Marina

Minnikova

The Espresso Lane To Global Markets
Case Study
Overview
Illy, a recognized coffee producer is known by producing the worlds finest coffee beans.
The company founded in Trieste, Italy, promoted a new and unique blend to more than 140
countries, thousands of high-end restaurants and coffee houses. The company emphasizes in
quality, innovative design, culture and business-to-business operations. Illy started its brand of
coffee, however, later the company decided to expand its product lines to include espresso
machines, cups and more. Furthermore, Espressamente was created, Illys own franchised coffee
bar. It has 200 locations in over 30 countries and has begun to expand to premium markets. The
companys strategic plan from 2010-2012, stated that they wanted to be recognized as the only
authentic Italian bar chain providing superior customer satisfaction to coffee lovers.
The coffee industry has been blooming, amounting to US$70 billion each year since
2005. The coffee market has shown aggressive competition and has been highly saturated.
Coffee sales around the world have been hurt by the decrease of disposable income and
economic environment in different nations. In order for many coffee shops to survive, innovation
and adaptation of products had to be made. Illy wants to expand the reach of Espressamente and
in order to do this, the company needs an entry mode strategy for each market prospect. An
analysis of the industry competitors and environmental/legal issues need to be address.
United States
Espressamente is going to face a lot of challenges in the United States market, due to the
fact that competition is fierce. Starbucks being the largest competitor, offer more the coffee
experience at a premium luxury than just plain coffee. Starbucks has decided to expand once
again and for a company that has approximately 11,000 stores just in the US, it represents a large
increase in concentration and therefore a bigger threat. MacDonalds McCaf core competencies
are its market strategy, infrastructure, offering their service as a restaurant and low price. Since
2006 it decided to offer premium coffee to their clients and have outpaced many of other coffee
chains. The projected market percentage change is just 4% and entering this market would
require a lot of sunk costs in infrastructure, shipping and innovation. Therefore, we recommend
not entering the United States market.
Germany
GDP per capita according to the case is US$37,900 and yearly coffee consumption in
Germany is 6.50 Kilograms per capita, collocating the country as the largest consumer per
capita. There is also a new trend in popularity for specialty coffee. Moreover, importing ILLY to
the country is very convenient, with only being 736 km away from Rome, a 2-hour flight. Since
Germany is a high-income country, large disposable income, low market dominance of large
firms, ranked 3rd in infrastructure and the existence of a sophisticated atmosphere of lifestyle, we
recommend entering the Germany coffee market. However, Espressamente must penetrate the
market with a massive marketing campaign to promote the brand since Tehibo possess 99%
brand recognition and is the market leader of roasted coffee. The most appropriate mode of
market entry would be direct franchising, because the company gets to enter the new market with
little risk and investment. The franchise system is reliable. The franchisee gets the
Espressamente proven brand, marketing exposure and management expertise to help it succeed.

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Japan
Espressamente should pursue joint venture to help the company navigate the countrys
local culture, as well as trends and norms. Pursuing this mode of market entry is very important,
because Italys market is very different to Japans. A second approach would be a sequential
franchising, because it would allow ILLY to have more control over Espressamente franchisee
and regulate the operations of each franchise. We point out that adjusting to local taste is key in
order to succeed in Japans market and it needs to be done in a way to avoid losing the
Espressamente vision. The main focus has to be premium transit, service partners and luxury
stores.
Brazil
Brazil has the second largest consumer coffee market in the world and increasing interest
in premium coffee and American-style coffee shops. Moreover, Starbucks has been very
successful and projected relatively high (36%) market growth. In addition to that, the demand for
higher coffee standards has increased as well as the consumption due to an expanding middle
class that can afford higher prices (income per capita $47,717). Because Brazilians prefer Italianstyle espresso, there will be no need to educate potential Espressamente customers. Moreover,
Illys company data shows growth in sales from 51 thousands kg in 2008 to 66 thousands kg in
2011, and an increased volume in euros from 523,372.95 in 2008 to 1,051,485.25 in 2011.
For the reasons above, we recommend that Illy enter the market. To better firm performance
Espressamente can localize the products and keep high brand reputation. Since it is not easy to
run the business in Brazil (the ease of doing business ranks 126 among 183 countries) and only
11% of franchises are foreign based. Illy should grow relationships with non-competing
businesses; the company should implement sequential franchising and joint-venture partnerships
with local companies.
China
The population of China is 1, 336, 718, 015 people with an urbanization percentage of
47% which is relatively high. The beverage industry in China is growing fast and the coffee
consumption increasing at a compound annual average growth rate of 10.7%. Furthermore
Starbucks opened 250 coffee shops and there is a potential market growth of 64%. According to
the analysis, we recommend that Illy enter the market. Since Chinese tastes are different Illy
should adapt its products. For example, coffee drinkers in China prefer to eat at the coffee shop
and they dont like the bitter taste of black coffee. That is why the company should advertise
their cappuccinos, lattes and mochas and offer food and desserts. Correspondingly, the company
should place its coffee shops in urban fashion areas targeting young people and travelers. Since
the franchising system is relatively difficult the company has to establish regional partners.
India
India is the second fastest growing economy in the world. The population of India is
significant (1, 189, 172, 906 people) with a rising income and an emerging middle class. In
additio, Indians have increased exposure to international lifestyles and global trends. According
to the data, coffee consumption in the country has increased by 6% in five years and the number
of gourmet coffee shops has grown.

