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DATE: 07/26/10
Victoria Chang, David Hoyt, Professor Glenn Carroll, and Professor Hayagreeva Rao prepared this case as the basis
for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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Our mission, passion and obsession is to delight people who value the quality of life, by offering the best
possible coffee nature can provide, enhanced through the finest technologies.
Andrea Illy, Chairman and CEO, illycaff SpA

The Gruppo illy mission is to become a worldwide recognized reference in the gourmet sector.
Riccardo Illy, President, Gruppo illy SpA

In 2010, Riccardo and Andrea Illy, two brothers running the family coffee and gourmet food
business, looked forward to an exciting future. The family business had been founded in 1933
by their grandfather, Francesco Illy, who had invented the espresso machine. The company had
become a global company in the premium coffee market based on its uncompromising quest to
provide the perfect cup of coffee. Their father, Ernesto Illy, had run the company until the
1990s, when the brothers took over the primary management.

Beginning in 2004, the company had branched out beyond coffee, buying (or taking major stakes
in) four small companies that shared the passion for excellence embraced by the Illys coffee
company, illycaff SpA. These companies, which produced chocolate, tea, candied fruits, and
wine, together with illycaff, formed a new entity, Gruppo illy SpA. Riccardo served as
president of Gruppo illy, while Andrea was chairman and CEO of illycaff.

In 2009, the company had more than 700 employees, total sales of 280 million euros (US $410
million), and net profits of US $11.7 million, with exports representing 54 percent of total sales.

Illy website, The Company,

The vast majority of the business, about 90 percent, came from coffee. While the company saw
attractive opportunities for their coffee business, the premium niche was limited in the long term.
The new businesses provided new horizons for substantial long-term growth. The brothers
http://www.illy.com/wps/wcm/connect/us/illy/about-illy/company/ (accessed J une
8, 2010).
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p. 2
considered the futurehow could they replicate their tremendous success in coffee with other
products? Could they effectively extract significant and substantive synergies across the new
product areas to add to the companys bottom line?


During a visit to Trieste, a city and seaport in Northeastern Italy, illy founder Francesco Illy first
started thinking about starting a coffee business. He had traveled there as a Hungarian
serviceman and became interested in the energetic city. What Francesco saw in Trieste was a
multilingual border city with a port, warehouses, insurance companies, skilled machinery
workers, and a vibrant city life with cafs.

In 1933, Francesco launched his coffee production
and sales company in Trieste, making it the only city in the world at that time that incorporated
the complete coffee production process. Francesco also sold chocolate in the early days of the
company, though these were phased out in order to focus solely on coffee.
Francesco ran the company until 1956, when his son Ernesto became a co-owner and director of
the company. Ernesto was the companys chairman from 1963 to 2005, then honorary chairman.
Ernesto liked to call himself a cocktail of science and business, especially since he had a
chemistry degree.
He focused on the companys investment in research, and on its branding.
He believed that a brand had to be designed and created on the basis of a promise given to the
consumer, and that the ethical dimension should distinguish a companys inner life as well as its

Ernestos son, Riccardo, joined the family business in 1977 as the sales director for Italy. He
later became international sales director, moving to managing director in 1992. In 1993,
Riccardo was elected as the city mayor, limiting the time he could devote to the company.
Ernestos younger son, Andrea, joined the company in 1990 as quality control supervisor.
1994, as Riccardo began his term as mayor, Andrea became CEO of illycaff. Like his father, he
was a chemist by training. Andrea led the coffee subsidiary towards internationalization, while
introducing process innovations, focusing on the endless pursuit of quality, and spreading the
coffee culture.

In 2003, the company underwent a review of its long-term plans. Although they expected
continued growth in the premium coffee market, eventually this market would be limited both by
demand for perfect coffee, and by the availability of the beans needed to produce coffee
meeting illycaffs demanding standards. They also realized that it would be prudent not to have
their entire future dependent on one niche product line. As a result of this review, the company
began diversifying in 2005, purchasing (or taking substantial stakes in) four companies making

Illy website, Traditions, http://www.illy.com/wps/wcm/connect/us/illy/about-illy/traditions/ (accessed J une 8,
illy website, Ernesto Illy, http://www.illy.com/wps/wcm/connect/us/illy/about-illy/traditions/ernesto-illy/
(accessed J une 8, 2010).
Ernesto had one other son, Francesco. He also had a daughter, Anna, who was in charge of marketing for the
green coffee department.
Illy website, Traditions, loc. cit.
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premium food products: tea, chocolate, candied fruits, and wine. These companies, together with
illycaff, formed a new entity, Gruppo illy SpA.

By 2010, Gruppo illy had total sales of 315 million euros (US $460 million). This was
dominated by illycaff, with sales of 280 million euros (US $410 million) and net profits of US
$11.7 million. Illycaff had 11 direct and indirect subsidiaries and more than 700 employees. It
sold its products in 140 countries spanning all five continents, with exports representing 54
percent of sales. Illycaff reached more than 50,000 of the finest restaurants and coffee
bars/cafs in the world.

By comparison, the sister companies were far smaller, and were still
building their international sales networks in 2010.

Coffee could be composed of a single type of coffee bean or a blend of several types. Blended
coffee produced a richer, more complex flavor than single-bean coffees.
Illy believed in
producing a single, unique, perfect blend of coffee for both brewed and espresso preparations.
A single blend means that illy can always be counted upon to have the same consistent taste,
cup after cup, year after year.

Illycaff was the only company in the world that produced only
one blend of coffee.
Illys single blend of 100 percent Arabica beans came from nine growing regions around the
world: a Brazilian base made up over 50 percent to give the blend body and aroma, enriched with
the sweetness and aromatic notes of wet-processed African and Central American coffees.

