Do historic European coffee brands stand a chance against the multinationals?

  • Illy’s 2022 revenue grew by over 21% compared to the previous year
  • Diversified revenue streams and the ability to tap into emerging markets make multinationals a strong presence in the coffee industry
  • Historic European coffee brands aren’t as agile but trade off a sense of cultural heritage

MULTINATIONALS STRENGTHEN their grip over the coffee industry as acquisitions continue across the board. Meanwhile, historic European coffee brands like Lavazza and Illy continue to chug along seemingly unperturbed. 

Lavazza was founded in 1885 in Turin, Italy. Despite significant expansion over the past 100 years, it continues to be a family-run business. Illy was founded 50 years later and is another example of a “heritage” European coffee brand. Both are currently led by the third and fourth generations of their respective families.

While multinational companies with a stake in the coffee industry often go as far back in history, they operate in an entirely different way. 

They typically have a holding across the wider food and beverage industry; first and foremost, they are consolidators prioritising scale and acquisitions, rather than coffee itself. These conglomerates aim to expand their market presence, acquiring “smaller” brands, and leveraging economies of scale.

Nestlé, for example, owns Nespresso, Nescafé, Blue Bottle Coffee, and Starbucks Coffee at Home, among others. JAB Holdings owns Keurig Dr Pepper brands and JDE Peet’s (whose portfolio includes Peet’s Coffee, Stumptown, and Intelligentsia).

Despite their differences, both historic European brands and coffee conglomerates share fundamental similarities: They both aim for an omnichannel presence, and sell a similar gamut of products, such as ready-to-drink beverages, single-serve home solutions, instant coffee, and regular ground coffee.

This means that, ultimately, they both go toe-to-toe to secure shelf space and name recognition.

But what is the competitive space really like at the top?

Risk tolerance

One key difference separating the two is that these historic European brands, such as Lavazza and Illy, generally earn their entire income from coffee.

In contrast, multinational companies operate on an entirely different model. They have a diversified portfolio of subsidiary businesses.

This means that, if the market takes a downturn, these conglomerates are less vulnerable to risk. Meanwhile, it is far more dangerous for the brands hanging their entire revenue stream on coffee.

It also means that multinationals, such as Nestlé, can test the market for premium products like high-end pods and instant coffee by observing how Blue Bottle customers respond. This is doable because the specialty coffee brand makes up a tiny fraction of Nestlé’s total income.

“Companies like Nestlé use smaller brands as a way of innovating and testing the market and what their appetite is for certain products,” says CEO of F+B Therapy Jake Leonti. “It gives them a freedom to test things without really having to deal with the repercussions.”

Essentially, these conglomerates are incentivised to explore new segments and drive company growth because their risk is mitigated by diversified revenue streams.

At the same time, multinationals whose entire business model revolves around making acquisitions can enter new markets with substantial resources, often resulting in a more successful market entry. They can also be decisive and enter markets within a relatively short timeframe – meaning they can be reactive and respond to opportunities more quickly.

In contrast, heritage brands move much slower, and their growth is often more organic. “When it comes to testing new markets, they’re going to be much more trepidatious,” Leonti says. “If people don’t buy it, then they could sink the whole ship.”

This highlights another key difference: while both generate significant amounts of money, multinationals are on another tier – facilitating a relative agility across the market as they quickly enter and begin to dominate emerging segments.

Cultural heritage

In the same breath, conglomerates like Nestlé or JAB don’t need to pivot their entire business to enter a promising market. They can marry into a new segment and – typically after a considerable marketing budget has been spent – begin to reap the financial rewards.

They can do this and retain their authenticity – leveraging the acquired brand’s established customer base, trading off of legacy goodwill.

However, heritage brands aren’t able to benefit from the same advantages. A company like Lavazza has such a strong sense of identity that, to pursue a similar strategy would be seen as inauthentic.

Making such drastic lateral moves could be seen as a departure from its cultural roots – it wouldn’t only bear financial risks for historic European brands; it could also risk their sense of heritage.

What keeps them in the game?

In spite of all these apparent restrictions on their ability to scale, historic European coffee brands continue to compete. Indeed, Illy experienced double-digit growth last year. So what keeps heritage brands in the game?

What some might consider to be a limitation, others would recognise as a strength. Brands like Illy and Lavazza are able to trade off a brand image steeped in history and culture, and they have an extremely well-established customer base which is loyal to those values. 

It could be argued that, in comparison to the evolving and dynamic audience coffee conglomerates are chasing with their constant stream of acquisitions, heritage brands have a stable and well-defined presence in the market.

And as the market becomes increasingly consolidated, this strong sense of identity and independence may turn into an even stronger asset.

“The idea of connecting with a family business, connecting with something that’s old and hasn’t been purchased could be attractive to a whole separate kind of niche of people,” Jake says.

Similarly, these brands typically offer bold, intense, dark roasts – it’s the Italian trademark they are known for. These coffees are generally cheap to produce, which means they are working with significantly higher profit margins compared to brands like Blue Bottle, which tend to use a higher-priced, premium product.

In this way, historic European brands are almost resistant to the growth of other emerging markets – operating with a relative level of impunity as the specialty coffee sector grows.

Furthermore, heritage brands’ singular focus on coffee may not be as dangerous as it seems. Coffee is cheap and people drink it all the time – essentially, it has proven to be relatively recession-proof. So while these brands heavily rely on coffee for their income, it’s fairly reliable income.

Looking ahead, multinationals will continue to slowly acquire partial or total shares of smaller companies in order to gain access to new markets, consumer segments, and R+D – and historic European brands aren’t necessarily excluded from the action. “Some heritage brands will and already have started to acquire some smaller brands,” Jake says.

For the coffee conglomerates, nothing is off the table – even Lavazza’s home turf. “It’s not just about increasing revenue, but increasing market share and information,” Jake says. “These companies want to go in and start to take Italian market share.”

As such, historic European brands may need to do more to secure their existing market share. This doesn’t necessarily entail major acquisitions – but they may need to respond in some way to the massive conglomerates turning up at their front door.

Coffee Intelligence

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