timer Asked: Apr 20th, 2020

Question Description

  1. What mode of entry should Reale consider? Should it be different based on the market selected?
  2. Discuss in detail, what are the relevant environmental and organizational variables should impact the decision?
  3. Discuss the advantages and the disadvantages of franchising strategy and apply that to how Reale can use franchising strategy to expand and to what country or countries do you recommend for the expansion and why?
  4. Discuss the advantages and the disadvantages of Joint Venture strategy and apply that to how Reale can use this strategy to expand and to what country or countries do you recommend for the expansion and why?
  5. Discuss the advantages and the disadvantages of Wholly Owned subsidiary strategy and apply that to how Reale can use this strategy to expand and to what country or countries do you recommend for the expansion and why?
  6. Analyze and compare the political, cultural, economical, social factors that attract coffee business in the 7 countries given in the case study.
  7. Discuss the 8 key success factors that considered by Reale. Apply and compare the 8 factors on at least 3 countries to recommend one of these countries for Reale to expand to.

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THE ESPRESSO LANE TO GLOBAL MARKETS Ilan Alon and Meredith Lohwasser wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail Copyright © 2012, Richard Ivey School of Business Foundation Version: 2017-05-10 “Espressamente is all about a perfect shot of dark elixir . . . Espresso is a miracle of chemistry in a cup.” Andrea Illy, CEO of Illycaffé S.p.A. The global coffee industry was booming. From October 2010 to September 2011, world coffee exports increased by 9.4 per cent to 103.1 million 60-kilogram bags.1 The International Coffee Organization stated, “Demand prospects for coffee continue to be promising, particularly given the growth of niche markets in traditional consuming countries and the arrival of new consumers in emerging markets and exporting countries.”2 Christophe Reale, managing director of Espressamente at Illy, contemplated Espressamente’s place within the global market and the company’s future growth opportunities. He knew that a global route to market meant prioritizing markets, but where did the greatest potential for success lie? And what kind of strategy should he pursue to take Espressamente to market? ILLY Founded in Trieste, Italy, and inventor of the precursor to the espresso machine, Illy marketed a unique blend of coffee drinks in over 140 countries and in more than 50,000 high-end restaurants and coffeehouses. Over six million cups of Illy espresso were consumed every day. In Italy, Illy coffee is widely recognized as the best coffee and is a “must have” in Italian restaurants. Over time, Illy became known as a company based on quality and espresso culture. The company focused on premium travel, business-to-business operations, fashion and culture.3 Illy was well-known for producing the world’s finest tasting coffee, which it accomplished through quality obsession and knack for innovative design. After beans were purchased, Illy-branded 60-kilogram bags of coffee beans were shipped to Italy; bags were placed in shipping containers to maximize air circulation, which reduced the risk of mould, condensation and unwanted odours. In Italy, the bags were handled by an 1 International Coffee Association, “Monthly Coffee Market Report,”, accessed on February 13, 2012. 2 Ibid. 3 Espressamente Illy Company Report, 2011. Authorized for use only in the course MBA 522 at Vancouver Island University taught by Esam Mustafa from Jan 07, 2020 to Apr 09, 2020. Use outside these parameters is a copyright violation. 9B12M058 9B12M058 automated system and sophisticated machinery. “The last selection is conducted by six bi-chromatic systems that electronically photograph each bean, detecting and eliminating any that do not meet strict color standards — an indication that the bean is not fully ripe, or is a ‘stinker,’ a fermented bean that can ruin a whole batch.” If a bean was defective, it was removed, as were the beans that surrounded it. Illy’s approach was one of zero defects.4 Illy built its brand upon its decadent coffee but expanded its product lines over time to include espresso machines, cups and mugs. ESPRESSAMENTE Born in Illy’s unique Italian heritage, Espressamente was the company’s own franchised coffee bar with 200 locations in over 30 countries. It served transit retail markets and began to expand to premium retail markets. Espressamente, meaning “clearly” or “expressly” in Italian, was meant to “purvey the original Italian cult of espresso.” CEO Andrea Illy wanted to create “an exclusive