A case study on Illycaffe (A): Internationalization

Term Paper

Submitted to
Sanjida Amin
Lecturer, Dept of Marketing
Bangladesh University of Professionals

Course Name: Global Marketing

Submitted by

MD.Mehedi Hasan Kollol (17251025)

MD Rubayet Hossain Rupom (18251005)
S.K. Abdur Rauf Iqbal (18251023)
MD Sayeem Bin Islam (18251037)
MD Ajharul Islam Rony (18251075)
A.K.M Ashique Parves (18251085)

Sec: A, Marketing - 2018

1
Table of Contents
Chapter 1................................................................................................................................................. 3
Company Overview................................................................................................................................. 3
Chapter 2................................................................................................................................................. 5
Case Overview ........................................................................................................................................ 5
Chapter 3................................................................................................................................................. 7
Relevant Theories.................................................................................................................................... 7
Chapter 4................................................................................................................................................. 9
Analysis and Justification ........................................................................................................................ 9

2
Chapter 1
Company Overview

Based in Trieste, Italy, Illycaffe produces and markets a unique blend of espresso coffee under a

single brand leader in quality. illycaffè was founded in 1933 in Trieste by Francesco Illy. Today it

is led by the third generation of the family. illycaffe produces and markets coffee and related

products. The company offers various blends of coffee and related products to restaurants, coffee

bars and other companies across the world through a broad retail network. Its product portfolio

comprises a wide range of ground coffee, coffee capsules and whole beans, fine chocolates, teas

and jams, cups, mugs, brewing equipment, coffee machines and accessories. Their mission is to

delight all those who cherish the quality of life, through their search for the best coffee nature can

provide and enhanced by the best available technologies. Their vision is being the world reference

for coffee culture and excellence. They want to create and offer the finest products throughout the

world’s best destinations, while demonstrating its character as the leader in the premium coffee

segment. illycaffe offers espresso, cappuccino, Mocha coffee, Brewed coffee and French press

coffee. Over 6 million cups of illy espresso coffee are enjoyed every day. illy is sold in over 140

countries around the world and is available in more than 50,000 of the best restaurants and coffee

bars. The company supplies its products to various foodservice operators, cafe's, offices and coffee

bars in various countries. It also has certifications and research facilities in various countries.

illycaffe employs around 700 people. illycaffe buys green coffee directly from the growers of the

highest quality Arabica through partnerships based on the mutual creation of value. The Trieste-

based company fosters long-term collaborations with the world ‘s best coffee growers -- in Brazil,

Central America, India and Africa -- providing knowledge and technology and offering above-

market prices. It founded the Università del Caffè to promote and spread the culture of quality

3
coffee in Italy and around the world. It interacts with the art world. It creates innovative products:

Iperespresso, covered by five patents, “ready to drink” coffee, capsule machines for offices made

by Mitaca. The company has constructed a world of intelligence, experience, taste, science and art

around the pleasure of a perfect cup of coffee.

4
Chapter 2
Case Overview

Illycaffe is a medium-sized Italian company which produces and sells premium coffee to

restaurants and coffee-bars. Its success in Italy provided the impetus for international expansion,

and also the inspiration for Starbucks, the American-based coffee-bar chain that is expanding

internationally. The case deals with the problems involved in going abroad and maintaining quality

and other firm-specific advantages while relying on independent distributors to deliver the product.

Being a single-product company, Illycaffe differentiated its packaging of espresso coffee.

Illycaffe’s positioning strategy in the crowded coffee market was based on the quality concept. To

maintain high standards, the management had patented a packaging system that was able to

guarantee high levels of flavor and aroma. One of the company’s major problems in maintaining

its quality image was the high rate of personnel turnover. The quality depended as much on the

human input and machinery as on the quality of the coffee used. So, the company decided that this

was a strategic area for innovation and began to offer technical assistance and training/consultancy

to its clients. As the firm had grown into a global brand, its dilemma had become its image as a

premium product that people should save for special occasions. Initially, Illycaffe faced sizable

entry barriers into the U.S. market and German market but they somehow adapted to the different

culture and also educated and trained the barmen on how to serve a good espresso by handling the

machine properly and using consistently the right dose of coffee. The company also had to form a

distribution alliance with a brand named ‘Hag’ in the German market. The contract that was signed

by the two companies in 1978 gave Hag exclusive rights to the sale of Illy coffee in Germany.

Following the signing of this agreement in 1978, Illy witnessed a steady increase in sales. But they

weren’t making any money as the selling price was too low to earn any margins. Then in 1990, the

5
company decided to change its strategy after Riccardo Illy took over responsibility for the

company’s international activities. Ownership problems also started to show up as Hag-Goldene

Tasse had been acquired by General Foods was itself later acquired by Philip Morris International,

the company which also owned Jacobs Suchard, a Swiss producer of coffee and chocolate with its

own line of espresso. The future started to look uncertain as the manager of Illy-Germany

terminated the contract between Illy and Hag-Goldene Tasse, offering an interim option to

renegotiate a new contract and I the meantime began to look for other major alternatives.