Thus, in order for illy to achieve the same consistent taste in its product, it needed to blend
different types of coffee together based on their individual characteristics, all the while
adjusting the amounts of each type to achieve the desired balance and signature taste of the illy

The company blended its coffee prior to roasting in order to achieve the greatest
homogeneity in taste and aroma. To ensure that the illy blend achieved its perfect balance and
consistency regardless of the variations from one harvest to another, the company employed a
liquorer, or a master blender.
Riccardo Illy made the decision to focus on one blend when he first joined the company in 1977.
At that time, the company had 20 different blends of coffee and was producing, according to
Riccardo, high quality within a high quantity of blends, not solely high quality. Over a few
years, he eliminated all but one blend, totaling 50 percent of the companys sales in order to
concentrate only on the best. After that, the company grew much faster and went from selling
1,000 tons of roasted coffee a year to 15,000 tons by 2009.

Illy website, The Company, loc. cit.
Answers.com, Coffee, http://www.answers.com/topic/coffee (accessed J une 8, 2010).
Illy website, Blending, http://www.illy.com/wps/wcm/connect/us/illy/the-world-of-coffee/origin-and-
blend/blending/ (accessed J une 8, 2010).
Illy website, Blending, loc. cit. In wet-processing, the skin and pulp from the coffee bean is removed when the
coffee is still wet. This is the method used in most of the worlds best coffees (Coffee Review website, Coffee
Glossary, http://www.coffeereview.com/glossary.cfm?alpha=W, accessed J uly 12, 2010).
Illy website, Blending, loc. cit.
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Greg Fea, CEO and president of illycaff North America, said of the one-blend strategy: I think
this was one of the most important company decisions. Many other coffee companies have a
vertical tier of different products of varying quality. But illy just makes one brand, which is the
best in the world. Its like making a Ferrari, but not making any cheaper versions of the same
car. The difference between us and Ferrari is that a Ferrari is only for a privileged few, whereas
illy is an accessible luxury for millions.


Illycaff sold its coffee to the hotel, restaurant, and caf sector (HoReCa); to general consumers;
and to corporations and companies. Throughout illycaffs supply chain, all of its constituents
down to the consumer paid a premium for its products. Andrea Illy commented that, The
strategy of making the best coffee in the world makes us a niche player. We work only in the
premium market, with a significant premium price, even to other premium coffees. The
company worked with some of the best restaurants and hotels in the world, including the Four
Seasons, the Mandarin Oriental, and the Meridien Hotel.

In essence, illycaff targeted the sophisticated coffee drinker. Fea said:

Our target market consists of people who are really passionate about quality and
about coffee, who find illy and realize its like the best Bordeaux in the world,
and so they stay with it. Our consumers want the same experience over and over
and they look for our product. Thus our cafs and restaurants draw from a much
bigger radius because people will actually go out of their way if they know that
they just need to walk a little bit further to get an illy instead of something else.

The markets in Europe and the United States were extremely different. In Europe, particularly
the southern European countries such as France, Spain, Greece, and Italy, there was a highly
developed coffee bar culture, particularly as compared to the United States. In 2010, Italy had a
population of 60 million people with 105,000 coffee bars,
while the U.S. had 300 million
people, but only 34,000 coffee bars. Moreover, in the U.S., consumers tended to prefer drip
coffee and other forms of coffee, while Italians preferred espresso. Because of these factors,
illycaffs target market in the United States was the consumer at-home segment, where 80
percent of the coffee was consumed.

Because illycaff was so focused on quality and was unique in its approach, competitors differed
depending on the customer segment. For instance, in the global HoReCa sector, illycaff
competed with companies such as Starbucks and Lavazza, an Italian company. In the market for
machines and coffee capsule systems for making espresso, it competed with companies such as
Nespresso, a division of the Nestl Group.

Quotations are from interviews with the authors, unless otherwise specified.
Greg Fea, CEO and president of illycaff North America.
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Home Products

Espresso and Cappuccino Products
Espresso is a strong coffee brewed by forcing steam under pressure through darkly roasted finely
ground coffee beans. Espresso means very quickly in Italian, referring to the time it takes to
make the drink. The companys founder, Francesco Illy, had invented the illetta, the first
espresso machine. Espresso is a potent and concentrated drink, characterized by its top layer of
foam called crema. The drink is used as the foundation for other drinks such as lattes,
cappuccinos, and mochas. Cappuccino is prepared using espresso, hot milk, and steamed-milk
foam. The European cappuccino was much smaller than the U.S. cappuccino.

Illycaff offered many coffee products to make espressos and cappuccinos, each available in
decaffeinated, dark roast, and medium roast varieties. These products included whole bean
espresso, ground espresso, and E.S.E. (easy serving espresso) pods that made it easy for
consumers to make espresso. They also offered a next generation espresso capsule technology
called Metodo Iperespresso, consisting of capsules that contained seven grams of roasted,
grounded, and tamped illycaff coffee. The E.S.E. pods could be used in machines made by a
variety of manufacturers under an open international standard, while Metodo Iperespresso
capsules were used as part of a proprietary, closed system made by illycaff.

