Illy confronts Starbucks with a low-cost indy strategy
Filed under: Company News, Starbucks
IllyCaffè SpA may not have a company-owned store near you, but it's a good bet you know the company's coffee. Illy's espresso machines and coffee beans are available to purchase online at the company's website, on Amazon.com, and a wide variety of retail outlets. Its art-inspired cups are a favorite of Italiaphiles (a good friend whose husband is Milanese was my introduction to the designer series of tiny espresso cups and saucers). And, after three years of success in Italy, the company has expanded its Artisti del Gusto (Artist of Taste) certification to the U.S., with 28 shops around the country serving Illy coffee, and about 100 more planned by 2012. In Tuesday's Wall Street Journal, Illy is said to be using this strategy to compete with Starbucks (SBUX) through the "backdoor." It's a bit of a reach -- after all, 128 coffee shops is about 1.1 percent as far-reaching as Starbucks, and far less of a threat to market share than Dunkin' Donuts or McDonald's (MCD), both of which have challenged Starbucks with their low-priced, high-volume and ubiquitous coffee.
Accustomed as I am to coffee shops here in Portland which pledge allegiance to one small craft roaster or another, sporting the bird-themed Stumptown sign or the architectural Bridgetown Roasters (or a half-dozen others), I have to say this isn't at all a new concept. But that's not to say it isn't a good one.
Illy's Artisti del Gusto certification works this way: independent coffee shops with "relevance in their market" are selected to use only Illy coffee beans and agree to do so for a three-year period. Baristas are trained to pull an Illy-quality espresso and given recipes for other drinks common to Artisti del Gusto shops. Illy provides art work, coffee machines, glassware and other branded touches, such as the red Illy umbrellas. Certified coffee shops are periodically monitored for consistency, and the certification can be pulled if the lattes aren't up to snuff.
This is almost exactly the way the Stumptown Coffee program works here in Portland, and has done so for many years. More than providing a way for the excellent coffee company to sell its beans in more places, it greatly expands the company's reach without significant investment, allowing it to focus on a few company-owned shops and commit the rest of its capital to finding and roasting really great beans.
Not only is this is a proven way to expand with minimal investment, it's also a way to increase the reach of a brand, and indoctrinates a much wider audience to the superiority of your coffee beans. In other words, it's a great way to market your product in grocery stores and online outlets, without a national advertising campaign. A coffee shop on your corner is far better than a billboard, since it's a place you already trust and whose coffee you are conditioned to love by association. Starbucks sells the majority of its packaged coffee through grocery stores; a whopping two-thirds of its ground and whole bean sales take place outside of its coffee shops.
Will this challenge Starbucks' coffee shop market? Probably not, though a small minority of shops may find the new competition fearsome. It could challenge the coffee giant's comfortable leadership in the grocery market, however. And it's interesting to see that Starbucks has recently taken a similar sort of strategy to Illy's -- expand its reach through independent coffee shops. The difference is that in Starbucks' case, the shops are very expensively capitalized by the company, from leases to furniture to a long and intensive research & development project, and most importantly, the shops are removed from most Starbucks branding. The 15th Avenue Coffee & Tea store in Seattle is a pilot project that, if initial messaging is correct, will be copied in other cities -- but with yet other branding.
Illy is competing with Starbucks, but not quite in the way The Wall Street Journal suggests. And Starbucks is, oddly and expensively, competing with itself (and then its other self, and the other one . . . ). Starbucks may win here, but they won't do so without much capital expense.
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Reader Comments (Page 1 of 1)
11-04-2009 @ 9:19PM
greg said...
The Wall Street Journal got ridiculously lazy when they penned that article headline. Anybody who tries to sell coffee in this country is instantly labeled as "taking on Starbucks". It is as ludicrous as suggesting that anybody who sells beef in this country is taking on McDonald's.
Illy has stated for years that they would never sacrifice their quality controls for growth -- where Starbucks spectacularly self-imploded.
Worse, it seems this article actually took the WSJ's headline seriously.
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11-07-2009 @ 12:46PM
pat said...
Dunkin Donut coffee is the BEST coffee there is out there. Im surprised you cant get it in all states.
11-04-2009 @ 10:41PM
prete ryback said...
any coffee is way better than the bitter starbucks, and dunkin donuts is the best and they sell alot more than starbuks, the most bitter stuff on earth
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11-07-2009 @ 2:50PM
Kara said...
I cant stand star bucks, I roast mine at home. A friend of mine worked at Starbucks, they use pump artifical flavors. It makes me sick. I buy Organic Zack's Coffee... I love the Desert Fox's Blend and the Espresso. Most mass market coffees are nasty. I use Organic Sugar in mine and Organic Creme.. thats good stuff.
