I will never forget seeing my father cry. We were on the campus of Stanford University, meeting with the renowned economist W. Brian Arthur to learn more about his theory of increasing returns. I didn’t expect it to be an emotional conversation. But when my father, Ernesto, started to describe our family business, illycaffè; our industry, coffee; and his desire to see more of its returns distributed to the developing-world farmers who supplied its beans, his voice cracked and tears filled his eyes. He described his deep frustration over vast disparities in the living conditions enjoyed by the world’s consumers of coffee and those endured by its producers. He explained that our goal was to spearhead a change.
At the time (this was in the 1990s), most coffee beans were still commodity products—low-priced, undifferentiated on quality, often blended, and sold through an exchange. Suppliers were underpaid not only because they sat at the bottom of the value chain but also because margins were very thin. My late grandfather, Francesco, had founded illy in 1933 with higher ambitions, intending to create an institution respected for both its products and its contributions to society. My father, who succeeded him as CEO and then chairman, and I, who stepped into the CEO role in 1994, were pressing on in that tradition. We had already implemented better quality-management systems and pioneered direct trade with growers. Now we wanted to scale up this new production model, incentivizing farmers to cultivate more-flavorful beans and thereby generating bigger profits to be shared among all stakeholders and reinvested in further improvement and growth: a virtuous circle of increasing returns. That’s why we were in Arthur’s office.
Over the past two decades, with additional leadership from Massimiliano Pogliani, my successor as CEO from 2016 to 2021, and Cristina Scocchia, who took over the top job in 2022, we are accomplishing what we set out to do. Illy has annual revenues of €500 million with earnings of more than €60 million before interest, taxes, and depreciation and a compound annual growth rate of 10%. We pay our growers an average of 30% more than market price for coffee beans and we are consistently recognized as one of the world’s most socially responsible companies. More important, over the past seven years we have pushed our industry to adopt the same ethos and to unite to address the threat of climate change.
A History of Ethical Excellence
My family is Waldensian, and one of our saints, Augustine, emphasized that perfection is twofold: what you achieve and how you do so. My grandfather, a Hungarian immigrant to Italy described by my relatives as “a genius and a gentleman,” took that idea to heart. Excellence and ethics were his core values in life. He thought of illy as a social institution that would offer the best possible coffee and care for all its stakeholders, operating with a commitment to transparency, sustainability, and continual personal and organizational growth. In the Mediterranean melting pot of Trieste he was not only an entrepreneur and a merchant, sourcing and selling beans from Brazil and Africa, but also an inventor. He revolutionized both coffee packaging—by means of pressurization technology that enhances flavor during transport and storage—and preparation, with his illetta machine, considered the blueprint for modern espresso makers. Illy was an immediate hit at hotels, restaurants, and cafes in Italy and by the 1940s was exporting to elsewhere in Europe.
My father wanted to follow in Francesco’s footsteps and join the family business, but my grandfather insisted that he first study chemistry and learn more about how to make coffee taste great. When Ernesto did come into the illy fold, after earning a doctorate, he created our first lab for scientific research and development. Later in his life he began traveling to Brazil and other countries to meet with local growers and explain how they could focus on quality rather than quantity, farm more sustainably, and be paid more in the process. He, too, was an innovator: In the 1950s he initiated a move toward consumer sales—putting our ground coffee into smaller cans for home use. In 1974 he oversaw the launch of our first single-portion espresso pods. In 1980 he took illy to the United States, introducing Americans to our Italian espresso. And in 1988 he patented photochromatic technology that allows us to use a digital sorting machine to evaluate defective beans at the source and the factory, so we take only the best and eliminate the rest.
That’s a tough act to follow, but I’ve tried. My thesis as a chemistry major at the University of Trieste was titled “Espresso Quality: The Science of Coffee.” In 1990, at age 26, I was appointed to a role in illy’s quality-control lab, where I directed a reorganization centered on total quality management, taking lessons from several in-person visits to Japan, including to Toyota Production System facilities.
