An in depth analysis of the future of our industry in Italy
Last June I was invited to the annual Council of European Coffee Federation to give an overview of the Italian coffee market. This happened after some Mergers & Acquisitions within the Italian coffee sector and some players started to ask what is happening to the Italian coffee industry.
In this article I’d like to share an analysis that can help to better understand what is happening to the Italian coffee industry. The question I would like to answer is: in which direction is the Italian sector moving and with what peculiarities?
When we talk about coffee in Italy, first we have to consider that it is an ecosystem which goes beyond the roasting industry itself – it involves equipment manufacturing, such as coffee machines, grinders, roasting machines, packaging machines, and it also involves cup manufacturing, logistic services, etc. They are all industries where Italian companies play an important role at global level, and which create a sort of synergic interaction.
The roasting industry is part of this system and it is the focus of my analysis.
Italy with its 5.2 million bags is the 7th biggest consuming country worldwide, behind the USA, Brazil, Germany, Japan, Indonesia, and France. On the other side, Italy with its 10.25m bags of green coffee imported in 2021 is the third biggest importer worldwide, behind the USA and Germany (Comtrade 2021). In 2021 Italy imported 10.3% of green coffee exported worldwide.
Looking at the import trend of green coffee, we notice a consistent growth: in twenty years, excluding 2020 for the reason we all know, it has doubled the quantities (with a CAGR of 2.81%).
After this first data we could say that the Italian coffee industry is running well – but how is Italian Coffee perceived? In some contests, Italian coffee is considered a good quality coffee, but in others, it has been often mistreated.
Some terms often used to describe Italian coffee are: “it is plenty of Robusta”, “it is dark roasted coffee”, or “it is a poor quality coffee”. Is this true?
Of course inside the industry we can find coffee with different grades of quality, some good and some bad, and it is not possible to give an overall evaluation of quality. Let's explore whether some of these definitions are correct.
Comparing the European imports of green coffee according to the International Coffee Organisation’s main categories (Colombian milds, other milds, Brazilian naturals, Robusta) shown in the latest European Coffee Report (year 2018-2019) we see that the Italian mix is not much different from the European one. As shown in the following graphic Italy imports arabica in all forms for 59.1%, while the ECF average is 61%.
Even though this data is quite broad, and it can’t be taken as an index of quality, it is clear that Italian coffee on average has not much more Robusta coffee than in the other EU countries.
More interesting is to observe the trend of this mix over the years. The following chart shows the Italian import mix of green coffee. To better understand this data I compared them with the ICO composite index, which is shown as the white shadow area on the back. From this chart it is possible to understand that Italian roasters tend to use Robusta coffee to mitigate the cost effect. The share of Robusta rises when the ICO composite is moving up, while the share of the Brazilian Natural is higher when the prices are low. This is probably due to a sort of price-cap existing in Italy.
In May 2022, Ditta Artigianale in Florence, a renowned Italian roastery, was at the centre of the scene because it was fined 1,000€ after a consumer complained to pay 2€ for a cup of decaf. Price is a sensitive issue in Italy, especially in bars.
One raw index of the competitiveness of a nation's industry is given by its international trade balance; if the export exceeds the imports, it means that the products of that nation's industry are attractive to the other markets for some reasons, otherwise, if the balance is negative, it means the opposite.
Looking at the following graph, which shows the trade balance of roasted coffee, it is evident that Italy has a significant positive balance: in 2021 it imported 18.553 tons of roasted coffee (a decrease of -0.57% over 2020) and exported 273,277 tons (+13.1% respect 2020). Italy exports are 14 times the quantity of the imported roasted coffee.
The positive balance on roasted coffee means a revenue for 1.691 million Euros (see graph below), which is higher than the value paid for the coffee imports in all forms (green, roasted and instant). In other terms Italy finances its imports of green coffee (1.536 billion Euros) with the exports of roasted coffee and the overall balance is positive for 155 million Euro.
A second evidence coming from these data is that Italian coffee is appreciated worldwide and it assures a competitive advantage to the Italian roasters.
In order to answer this question, let’s compare the Italian exports of roasted coffee with the world exports of roasted coffee.
In the following chart we have the long-term volume trend of Italian exports (red and green line) toward the World trade of roasted coffee (histograms). Italian exports show a positive trend which reflects the same trend at global level.