11-04-2009 @ 10:56PM
Disappointed in Starbucks said...
Starbucks coffee has become horrible - don't waste your money. A total downslide from how they use to be. I don't know if it's the water or what, but it's lousy now and the price is still expensive.
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11-04-2009 @ 11:40PM
Gina said...
Anyone who appreciates coffee in its pure state, that is without anything added to it, could not tolerate the abominable taste of swill sold at Starbuck's.
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11-08-2009 @ 5:10AM
Randy said...
Finally, someone who knows how to drink coffee. These concoctions at Starbucks, CC, etc is not coffee. Hot water poured over coffee grounds without any addatives is the only way that you can taste the coffee itself. only then can you tell is it's fresh or not. Artifical sugars and creamers is what hurting people. Coffee alone if good for you. I have drinking mine black since it was 16, I'm now 71 and know what I'm talking about.
11-05-2009 @ 8:18AM
Davie said...
Starbucks is ripe for the taking if they use their head and price competitively with clean smart looking cafes, they should use Apple as an example of clean fresh style in their decor
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11-05-2009 @ 8:28AM
Robert said...
Not only does Starbucks make expensive (and lousy) coffee, they didn't even honor gift cards I had several years ago (they were still valid at the time). They rose to the top initially due to all their yuppie (its all about me) customers, but now the public has their number - give it up Starbucks, you're not even second rate now and you know it!
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11-05-2009 @ 8:54AM
Yazz said...
Starbucks: Stale. Way out of fashion.
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11-07-2009 @ 8:41AM
Juan Valdez said...
"Pikes" Starbucks everyday "Dunkin Donuts" type of weak, no flavor coffee is going to be Starbucks' demise.
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11-07-2009 @ 10:36AM
chris cole said...
starsucks...i hope PEETS doesn't get like them. they're all overpriced. buy a good espresso machine, find a coffee you like and make it at home....5 bucks for a fancy cup o coffee made by a teenager...i don't think so! costco has some good ones....san francisco bay french roast..try it.
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11-07-2009 @ 10:58AM
larry said...
If the general public new how much mark up these coffee selling crooks actually made off a cup of high end coffee I think they would think twice about buying the mud.Average cost depending on bracket pricing it could be any where from .05 to .17 cup depending on creams,sugar. type of cup : fat foam,trophycup style etc.
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11-07-2009 @ 11:00AM
Ralph said...
I agree with everyone...Starbucks is horrible. I wish that Barnies would have stayed and Starbucks sank. I loved Barnies. But here in Palm Beach Gardens, they just opened up a Cafe Duomo with Illy coffe and it is totally the best. I love it even more than my favorite Dunkin Donuts!
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11-07-2009 @ 11:32AM
George said...
In New York City, it's... JOE'S THE ART OF COFFEE! Yes, that's right - no comma after "Joe's"! The best, most dependable coffee place I've ever found - I hit it EACH and every day. Really worth it! There are about 5 Joe's around town.
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11-07-2009 @ 11:49AM
M said...
Illy finds great arabica beans and actually takes the time and effort to roast them into flavorful coffee. when i bring Illy in to work its noticed and complimented. i can't wait till they open up coffee shops across the country.
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11-07-2009 @ 12:16PM
Mike said...
Starbucks is BAD. I don't know why any body thinks it is good. It really sucks, and is very high priced. Nuff said.
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11-07-2009 @ 1:33PM
Brenda said...
I went to a Starbucks, bought a mug ($18.00) then they were appauled when i asked for plain coffee ad charged me $2.00 more for the coffee. I took a drink and dumped it.
Dunkin Donuts does have the best coffee! When I find the new IffyCaffe' I will try it !
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11-08-2009 @ 9:45PM
Robert said...
Yes Starbuck's has lost its swag. I used to be a die hard Starbucks drinker. Its truly amazing when you take the time out to realize just how much we are truly paying for a cup of their coffee. I Now have 3 grinders, a capp machine and tree various types of regular coffee makers. I buy Round the Clock beans, by far the best quality for the price, and make my own coffee drinks at home. That convenience thing that we may have gotten used to via Starbucks is now seen as overrated. Im sorry people are losing so many of their jobs as Starbucks tries to stabilize itself in the market and has shut so many stores. But much like Blockbuster Video, they became very greedy and unappreciative of the client base they established and now they must pay the Piper. Ok gotta go, my Melita Capp Machine is calling me.
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