destination with an emphasis on quality and aesthetics. The Espressamente experience will be oh-so-Italiano, focused on coffee served short and dark with the perfect crema, or foam, in a designed demitasse.”5 (See Exhibit 1.) In its 2010–12 strategic plan, Espressamente stated that its goals were to be “recognized as the only authentic Italian bar chain delivering superior customer satisfaction to premium transit coffee lovers,” to be profitable and to become a strong stand-alone brand. To achieve these goals, the company first focused on premium transit, retail and service partners instead of private dealers, as well as consistency development. In addition to premium transit locations, the company added luxury retail stores. THE GLOBAL COFFEE INDUSTRY Coffee, after oil, was the most heavily traded commodity in the world.6 As of 2005, coffee sales each year amounted to over US$70 billion. The International Coffee Organization emphasized that “the importance of coffee to the world economy cannot be overstated.” Recently, demand had grown in both developed and emerging markets. Specialty coffee was projected to increase worldwide; in the United States alone, specialty coffee sales were forecasted to increase by 20 per cent each year.7 Coffee sales across the globe were greatly affected by disposable income and the general economic environment: “Coffee manufacturers depend on a healthy economy and strong consumer spending to drive sales, as consumer spending drives demand for higher priced specialty products.”8 As the middle class grew in emerging markets, so did prospects for a successful coffee market where the expectation for a premium product was particularly strong. Additionally, the coffee market was characterized by high saturation and aggressive competition. In developed nations, there were thousands of coffee shops, both chains and independents, that competed for space. As a result, many of the larger retail chains looked to international expansion for growth. Emerging markets with growing middle classes, such as in China and India, were experiencing high competition among coffee retailers as Western companies expanded. Although there was 4, accessed February 17, 2012. “Basta with the Venti Frappuccinos,” Bloomberg Businessweek, 2006,, accessed February 13, 2012. 6 Global Exchange, “Coffee FAQ,”, accessed February 14, 2012. 7 NACS Online, “Fact Sheets: Coffee Sales,”, accessed February 14, 2012. 8 First Research, “Industry Profile: Coffee Shops,” 1?accountid=11311, accessed February 14, 2012. 5 Authorized for use only in the course MBA 522 at Vancouver Island University taught by Esam Mustafa from Jan 07, 2020 to Apr 09, 2020. Use outside these parameters is a copyright violation. Page 2 Page 3 9B12M058 A variety of environmental and legal issues surrounded the coffee industry as well. Sustainable coffee production and human rights issues that affected the supply side of coffee became essential to the future of the industry. The world coffee market was characterized by a coffee paradox: there was a “coffee crisis in producing countries with trends towards lower prices and declining producer incomes,” while there was a coffee boom in consuming countries characterized by rising sales and profits for retailers. Suppliers had very limited power; in 2005, when coffee sales amounted to over $70 billion, producers only received about $5 billion.9 Some legal issues arose as a result of increased coffee sales in emerging marketplaces. For example, developing nations had fewer laws related to copyright and other regulatory measures. COMPETITORS The coffee industry was highly competitive. Espressamente’s main competitors worldwide included Starbucks, McDonald’s McCafé, Costa Coffee, Lavazza, Tchibo, Segafredo and the Coffee Bean and Tea Leaf. Each had different competitive advantages, and all continued to expand internationally (see Exhibit 2). Reale considered international expansion and, based on an analysis of Illy sales (see Exhibit 3), internal analysis of documents, executive knowledge of external markets and sales potential, decided to focus on the markets with the highest potential: Brazil, China, Germany, India, Japan, the United Kingdom and the United States. BRAZIL Brazil, the largest grower of coffee in the world, was the second-largest consumer coffee market behind the United States. Coffee consumption in Brazil rose rapidly “in line with increased interest in premium varieties and the opening of new, American-style coffee shops,” which presented opportunities for coffee retail companies. Brazil was one of the fastest growing markets by sales in the specialty coffee shops industry, with growth rates always exceeding 30 per cent.10 Additionally, the coffee market in Brazil was one of the