The Metodo Iperespresso process involved a two-phase extraction method that resulted in a
rich, smooth espresso with a velvety, long-lasting crema. Since the capsules kept coffee from
touching the espresso machine, there was no coffee oil buildup. Users could drop the capsule
into the machine and turn a dial to enjoy an espresso in a few seconds. The machine allowed
users to employ an auto-frothing steam wand to create cappuccino, latte, and other coffee drinks.
This made it much easier for consumers to make espresso at home, ensuring a good final result
there were so many variables in the manual process that any mistake could result in a bad cup of
espresso. On the growth of this market, Giacomo Biviano, a long-time employee and head of the
Europe, Middle East, Africa, and Latin America division, said: Coffee is stable, but the capsule
system market is growing over 10 percent a year because it is a much easier way to prepare

The shift towards closed systems, or machines that allowed consumers and businesses to make
various coffee drinks that only used illy coffee, required changes in the company. Durable goods
such as machines were a relatively new area for the company, with new challenges. The shift
also brought a potential risk, as there was an intense battle being fought by giant multinationals
with large legal budgets over machine standards. Small companies such as illycaff hoped that
no proprietary design would dominate the industry, and that there would be a well-accepted open

Brewed Coffee
Brewed coffee is made with an autodrip machine and is the most popular preparation method in
the United States. For brewed coffee, illycaff provided its Ground Coffee product
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(decaffeinated, dark roast, and medium roast). The coffee was more coarsely ground than illy
espresso ground coffee.

In Italy, many people enjoyed a moka pot of coffee each morning. Moka pot coffee is prepared
by a steam pressure moka coffee pot (often called a stovetop espresso pot or macchinetta).
Illycaffs research and development group used their experience with espresso to optimize
coffee for use in moka pots to deliver the same consistent, distinctive illy flavor and aroma. It
also collaborated with the Bialetti company to develop an improved moka pot that eliminated the
residue that could produce unpleasant aromas in conventional pots.

Away-from-Home Market

Illycaffs away-from-home market consisted of franchising the caf chain espressamente illy,
other cafs, restaurants, and hotels. The caf was a social network and a daily ritual for most
Italians. By 2010, there were 230 espressamente illy cafs in 34 countries on 5 continents. Each
caf provided an authentic Italian coffee experience starting with its design where the art of
Italian caf culture meets the love of all things beautiful. In other words, the ultimate coffee
Two internationally renowned Italian architects

created the models for the
cafs. Product offerings at the cafs included cappuccinos, espressos, and various Italian foods.
Beyond espressamente illy cafs, illycaff also offered a larger 3-kilogram pressurized tin of
coffee beans for use in commercial establishments. The pressurized tin (unopened) allowed
users to preserve the coffee for at least three years. Illycaff also marketed its Metodo
Iperespresso system to commercial establishments for espresso preparation, since it was an easy-
to-use machine with no mess and easy cleanup. For the small to medium-sized office market,
illycaff provided the E.S.E espresso pods and an E.S.E.-compatible espresso machine.

Illycaff also had a program called Artisti del Gusto or Artists of Taste, where cafes in Italy
and the abroad agreed to serve illy exclusively, while allowing the company to have an influence
on quality and many other details. Instead of opening its own branded coffee shops in the U.S.,
illycaff aligned itself with coffee shops such as Caffe Greco in San Francisco and Caf
Nineteen in Atlanta, Georgia. Illycaff supplied the coffee shops with espresso machines, coffee
cups, artwork, drink recipes and training; in return, the shops agreed to serve only illy coffee for
at least three years. In the case of Caffe Greco and Caf Nineteen, sales increased due to the
exclusive illy offering.

By early 2010, 28 U.S. coffee shops operated with the Artisti del Gusto
certification, and illycaff planned to add 100 more over the next three years, as well as to launch
the program in Canada and Mexico. Illycaff personnel regularly visited certified coffee shops
to monitor quality.

Illy website, The Project, http://www.illy.com/wps/wcm/connect/us/illy/away-from-home/espressamente-
illy/the-project/ (accessed J une 8, 2010).
Claudio Silvestrini and Luca Trazzi.
J ulie J argon, Illy Uses Backdoor to Take on Starbucks in the U.S., The Wall Street Journal, November 3, 2009,
http://online.wsj.com/article/SB10001424052748704112904574475722260947260.html (accessed J une 8, 2010).
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Illycaffs strategy focused on quality and consistency of the beans, technological innovation,
and education. This strategy enabled illycaff to have a more consistent quality in the cup when
compared to competitors. Fea explained:

Instead of focusing on just the quality of the beans (which I think we have
indisputably the best quality beans in the world), we are also committed to quality
in the cup. That means we have to take control of the quality of the machines
being used, and the quality of the people who are transforming the coffee from
location to location. Technology and education help us to achieve quality in the
cup. In terms of technology, were one of the leading developers of patented
technology in the world. We also started a Universit del Caff, where we send
professionals and consumers to study how to properly prepare coffee.

Focus on Quality

According to Riccardo Illy, the company differentiated its products mainly by quality, saying:
What that means is that we must produce only the best coffee and products, and aim for
perfection. Andrea Applewick, project manager of the Ernesto Illy Foundation, elaborated:
Everything about illy is of the utmost qualityfrom the reception area, to the service that you
receive at the bar, to the cafeteria. Its not necessarily just the coffee itself, but after you enter
into the gates of the company, you immediately feel that quality is the most important thing.

Illycaff ensured the quality of the pre-roasted green coffee beans by purchasing all of its coffee
beans directly from growers, testing each bag purchased; they did not buy a single bag on the
spot market. They paid a 30 percent premium for coffee; the money went directly to the farmers,
who avoided the middlemen and the spot market, and thus kept more profits to invest in their
plantations to create higher quality beans and achieve a higher quality of life.

Once purchased, the large jute bags of coffee were shipped to the roasting facility warehouses in
Trieste, Italy as quickly as possible. Even during shipping, illycaff was attentive to quality.
The bags were placed in their shipping containers in a way that enabled air circulation and
minimized mold, condensation, and other issues (as opposed to packing so as to maximize the
number of bags in a given space).

