Lavazza’s strategy for global growth

Lavazza growth

Domestic success is no indicator of potential for triumph overseas. Actors, brands, and businesses that are heralded at home can receive a crude shock when their formulas for national stardom are shunned abroad. 

On the domestic front, Lavazza’s success in Italy is virtually unrivalled. At the close of 2012, the company enjoyed 43.4 per cent of the Italian coffee market by volume, and an even more impressive 48.4 per cent by value. Fortunately for Lavazza, however, a strategic approach catered to each market has translated to success overseas.

Of the company’s annual revenue, which hit around US$1.7 billion last year, around 40 per cent came from foreign sales. With the Italian market showing few signs of recovery, the company is now looking to increase its revenue through international operations, by upping its percentage of foreign sales to 60 per cent.

Marco Lavazza, a great grandson of company founder Luigi Lavazza and current Vice President of the group, tells Global Coffee Report that developed markets are the company’s key areas for growth.

“Italy is still our main market, it will continue to be so, but we have to strengthen our presence in potential markets,” he says.

He identifies France, Germany, the United Kingdom and the United States – all countries where Lavazza has a direct subsidiary presence – as the four main targets for growth. Marco also notes that Australia – where Lavazza is distributed through its partner Valcorp – has a booming coffee market, and is also a top priority area.

In the UK, this expansion will come also through the establishment of Lavazza branded coffee shops. This is the direction of development of a partnership with Catalyst Retail Limited, the retailer identified by Lavazza in the UK to develop the Espression brand.

Catalyst Retail will be responsible for selecting the venues most appropriate to the opening of new points of sale in the coming months (five openings are already planned, in addition to another 50 in the next two years).

“We’re not doing this by ourselves, a key to this plan was to find a professional partner to establish a presence on a permanent basis,” says Marco.

With the UK offering a highly developed coffee chain culture, Marco says this strategy best suited the British market. He says the Lavazza chain will not only bring in a new revenue stream, but importantly will generate brand awareness among coffee consumers.

“We want to give the right idea, that when a customers comes in, they are coming into a real Italian store,” says Marco. “Everything links together, because at the end of the day, we only have one brand. We want to give customers a positive association with that brand. They have to find quality and consistency wherever he or she goes.”

In the US, the strategy has translated into an investment in the single-serve realm, through a partnering with Green Mountain Coffee Roasters (GMCR). The Vermont-based company’s single-serve system, Keurig, enjoys the lion’s share of American kitchen counter-tops. Although GMCR is a coffee roaster in its own right, in the single-serve segment Marco says the two companies were more complementary than competitive.

“The single-serve segment is booming in the US, and GMCR was a really a perfect marriage for our company,” he explains. “We have the same approach to high quality coffee, but the key was that they were going with purely filter, while we are dedicated to espresso. What we were lacking on the one point, they were lacking on the other, so really it was the perfect match.”

Marco points out that both GMCR and Lavazza share a long history of working with single-serve machines. GMCR were early to introduce the Keurig system, while Lavazza were pioneers in working with single-serve systems in Europe 20 years ago. Lavazza first introduced Espresso Point in 1989, the first single-serve system with the Lavazza name. This was later followed with the BLUE (Best Lavazza Ultimate Espresso), and the A Modo Mio, which continues to attract a strong following in the upper tier of single-serve systems.

Lavazza combined its technical expertise with GMCR to release the Keurig Rivo Cappuccino and Latte System last November. The Keurig-branded system offers single cup technology specifically designed for Lavazza espresso capsules, along with fresh milk frothing technology.

This marks GMCR’s entrance into the espresso, cappuccino and latte brewer category. As the two companies were developing this product partnership, they found themselves even further financially entwined. In 2010, GMCR was interested in acquiring Canadian company Van Houtte, which it eventually did for around US$905 million. As a result, it was looking for a cash injection.

“As they were in a position to buy Van Houtte, they asked us if we were interested in investing in GMCR,” says Marco. “This was the first time we made a big investment in an outside company.”

Lavazza purchased around 7 per cent of GMCR in August 2010 for a reported US$250 million, and later upped its stake to a current 7.5 per cent.

“We’ve been quite pleased with how it’s going,” says Marco. “We see this as a good commercial partnership. Single-serve systems are going very well in the United States.”

