Fuel for further expansion

Keep it in the family. It's a cliché about Italians, but it's how Turin-based coffee giant Lavazza has managed to continue investing in global expansion despite three years of worldwide economic instability.

The business was founded in a grocery shop in 1895 - when Luigi Lavazza began hand-roasting coffee beans for rich customers - and grew over four generations into the leading single-product coffee company in the world, with 4,000 employees and annual turnover of EUR1bn. The company's famous espresso roasts are sold in 90 countries and command a 50% market share in Italy where Lavazza is practically a synonym for good coffee.

Even at this scale, the Lavazza family remains firmly in control, with patriarch Alberto at the top and the next generation - including his nephew, vice-president Giuseppe - in key executive positions. This has helped the company stay disciplined about cash, allowing it to finance a spate of recent acquisitions and expansions without taking on debt or relying on outside investment.

"The family agree that profits are to be reinvested in the business," Giuseppe Lavazza told the Sunday Tribune. "The family takes a very limited amount of cash out of the company - 90% is left in. This has allowed us to be very independent from the banks and from the market. This can be a great advantage especially if you want a very long-term strategy."

That long-term strategy is simply global organic growth through the company's own resources. No debt, no leverage, no stock market offering - just sound equity gradually built up through retained earnings.

"With a company listing the vision is short term, as there is pressure from the market and investors," said Lavazza. "Competitors already put us under pressure. We don't need investors adding to it. We are free to run the business following our own ideas."

One of those ideas was to use Lavazza's strong cash position to help customers cope with the credit shortage and currency fluctuations that have characterised the market recently, especially in Europe. "We extended credit to customers because a lot were in serious trouble," said Lavazza. "With currencies, a lot of countries had trouble in the last year. Britain was one of them, eastern countries too. Because of depreciation we had to make a lot of effort to make sure our people stayed in business."

With no debts and high liquidity, Lavazza could sustain its own base despite the disruption to its customers. Nonetheless business slowed in 2008 as the dollar price for coffee on the commodities markets rose and disposable income fell in its main markets. To maintain revenues and volume, Lavazza used its cash pile to fund acquisitions in new markets.

The company spent EUR200m buying a 7% stake in leading North American roaster Green Mountain Coffee. It also snapped up a clutch of Italian brands, as well as a chain of cafes in Bulgaria and an office coffee-service firm in Argentina. These moves built on an earlier plunge into the massive Indian market, where Lavazza now owns 200 coffee outlets employing 1,600 people.

"The company has the chance of growing in new areas where consumption is low," said Lavazza. "New, emerging markets for us are India, Brazil, Asia-Pacific, China and the US. Lavazza wants to take the chance of being one of the most important players."

This approach helped the company keep revenue steady in 2009, the worst recession year, while diversifying its income streams. Lavazza now gets 40% of its turnover from overseas markets.

It has achieved this partly by taking a brand that is mass market in Italy - what Lavazza calls "high quality coffee that is accessible" - and presenting it as a luxury outside the domestic market.

This is true in Ireland where Lavazza first challenged incumbents such as Bewley's and Robert Roberts in the mid-1990s with its now-ubiquitous "Qualita Rossa" blend. Market share has grown by more than five times since then and is still increasing at 20% per year. Lavazza has 23% of the total Irish coffee market, distributing through retail outlets, restaurants, cafes and bars, and workplace coffee service.

"What we're doing abroad, where espresso is considered a niche, Lavazza is offering the same products we are selling in Italy, keeping the same quality, philosophy, direction," he said. "We are selling something we call the Italian coffee savoir faire, the Italian espresso experience ... All of this is part of being an Italian company. We have to promote these things, but in Italy it's considered basic."

Lavazza admitted his company had been helped along by the so-called "coffee revolution" of the past 15 years, especially in the US with Starbucks, and the rise of "foodie" culture in the developed world. The phenomenon turned foods, including coffee, from simply something to eat or drink into sources of diverse pleasure and cultural significance.

"At Lavazza we always believed coffee should be a real pleasure and give you something special," he said. "In the Italian tradition it's not just a commodity, it's a social feature rich with different attributes. It needs a special skill to be managed. This attitude was not so developed outside Italy where coffee was considered a plain commodity with no value."

The value of coffee to an Italian becomes evident when Lavazza begins to talk about espresso as a "category of distinction" that serious producers need to carefully nurture as they seek to expand its appeal in the wider market.

"We have to protect and defend the discipline, because espresso was born in Italy," he said. "But now a lot of new places are trying to pick up espresso culture and retrofit it. At Lavazza we want to preserve the tradition and give it a chance to evolve."

One way of doing it, he said, is to help consumers "develop organolectic capabilities" relating to coffee, so that they are aware when they are buying something of high quality. Organolectic is a word used mostly in the wine trade to describe the synthesis of sight, smell, touch and taste which produces a distinctive effect on the drinker - and it is an indication of how Lavazza is trying to position his product in the global consciousness.

But unlike with wine, where novelty, development and maturation are prized, coffee drinkers tend to want a unique taste consistently over time.

"In coffee, the memory of the taste is the main thing," said Lavazza. "If you like one taste, you want to have it - always. This is not easy. Coffee is a commodity with varietals connected to different climate conditions and soils. In the end, coffee is a very interesting raw material because it is so flexible. You can mix it, drink it in a lot of different ways. You can grab and go, or drink it in two seconds at a counter, or while you eat. It's something that's adaptable to different uses. The secret is to provide quality and pleasure."

The Lavazza CV

Age: 45, Education: Istituto Sociale and University of Economics, both in Turin

Career: Philip Brothers (London), Coinca, Family: married with three children, Hobbies: literature, music and golf.