Upon reaching the roasting plant, the beans were removed from the bags and placed on a
vibrating screen to remove the remaining foreign objects. An aspirator removed the smaller
lighter impurities, a magnet removed any metal, and then the green coffee was stored in silos.
The final selection stage was conducted by six bi-chromatic systems that electronically
photographed each bean, detecting and eliminating any bean that did not meet strict color
standards. According to the company website, Illycaff believes that this level of inspection is
essential for natural coffees in particular and it is just one of many methodologies used
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p. 8
exclusively by illy to approach its goal of zero defects. Why does illycaff go to such lengths?
Because a single imperfect bean among the 50 in a cup is enough to spoil an espresso.

The green beans were then roasted. Again, this process was done with a focus on quality. For
instance, after drying and roasting the beans, the company used streams of cool air (although
slower and more expensive than using water showers) to preserve the aromas of the coffee and to
protect the beans from humidity.

Quality and freshness was an important part of illycaffs final packaging process. To ensure
freshness, founder Francesco Illy invented pressurization in the 1930s. According to the

Pressurization extracts the air from the can and replaces it with inert gases at a
higher-than-atmospheric level of pressure. This method guarantees a longer
preservation time, maintaining the coffee for over two years until it is prepared.
At the same time it ages the coffee, improving its aroma over time by causing its
volatile aroma compounds to bind with the oils that are contained in the beans.
Simple vacuum packing cannot achieve this flavor transformation. The effect
of the aging process is similar in many ways to the development of complex
flavors when a fine red wine is aged under proper conditions.

Riccardo Illy added: There are no other roasters that are able to produce our tins and to
pressurize the coffee to age it in order to fix the flavors with the oil contained in the coffee. This
is really unique and our consumers are able to detect the difference.

Fea reflected on the companys focus on quality:

We have a unique approach to quality, which you just dont find in the world
today. Its not marketing hype; its what we do. Other companies tell us that
were crazy because what we do is so expensive and laborious. It probably
wouldnt work for the big multinationals, because it would require too much
technology and tedious work, but for us, its our mission.

Focus on Scientific and Technological Innovation

Since its founding, illycaff had been a research laboratory, where technological solutions for
producing the best espresso have been designed, constructed, and patented.

Illy website, Selection,
Coffee bean
quality was highly variable, even between trees in the same plantation. In order to ensure the
highest quality, illycaff employed many technologies to control all aspects of production, from
blend/selection/ (accessed J une 8, 2010).
Illy website, Roasting, http://www.illy.com/wps/wcm/connect/us/illy/the-world-of-coffee/origin-and-
blend/roasting/ (accessed J une 8, 2010).
Illy website, Innovations, http://www.illy.com/wps/wcm/connect/us/illy/about-illy/innovations/ (accessed J une
8, 2010).
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p. 9
bean selection to packaging. Many of these practices were unique to illycaff within the coffee
industry. The pressurized cans were one technological innovation, as well as the illetta, the first
coffee machine with automatic water dosing and a jet of compressed airthe predecessor of all
espresso machines.

When Ernesto Illy joined illycaff, he infused science and technology into the company,
launching the internal research laboratory and collaborating with scientific centers and
universities. One invention at this time was the sorting machine that analyzed the intensity of
light from every bean so that the poor quality ones could be removed. Another invention was the
E.S.E. pod for easily preparing espresso at home or in the office using an espresso machine. In
2008, illycaff launched the Metodo Iperespresso capsules and machines, leading to a creamy
rich and persistent foam topping, shifting the process away from the standard percolation

Illycaffs internal research and development group focused on the study of coffee through
agronomy, botany, physics, chemistry, biology, statistics, and computer science. It also
partnered with universities in Trieste, Udine, Florence, Milan, Budapest, and Manchester. In
2010, the company opened a patent office in illycaff for their proprietary recipes and
technological developments and innovation. By 2010, illycaff had developed the industrys
third-largest intellectual property portfolio, despite its small size.

Focus on Education: Universit del Caff

Another pillar of illycaff and Gruppo illys strategy was its focus on education. The company
established the Universit del Caff in 1999, to promote and establish the culture of quality
coffee in Italy and worldwide.

UdC was headquartered in Trieste, and offered training and
educational activities to producers of coffee on issues such as organizing a plantation, as well as
to professionals in coffee shops on coffee and coffee shop business issues. UdC also offered
courses for the consumers (connoisseurs) of coffee, and held tasting evenings and coffee-themed
dinners for coffee lovers.
By the end of 2009, over 41,000 students from around the world had attended courses at illys 16
Universit del Caff subdivisions. In 2008, of the over 11,000 students who attended the UdC,
more than 800 were producers, 6,900 were professionals, and 3,500 were connoisseurs.


Geographical Expansion

The companys geographical growth strategy began with its founder, Francesco Illy, in 1933.
Francesco was in a joint venture with a partner who was a roaster himself. The partner sold
products in his territory, and the joint venture focused on the rest of Italy and foreign markets.
Riccardo Illy said: This strategy obliged my grandfather to invent pressurization to protect the

Illy website, Universit del Caff, http://www.illy.com/wps/wcm/connect/us/illy/the-world-of-
coffee/universita-del-caffe/ (accessed J une 8, 2010).
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p. 10
freshness of the coffee, and also obliged him to focus on high quality, because in 1933 the cost of
distribution was very high. So the only way to charge a higher price to the customers to make up
for high distribution costs was to produce a higher quality product. Francesco Illy sold coffee
in Switzerland immediately. When Ernesto Illy entered the company, he developed the export
market in the Netherlands, then France, then Germany, and finally, in the United States in 1980,
when espresso wasnt well known at all, according to Riccardo Illy. We built an espresso
market in the United States from scratch.