The next year my family decided to try sourcing single coffee lots directly from local growers—the start of our integrated supply chain—and introduced an annual award to recognize the top growers in our network who sustainably produce superior beans. It’s now part of the Ernesto Illy International Coffee Award (EIICA). However, we soon discovered a problem: Even those growers could be unreliable. An award winner one year might be unable to produce high-quality beans the next.
At that point we became further involved in illy’s production and later in all its operations—everything from logistics to IT. Soon my family asked me to step into the CEO role, and I was excited to do so with a goal of tackling the supplier-consistency challenge. One of my first initiatives was to develop a more comprehensive program in which our growers could learn from agronomists about systems and equipment that would help with their crops. Eventually, in 1999, that program became the Università del Caffè.
Moving a Family Business Forward
Although a few other industry players were also beginning to embrace greater social responsibility at that time, our focused efforts were the exception, not the rule. Broader change started only after the coffee crash of 2001, when overproduction in Brazil and Vietnam caused the price of beans to drop to 45 cents a pound, not even covering growers’ costs. As farmers and their families fell into deeper poverty, Oxfam and other nongovernmental organizations attacked the big multinational coffee companies for failing to support their suppliers. Thankfully, that triggered a move toward coffee certification by Fairtrade. Indeed, our early start on these issues has enabled us to announce nearly 100% direct and fair sourcing of our beans. We prioritized quality as well as sustainability, and every day 8 million cups of illy coffee are served in more than 140 countries, in cafés, restaurants, hotels, and single-brand shops, at home and in the office.
The 2000s brought new sales and marketing initiatives linked to our quality-focused, supplier-friendly strategy. We already had the illy Art Collection, for which we’d asked artists around the world to use an illy espresso cup as their canvas; clever ad campaigns; and a pop art logo designed by James Rosenquist in 1996. In 2002 we commissioned the photographer Sebastião Salgado to undertake a project featuring our growers around the world. (He ended up working on it for 14 years, across 10 countries, which culminated in the exhibition and book The Scent of a Dream.) One notable success story from this period occurred in Colombia: We trained former FARC soldiers to grow beans for us, and they were such quick studies that a few years later they won an EIICA for sustainable quality. That era also saw the launch of stand-alone illy espresso bars, followed by illy caffès and illy shops, which helped us tell our and our suppliers’ stories. Our product innovations included the iperEspresso capsule, made via two infusion and emulsion phases and protected with five patents, and illy ready-to-drink cold canned coffee.
Moving into the next decade, I began to think even more deeply about illy’s and our industry’s impact on the world. I studied the Harvard Business School professor Michael Porter’s emerging thinking around shared value. I worked with the supply chain and certification body DNV to create a responsible-supply-chain certification for coffee. And I joined the International Coffee Organization (ICO) as chairman of a new program to promote coffee quality and sustainability by engaging a broader network of growers, roasters, institutions, and retailers. In 2013 Ethisphere named illy one of the world’s most ethical companies—an honor we’ve retained ever since—and in 2021 we earned B Corp certification, a designation reserved for organizations that achieve positive ESG goals.
A key turning point for our industry came in 2015 during the World Expo in Milan, the theme of which was “feeding the planet.” There the ICO, with illy’s leadership in overseeing the coffee pavilion, hosted the first Global Coffee Forum to discuss challenges and best practices to benefit all stakeholders in our ecosystem. We welcomed Jeffrey Sachs, the Columbia University economist and sustainable development expert, to discuss another pressing issue: protecting the environment.
Coming Together on Climate Change
Coffee plants grow only under optimal conditions. The weather can’t be too hot or too cold, too dry or too wet. Obviously, the increasingly extreme weather fluctuations brought on by climate change make cultivation even more difficult. Longer term, we’re likely to see a shift in the geographic areas where people can successfully farm, which will lead to migration and socioeconomic turbulence. In Milan, Sachs presented a study showing that if current trends continued, up to 50% of regions then growing coffee would no longer be suitable for cultivating it by 2050.
