Based on the case “ The Espresso Lane to Global Markets”, this memo will look into Illy’s core capabilities and analyze its international strategy in light of CAGE distance, RAT, CAT, and foreign market entry mode.
Illy’s core capabilities lie in its Italian-style, focus on design and aesthetics, high quality, espresso culture. The increasing demand for coffee worldwide represents a huge opportunity for Illy to venture into global markets. I believe Illy has competitive advantages based on “VIRO” analysis. Illy is capable of creating value overseas with its unique, high quality Espresso. Its high-end restaurants and unique culture and customer experience are rare and hard to imitate. Given the success in its home market Italy, it is evident that Illy’s management is capable of employing those capabilities effectively.
Success of global ventures not only depends on competitive advantage, but also liability of foreignness. By using CAGE distance framework, we can determine which foreign market will incur the least liability of foreignness. First of all, Coffee is in the consumer discretionary industry, and consumers’ taste varies in different cultures. For example, coffee is a traditional drink in western culture, but foreign to Asian culture. As such, Illy may want to avoid venturing into a market with big cultural distance. Secondly, Illy high-end player in the market, and its target consumers are high-income consumers. Hence, when venture oversea, Illy should choose a country with high-income level—economic distance matters. Thirdly, long geographic distance would increase risks linked to the long-distance shipping, such as risks of mould, condensation and unwanted odors. Therefore Illy would prefer countries with low geographic distance. Finally, Illy should choose a country with low administrative distance, a market where is business friendly.
Among all the countries that Reale considered, I would recommend Illy to venture into the UK first, then US, Brazil, India, Germany, Japan and China. Coffee market is mature in the UK. More importantly, it is projected to grow more than 12% annually in the next 3-5 years. Moreover, from Exhibit 3, GDP per capita in UK is $35,900, which is $5,800 higher than Italy’s. This shows big market potential for premium coffee products in UK. With mature consumers generally capable of appreciating premium quality coffee, Illy can differentiate itself by selling its core competencies such as Italian-style, and top quality product. In addition, UK has small cultural and geographic distance to Italy, and is ranked 7 in terms of ease of doing business. All of the 4 factors from CAGE analysis indicate a favorable condition for Illy to do business in the UK market. The best market entry mode in UK is direct franchising as it preserves the authenticity of Illy’s brand by providing supplies and expertise directly from Italy. Under RAT analysis, UK also seems to be a good choice due to the similarity of the two markets. Illy’s high quality coffee is highly relevant to consumer’s taste in UK, and Illy will be able to transfer and appropriate its expertise in the UK market. Furthermore, under CAT analysis, the new capabilities and expertise derived from the UK market can in turn enhance Illy’s domestic business in Italy due to the small cultural distance between these two countries.
After securing its market position in the UK, Illy can expand into the US market due to the cultural, economic, geographic and administrative proximity between the UK and the US. Coffee was a cultural obsession in the US (with 20% of adults drank gourmet coffee daily) and the US is the largest consumer coffee market in the world. Despite the fact that the American market is highly competitive with big brands, Illy can leverage its competitive advantage to differentiate its high-quality products from others. US GDP per capita ($48,100) is the highest among all the countries considered. This indicates huge potential for premium coffee market. Moreover, US is ranked 4th in terms of ease of doing business. With its core competitive advantages, Illy is likely to do well in the US market.
Brazil should come as a third target due to the fact that it’s the second largest consumer coffee market in the world, and its high projected percentage market growth 36% (Exhibit 3). The case mentions 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.” However, the main challenge facing Illy is how to localize its products in Brazil without losing its core competency of authentic Italian Style. Moreover, due to the relative low GDP per capita ($11,600), Illy’s high-end coffee may not receive popularity from a significant portion of the population. In addition, franchising in Brazil is difficult, which raises further questions that if Illy can effectively transfer and capture the value of its capabilities in Brazil.
India can be a good choice given its coffee-drinking culture and growing wealth. Illy can also source coffee locally to cut cost as India is the sixth largest coffee producer in the world. However, due to the low GDP per capita, Illy may find it hard to exercise its pricing power on its premium product.
For Germany, the market growth rate is project the lowest (2%) among all countries. Furthermore, the German Franchise Association may pose significant administrative barriers to Illy’s entry into the market.
For Japan, aside from its unfavorable big cultural and geographic distance, taste is very localized. Therefore, Illy will find it difficult to differentiate its product while maintaining its core capabilities in Japan.
For China, coffee has yet become a popular drink. With big economic, geographic and administrative distance, Illy should not enter the Chinese market in the short run. Although the coffee market is growing fast, most consumers—who are new coffee-drinkers—may not be able to appreciate Illy’s high-end coffee. Furthermore, Illy may find it hard to keep its core competitive advantages due to administrative restrictions.