When Riccardo joined the company he initially focused on the Italian market, then became the
commercial manager in charge of foreign markets. He started developing new markets, largely
through independent distributors. Under Riccardos leadership, illycaff launched its global
initiative just prior to being elected city mayor in 1993. Andrea Illy then became CEO and
rapidly developed the international markets, reaching nearly 150 countries worldwide by 2010.

As illycaff expanded into different geographical markets around the world, the company
followed a strategy of converting consumers, according to Biviano:

When we are thinking about entering a market, we always look at the market, we
buy market research, and we investigate. We always do our best to understand
consumer need. But at the end of the day, we are not driven by consumers,
because sometimes they dont know what they need. For example, everyone used
CDs for music until Apple developed the iPod and now everyone is buying music
from the web. We have the same concept for our products. Our goal is to get
consumers to try espresso and start drinking espresso, maybe with an espresso
machine. In some markets such as Africa, however, we are not strong because
there simply isnt enough purchasing power to buy our premium product.

Geographical Expansion Example: North America
In 1998, illycaffs North American business was operating at a stable revenue base of about $15
million, with an expensive structure, and no clear growth plan. Replicating the Italian strategy
had not been effective, due to the differences between the two countries. The largest coffee
market was the consumer segment, yet the company was concentrated in the HoReCa business

Rather than cut costs to those appropriate to a smaller business, they decided to grow the
business. Over the next decade, the North American business multiplied by four times and
became profitable.

The first thing that the company did in North America was to expand into drip coffeethe
preferred U.S. consumption method, as well as espresso and espresso preparation. In the U.S.,
so much of the coffee consumption is drip coffee, and this had never been done at our company,
so it allowed people in the U.S. to enjoy coffee the way they liked it, said Fea.

To support its North American strategy, the company did not use traditional advertising, but built
the brand through experiential marketing, or ways in which consumers could not only shop,
but also have a complete coffee experience. For example, illy opened a store for three months in
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a Soho New York art gallery that allowed consumers to enjoy the art, shop and also take
seminars on coffee. At the gallery, illy had events such as film showings and art shows. The
illy brand has always been associated with the arts, said Fea. Consumers came to the Soho
store and the store received a lot of press that helped to build the brand. This approach was
consistent with the global illy communications strategy, which favored public relations efforts
and experiential marketing over traditional advertising. It continued a long-term illycaff
involvement with contemporary art, as exemplified by the companys commissioning of artists to
design espresso cup collections, and collaborations with major worldwide art institutions.

Another marketing program that illyUSA developed was its e-store at illyUSA.com, where the
company offered a coffee machine at a low price in return for a subscription of coffee. Because
the company learned that American consumers were afraid of having espresso machines in their
homes, as they did not know how to use them, they had company experts who were trained in
machine functionality and troubleshooting.

By 2010, the companys North American revenue had grown to approximately $60 million from
$15 million a decade earlier, and was available in 25 percent of the U.S. retail stores selling
premium coffee, including stores such as Williams-Sonoma, Sur La Table, and Whole Foods.
The company even sold its coffee in 800 of the 3,800 Safeway stores, selected by illy because
their customers were predisposed to quality. In such Safeway stores, illy team members worked
with the retailers to help them develop an effective program not only in terms of product, but
also in terms of solutions for teaching consumers how to make coffee, how to make better coffee,
and what product to put into a machine. Illy partnered with Williams-Sonoma to offer sessions
on coffee at 30 of its stores that had training facilities. Fea said: This is a great way to introduce
people to our product, because we have their attention for more than two seconds so we can
actually tell them something. If we only have someones attention for two seconds in a
magazine, thats harder.

Expanding into the Ready-to-Drink Canned Coffee Product

In 2009, Coca-Cola and illycaff partnered to create Ilko Coffee international, bringing a line of
Italian canned coffees all over the world, in the $17 billion global ready-to-drink coffee market
(dominated by J apan, with three-quarters of the global market). The partners offered three drinks
in the Illy Issimo line: 1) Caff (basic black with some sugar), 2) Cappuccino (with lowfat
milk), and 3) Latte Macchiato. By 2010, Illy Issimo drinks were sold in 20 countries in addition
to the U.S.a $2 billion market dominated by the joint venture of PepsiCo and Starbucks.
Coca-Cola and Illys drinks were priced 15 percent more than Starbucks drinks, and sold in
upscale locations such as Whole Foods in North America. Riccardo Illy said: Our ready-to-
drink product is made with our same blend, but just in a different preparation in order to allow
our consumers to enjoy our products in different situations.

By 2010, the brand had captured nearly 20 percent market share in the 10 countries of its initial
launch, with the goal of achieving at least 30 percent market share globally in the ready-to-drink
coffee market.

Coke CEO Sees Canned Coffee Growing Despite Recession,
Applewick recalled the initial interest from distributors in J apan: We decided
http://www.reuters.com/article/idUSN2833611620090528 (accessed J une 8, 2010).
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p. 12
to do a ready-to-drink product almost 10 years ago because a distributor in J apan asked us if we
would make such a product. After 10 years of research, 10 years of understanding the market,
and thanks to our partnership with Coca-Cola, we now have this drink available in J apan,
Europe, and the United States. We are not a company that makes rash decisions when it comes
to our coffee.


In 2003, illycaff conducted a review of the long-term plan of the business, looking out 10 to 20
years. The companys focus on producing perfect coffee resulted in high-end positioning, and
a degree of exclusivity, which was inconsistent with growth through mass marketing of lower
priced brands. At the same time, the company was constrained by the availability of beans that
met its quality requirements. These considerations limited the company to less than 2 percent of
the global coffee marketa size that would allow illycaff to grow, but the growth would
eventually be constrained. They then addressed the question of how to grow beyond the size
possible within the market niche for perfect coffee.