Our industry had to proactively address this threat. Demand for coffee was accelerating in the United States and Asia, and production in South America, Africa, and Southeast Asia was decreasing owing to global warming. We needed to find a path toward coffee security. So participants in our industry forum settled on a commitment dubbed the Milan Coffee Legacy: a promise to strengthen the relationships between growers, producers, and consumers through quality and sustainability and to fight against climate change. The ICO began working with the leading trade associations in coffee-growing countries on a “global adaptation plan” to help us understand where production has suffered or might soon and to outline corrective actions. We concluded that we had to invest further in better agronomical practices and also create more-resilient cultivars, varieties, and hybrids. Illy has since partnered with Lavazza and World Coffee Research to complete a project that involved fully mapping the coffee genome for use as a tool in that development work.
As for the company itself, we’ve pledged to become carbon-neutral by 2033 through the use of renewable energy and circularity, and we aim eventually to be carbon-negative, contributing more to our planet than we take from it. To accomplish that ambitious goal, we’re focusing on increasingly regenerative agriculture. Let me explain: The right kind of soil, enriched with organic materials, can be a gigantic carbon sink, capturing triple the amount that is lost in the atmosphere. And that kind of soil is better at retaining water, more resistant to erosion, and rich with microbiota that feed into the roots of plants and keep them healthy and fertile. This is the model we need to perfect, while modifying it for all our growing regions. Right now we have two experimental plantations—one in Ethiopia, one in Guatemala—where farmers are rotating crops, enriching the soil with compost and biochar, avoiding tillage, and minimizing the use of mineral fertilizers, pesticides, and herbicides in an effort to operate in a carbon-neutral or -negative way, offsetting the emissions associated with transporting, grinding, and storing their beans.
When I stepped down from the CEO role, it was to devote more time to spreading the gospel of this “virtuous agriculture” model. I’ve since spent some 1,000-plus hours getting the concept scientifically validated, creating governance around it, testing its application, and persuading industry peers to follow our lead. In making my case, I return to Porter’s thinking on a company’s purpose: It’s not to generate profits; it’s to create long-term enterprise value. And in 2022 one can’t do that without acting as a responsible corporate citizen. Consumers are already rewarding more-sustainable producers with their purchases. Any group that hasn’t moved in that direction is likely to find itself losing market share to competitors that have. Equity investors and bank lenders are also increasingly focused on ESG metrics, which lowers the cost of capital for good actors and increases it for bad ones. And governments are slowly moving toward stricter environmental regulations. So this is not purely altruism. We have plenty of business incentives to do the right thing for all stakeholders—and for the environment.
Our Four Pillars
My grandfather’s dream was to offer the best coffee to the world. But his definition of “best” was about more than a drink that tasted great. He also wanted illy coffee to be produced in the best possible way. Over time we’ve refined that into a business model built on four pillars: selecting the best producers, sharing knowledge, rewarding the finest quality, and creating a community built on passion. We aim to enhance the lives of our consumers, clients, employees, and suppliers and the residents of areas in which we operate. As illy moves into its 90th year, we are maintaining that strategy.
Even as our competition has risen over the past decade, we have never compromised on our values. Some might see an influx of other providers of high-quality, fair-trade, sustainably sourced coffee as a problem for us—a glass half empty. But the glass-half-full view is that those new entrants are helping to grow the market for what we sell in a way that we couldn’t have done alone. And as we watched other brands first outpace us but then overstretch—into too many markets, stores, or product lines—we stayed focused on our exclusive niche, got better organized, honed our product portfolio, and improved our communication systems. That included creating Circolo illy, a digital network through which all the stakeholders in our supply chain can connect.
Thanks in part to a purpose-driven, collaborative spirit, we are one of the world’s fastest-growing global coffee suppliers. We also continue to create great value outside our organization, ensuring better socioeconomic conditions for our farmers, doing our part to help protect the planet, and pushing other agriculture-based companies to do the same.