In order to better understand the relative position of the Italian export it is useful to evaluate its market share. In the below chart we can see its trend and in particular it is possible to notice that at least until 2011 it was quite stable at around 15%, and then it started to rise from 16% up to 23% in 2021.
Another interesting evidence of the competitiveness of the Italian coffee industry comes from its performance toward the other main nations. The graph below which presents the export volume of roasted coffee by countries shows that Italy has recovered the gap with Germany and since 2018 it has become the main world exporter.
This is more evidence of the strength of the Italian coffee industry. It is increasing its market share worldwide.
After all this positive evidence, can we come to the conclusion that the Italian coffee industry is ready to face the future challenges? To answer this question let’s have a look at the domestic demand.
The internal market can be split according to the distribution channel: retail, foodservice, OCS (Office coffee system) and ecommerce. This is the split of the market according to the latest data gently provided by Lavazza for this analysis. In the last 2 years the Foodservice share reduced because of the Covid effect. Retail and ecommerce were the only to benefit.
In any of them play different actors, with different rules: the retail market for instance is highly concentrated, where just few big players control the offer.
On the other hand, the foodservice market is very fragmented where there are almost 1000 roasters and most of them are small size companies which operate at local level.
In the last 10 years their number increased; it was 800 in 2011, but this is not necessarily a good signal for the industry, and we’ll see why in a few minutes.
In volume terms the evolution of the internal demand shown on the following chart is quite flat and, in the latest years, it shows a sort of contraction. This trend is not just Italian because it is quite common in the traditional consuming countries, where the demand is saturated and there are not big opportunities to grow further in volume terms.
But it means that if the Italian coffee industry continues to grow, as we’ve seen from the trend in the imports of green coffee, this depends more and more from the exports. This is clear from the following chart.
Since 2018, exports have become the main market for the Italian coffee industry.
This is a positive point because in a flat internal demand the export gives to the industry the opportunity to continue to grow. On the other hand, it also means that the industry is more exposed to the challenges coming from the external markets.
We’ve seen that Italy is gaining market share on the world export of roasted coffee, but in terms of value the picture is a bit different. In the chart we see that Italian market share rose in the period 1997-2004 from 17% to a peak of 25%.
Those years were the years of the globalisation of the espresso coffee, where many countries discovered the espresso coffee with its espresso based beverage and with its coffee shops’ atmosphere, like Starbucks. All this pushed up the coffee consumption in two ways: in the consuming countries by attracting many segments of the population until then far from the coffee consumption, as women and young, and, in the other countries, it allowed the penetration of coffee consumption also in cultures with any tradition on drinking coffee, such as Asian countries. Coffee, and in particular the espresso coffee-based drinks became a new lifestyle, synonymous with progress, modernity and in some cases also a status symbol.
The espresso was the new business opportunity for many international players, such as food chains, coffee houses etc but most of them were unskilled regarding this new coffee system, so some of them started to buy coffee from Italian roasters and in several cases they kept the producer’s brand to transmit a sort of authenticity to the consumers.
It was the time I call the “golden age of Italian coffee” worldwide. But soon the market changed and the landscape with it.
Little by little the international players started to cope with the knowledge gap and so they tried to roast coffee for espresso by themselves, or to buy it from local roasters. In order to blind this change to the final consumer they frequently used Italian sounding names for the coffee roasted locally.
As soon as the volumes started to reach certain levels, some companies started to replace the Italian coffee also for cost wise. In big quantities, self-roasting allowed them to achieve significant cost savings.
To these aspects another played a role. The qualitative standards of the coffee evolved along the years, influenced by the success of the “Third wave”, which introduced the single origin concept, the seasonal coffee, and the fresh roasted coffee as the new standards. Italy took time to understand this evolution, so Italian competitive advantage started to lose ground.
To these aspects we have to add another phenomenon which was an indirect effect of the globalisation of the espresso coffee- the explosion of the capsule market. in the office first and then in the household, which capsules changed the dynamics of the international coffee trade. This is evident from the sharp increase of coffee exports from Switzerland, because of Nespresso, which was more evident in value terms than in volume.
Italian position, after the peak of 25% market share in 2004 started to lose ground until 2011, when it reached the bottom level of 14% in 2011, with a slow recovery in the latest years.