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Since the country has a potential market for high-end coffee we recommend the company
to develop the market. We endorse dividing the country into different individual markets for
expansion and making partnerships with other local businesses because of the bureaucracy. Since
there is a strong interest in the Western culture, the company should promote its products as a
unique Italian experience.
UK
The UK market shows a strong growth of coffee interest with the urbanization percentage
of 80%. In addition to that, UK is one of the easiest places in Europe to start and run the
business. Furthermore, the growth of branded coffee shops has been increased for the reason that
coffee drinkers consider coffee shops as a social place. Because of the reasons above the
competition among the brands is very aggressive. There are 842 franchise systems represented
by 34 800-franchise units in the UK. The population of the UK is relatively low and there is no
room to enter the market. For these reasons we do not recommend Espressamente entering the
market.
Conclusion
Given the analysis we have arrived at the following conclusions:
Espressamente should enter the next markets:
Germany: The franchise system is very reliable for the German market; Direct
Franchising would work best because it would have minimum liability and low
investment.
Japan: Since the countrys tastes are so different from Italian style preferences,
Espressamente should pursue Joint Venture in this market. This way
Espressamente will be able to navigate throughout the countrys culture and
understand the market.
Brazil: The Company should implement Sequential Franchising and Joint venture
partnership depending on the area; this will ease running the business.
India: Since it is hard to run the business in India, we recommend Espressamente
to establish partnership with local companies in order to thrive in a complex
environment.
China: Since the franchising system is relatively difficult for a country of this
magnitude, we recommend establishing regional partnerships and as in Japan, the
product needs to be localized.
We do not recommend entering the following markets:
UK: The competition in this market is very aggressive and there is really very
little room to enter.
United States: As in the UK, the US competitors are many and increasing at a
rapid rate. Entering this market would result many sunk costs and investment in
infrastructure; for these reasons we do not recommend this market.
As mentioned before, Espressamente needs to localize its product according to local taste and
preferences. Illy should promote Espressamente as a high-quality luxury brand and as a unique
Italian experience. The coffee shops should be located in urban areas and target middle class and
upper income customers.
APPENDIX

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ILLY SWOT
Strengths

Weakness

-Great brand image

-Quality/Premium product
-Viewed as authentic
-Centrally located business (Italy)
-Already international
Opportunities

-Premium prices
-High-end product
-Viewed as an Italian brand
-Relies on urban customer base

-Growth in espresso culture

-Growing coffee taste
developing countries
-Global expansion

Threats

-Aggressive competition
in -Saturation
-Recession/Economy
-Decreasing disposable income
in some nations
-Difficult
product
differentiation

SWOT Germany
Strengths

Weakness

-Interest in espresso
-15% Per-capital decline in
-Interest in specialty drinks
consumption
-Ranked highly on ease of doing
business
-Established product in Germany
-736 Kilometers away from
Rome. A 2-hour flight.
Opportunities

Threats

-Interest in fresh preparation of -High concentration

specialty coffee
-Aggressive competition
-Projected growth of 10.5% -Low growth forecast
(2011-2015)

SWOT Japan

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Strengths

Weakness

-Coffee
shops
influence
preferences
-Worlds third largest coffee
importer
-Expected
5.4%
compound
growth through (2015)

-Not good for franchising

-Diminishing
disposable
income
-6,138 Kilometers away, 13
hour flight.

Opportunities

Threats

-Innovation of the product and its

packaging seen as key to growth.
-Adjust to local taste
-Identification of the right
business partners

-Off Trade sales potential

-Necessary innovation in terms
of health, taste, addition of
traditional ingredients.

SWOT United States

Strengths

Weakness

-Number 1 consumer (25%

consumption of worlds coffee)
-Ranked 4/183 in ease of doing
business
-High disposable income
-50% of Americans 18 and over
drink coffee everyday.

-Low potential for growth

- 4,497 Kilometers away,
Washington DC. A 9-hour
flight.

Opportunities

Threats

-Diverse demography
-High Saturation
-Cultural obsession
-High competition
-Growing perception of health
benefits of coffee.
-Opportunities for development

SWOT Brazil
Strengths
- 2nd largest consumer market

Weakness
- Produce local coffee

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- Rising coffee consumption
- Interest in premium coffee
- Growth of Middle class
- Urbanization 87%
Opportunities
-Opportunities for development
-Italian-type coffee preferences
SWOT China
Strengths
- Fast growing coffee
market/growth rate of 10.7%
- Rising consumption
- Big population with
urbanization of 47%
- Growth of Middle class
Opportunities
- Interest in premium
coffee
- Adapt to local taste

- Hard to do business
- Long flight
Threats
-Transformational difficulties
-Different cultural experience

Weakness
- Hard to run the business
-Customers prefer to eat while
drinking coffee
- Customers do not like bitter
taste of espresso
Threats
-High competition
-Difficult franchising system
-Different cultural experience

SWOT India
Strengths
- The 2nd fastest economy in the
world
- Rising consumption
-Interest in espresso
-Interest in specialty drinks
Opportunities
- Growing coffee market
- Exposure of Western lifestyle
- Interest in premium coffee
- Growth of Middle class

Weakness
- Sixth largest producer of
coffee in the world
- Bureaucracy

Threats
- Difficult franchising system
- High competition among
other coffee brands

SWOT UK
Strengths
- Growing coffee market

Weakness
-High Saturation

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- Growth of branded coffee
shops
- Interest in premium coffee
- Rising consumption
Opportunities

Threats

-Diverse demography
-Cultural obsession
-Opportunities for development
-Ability to secure premium
locations at lower prices
-Few restrictions to franchising

-High competition

Ansoff Growth Matrix:

Market Penetration: USA, UK, Germany
Market Development: India, Brazil
Product Development: China, Japan