The other attractive growth prospect within the coffee business, given an eventual saturation of
the premium niche and the limited amount of premium coffee beans, was to increase the value
addedgenerating more revenue from the same number of beans. This was the basis for many
of the new products previously described, such as espressamente illy coffee bars, single serve
pods (and their associated coffee machines), and the Ilko ready-to-drink product.

They then considered ways to grow by diversifying into new products. This would have an
additional risk mitigation advantage, as Andrea Illy noted: Coffee is not a primary necessity.
One day, there could be a new fad, or an alternative product to coffeeit could happen. Nobody
will die if coffees not around anymore. It would be risky for a family business to put all its eggs
in the same basket.

The Illys believed that the company had assets that could be valuable to other businesses,
specifically its unique blend of art and science. It applied art to selecting and blending coffee
beans, to its recipes, and its activities surrounding connoisseurship. It applied science toward
product innovation and quality, with its extensive research and development capabilities. These
assets could be applied to other companies that shared illycaffs passion for perfection. As a
result of this long-term review, the Illys decided to diversify.

The diversification process began in 2004, when Gruppo illy SpA was formed as a holding
company for illycaff and the sister companies it would acquire.

The company expanded into other products through strategic acquisitions of companies already
known and regarded as best of class in their business sectors, that shared the same values as
Gruppo illy, and that had the same image of uniqueness, as expressed by Riccardo Illy, who
went on to say, We looked at the quality and image of the products, brands and especially of the
people leading these companies.

E-mail communication from Riccardo Illy, May 17, 2010.
In each of the acquisitions, the leaders with the primary
product knowledge remained with the company after it became part of Gruppo illy. Andrea Illy
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p. 13
pointed to a third important characteristic: heritage. In its acquisitions, the company would add
two products that had been part of its prior history: chocolate (which it had produced beginning
in 1933), and tea (which it had produced in the 1960s).

In 2005, the company acquired a 40 percent share

in Agrimontana, a leader in the production of
top-of-the-line confectionary products, such as marrons glacs and jams. In 2006, it obtained a
controlling 80 percent share of Domori, a luxury Genoa-based chocolate company; in 2007, the
company acquired a stake in the high-quality French tea brand, Dammann Frres; and in 2008, it
acquired a stake in Mastrojanni, a wine farm in Montalcino, Italy, an area famous for its Brunello
red wine.
Agrimontana brought innovation, experience, and aesthetic focus and attention. It innovated by
packaging candied chestnuts in a modified atmosphere for longer shelf life and a softer structure.
The company also innovated by packaging candied fruits with an ad hoc pasteurization in
order to preserve the authentic taste and color of the fruits without using any artificial
preservatives. Agrimontana focused on tradition in its cooking (long-lasting), selection, and
candying (handmade). Aesthetically, Agrimontana had launched a new logo and new packaging
that was consistent with Gruppo illys brand.

Domori brought similar attributes. Domori innovated in two basic ways: botanic innovation and
process innovation. Botanically, Domori cloned and saved fine varieties of cacao (the tree that
produced the cocoa bean) that were nearly extinct, such as criollo. In its process innovation,
Domori used machines, such as the ball mill, which maximized the aroma of chocolate.
Experience was also an important reason why Gruppo illy acquired Domori. For example,
Domori roasted cocoa beans at lower temperatures in order to keep a wider spectrum of the
aromas. Aesthetically, Domori had launched a new logo, with corporate image and packaging
that were aligned with Gruppo illys brand.

Similarly, Dammann brought innovation, experience, and aesthetic focus and attention. In the
mid-1980s, the company, in cooperation with a J apanese engineer, created the sachet crystal,
an elastic filter made of nylon that enabled the expansion of tea leaves, which led to more intense
aromas in the cup. In terms of experience, the company exclusively used natural processes in the
aromatization of teas (dried flowers, petals, and essential oils), leading to a more natural, long-
lasting, and well-balanced taste between fruit and tea. Aesthetically, Dammanns packaging was
a part of the product, and in its flagship store in Paris, the architecture and furnishings were an
integral part of the consumers tasting experience.

Riccardo Illy said that Gruppo illy hoped to exploit all the possible synergies between illycaff
and its sister companies while maintaining the autonomy and identity of each company. In
essence, he said that Gruppo illy aimed at achieving the correct equilibrium between full
autonomy and responsibilities for the sister companies in their own businesses and integration
to reinforce the competencies and actions through synergies with illycaff and the other
companies in the group. Each acquired company retained its original name and brand.

Eventually, Gruppo illy boosted its share of Agrimontana to 75 percent in 2007.
The rationale for the three acquisitions is mostly quoted from Riccardo Illys presentation on Gruppo illy at
Stanford University in J uly 2009.
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The acquired companies were small compared to illycaff. Despite growing from the time of
acquisition, by 2010 they still only accounted for about 10 percent of Gruppo illys business
coffee was by far the largest share of the business. As independent companies, they were too
small to be able to afford the extensive research and development capabilities developed by
illycaff. While the sister companies retained their operational independence, they had access
to illycaff for support. Andrea Illy described the arrangement as follows:

They are free and independent. We give them the opportunity to access our
customers, through our sales force or independently. They have access to the
knowledge in our departments, such as scientific knowledge. Should they need to
conduct a research and development project, whatever is needed is at their
disposal. IT, administration, finance, research and development, quality
assurance, production, any department is at their disposal for internal consultancy.

He gave the example of Domori potentially wanting to evaluate the aroma of its products or raw
materials: You need the aroma lab to screen the cocoa aroma? We can make it. These things
are totally out of reach for a small company.

