Major Italian Coffee Players Facing Crossroads

Major Italian Coffee Players Facing Crossroads

Analyst Insight by Hope Lee – Senior Beverages Analyst

As Massimo Zanetti Beverage Group SpA (MZBG, the owner of Segafredo) is listed in Milan, investors are perhaps eyeing other privately-owned Italian foods and beverages companies. Italian entrepreneurs are traditionally known to keep things within the family and public listing is often not considered a favourable option for the continuity of their businesses. However, the this mind-set is likely to change as many of these companies have started exploring international markets more aggressively to mitigate domestic slowdown. Here is a quick glance at the global growth markets which they could explore, and the state of play regarding the major Italian coffee players.

Lavazza: Hot pursuit of international markets amid domestic maturityWith an established coffee culture and an ageing population, Italy is a highly mature coffee market, and one which is set to see a decline in foodservice volume sales over 2014-2019. This situation mirrors Japan’s soft drinks market, where Japanese companies are addressing the issue of domestic maturity by looking to expand internationally.

The strategy of the major Italian coffee players has been to extend Italian coffee culture abroad and offer the world high quality and authentic coffee. The commonalities between these companies are that they all operate in the foodservice and coffee appliances sector. Selling Italian coffee culture will benefit sales of the coffee accessories or foodstuffs they offer. The differences are that their international expansion plans are at different stages. In the global coffee arena, they present something of contrast to Starbucks’ American style of coffeehouse culture. Starbucks is much more advanced in globalisation, and its marketing message has been well received.

Thus far, only Lavazza has managed to squeeze into the world’s top 10 table, with Massimo Zanetti Beverage Group SpA (MZBG) placed 12th, behind Starbucks and Melitta. Lavazza was one of the first Italian coffee manufacturers to expand in the international markets. The strategic acquisition of a stake in Keurig in 2012 came as something of a surprise, but later proved to be a wise move. Lavazza now owns 7.5% of Keurig. Lavazza has stated that France, Germany, the UK, the US and Australia are its core growth markets in the next few years. In recent years, Lavazza slowed down its investment in UK outlets, while increasing its efforts in the US. Lavazza has reported that revenues from overseas make up around 40% of its corporate sales, and its objective is to raise this to 60% (including all product categories). However, the company has not mentioned the time scale over which this is to be achieved.

Italian Major Coffee Players: Fresh Coffee Sales, US$ mn RSP 2014

Company	World	Italy
Lavazza SpA, Luigi	1,500	896
Massimo Zanetti Beverage Group SpA	615	146
Illycaffè SpA	249	161
Kimbo SpA	164	164

Source: Euromonitor International

Medium-sized companies may fall prey to Jacobs Douwe Egberts

In terms of global market share of overall coffee, there is still a big gap between Starbucks and MZBG. It is unlikely that MZBG will overtake Starbucks as it is not penetrating rapidly into the major growth markets, such as the US and Brazil. MZBG’s global sales reached US$628 million in 2014, but all the top 11 players have sales of over US$1 billion. Moreover, the formation of Jacobs Douwe Egberts (JDE) and the possible aggressive coffee strategy anticipated may impede Italian companies’ international plans. Medium-sized Italian companies may fall into JDE’s “acquisition shopping basket” in the medium term. JDE will assume DE Master Blender’s legacy in Brazil, where MZBG has not yet registered a noticeable retail share. The capital generated from the listing may well help MZBG to fund global expansion. The stiff competition in certain established markets, such as the US, may make it expensive to enter. In the long term, markets which do not have a strong coffee culture may be targeted at mould consumption habits towards Italian style coffee.

Major Coffee Growth Markets, Absolute Growth, 2014/19

Growth Markets RSP	Absolute Growth, US$ mn RSP, 2014/19	Foodservice Volumn Growth Markets	Absolute Growth, Tonnes, 2014/19
China	197	Canada	3,656
India	223	United Arab Emirates	3,774
Philippines	228	Algeria	4,338
Ukraine	231	Mexico	4,665
Spain	240	Netherlands	4,907
Indonesia	256	India	4,986
Italy	388	Guatemala	5,635
Mexico	509	United Kingdom	6,524
Germany	630	Australia	7,101
Canada	772	Turkey	7,741
Japan	773	Vietnam	13,732
United Kingdom	806	Indonesia	14,336
USA	1,150	USA	30,312
Brazil	1,729	Brazil	118,488

Source: Euromonitor International 

Meanwhile, Illycaffè and Kimbo have partnered to develop the Uno Capsule System pod coffee machine. Kimbo created the brand Espresso Italiano. The company is present in France and the UK, although retail sales remain small. Kimbo is not yet present in Asia-Pacific. Internationally, Illycaffè ranks third in Asia-Pacific’s coffee pod category, and holds number one position in fresh coffee in China, which may be a bonus on the corporate scale if Illycaffè does negotiate with potential investors or acquirers.

In brief, now is perhaps the moment for Italian players to make a meaningful transition from a domestically focused business to international expansion. Although success is not guaranteed, it is a risk that they may have to take, in whatever form: public listing (whole or partial), go alone, or to be wholly or partly acquired by investors. If domestic maturity cannot be changed dramatically and the global marketplace does not encourage them to carry on the old way of doing businesses, the only way to change is to adapt their growth strategy.