most dynamic in the world and increasingly attracted foreign direct investment.11 Starbucks was highly successful in Brazil, highlighted by the growing demand for higher value gourmet coffee varieties. It was projected that the continuation of this trend meant that value sales would increase at a faster rate than volume sales over the next five years.12 Although consumption was rising due to a larger and wealthier middle class, consumption per capita was still quite low compared to mature markets. Despite this, it was possible that Brazil would overtake the United States in terms of overall coffee consumption sometime in the next few years as increased wealth in Brazil drove a rise in locals’ thirst for espressos and cappuccinos.13 As the eighth-largest economy in the 9 Geoff Riley, “Market for Coffee,” economics/revision-notes/as-markets-coffee.html, accessed February 17, 2012. 10 Business Monitor International, “Brazil: Food & Drink Report Q4,” 11 Ibid. 12 Ibid. 13 Ibid. Authorized for use only in the course MBA 522 at Vancouver Island University taught by Esam Mustafa from Jan 07, 2020 to Apr 09, 2020. Use outside these parameters is a copyright violation. still room for growth in these markets, competition was aggressive. High levels of competition in the premium coffee industry forced players such as Starbucks, the Coffee Bean & Tea Leaf, Costa Coffee and independent coffee shops to continually innovate and adapt their products and offerings to compete in these concentrated and saturated markets. 9B12M058 world, Brazil weathered the global economic crisis well and positioned itself as a regional and global power; it is expected to grow to become the fifth-largest economy in the next five years. Growth in exports and social programs lifted tens of millions of Brazilians out of poverty, and a majority of the population became a part of the middle class. As a result, purchasing power parity increased dramatically, and domestic consumption became a driver of Brazilian growth. Brazil’s franchise sector was growing on a large scale: in 2010, 1,855 franchises operated 86,365 units and employed 777,285 people.14 Only 11 per cent of franchises were foreign-based franchisors and there was “natural fierce sector competition.”15 Entering the Brazilian market meant localizing products and services to better compete in a market in which the strength of local brands was a major challenge. Foreign-based franchisors developed relationships with non-competing businesses because of the challenge of finding suitable master franchisees in Brazil; additionally, joint-venture partnership tended to appeal to Brazilian partners because it meant risk was divided between the two partners.16 “Breaking into this market requires thorough research on the viability and uniqueness of the services and products.”17 Brazil’s capital, Brasilia, was approximately 9,054 kilometers away from Rome, Italy. The flight time from Brasilia to Rome was approximately 12 hours. CHINA China’s beverage industry was one of the country’s fastest growing sectors. Tea and coffee were established product categories there and were expected to experience modest growth between 2011 and 2015; coffee consumption was projected to increase at a compound annual average growth rate of 10.7 per cent. “The relatively modest growth forecasts can be attributed to the saturated and mature nature of the market.”18 Despite saturation and maturation, large coffee industry players such as Starbucks, China Resources Enterprise and Gourmet Master had plans for aggressive expansion “to capitalize on the growing café culture in China.”19 Coffee drinkers in China often enjoyed food while they drank coffee, which resulted in minimal to-go sales. However, on-the-go consumption of coffee was increasing. Historically a tea drinking culture, coffee had become an established product category as well. China boasted a huge population, 43 per cent of which lived in urban areas. After the economic downturn, “consumption’s role in the economy declined even though real wages increased in China 12.5% a year for a decade . . . “20 As a result, the country experienced decreasing rates of consumption. Despite the threat of decreased consumption, “rising consumer income and increasing standards of living, as well as the awareness of better-off lifestyles, especially among the growing number of middle-class consumers, have boosted the demand for high-quality products.”21 14 Brazilian Franchise Association, “Economic Impact in Brazil Reaches New Heights in 2010,” df, accessed February 17, 2012. 15 Paulo Rodrigues, “Brazil: Franchising,” IndustrySecondary.aspx?id=45562, accessed February 17, 2012. 16 Ibid. 17 Bachir Mihoubi, “Dealing with the Complexities of International Expansion,”, accessed February 17, 2012. 