Taking on Starbucks

Volume 9 Letter 11

Developing and executing a strategy as a single enterprise can be very challenging. Developing a strategy that aligns your goals with those of your customers can quickly drive a strategic plan forward. Take the case of Illy, the Italian coffee maker and their battle to take on Starbucks.

Illy has traditionally sold their coffee at high end grocers, hotels and restaurants. They wanted to expand into the lucrative Coffee House market dominated by Starbucks, and occupied by thousands of splintered independents. Rather than competing head to head with Starbucks, Illy came up with a unique strategy. They are partnering with independent coffee houses by signing up those who agree to exclusively sell their coffee and strictly adhere to Illy’s quality control measures. For coffee houses that align with Illy the attraction is obvious; a premium brand allows them to differentiate themselves from other independents and compete with the major chains. A coffee shop in Atlanta for example that recently converted sells a 12 oz cup of Illy drip coffee (served in a Illy cup complete with the red rim and Illy logo) for $3.00 whereas prior to signing with Illy a cup of regular 12oz coffee sold for only $1.60. According to the owner margins are way up and coffee sales have tripled.

Illy started signing up independent coffee outlets a few years ago in Italy and recently expanded their program to North America. Realizing that customers are buying an experience rather than just a cup of coffee Illy supplies the shops with Italian espresso machines, the coffee cups, art work, coffee recipes, and extensive staff training. Once everything is in place the shop becomes Illy certified. In return the outlet must sell Illy coffee exclusively for at least three years. Illy ensures their strict standards are adhered to with regular checks – those not performing can have their certification removed. With relatively little cost Illy has expanded their brand’s reach and avoided a one on one confrontation with the giant Starbucks. What can we learn from Illy:

  1. Align your strategy with other stakeholders: independent coffee shops struggling to compete with major chains can now align themselves with high quality products and production methods yet still retain their independence.
  2. A focused strategy can go a long way: Without nearly the resources of Starbucks, Illy has taken them on leveraging infrastructure already in place.
  3. You don’t always have to fight to win: Illy attacked Starbucks and other major chains in an area where they can not respond. One doesn’t always have to go head to head to win.

While you’re enjoying your next cup of coffee think about how can you align your strategy with your customers?

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