With the release of the Keurig Rivo, Lavazza and GMCR will be well placed if Americans’ love of the single-serve system is accompanied by a further embrace of espresso-based beverages. Marco says he’s confident the trend is already taking off, both in the UK and the US, and that Lavazza is positioned to take advantage of this boom.

“It was time to offer a solution of both coffee and milk,” he says. “We have a long tradition of espresso, and we’re confident we’re closest to the perfect recipe.”

Marco says espresso culture has grown exponentially around the world. The challenge has been the fact that coffee is “not a finished product”, and that espresso especially is highly dependant on the person making the coffee, and the equipment.

“Single-serve systems are a solution to this problem,” he says. “It’s difficult to convey what we drink in the lab to what our customers drink at home. We’ve been bridging this gap with the closed [single-serve] systems. They have to be convenient and simple.”

A common problem brought up among discussions of single-serve systems has been the issue of patents. GMCR not only profits from the sales of Keurig machines, but from the K-Cups (coffee capsules) used in those machines. Patents have helped protect the company from seeing capsules compatible with their systems emerging on the market.

The result was that consumers were essentially “locked-in” to purchasing all of their coffee from GMCR and its affiliates. Over in Europe, Nespresso – a market leader in the single-serve segment – has battled court cases against companies offering Nespresso-compatible capsules.

On the legal front, those battles are coming to an end. The technology has been around long enough for those patents to expire. GMCR saw the expiration of its patents late last year, leaving the market open to competitive K-Cups. Marco, however, is confident this expiry will do little to effect GMCR’s business.

“Every patent has to expire. The only way to tackle this problem is to invest in the brand,” he says. “When a brand has a strong image and reputation, people are happy to continue to pay more for that brand. When that coffee has worked for them, when the taste is right, they will stay loyal.”

Another challenge this historical Italian company has faced in recent years is the change of the modern media landscape. Marco says that while Lavazza has stayed true to its core values, the nature of modern media has meant that communicating those values has changed dramatically over the years.

“Social media and globalisation have changed the rules of the game,” says Marco.

With so much data being processed, Marco says Lavazza has taken a careful approach in using social media and internet platforms. He says the first step has been to try everything – and then understand how their efforts are shaping their brand.

“There is lots of data out there, if you don’t know how to read it properly, it can be very misleading,” he says. “You need experts who can read that data.”

From Facebook to Twitter, Lavazza has taken an active approach in the social media world. One of its biggest moves into the digital realm, however, has been the release of the 2013 Lavazza calendar. Widely regarded for its photography genius, the annual larger-then-life Lavazza calendars pay tribute to the brand’s stylish appeal by working with the world’s top photographers. The company made the bold move this year to release the calendar digitally, without any printed version.

“This year, we only released it on the web,” he says. “It’s a big change, but so was moving from black and white photos to colour. That was a big breakthrough, but when the times are changing we need to move with them.”

Despite their billion dollar revenue figures, Marco points out that Lavazza is still a “small company among giants” and they need to be effective in their communications. “We need to find the best way to convey our values,” he says.

Marco says the company strives to ensure those values are not only communicated, but trickle down the entire value chain. Integrity, for instance, is a core Lavazza value – ensuring that every person they work with is treated in the right way.

“As long as we keep buying coffee from particular parts of the world, we need to ensure that our business is affecting people the right way,” says Marco. “That doesn’t just mean ensuring [coffee farmers] are getting a fair price, but also helping them improve their livelihoods.”

The iTierra project was Lavazza’s first independent corporate social responsibility project, launched in 2002. The project aims to improve the living conditions, social developments and economic growth of farming communities. The results have not only seen the lives of farmers improve, but also the quality of coffee.

In addition to looking at origin to improve its coffee, Lavazza has also invested heavily in research and development. The company signed a five-year agreement with the Turin Polytechnic Institute for research and development activities.

In October 2010, it inaugurated an innovation centre in the historical Settimo Torinese plant. All these efforts, Marco says, is about protecting the brand while building a company they can leave to the next generation.

“We have one brand, and it’s our surname, so it really has to be perfect,” he says. “There aren’t that many families that still run this level of operation. We are the fourth generation, and the fifth generation is already in place. I’ve learned that you don’t have to destroy what they give you.”

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