Andrea Illy's speech at the "Feeding the World" conference (The Economist)

So good morning, ladies and gentlemen, and thank you to The Economist for this invitation. I'm really honored to introduce the Illy case to such an outstanding audience. The title of the presentation is Illy Responsible Supply Chain: A Systemic Approach To sustainability, first of all, the importance of coffee. Coffee is quite important. I don't know how many people drank coffee during the coffee break and how many you drink per day, but you know how important. There are more than 25 million people in the world— families, not people. People, I think there are 75 million people involved in the coffee growing in more or less 50+ countries. Most of them are poor, some are developing countries, so there is also a big sustainability issue in terms of poverty and living standards. One of the problems that you can see in the chart is that the value added from producing, let's say, consuming countries, with 80% plus of the consumption in consuming countries, as opposed to the production is 100% in developing countries, and the value added is pretty much here. So because if you see out of $105 billion, the worldwide coffee market, Only 26, more or less, now, with very quite high prices, go to the growing countries. So there is a problem of wealth distribution. The market is also characterized by very heavy cyclicality and volatility. Just to give you an example, at the beginning of the last decade, we started the year with prices around $0.43 per pound at the New York Stock Exchange, and last year the same price peaked 309 cents per pound. So it's difficult to manage such volatility and it's quite disruptive. This scenario in coffee is not so bad because first of all, there is definitely a decommoditization of the sector. There are 3— let's say 2 major factors. First of all, Product differentiation is definitely growing a lot. Pure origins, gourmet coffee, espresso, cappuccino, portioned coffees, coffee shops, a lot. Ready-to-drink coffee, a lot. Many product innovation, many new offering. And the value added is definitely increasing, okay, as seen also by the prices. However, in this very moment, there are tensions in the fundamentals because The balance between production and consumption is never perfect in coffee, and it is not now. So we are in a production deficit. The stocks are very low. And as a consequence of this, for the first time in coffee history, it has been more than one year now that the price of the New York Stock Exchange is systematically always above $2 per pound. This is the first time it happens in history. Coffee is also— coffee production is also impacted by global warming. From here to there, different situation, more frost— less frost but more drought, or too hot weather, too much rain, depends on the country. And this is also creating difficulties in recovering in the production. As far as Illy Caffè specifically is concerned, we are a small company, third-generation family business. Along with my brother and sister, I represent the 3rd generation. The 4th is already coming. I'm the chairman and chief executive, okay? Our mission is to delight the consumer all over the world with the best coffee nature can provide. Consumer, which I nickname Q-lovers, so lover of quality. Our focus is definitely science-based. I'm a chemist myself, and with a lot of innovation, as much as possible of innovation. We do serve more or less 6 million cups every day, always of the same blend. We are the sole company in the world only producing one type of coffee, and we are present in 140 countries with a turnover of more or less €300-something million. We do have a very, let's say, I would say, systemic approach to sustainability. First of all, we are a stakeholder company. We don't consider ourselves ourselves a shareholder company. We have a very clear aim at improving the quality of life for all the stakeholders. The stakeholders do have a very clear hierarchy: consumer, customers, collaborators, suppliers, communities, and the shareholder at the service of the company. For all the stakeholders, we do pursue the triple bottom line, so the economic sustainability through share value, The social sustainability through the concept of growth, basically through knowledge, education, and the environmental sustainability through the concept of respect. Respect the environment in whatever we can do, including of course coffee farming. We do have, in order to get the best coffee in the world, a proprietary supply chain, which is where let's say, a great focus to sustainability is, is, is there. This supply chain is based on 3 steps. First of all, to select and motivate the grower to work with us. Then to transfer them knowledge, how, as we will see, to reach our standards. And third, purchasing directly, as we will see, at fair and, and, and, and rewarding prices. This supply chain is certified with a completely new certification scheme because there was no— there are no official, let's say, international standards for sustainability or for sustainable supply chains. There are a few private proprietary standards for the certification of so-called fair trade, but not for sustainability. So we had to asked the worldwide leader of certification, Det Norske Verita, to develop a brand new standard. They did work 2 years and the outcome is that we have this responsible supply chain certification. It's a brand new system because it's not the grower anymore certified, it's the company. So we take responsibility of what we do even for the grower because we consider them the weak part of the chain, so we have to make— take the burden of the certification. And second, the approach of this certification is from solidarity, which is typical of, let's say, fair trade, very positive first step in the direction of sustainability, but we try to certify sustainability altogether. Which are the pillars of this supply chain? First of all, go direct to growers. We started in 1991 in Brazil because we were simply running out of high-quality coffee. The story is simple. Until '89, there was an international coffee agreement at the International Coffee Organization, and this was setting— coffee was a complete commodity at that time. And it was fixing quotas for export and production of generic coffee. In 1990— in 1989, this agreement was abrogated and a free market started. And Brazil became even more free because any regulatory system was gone. This was the beginning of the renaissance, coffee renaissance. And there we started to go direct in Brazil, talking to the growers. Going direct helps us not only to source the best beans, but also have full product tracking. We know every single bean, where it comes from. I like to say that in every second in our life, 10,000 beans of Illy blend are sourced, are selected with 10 different criteria. So we do have this kind of tracking. It allows us to have a very comprehensive information exchange with the coffee growers. We can clearly define our needs and they can clearly tell us what they can do and what they cannot. It's building motivation, particularly because it's very rewarding for the growers to have a relationship with their buyers and to know more also about the consumption markets. And also it gives us the possibility to create a long-term relationship. The Brazil Award in 1991 was the first initiative. Now we have a club of the growers working with us, and