Illy Chairman Talks About Coffee Capsules, Caffeine, and Climate Change

(Bloomberg Businessweek) -- Leading the global coffee empire started by his grandfather 86 years ago in Italy, Illy speaks with Bloomberg Businessweek Editor Joel Weber about tradition, innovation, climate, and sustainability—and whether or not to take milk with your coffee. The two spoke at the Conduit’s Good Business Festival in London.

JOEL WEBER: There are few businesses in the world that have stayed in the family for multiple generations. You’re the third generation. How has Illy defied the odds?

ANDREA ILLY: All businesses more or less start with family. Then it depends: It stays in the family or you go public. Typically, businesses go public because the family wants to withdraw from the day-to-day work, or because the company needs to raise some equity, or something goes wrong and the company has to be sold. I think there are families who are good at managing the business and can preserve control forever, possibly. There are businesses that have been in the same family for 10 generations.

How do other businesses learn from you? What should they use to measure performance?

I was surprised by the skepticism and the misinformation with which many people received the Business Roundtable declaration by chief executives this summer [that corporations shouldn’t focus only on share prices]. What they listed was a very old-fashioned argument supporting the theory of shareholder value, which is, first of all, increasing value, not profit. Value is how much cash flow you generate over time—10 years, 20 years. The net present value you generate depends on the cash flow you generate in the long period ahead.

And it’s complete nonsense to talk about profits or shareholder value without considering sustainability as a main value creator. This wasn’t written in the press when the CEOs made their declaration. I was surprised, because, if you do a finance course, you’ll learn it immediately.

If you’re not sustainable in business, then you will have reputational damage that will make you sell less because consumers buy less from businesses with low reputation. If you aren’t sustainable, you’re going to have higher costs because of liabilities. Then you have to pay liabilities, so you’re going to diminish your cash flow. If you have an unsustainable business, you’re going to be more risky, so your cost of money is going to be higher. You’ll have factors which are worsening your net present value.

You’ve described your business model as a stakeholder model rather than a shareholder model. What’s the difference?

The theory and culture of shareholder value is typical Wall Street. Cash flow, profits, are for shareholders to increase their wealth. In the stakeholder model, there are many more parties involved. In our case, we have a hierarchy: consumers and customers, then our business partners, then the talented people who work for the company and create the product, then our suppliers who produce the coffee beans. Then, at the bottom of the pyramid, the shareholders.

In this case, that’s you.

Me, my son, my family, at the service of the company. Not the other way around. So the main difference is that a stakeholder model is about the shareholder serving the business.

Sixty percent of your business is now outside of Italy. How do you take that model and keep your brand integrity while expanding into new markets?

The dream of my grandfather, the founder, was to offer the greatest coffee to the world. Offering is more than producing or selling or distributing. It’s not about quality or value. Greatness is beyond being the best; it encompasses the way you do things. Our mission is about delighting people who appreciate quality of life all over the world with the best coffee that nature can provide, enhanced with the best technology. And beauty. Beauty is beyond goodness. It’s an enhancer of the coffee experience.

That’s why Illy decided to have only a single blend. Because by blending, we get to the fundamental attributes— richness, elegance, balance, and consistency. Our single blend, globally and universally, is designed for the ultimate coffee experience, which is Italian espresso. And that’s the focus of our strategy: expanding, distributing, developing new occasions for consumption.

You’ve expanded your business substantially. Revenue is at about half a billion dollars right now. What is it about coffee? Why is it such an incredible business?

It’s a dream, because it’s about success in life and in business. And, it’s very good for your health. It makes you live better and longer. It’s really the best way to enjoy caffeine: 90% of the human population consumes caffeine in one way or the other—and coffee should be the preferred one. Tea still beats us out in number of consumers, even though we’re the best.

What’s your goal from a growth standpoint?

Growth is not a goal per se. It’s a way to stay competitive, a way to delight more and more consumers, a way to self-finance the business. It shouldn’t be seen as a kind of a greedy goal in itself. We believe a company must have a purpose, and the purpose has to be completely coherent with the business development. That means that we will never compromise our ethical values or our sustainable quality just for growth.

You’re a chemist by training. How does having a science background affect the decisions you make as a businessman?

In 1990 we started direct sourcing from coffee-bean-producing countries. We now buy 100% of our coffee directly from growers. The aim was to not only get 100% traceability to farmers, but also to exchange knowledge with growers so they can elevate the sustainable quality of their products. Because sustainability and quality are two sides of the same coin. In Brazil we work a lot in the state of Minas Gerais and in the state of Rio de Janeiro, hand in hand with our coffee growers. We founded the University of Coffee to teach what people need to know from the soil to the cup. We have five agronomists and technicians visiting a minimum of 100 farms per year, training and auditing them so they can implement our sustainable quality guidelines.

Virtuous agriculture is one of your passions. What does that mean?

It’s beyond a passion. The mother of all causes is climate change. We absolutely must reach the Paris goals. From 2020 to 2030, we need to reduce emissions by 50% and become carbon neutral entirely—the entire world—by 2050. This is a challenge, a very serious one. I believe my company must contribute to this goal. So I wanted to pursue this idea to be carbon free in 2033 because 2033 will be our centennial. But we don’t want to buy carbon credits outside our value chain. It doesn’t work. So we need to have a soil-to-soil carbon cycle. We need to sink carbon in the same soil where we grow our coffee. And this is how I started studying this opportunity to sequester carbon from the air into the soil. It will not only reduce net emissions in the atmosphere but also make the soil much more healthy, fertile, biodiverse, and resilient to pests, diseases, and extreme weather events, including droughts and floods.

How do you do it?