Andrea further commented on their independence, saying: If we pushed them for performance,
and results, and deliverables, we would probably very, very soon destroy and destabilize the
organization. Thats why its the correct mix between their independence and access to the illy
system. We support them, as opposed to drive them.

Riccardo felt that strategic acquisitions provided four advantages for Gruppo illy: 1) reinforce
positioning on the top quality segment; 2) strengthen internationalization; 3) cross-fertilization in
the process; and 4) scale economies in the organization: sales force and marketing, logistics,
warehousing, distribution and other fixed costs. He also mentioned several advantages for its
distribution customers, such as:

1) Gruppo illy represents a reliable partner on a wide range of products; 2)
reduced business complexity: less suppliers, less administration; 3) the quality,
the know-how, the service and the unmatched quality experienced with illycaff
are guaranteed also for tea, chocolate, pastry products, and wine; and 4) the
Gruppo illy portfolio products reinforce the premium positioning of the customer
and will increase the gap and the distinctiveness against price-competitors.

While not a primary reason for the diversification, Riccardo noted that the company planned to
exploit synergies throughout the value chain. These included: raw material supply; industrial
processes, automation, quality control, and product development (such as frozen offerings in the
coffee, chocolate, and tea product lines); logistics; and marketing, sales, and post-sales services,
particularly in knowledge transfer provided by Universit del Caff.

Riccardo Illy e-mail, May 17, 2010.
As one sales example,
he cited the sales organizations of Agrimontana and Domori, in which Agrimontana was selling
Domori chocolate to its pastry chef customers, and Domori was selling the Agrimontana retail
products to its customers.
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p. 15

Gruppo illy planned to grow the sales of Domori Chocolate and Dammann Tea to the level of
illycaff in 20 years, in order to produce a high level of cash flow that we could perhaps invest
in the wine sector, according to Riccardo. The wine sector represents a return to the origins of
my entrepreneurial family and to my grandfather as a farmer. It also represents the passion of
my brother, mother, and father. But it is a long-term investment. I sometimes joke that it is for
our grandson. Riccardo felt that these new product areas reminded him of when he first started
working for illy coffee in 1977. At that time, he felt like he was doing missionary work. For
example, in the chocolate sector, Domori was using only Criollo cocoa and Trinitario cocoa,
special high-quality cocoas. Of course the cost is higher, he said. So our sales prices are
higher, but we have to convince people through tasting sessions and training sessions.


The Illy brothers, and their family, had helped to build illycaff from a small business to a
worldwide enterprise with multiple product areas beyond coffee. They now looked forward to
the challenge of taking the company to a new level by growing their recently acquired brands.
They saw a growing global market for premium coffee, which they considered themselves well
positioned to address. The biggest risks appeared to be in the supply chain, due to the limited
production of coffee beans that met their quality standards. Another risk was in the market for
measured serving pods and machines, as described previously. Illycaff hoped that no closed,
proprietary system would dominate the industry.

The newly acquired brands faced the challenges of growing beyond their extremely small size, in
the face of competition. In a competitive market, it might be difficult for small brands to be
noticed by consumers. However, illy had succeeded in meeting this challenge with coffee, and
looked forward to overcoming it with its new products.

Despite all of these different challenges, they looked forward to the future, a future where they
hoped that quality and the perfect cup of espresso would prevail, and that quality could be
successfully transferred to other products.

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p. 16
Exhibit 1
illycaff Mission, Values, and Vision
(as Stated on the illy Website)


Thanks to our enthusiasm, teamwork and values, we aim to delight people all over the world who
value the quality of life by offering the best possible coffee nature can provide, enhancing its
perfection through the most innovative technologies, and inspiring emotional and intellectual
involvement by seeking beauty in everything we do.


Seeking perfection is our main value. It is expressed in two cornerstones: passion for excellence,
meaning love for beauty and well done, and ethics, meaning long term value building through
sustainability, transparency, and people development. We wish to improve our stakeholders'
quality of life driven by our passion for everything we do.


We aim to be the world reference for coffee culture and excellence. An innovative company
offering the finest products in the best places, growing to become the high-end segment leader
and creating superior stakeholder value.

Source: Verbatim text from Illy website, Mission, Vision, and Values,
http://www.illy.com/wps/wcm/connect/us/illy/about-illy/mission-vision-and-values/ (accessed J une 8, 2010).

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p. 17
Exhibit 2
Biographical Sketches of Riccardo and Andrea Illy

Riccardo Illy, Chairman Gruppo illy SpA and vice-chairman illycaff SpA
Riccardo Illy joined the family firm in 1977. In his position as sales director Italy, he developed
the marketing and public relations activity and produced the first important advertising
campaigns to receive international recognition. In the second half of the 1980s, he began the
development in the foodstuffs and office sectors. Subsequently, he held the post of international
sales director and re-organized the structure of the subsidiary companies. In 1992, he became
managing director, becoming vice-president in1995. He has been chairman of Gruppo illy since

In 1993, he entered politics. From 1993 to 2000, he was mayor of Trieste, and in 2001 was
elected MP in the Italian Parliament. From 2003 to 2008, he served as president of the regional
government of Friuli-Venezia Giulia. In 2004, he was elected president of the Assembly of the
European Regions. He has served in other civic organizations, and been the recipient of
numerous honors.

Andrea Illy, Chairman and CEO of illycaffe SpA

Andrea Illy graduated in chemistry from the University of Trieste. He joined the family
company in 1990 as the supervisor of the quality control department. He was appointed CEO in
1994, and chairman in 2005. He is the author of books detailing the scientific and technical
aspects of the coffee business, and served in executive positions on scientific committees and
organizations related to coffee and other food products. He has also been given awards for
marketing and business excellence.