we, as I said, purchase all directly. Second pillar, very important, is education and knowledge transfer. Education about, first of all, continuous quality improvement, and second, the agronomical practices, how to reach this quality improvement, not only, but also how to reach better productivity, less waste, better environmental impact, whatever can improve the total quality of production. And finally, also information, education about markets for the growers to be more, let's say, aware of the markets where they are playing and be able to plan their own business. The initiative, the main one, is that we did create a University of Coffee 10 years ago. It's organized in 3 departments. One of the departments is for the coffee growers. The University of Coffee has, let's say, 25 branches around the world. Some of the branches are more for the hospitality, but in most of the growing countries we do have a branch. And since the beginning, 60,000 people were trained. Out of these 60,000 people, More or less 8,000 are coffee growers. And recently we launched a new initiative with the University of Coffee, which is a master's degree in coffee science and economy. There are 19 students now in Trieste for 9 months studying for the second edition of the graduate of coffee economy and science master's. And also we publish as much as possible books in order to disseminate the coffee culture and the coffee knowledge. 3rd big pillar, consequential standards development. We were able to develop our own quality grade, so we know exactly what we buy, and this forces us to completely change also our supply chain in terms of buying and purchasing campaign. We do not source anymore just in time. We cannot. We go to the grower. Once they have the coffee we are looking for, we must buy immediately and bring it at home. So we have a big warehouse for the coffee for one entire year, which is also very expensive from the working capital, as you can imagine. Good agronomical practices are the practices that we adopted because this is very, let's say, pragmatic and common sense. These agronomical— good agronomical practices maximize the consumer benefits, maximize the grower's profit. without causing any harm to the environment. Good, perfect. Perfect balance. This is what we do. And we issue some manual and we have training programs about that. When there are issues like problems, some in agriculture, sometimes it happens, we quickly do research and development in order to find the causes and we issue guidelines. We have been working recently, and this is what is mentioned in the quote, in the statement, of the program, this program with Oxford University, which is for sustainable coffee farming framework. We are trying— the system, let's say, develops some metrics and KPIs which allows to measure sustainability of coffee farming in any situation, any country, any region. This is for first time ever that a tool like this has been developed. Thank you. DNV has been already mentioned, is a new standard. We are working with SAI along with many other partners for the carbon footprint and also we participated to the green coffee defects definition at the International Standard Organization. Last pillar, fair and transparent prices. I think it's very important to underline that this system works because it is open. There are no constraints. The grower is not forced to work with us. It's completely free whether they want to come on board, to participate to our educational programs, whether they want to challenge themselves in producing a lot to be sold to us. We are not committed to buy. They are not committed to sell. If we buy, we pay a premium market. If there is— the prices in the market are unsustainable, like I have I told you at the beginning of the last decade, we pay sustainable prices which always allow to get a profit for the grower. This is a commitment. And besides this value, monetary value, there is also quite a significant intangible value which the growers appreciate very much, and they state about the preciousness of working with us. What has been the impact of this 20 years' experience? First of all, it was very positive in deregulated markets. In other markets, it was maybe not so positive. We were able to build trust. We have to maintain trust every day. We are able now to buy 100% of our coffee directly from the hands of the grower. We started from zero. It's more than we were dreaming at the beginning, except Ethiopia, because it's a regulated market where the vertical integration is forbidden and there is no product tracking at all. We were able to develop, as I already mentioned, the proprietary grade. There has been a butterfly effect. Brazil, when we started, was not a gourmet coffee producer. It was considered just a lousy commodity coffee. Now it is the leader in the world in gourmet coffee production, very well respected even by the top gourmet coffee producers. And our market share shrunk in the meantime because so much increase of the production. How did it happen? It has been— this is about the paper which is in the presentation. It has been through epidemic imitation of our practices. So we're very glad of that, and I think that this is a key message also for other possibilities. The growers are trading up, not only the coffee they sell to us, They claim that they are selling at a premium even the rest of the coffee that they don't sell to us because we buy maybe 20%, 30% of their production, only the heart of their production, but the rest they sell at a premium as well. There has been an introduction of new processing technique. In Brazil, at the beginning, they used to produce the so-called natural coffee, was dried under the sun. sun, now is the so-called semi-washed coffee, which is a completely different system. We participated in the development of this system and it's much better quality. And also, water use has been reduced in several countries. This is one of the programs. Future evolution, not only for ourselves, so this is generic for the coffee, to continue to be able to grow quality and volume at the same time. So this is real sustainability. Usually there is a kind of a paradigm that when you increase volume, you compromise quality. This is not true. There is the possibility, and more and more in coffee there will be the possibility, to increase quality and production at the same time. We will have to cope with climate change and sustainability altogether. Nowadays, as I said, we are in a deficit and it's difficult to know where the coffee needed for the next 10 years consumption will come from. For sure, Brazil will continue to have a super leadership role. I hope that Africa will be able to come back because Africa did decline the coffee production the same amount amount as Vietnam, which skyrocketed into the 2nd largest producer in the world position, that for the future Africa will be able to come back. Total traceability will be more and more an opportunity, also for consumer confidence, product differentiation, and so on. I very much think that if coffee is sustainable from the economical standpoint, if the If it is based on knowledge, it will also represent a great opportunity for reduced poverty in the producing countries. And one of the biggest opportunities is to have as much as possible a multi-stakeholder approach beyond only the private and the institution, government, NGO, all working together in a team. Thank you very much.