LAVAZZA: The Challenges Of Foreign Market Entry In A Brand-Intensive Industry Case Study

Luigi Lavazza SpA (Lavazza) was the largest coffee maker in Italy, often analogously referred to as Italy’sfavourite coffee, and the seventh-largest coffee roaster in the world. 2 Founded in Turin, Italy, in 1895,Lavazza had a 125-year-old legacy with deep roots in Italian coffee culture and was primarily known forits espresso blends—a cornerstone of the coffee culture in Italy and the rest of Europe. 3 Since the 1980s,after Lavazza ventured into global markets, it had seen tremendous growth, and by 2020, more than 70 percent of Lavazza’s global sales came from overseas markets.4 Despite its success in global markets, Lavazza was finding it difficult to make its mark in the United States—the largest coffee market in the world, worth more than US$8.1 billion, 5 and the second-largest market for Lavazza (see Exhibit 1). After establishing its North American subsidiary in 1989, 6 Lavazza entered the US market in the 1990s using strategic partnerships with restaurants and hotels to cater to US consumers. But even with its thirty years of experience in the US market and a strong global brand, Lavazza continued to struggle in the US market, earning total revenue of $110.8 million across all of its segments, representing a market share of less than 1.4 per cent.7 By September 2021, as competition in the global coffee industry intensified, Lavazza could no longer afford to be complacent with its performance in the US market, and it sought to increase its market share. However, Lavazza faced a key strategic decision: should it try to introduce US consumers to the “Italian way” of drinking espresso coffee, or should it create a new brand identity and a new portfolio of products that were more aligned with the tastes of US consumers?

LUIGI LAVAZZA AND AN EMPHASIS ON INNOVATION

In 1895, the founder of the company, Luigi Lavazza, invented the art of blending coffee by mixing coffee of different origins and then roasting it, often customized to the individual tastes of his customers. This required Lavazza to source coffee beans from multiple geographical locations dispersed globally, an unusual strategy for a grocery shop coffee seller at the time. However, Lavazza’s blended coffee soon became a sensation with local coffee consumers and led to the company’s eventual success. By 1927,Lavazza had transformed from a small-scale commercial enterprise into a family company.

Staying true to the vision of its founder, the company philosophy continued to emphasize product quality and innovation through to the latter half of the twentieth century. Unlike most family firms, Lavazza continued to spend heavily on research and development. In 2018 alone, Lavazza spent more than 2.5 percent of its revenues on research and development. 8 In the 1970s, Lavazza introduced vacuum-sealed packaging for its coffee beans and coffee grounds to prolong their freshness. 9 Overseas export of coffee often led to significant degradation of the aroma and taste of the ground coffee and remained a significane challenge for sellers of roasted coffee blends. To overcome this issue, Lavazza introduced vacuum-sealed packaging for ground coffee, which soon became the de facto industry standard. This new and innovative form of packaging meant that Lavazza could sell a variety of custom blends to a wide range of consumers, each with different tastes and budgets.

Lavazza’s third innovative breakthrough came in the 1980s when it started to explore international marketsfor expansion and growth and opened its first overseas café in France in 1982. 11 Through the 1990s and 2000s, Lavazza sought to use its age-old expertise in coffee blending to its advantage and aid its expansion in the global market by undertaking extensive market research and investing in a lab dedicated to formulating new coffee blends that changed in response to consumers’ evolving tastes. Based on local consumers’ tastes in coffee and consumers’ willingness to pay, Lavazza offered a wide variety of coffee blends at different price points. By the early 2000s, Lavazza had succeeded in making café-quality coffee and Italian-inspired cafés a global phenomenon and was present in more than 140 countries. In 2020, global sales contributed to more than 70 per cent of Lavazza’s overall turnover.

Despite Lavazza’s popularity in global markets, its cutting-edge technology, and its emphasis on innovation,the US market remained elusive for the coffee maker. Its US strategy of partnering with local restaurants and bars did not result in any notable success. In 2015, Lavazza shifted away from the business-to-business (B2B)segment and its partnerships with restaurants and cafés and instead began to focus on the household coffee market and selling its products directly to consumers through local grocery chains such as Publix Super Markets Inc. (Florida) and Costco Wholesale Corporation.14 The roasted and packaged coffee beans and coffee grounds were imported from Italy and distributed in the United States. This strategic shift in focus did lead to some success for Lavazza in the United States. In 2020, its retail segment grew by more than 22 percent in the United States, with a market share of just over 1 per cent. However, this success paled in comparison to the performance of its peers, such as Folgers Coffee (Folgers), which had a market share of over 25.1 per cent of the US household market, and Starbucks Corporation (Starbucks), which had had a market share of over 12.4 per cent of the US household market in the same period.15 Lavazza also continued to perform poorly in the United States in terms of brand awareness and consumer appeal. Even with extensive marketing and brand awareness campaigns, in a survey conducted by Statista in 2017, where coffee consumers were asked about their preferred brands, Lavazza ranked eighteenth—far behind all of its major rivals.

