The boss of Italian coffee legend Illy explains why the market for gourmet coffee will continue to grow, and why he has no time for ethical certification

Espresso is the order of the day when having coffee with Andrea Illy. The chief executive of Illycaffè, the Italian coffee company, is passionate about the drink his family has made for three generations. To this day, Illy sells just one blend of coffee, designed to be drunk as espresso.

“My ancestors chose the best way to prepare coffee, which is espresso,” he says. “It is the best way because it represents the quintessence of coffee – it extracts and squeezes the best flavours.”

Some in the industry might disagree with this view, but Illy’s very Italian obsession with espresso is working for the brand. The Trieste-based company made a profit of €7.1m in 2007 on revenue of €270m. This year Illy marks its 75th anniversary as a privately owned, family firm in the highly competitive $80bn global coffee market.

Going upmarket

Consumer taste for gourmet or speciality coffee – upmarket drinks made almost entirely from Arabica beans – has grown over the past 30 years. Illy says a focus on espresso, the rise of coffee shops and bars, and the use of portioned servings of ground coffee for baristas – an Illy invention in 1974 that makes baristas’ work easier – have all fuelled growth in the sector. He acknowledges too the “big influence” of Starbucks in spreading coffee culture around the world.

The result is that gourmet coffee now accounts for 6%-8% of the industry, or an annual market of about $5bn, and it should grow further. “It would be a reasonable expectation for the gourmet segment to account for 10% of the market. There’s space for 50%-80% growth in this segment,” he says. The economic downturn will not change this, he adds, because coffee is an affordable luxury. “It’s your everyday treat,” he asserts.

This should be good news for the world’s 25 million coffee growers – at least for those of them who manage to sell into the gourmet market. Prices for growers supplying this segment are at least 10% above the world market price, currently about $1.10 per pound of coffee. Illy pays growers a 30% premium on the market price. And, unusually for a coffee roaster, the brand sources beans directly from coffee farmers, cutting out the middlemen. “We skip exporters, traders, and we skip cooperatives. The money goes directly into the pocket of the grower,” Illy says.

Sourcing directly from growers may boost farmer incomes, but the real reason Illy does so is to guarantee that the beans it buys are good enough. The company stopped buying coffee on the market in 1992 because “it was not sustainable to get the quality we were looking for,” Illy says.

The company puts farmers through a rigorous selection process. Every year the company runs a competition in coffee-growing countries. Winners are trained up by the brand’s agronomists. They advise farmers, for example, on whether to shade-grow coffee, how far apart to space coffee plants, and whether or not to irrigate their farms. Coffee farmers that pass the training stage can then sell to Illy. Selected growers get a certificate, saying that they supply Illy, which they can use to command higher prices for the rest of their coffee from other buyers on the market.

By teaching farmers to grow better quality coffee that commands higher prices, Illy says, his company contributes to the long-term viability of coffee farming. “This is an example of teaching someone how to grow good coffee, not subsidising them to grow sub-standard coffee,” he says. Illy follows ISO environmental standards, but does not take part in any certification schemes. Illy is highly sceptical of voluntary ethical certification schemes for coffee. He particularly dislikes the Fairtrade mark, which guarantees small coffee farmers grouped in cooperatives a minimum price for their crop.

Illy argues that ethical certification gives consumers a bad deal because they have to pay more for a coffee whose quality is no better than non-certified products that are cheaper. He admits the premium Illy charges consumers is much higher than those for Fairtrade, for example, but argues this reflects the higher quality of the product. “What drives the coffee purchase from the consumer is pleasure,” he says, suggesting that quality trumps ethics for shoppers every time.

Chris Willie, founder of the Rainforest Alliance, the social and environmental certification group, disagrees. He says today’s coffee consumers want both ethics and quality. Willie cautions that high prices offer no guarantee to consumers that farms growing the coffee are managed sustainably. He says: “Even now we see farmers getting high prices but still mistreating their land, workers and environment. Earning a lot of money for the crop does not assure environmental or social sustainability.” Most important, he says, are the margins that farmers make from growing coffee, which will determine how much time and resources they will invest in improving conditions on their farms.

