasters without reference to the commodity prices of coffee. With these third-wave roasters, every coffee came with a story of its origins and growers could count on occasionally eye-popping premiums for their beans.

As yet, specialty coffee represented a small sliver of the overall market and there were other signs that it might not ever grow beyond a small circle. New trends like coffee-based drinks and single-portion coffee in pods (e.g. K-cups, Nespresso) actually shifted more of the value-added towards roasters without a premium for growers. A consolidation was taking place among mass roasters that was even sweeping-up third-wave roasters in its wake. Observers argued that could lead to greater uniformity with even less emphasis on origin-based, direct-traded coffee.

Illys hope is that someone would come up with an innovation that would solidify the beginnings of the third wave and help reshape the market. Such a change would not necessarily have to involve illycaff; Andrea Illy believes as the worlds premium brand, an increased emphasis on quality in the market would only help his company. The most important thing was to make the coffee supply chain more equitable and coffee bettertasting.

Illys Approach:

Illy might be dismissed as a dreamer, if his own company illycaff, hadnt made the virtuous circle work for their offerings. Illycaff works closely with its growers, educating them as to the best cultivation techniques, and gives them 30% more than the going rate for their coffee. After harvest, illycaff blends and roasts the beans, using proprietary technology that the company developed. Then illycaff ships (in its own special cans) this premium coffee to cafes, restaurants, and customers, who can use illycaff machines to prepare the roasted beans to its best advantage as coffee, espresso or espresso-based drinks. If that werent enough, illycaff sponsors its own university, Universit Del Caff, to train growers, caf professionals, and connoisseurs as to the fine points of coffee cultivation, preparation, and tasting.

Illycaff has built a global company through these techniques and its willingness to build relationships and innovate at each step of the coffee supply chain. Nonetheless, as Andrea Illy would be the first to acknowledge, his company is a luxury niche player in the much larger global market. As a coffee missionary, he would like to see a larger part of the market transformed.

Assignment

Evaluate Andrea Illys approach and propose innovation(s) in the coffee supply chain that will help move Andrea Illys dream closer to reality.

Your proposal should outline which firms and organizations are likely to participate. You should address which customer groups your scheme will target and why your scheme might alter their existing patterns of consumption. Also outline the funding and governance of your particular scheme, referencing how firms and other actors would individually or cooperatively bring about the particular innovation you are proposing (e.g. if you believe that the coffee market would be made better through sponsoring coffee cruises you would specify who would own and pay for the boat, how the operational costs would be covered, who would choose the captain, etc.)

Keywords: Improving the livelihoods of growers, a reward system for higher quality coffee, increasing coffee connoisseurship, willingness to pay more among customers, impacting more farms and/or roasters.

Note: Your recommendations need not involve the resources of illycaff directly. Andrea Illy has noted that anything that increases coffee quality and appreciation will help his company.