Sources: Riccardo Illy: Stanford Graduate School of Business website, Executive Circle Summit,
http://www.gsb.stanford.edu/exed/executivecircle/faculty.html (accessed J une 8, 2010). Andrea Illy: illycaff.

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p. 18
Exhibit 3
History of illy Coffee

1933: Francesco Illy founded the company in Trieste.

1935: Francesco Illy designed and patented both the illetta, the predecessor of modern
espresso coffee machines, and pressurization, a revolutionary system for preserving the blend,
which allowed coffee to be shipped right across Italy way back in the thirties.

1939: illycaff introduced the espresso culture to Northern Europe. Holland and Sweden were
the first countries to discover the aroma and delight of concentrated coffee in a small cup.

1947: The arrival in the company of Francescos son, Ernesto, a chemistry graduate,
strengthened its passion for science and technology and alliances were set up with other
businesses, science centers and universities.

1957: The can manufacturing unit was built, so that the preservation of the coffee aroma and
flavor was also directly controlled and guaranteed by the company. The company's first
chemistry laboratory was also established, as well as the initial production of coffee for home
consumption in smaller-sized, round cans of ground illy coffee.

1965: The company moved to its current Trieste headquarters in Via Flavia, which houses the
chemistry laboratory, the production of coffee and packaging materials and the packaging

1974: illycaff was the first company in the world to produce portioned coffee servings
individual coffee pods for preparing caf-quality coffee at home or in the office in the simplest,
safest and quickest way.

1988: illycaff patented the digital sorting machine, which guarantees bean perfection by
photographing their shape and color.

1991: The designer Matteo Thun created the signature white illy espresso cup based on an idea
by Francesco Illy, a synthesis of beauty and functionality. In this same year, the Brazil Award
was instituted to reward, on a yearly basis, the Brazilian coffee growers who produce the best
quality green coffee. A quality control laboratory, Assicaf, was also established in Brazil.

1992: The first series of illy collection cups was produced.

1996: The current illy logo a red square with the brand name written in four soft white
brushstrokes was designed by artist J ames Rosenquist.

1998: illycaff founded AromaLab in the Area Science Park in Trieste, where the individual
aromas making up the flavor of coffee are identified, studied and mapped.

2000: The University of Coffee was founded, a place where baristas and coffee lovers learn the
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p. 19
art and culture of coffee, from bean to cup.

2002: The In Principio project, the collaboration between illycaff and the photographer
Sebastio Salgado, began in Brazil. It then went on to cover India, Ethiopia and other coffee-
producing countries.

2003: The illy bar concept, a chain of Italian-style illy cafs, was established. By the end of
2005 there were 50 in Italy and over 130 in seven countries worldwide, now known as
espressamente illy.

2006-2007: After the coffee serving and the E.S.E system, an innovative new system Metodo
iperEspresso was launched for preparing "next generation" caf quality espresso at home or at
the workplace.

2007: The Artisti del Gusto program is launched to create an international network dedicated to
helping the best coffee shops expand and enhance their professional competence. By 2010, this
program had involved more than 1,000 shops worldwide.

2008: illycaff launches a ready to drink canned coffee, cappuccino and latte to drink cold,
called illy issimo, in a joint venture with the Coca Cola Company.

2010: Mitaca is born. It is a joint venture between illycaff and Itaca and it is aimed at
producing capsules and machines for the Office Coffee Service. A brand new plant is opened
close to Milan.

Source: Illy website, The History of illycaff, http://www.illy.com/wps/wcm/connect/us/illy/about-
illy/traditions/the-history-of-illycaffe/, (accessed J une 8, 2010). E-mail communication, J uly 1, 2010.

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Exhibit 4
Gruppo illy SpA Revenue (Euros)
Source: Gruppo illy SpA.
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p. 21
Exhibit 5
Strategic Acquisitions

I. Domori
a. Innovation
i. Botanic: Clones selection to save and re-launch the rarest and finest
varieties of cacao (such as criollo), close to extinction
ii. Process: use of machines projected for the scope (to preserve in the
chocolate bar the highest possible aroma profile deriving from the
aromatic cocoa) such as the ball mill
b. Experience
i. Use of processes (i.e. roasting at lower temperatures) for a mild
processing of the cocoa in order to keep a wider spectrum of aromas
c. Attention for the aesthetic
i. New logo, new corporate image and new packaging

II. Agrimontana
a. Innovation
i. Candied chestnuts are packaged in modified atmosphere for a longer shelf
life of the product and a softer structure of the chestnuts
ii. Candied fruits are packaged with an ad hoc pasteurization in order to
preserve the authentic taste and colors of the fruits with no need to use any
artificial preservative
b. Experience
i. Traditional way of cooking (long-lasting), selection, and handmade
candying in order to guarantee the correct absorption of sugars and the
highest consistency in size and quality of the candied chestnuts
c. Attention for the aesthetic
d. New logo, new packaging

III. Dammann
a. Innovation
i. Creation, in the mid 1980s (in cooperation with a J apanese engineer) of
the sachet crystal, a filter made of nylon, smooth as silk, that with its
elasticity, allows the expansion of the leaves that can in this way spread all
the beauty and intense aromas in the cup
b. Experience
i. Use of exclusively natural processes in the aromatization of teas (i.e. dried
flowers, petals, essential oils) for a result that turns into a natural, long-
lasting and well-balanced taste between fruit and tea
c. Attention for the Aesthetic
i. Packaging is part of the product. In the flagship store in Places des
Vosges, Paris, the architecture and furnishing are an integral part of the
tasting experience you can enjoy inside

Source: Gruppo illy SpA.

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