Certified and credible

Gourmet coffee brands are partnering a number of non-governmental organisations to certify the coffee they buy (see below). Market leader Starbucks was one of the first to do this in 2004 when it launched its Coffee and Farmer Equity Practices programme. Developed with Conservation International, the programme is a set of environmental and social guidelines that Starbucks buyers work with coffee farms to implement. It currently covers 65% of the company’s supply chain.

“Eventually we would like to get to 100%,” says Colman Cuff, managing director of Starbucks Coffee Trading Company. “But we don’t want to limit ourselves to not buying coffee because it’s not in the programme. If we identify a high quality coffee, we’ll buy the coffee and we’ll push the producers to get into the programme.”

Gourmet coffee brands continue to face the challenge of getting the right quality – what Cuff calls “customer experience” and what Andrea Illy calls “pleasure” – and ensuring high standards of social and environmental protection.

In coffee farming, quality can sometimes conflict with sustainability. For example, the “washed” method of processing coffee is, as the name suggests, very water-intensive. In this method, the fruit or pulp surrounding the coffee beans is removed by fermenting the fruit with microbes and washing it with large amounts of water. The beans are then dried.

The alternative method is to leave the picked fruit to dry in the sun. This saves water, but does not produce the best-quality beans. Illy says that in Ethiopia it has tried to raise the quality of sun-dried coffee by helping to introduce farmers to the semi-washed method, which uses water but in smaller quantities.

For Illy, sustainability means continuing to put time and effort into sourcing the best quality beans it can find. The social and environmental benefits that may, or may not, accrue from this are secondary. What is clear is the time and effort the company puts into building up the capacity of its farmers, which should have knock-on benefits for their livelihoods through higher prices. Illy says: “We can’t go to the grower and say we need 30%-40% more beans, because we would not be able to maintain the same quality standard. This process of knowledge transfer to the growers is long; it takes years and years to get growers on board. Some come in, some go out. We can source between 10% and 15% more coffee per year, but no more.”

Illy says the company can self-finance its growth, and has no plans to sell out or go public. Doing so might dilute the brand, he fears. He would consider selling other products, but not under the Illy name. For now Illy is a “stakeholder company” with investors low on the priority list and consumers at the top, he says. Customer satisfaction is his driving goal. “Coffee is about pleasure. Everything we do must be consistent with the idea of pleasure,” he says. And pleasure, for Illy and his forbears, is espresso.

Illy facts

· Founded in 1933 by Francesco Illy, Illycaffè today employs 700 people directly. In 2007 it made a net profit of €7.1m on turnover of €270m.

· Illy sources its single blend of 100% Arabica coffee from nine different growing regions from central and south America, India and Africa.

· Illy coffee is sold in more than in over 50,000 public restaurants and bars in 140 countries. In 2007, exports accounted for 52% of total sales.

· It has opened a chain of over 150 Italian-style coffee houses – espressamente illy – in 20 countries.

· It has trained 7,000 baristas since opening the University of Coffee in Trieste in 2000. In June it opened a similar school in London, and further branches are planned for Brazil, China and India.

Quality and sustainability

Many gourmet coffee brands offer Fairtrade varieties and are working with other ethical certification schemes.

Gourmet coffee brands working with the Rainforest Alliance include: LavAzza, the Italian brand, and Caribou Coffee from the US.

Tchibo, the German coffee brand, buys beans certified to the standards of the Rainforest Alliance, Fairtrade and the Common Code of the Coffee Community, a multi-stakeholder group to promote sustainability in coffee supply chains.

Brands certified to the Utz Kapeh ethical standard include Douwe Egberts, the Dutch coffee brand owned by Sara Lee, and Friele, Norway’s biggest coffee roaster.