6
Chapter 3
Relevant Theories

Global Marketing: Global marketing is the process of adjusting a company's marketing strategies

to adapt to conditions in other countries. It involves planning, producing, placing, and promoting

a business' products or services in the worldwide market. Basically, to enter into a foreign market,

brands need to come up with segmentation, targeting, positioning and pricing strategies that will

help the company to sustain in the new market.

Global Market VS Domestic Market:

Global Market Multi-domestic Market

In global marketing, companies maintain the In multi-domestic marketing, companies tend
same basic marketing approach in each to change some aspect of their marketing
market. strategy in each country.
In a multi-domestic market, companies adapt In a global market, companies are more
based on the differences in resource centralized. Their operations and primary
availability, cultural values, product usage and decisions are made at a central headquarters in
marketing opportunities. the home country. Its primary trait is that
business-level strategies are constant across all
markets.
The major obstacle to applying a strategy in The multidomestic approach is usually more
global market is products and messages don't expensive to implement and time consuming
work the same everywhere. since it needs to design and develop different
strategy for each country.

FSA (Firm Specific Advantage): This is basically a unique strength a firm has that distinguishes

itself from the rivals, and creates a competitive advantage. For example, Honda has a very wide

7
range of motorized machines, its assortment covers a large group of consumers which is the Firm’s

specific advantage.

CSA (Country Specific Advantage): This is basically the strengths or benefits specific to a

country (or location). They represent the natural factor endowments of a nation: they are based on

the key variables in its aggregate production function. For example, the cost of labor force in

Bangladesh is a country specific advantage for many firms.

Entry barrier: Entry Barrier is the economic term describing the existence of high start-up costs

or other obstacles that prevent new competitors from easily entering an industry or area of business.

Barriers to entry benefit existing firms because they protect their revenues and profits.

Common barriers to entry include special tax benefits to existing firms, patents, strong brand

identity or customer loyalty, and high customer switching costs. Others include the need for new

firms to obtain proper licenses or regulatory clearance before operation.

Joint Venture: A joint venture is a business arrangement in which two or more parties agree to

pool their resources for the purpose of accomplishing a specific task. This task can be a new project

or any other business activity. In a joint venture, each of the participants is responsible for profits,

losses, and costs associated with it. However, the venture is its own entity, separate from the

participants' other business interests. For example, Google and NASA developing Google Earth is

a joint venture project.

Negotiation Approach: A predetermined approach or prepared plan of action to achieve a goal or

objective to make an agreement. For example, distributive negotiation includes haggling prices on

an open market. In a negotiation strategy, each side often adopts an extreme or fixed position,

knowing it will not be accepted—and then seeks to cede as little as possible before reaching a deal.

8
Chapter 4
Analysis and Justification

Q. 1 To what extent do you think a global strategy in coffee is well‑founded? For example, is

the espresso market global or multi-domestic?

To put it simply, the globalization of coffee depends on these things- the globalization of the coffee

beans and globalization of a coffee shop. The globalization in coffee close linked to that of coffee

shop. Without large-scale coffee shop chain, it would be difficult to achieve the international large

purchasing and circulation and even not to mention a global strategy in coffee.

The global strategy for Illycaffe is to globalize their brand identity that is associated with quality.

For example, when it comes to coffee, they would want to associate with a more premium product.

However, the emergence of Espresso is the most obvious sign of coffee globalization. Espresso

even subverts the American light taste of the traditional coffee, occupying large areas of the U.S.

coffee market. To a certain extent, Espresso promote the development of globalization in coffee.

The simple modulation technique makes no longer be monopolized by some special technicians,

which is widespread in usual coffee shops and the technology has no longer become the threshold

of the cafe. This saves much time in training staff for a cafe, and thereby there is some time to

consider a market strategy and the overall pattern of the evolution of coffee, which eventually

speed up the development of the coffee shop chain. If we look at Illycaffe, their strategies are more

regional but they are also looking to move forward to the European Market.

From the above discussion, our opinion is that a global strategy in coffee is well founded, specially

lied in the espresso market globalization.

9
Q. 2 How would you define Illycaffe’s FSAs? CSA’s? Can they be transferred abroad?

Illycaffe’s firm specific advantages include their knowledge-based technique. They believe and

act in priority-expertise experience within their own industry. They are also marketing-based

where they market differently in each country. Illycaffe works towards quality. That’s why illy

produces one single blend composed of nine types of 100% premium Arabica coffee, the very

finest and makes it available in different formats and roasts. This choice guarantees consistent

quality and distinguishes the illy blend, ensuring it always has the same unique aroma and flavor.