But in order to better understand how these facts changed the world trade market, let’s have a look at its evolution in volume and in value terms over the years.
In the below chart are shown the two curves from 1994. It is possible to distinguish two different phases: a first phase, until 2004-2005 where the two lines show a similar trend, and a second phase where the rise of the value curve started to be much sharper compared to the volume one. We entered the ‘premiumisation’ phase of the coffee market, which is still continuing.
It is curious to note that as soon as the value curve accelerated, Italy started to lose market share.
In 2004 Italian coffee reached a premium price of 56% toward the world export average price, but since then it decreased constantly to reach a negative level in the last years.
It seems that the Italian coffee industry is continuing to gain market share, but at a lower price. Italy is struggling to keep the value of its coffee.
This is the main challenge the Italian coffee industry has to face in the next few years. In a condition where the market is moving toward a premiumization phase, Italy has to find a way to defend its competitiveness by increasing the value of its coffee.
This can’t be done ignoring the fact that the world coffee industry is facing a new paradigm, which is characterised by some key aspects.
First of all, the market is changing continuously the way it creates value to the consumer and this is particularly evident in the AFH market, where most of the Italian roasters operate.
For decades, foodservice competition has been based on service. Whoever could provide better service to the barista was more competitive. In this context it’s clear that proximity, rather than size, played a central role in ensuring the frequency of visits, timely responsiveness to needs, monitoring of the territory, and establishing close relationships with the customer.
In that context there was also little crossover between distribution channels because each of them worked with their specific rules. Those focused on retail were weak in foodservice and those who worked in foodservice were weak in retail.
Now in the new paradigm the competition is shifting from service to brand. As consumers seek higher value experiences with ever-changing consumer habits, the brand becomes the link to build a premium strategy. More than the product itself, what matters most to the consumers is the distinctive experience they receive and the values at the core of the brand identity.
Consumers want to feel proud of their purchase decision and sustainability concern has never been more present in the minds of consumers.
So, sustainability became part of the competitive scenario. The companies that are able to distinguish themselves on this front enjoy the benefits. But in order to create a good sustainability strategy, good skills and resources are required.
All these aspects means that in the new paradigm, the barriers that protected small food service roasters from the advent of large coffee roasters are easing. With the digital transformation, ecommerce, and the effects of the long pandemic we are moving more and more towards an omnichannel system, in which the consumer gets the experience’s perception from multiple touch points and where he wants a similar coffee experience when he needs whatever location, whatever moment. The same product at an affordable price
The International Trade of Chambers, call this new paradigm the ‘Fourth wave’, which brings the premium coffee in any place to a broader public at a more affordable price. The historical quality differentiation between the standard and the specialty market segments will decrease.
A consequence of the new paradigm is the strong consolidation process, started a decade ago, which is reshaping the coffee industry.
Not just all the acquisitions done by JAB, but also Nestlé's deal with Starbucks, or the acquisition of Costa Coffee from Coca Cola, or the acquisition made from Lavazza as well as all the others can be read in this perspective.
This means that the new brand-based competition is not easy for small size roasters. To compete, it is not just a matter of product improvement. It is necessary to make substantial investments in building experiences, innovation, and branding to cut through the noise, which often the small businesses have difficulty making due to a lack of economic, resources and skills.
Also during Covid we noticed that the more structured companies and the chains have been more resilient than the small scale and independent ones to overcome the crisis. In this context it is evident that the small roasters will face more and more difficulties in defending their market space.
In the last year some Italian roasters have been protagonists to some M&A operations and this created a lot of curiosity and interest, mostly outside Italy. I have been contacted by some analysts, some journalists and some players to understand what is happening to the Italian industry.
I believe that these operations are nothing different from what is happening at the global scale. It is the consequence of the new paradigm and some players are realising that they are too weak to face the new scenario by themselves, so they are looking for a solution. The curiosity around Italy is because it is the first time that the Italian coffee industry is so directly involved.
To conclude it is possible to say that the ‘Made in Italy’ has a strong value in the coffee industry, but it can be at risk if there is not the awareness of the future challenges and there is not the ability to react in order to overcome the weakness of actual conditions. I hope this paper gives a contribution in this direction.
Article translated from original Italian text.
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