You have to enrich the soil. About 98% of agriculture is so-called conventional agriculture. Starting with the green revolution, the paradigm has been to maximize productivity. But this productivity maximization eventually depletes the soil, impoverishes it, and makes it dry and arid. This agriculture is more and more dependent on chemical fertilizers, billions of tons per year, and 3.5 billion tons of pesticides per year.

This overdependence on chemistry makes a substantial contribution to greenhouse emissions and climate change. In 2018 the world produced more or less 32 billion gigatons of carbon emissions, and agriculture was responsible for 11 of those. Instead of emitting, agriculture can sequester carbon in the soil. If Elon Musk is extremely successful, he will completely offset emission that comes from mobility. Agriculture can be a net carbon sequestrator. Negative emissions instead of neutral.

This is why I’m starting to enrich the soil with organic carbon, and, thanks to that, making better coffee, coffee that’s more resilient to climate change, and showing the way to the rest of agriculture, that this is feasible with very good results.

And there’s a part of virtuous agriculture that we didn’t speak of. Soil health is also about human health. If you have less chemistry in the soil—and more biodiversity—then you’re going to have a healthier plant, a healthier fruit or seed, which eventually is going in your gut, is going to have a better health impact.

There are many different components in our food that can make a positive contribution to our bodies. I’m not talking about healthy diets—the kind that prevents damage—I’m talking about having a virtuous diet, one in which your food provides a positive contribution to your health, food that also has curative effects. Take the example of stress, the major source of inflammation and free radicals. It may sound counterintuitive, but coffee, which is very rich in antioxidants, can fight those negative health effects of stress. I took a sabbatical to study this.

How bad might climate change be for coffee?

Coffee has been impacted by climate change for over 15 years now. It’s about drought. It’s about too high temperature in some countries. It’s about excessive humidity and rain or floods in some other countries. It very much depends on the region, and it very much depends on the season, and, in the ocean, with La Niña and El Niño.

In Brazil, by far the leading producer with over 40% of world production, the region where coffee is grown used to be the enormous Atlantic forest, which has been deforested by 98% in the last century. There’s now a microclimate there where temperature increase due to climate change is twice the global average. That means that coffee-growing regions in Brazil are already suffering what is going to happen in the rest of the world in 20 years.

Coffee has a massive water footprint, each cup requiring almost eight times as much water. How could the industry change its approach to water management?

In the coffee plantations, it’s not necessary to use so much water. Typically in Brazil, once again, because you have flat land and you can dry the coffee under the sun instead of washing it, fermenting, and then drying mechanically. In other countries where the conditions are different, the predominant processing technique is washed coffee using a ton of water. This isn’t necessary. So our partners in Guatemala, in Colombia, in Ethiopia, and many other countries process semiwashed coffee. That means that we use, I think, one-fifth of the water that’s used for washed coffee. There’s no water usage along the rest of the chain until you brew it. And all the water you use for coffee brewing goes in the cup. And you can reduce the volume of water in the cup by drinking a beautiful Italian espresso.

This is also being improved by the use of capsules and the portion system, because the old traditional way of brewing coffee ended up with at least one-third of the coffee in the sink.

But capsules have a downside—they can enter landfills as trash. Is there a better way?

Capsules do have an environmental impact. They’re typically made with 100% recyclable materials, either plastic or aluminum. I hope in the future there will be compostable products. We produce our paper pod. In this case, it’s not a capsule. It’s a pod in compostable paper. There are some kinds of capsules that claim to be compostable in the market, but they have a footprint that is much worse than the noncompostable ones. Perhaps the future may bring more compostable materials, but it’s difficult, because we use hot water and pressure at the same time, and this is really stressful for material.

What trends are you seeing with younger consumers, the millennials and Gen Z?

They’re drinking more coffee, thanks to quality. Not only quality, because the coffee experience is also a gathering and a sense of place. Cafes are a kind of lifestyle for the younger generation, particularly students. That’s very good, because it’s decreasing the average age of coffee consumers, which used to be 25 to 35. Now it’s becoming even younger.

You’re not known for a retail presence. What are your ambitions there?

We’re incubating this business. Although we’re a tiny retailer, we have 250 self-branded cafes in the world, and we want to accelerate that in the U.S. In San Francisco, we have seven or eight directly operated stores just to fine-tune the formula. We hope to find a partner for our U.S. expansion. We’re actively seeking a retail partner to help us grow, opening more of our cafes, having good business synergies, even if not from the coffee sector.

You’ve also partnered recently with JAB Holding Co., a huge global brand based in Luxembourg that’s become very interested in coffee of late. Why?

The most dynamic segment of the coffee business is portion systems, the capsules. In the U.S., you have these K-Cups. In Europe, the de facto standard is the compatible capsule. It’s about standards and technology. We needed to have this standard technology. They have it, and they’re still the best technology within the standard. And so we decided to partner with them.

You’ve seen a number of changes in the culture and business of coffee. How do you see consumer tastes changing?

Coffee used to be a commodity, a pure commodity. People woke up, got their caffeine kick, and then ran. There was basically no quality because, as a commodity, it was just coffee at a minimum possible price.

Now consumers are more educated. It’s just the beginning of a revolution, similar to what happened with wine. Wine has been made for five millennia. Coffee only one. So we have a long way to go to catch up, but we’re accelerating, pursuing the same kind of paradigms as the wine industry. The consumer gets better quality, but also growers can get a higher price because the consumer is ready to pay for the quality.

I know you’re an espresso fan. What do you say to people like me who drink their coffee with a little milk?

People typically pour milk in the coffee if it’s bitter, right?

Yeah.

But if the coffee’s really good, it’s not bitter. Then you don’t need any milk. Drink a bit of espresso. You will enjoy better quality. You will enjoy the richness of the aroma, the refined aromas. Without milk.

To contact the editor responsible for this story: Howard Chua-Eoan at hchuaeoan@bloomberg.net

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