The green coffee beans are carefully selected at source from the best plantations in Brazil, Central

America, India and Africa. For illy, improving and enhancing the enjoyment of espresso is the

object of its research and passion. Illy’s advertising and promotion policy both concentrate on the

quality of its product and connect with its brand name to enhance brand loyalty.

In our opinion, Illycaffe’s firm specific advantages with quality and resources can be transferred

abroad through establishing new marketing channels where it can ensure the high quality of illy’s

coffee and service but their marketing-based advantage cannot.

A few of the country specific advantages include their “made-in” strategy and their own brands.

Espresso is a symbol of the Italian because of the made-in label. In Italy, Illycaffe is famous for

their espresso quality. The cafe is a vibrant hub of the social network and a daily ritual for most

people; a place where locals go to relax and socialize with others. Illy gives visitors a truly

memorable authentic Italian experience.

Though Italian espresso and coffee bars have left a great impression on people all over the world,

we still think Illy’s CSAs cannot be transferred abroad since CSAs belong to a country’s long-

term effect and have a Country-of-Origin Effect.

10
Q. 3 What were the difficulties Illycaffe faced when expanding abroad? How did these impact

its choice of entry mode?

As we know, Illycaffe is a well-established company which produces not only the high quality

Espresso coffee but also represents a high quality lifestyle. But due to the fierce competitions in

the international market, illycaffe without exception faced some difficulties when expanding

abroad. For instance, when they entered into the American market in 1981, the initial American

reaction was not very enthusiastic toward the bitter beverage served in a tiny cup. Also, they faced

some other difficulties when they entered the US market. For example, since the 1950s U.S. coffee

consumption halved as a result of competition from soft drinks. Also, they faced difficulties

adapting to the American culture and also the barmen were not trained and educated on how to

serve a good espresso by handling the machine properly and using consistently the right dose of

coffee.

The company began focusing on the foodservice industry, courting top chefs and owners of fine

restaurants throughout the country for entry modes in the market. Statistics clearly showed that

Illycaffe was in the right market at the right time as Specialty Coffee Association said its industry

was booming, doing more than $3 billion in retail business in 1993, with that figure expected to

reach $5 billion by 2000. They also made the expresso drink a fashionable one in the market. Also,

educated and trained the barmen on how to serve a good expresso so that they can sustain in the

market.

Illy faced some entry barriers in the German market also. The position of Illy in Germany was

somewhat different from its position in other European countries where sales were made through

agents and sales subsidiaries. They also couldn’t afford a greater investment in both sales force

and promotion as the company’s financial situation was not in a good state in that year. So, they

11
choose to merge with a German company named Hag for entry mode. Illycaffe and Hag went on

to form a distribution alliance as Hag provided an extensive distribution network throughout

Germany for Illycaffe.

Q. 4 What created the problems with the existing distribution strategy in the German

market? Was the distribution alliance with Hag ill-advised?

When Illycaffe entered Germany in 1981, they did not expect the difference of sales procedure.

Sales were made through agents and sales subsidiaries which was not appropriate for the German

market. This created a huge problem in distribution for the company. Also, coffee was one of the

best-selling drinks in the German market. The consumption of coffee in the German market was

average 150litre in 2004. But as the report said, the selling of Germany traditional coffee had

declined because of consumers having more interest in the special expresso coffee. Illycaffe was

one of their choice. But since it was a new market and they had a growing demand; the company

should have increased their man power and distribution channels and work on maintaining

advanced IT infrastructure.

We don’t think the distribution alliance with Hag was ill-advised. Because sometimes to sustain

the position in an International market, it is necessary to form alliances with local companies. Also

Hag had an extensive distribution network throughout Germany. It helped illy a lot with their

distribution strategy. Also to remain competitive in the market, they had to find out the cause and

settle the problem which they did through a distribution alliance with the local company.

12
Q. 5 What negotiation strategy would you have recommended to Mr. Illy?

After researching the techniques Germans use when it comes to negotiation styles, we would

recommend the following:

Follow the joint problem-solving process the Germans prefer. Their primary negotiation style is

cooperation and they believe in win-win situations. As long as there is respect and trust, Mr. Illy

should have no problem in negotiating with Germany. It is also important to avoid haggling since

the Germans strongly dislike that.

Mr. Illy must be patient and not appear ruffled or irritated by the strict adherence to protocol.

Germans are detail-oriented and want to understand every aspect before coming to an agreement.

So as long as Mr. Illy presents his points clearly and concisely, he should have no problem

negotiating.

Mr. Illy should avoid confrontational behavior or high-pressure tactics. It can be counterproductive

since Germans are not very welcoming to the high-pressure tactics. Also, he should avoid

contradictory statements, such as following a compliment with a complaint; the inconsistency may

cause the Germans to reject his statements outright.

13