18 Business Monitor International, “China: Food & Drink Report Q1,” accountid=13584, accessed February 14, 2012. 19 Ibid. 20 Ibid. 21 International Trade Centre, “The Coffee Sector in China,”, accessed February 17, 2012. Authorized for use only in the course MBA 522 at Vancouver Island University taught by Esam Mustafa from Jan 07, 2020 to Apr 09, 2020. Use outside these parameters is a copyright violation. Page 4 9B12M058 The complex nature of conducting business in China resulted in the establishment of foreign companies through partnerships or master franchising. In 2007, the Chinese Ministry of Commerce changed and clarified many laws that made doing business difficult for foreign companies. Importantly, the “two-plusone-requirement stipulating that prospective franchisors own at least two directly operated outlets in China for at least a year” was amended.22 Although China was slowly changing, franchising there was still complicated: “The concept is still new to China with many Chinese unfamiliar with it. Moreover, collecting royalty payments from your mainland franchisee and ensuring that the franchisee maintains the integrity of your brand is also a challenge.”23 Additionally, foreign franchisors were not allowed to directly purchase real estate property located in China unless it was for personal use. In 2008, China had 3,500 franchised businesses and more than 300,000 franchisees.24 As a result of the complexities of running a business in China, importance was placed on establishing different regional partners to successfully and respectfully navigate the Chinese coffee market. Partnerships also allowed companies to gain insights into Chinese tastes and preferences. Additionally, cafés were frequented by young, affluent, fashion-conscious, urban Chinese, as well as expatriates and foreign travelers. Chinese patrons of premium coffee shops preferred lattes, cappuccinos and mochas to espressos, which they considered bitter. Finally, Chinese frequented coffee shops for music and ambience, branded wares and the variety of fresh pastries and cookies offered and were usually business people in meetings, friends meeting or couples on dates.25 China’s capital, Beijing, was approximately 8,147 kilometers away from Rome, Italy. The flight time from Beijing to Rome was approximately 11 hours. GERMANY Coffee was an established product in Germany, which ranked second in the world in pounds per coffee consumed per person. Per capita consumption of coffee in Germany had been in decline over the past 15 years, in part due to the “unfashionable and unhealthy” product reputation it held. This trend had recently begun to change due to the rise in popularity of specialty coffee and an increase in U.S.-style coffee chains. “The German Coffee Association reported a shift in consumer behavior, with a clear trend toward the fresh preparation of specialty coffee.” In 2010, average German coffee consumption was 150 litres per person. Business Monitor International predicted that the coffee industry in Germany would grow by 10.5 per cent between 2011 and 2015. It was possible that this growth will be inhibited by continued world economic difficulties; however, it was not affected in 2009 when espresso drinks and single portion coffee drinks demonstrated strong growth.26 The German coffee industry was characterized by fierce competition and high concentration. Germany had about 1,000 franchise systems that operated 64,000 units with the help of 470,000 employees.27 The German Franchise Association had a great deal of power; although it was only partly 22 U.S. Commercial Service, “Country Commercial Guide, China,” accessed May 13, 2012. 23 Ibid. 24 Beijing Tian Yuan Law Firm, “Franchise 2011: China,”, accessed February 17, 2012. 25 International Trade Centre, “The Coffee Sector in China,”, accessed February 17, 2012. 26 Business Monitor International, “Germany: Food & Drink Report Q4,” d=13584, accessed February 14, 2012. 27 Heiko Stumpf, “Franchising in Germany,” any2011.pdf, accessed February 24, 2012. Authorized for use only in the course MBA 522 at Vancouver Island University taught by Esam Mustafa from Jan 07, 2020 to Apr 09, 2020. Use outside these parameters is a copyright violation. Page 5 Page 6 9B12M058 Germany’s capital, Berlin, was approximately 736 kilometers away from Rome, Italy. The flight time from Berlin to Rome was approximately two hours. INDIA Although historically known for its tea culture, India was the sixth-largest producer of coffee in the world. Interest in coffee in India, particularly the transition to sophisticated coffee bars, began in the 1990s. Specialty and gourmet coffee shops increased in prominence ...
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