LAVAZZA’S GLOBALIZATION STRATEGY AND BRANDED CAFÉS

When entering foreign markets, Lavazza tended to acquire and utilize local roasters and brewers to cater to the tastes of local consumers. It adopted this strategy in both mature and emerging markets, with notable success. 17 To serve mature markets such as France and the Netherlands, Lavazza acquired Carte Noire and Merrild. Similarly, Lavazza acquired the coffee companies Fresh and Honest Cafe and the Barista Coffee Company Limited to enter India, an emerging market. This expansion strategy underscored the recognition that different coffee markets had distinctive features and differing consumer demands. The acquired assets, however, were rebranded to fit Lavazza’s brand identity. These acquisitions and rebranding helped Lavazza to tailor its offering to the local market while remaining true to its core philosophy of serving authentic Italian coffee and keeping its global brand identity consolidated. In 2013, Marco Lavazza, the vice-president of the Lavazza Group, noted, “We want to give the right idea, that when a customer comes in, they are coming into a real Italian store. Everything links together because, at the end of the day, we only have one brand. We want to give customers a positive association with that brand. They have to find quality and consistency whereverhe or she goes. . . . We have one brand, and it’s our surname, so it really has to be perfect.”

Besides innovations in ground coffee tailored to local markets, Lavazza’s strategy in the European market had also been to open Lavazza cafés that were designed to demonstrate the coffee maker’s creativity and to emphasize the rich taste of its espresso blends. Brightly lit and featuring a contemporary design with golden panels, Lavazza cafés symbolized opulence and aimed to provide Lavazza’s consumers with a holistic experience.19 The café baristas were trained to serve precision in a cup of coffee, and offered consumers food suggestions to complement their coffee choices—all a part of Lavazza’s “coffee design experience.”

Opening boutique cafés proved a successful strategy for Lavazza in entering the broader European market. In 2021, Antonio Baravalle, chief executive officer (CEO) of Lavazza, said, “When you're building a brand, you need all contact with customers: at home, in the office, in cafés and bars. . . . We need the combination of all touchpoints.”20 Naturally, Lavazza cafés also served as venues for product introduction and as points of sale for Lavazza’s household products. In addition, Lavazza built and leveraged a community of bar owners by providing them with the training to test and serve coffee. These coffee bar owners became an integral part of Lavazza’s success in Europe, as they helped to control the quality of the customized, handcrafted single-serve coffee and became local brand ambassadors. By 2015, Lavazza operated fifty training centres globally, in which more than 30,000 individual bar owners were trained.

LAVAZZA BRAND AND INNOVATIVE MARKETING

In the 1950s, as TV advertising soared, commercials became the proving grounds for creative professionals.Emilio Lavazza, then CEO of Lavazza, leveraged this visual medium and synonymized Lavazza coffee with the elegant Italian way of drinking coffee. Ad slogans such as “Lavazza coffee—the more you down,the more it picks you up,” “Any time’s the right time,” “Coffee makes everything better—even Heaven,”and “From Italy with passion” had enormous mass appeal and helped Lavazza to become a global brand,which itself remained distinctly Italian.

Continuing its streak of marketing innovations, Lavazza also pioneered the use of celebrity endorsements,art exhibition patronships, and sports tournament sponsorships in the industry.23 This helped Lavazza’s brand identity become intricately linked with precision, authenticity, creativity, and innovation. In 2019, at an art exhibition sponsored by Lavazza, Francesca Lavazza, a member of the Lavazza board of directors, emphasized that the sponsorship of art exhibitions represented “not only a progressive and crucial step towards supporting and enhancing arts and culture but also a reaffirmation of our role as ambassadors of creativity, innovation, and sharing.”

LAVAZZA’S US STRATEGY: EMPHASIZING ESPRESSO BLENDS AND LOCAL ALLIANCES

One of the key ingredients of the success of the Lavazza brand in Europe was Lavazza’s wide array of espresso blends, which had become synonymous with the brand itself. This was unsurprising considering Lavazza’s roots in Italy, home to espresso drinks. Lavazza sought to replicate the success of its espresso blends in the United States by persistently marketing them to US consumers. In line with its global strategy, Lavazza formed an exclusive partnership with the 2015 US Open tennis tournament to enhance its standingin the US consumer market, and this partnership continued into 2021.

Lavazza also sponsored several art exhibitions in the United States, including several at the Solomon R. Guggenheim Museum in New York. These marketing decisions emphasized Lavazza’s espresso blends’ authenticity, perfection, and precision. In August 2015, at the commencement ceremony of the US Open, Giuseppe Lavazza said, “The agreement, which forms part of the internationalization strategy pursued by the Italian company and brand, underlines our intention to make the United States our second home and to consolidate the relationship between Lavazza and expressions of excellence the world over.”26 Lavazza also stated that “The [US Open] Championships provide the greatest opportunity to showcase the excellence of our core product—espresso, as well as our innovative flair in the form of exclusive new recipes and skill in training baristas to Lavazza’s exacting standard.”

There seemed to be a mismatch in Lavazza’s product-market fit. Among US households, drip coffee was the most popular non-alcoholic beverage, and ground coffee and single-cup coffee were the leading market segments in the US coffee market.

Moreover, US consumers tended to drink less concentrated forms of coffee in larger quantities and often preferred flavoured coffee drinks (see Exhibit 2). Lavazza had a competitive edge in relation to its peers because its product portfolio could cater to both bulk ground coffee and single-serve coffee consumers.

In 2015, Ennio Ranaboldo, then CEO of Lavazza North America, said, “What we were really missing was a significant grasp of the American consumers’ minds. As much as we love espresso, it’s drunk by a minority of consumers. Already the ability of expanding the lineup to include other specialty beverages was a major achievement. Now, we have a full lineup of drip coffees tailored for the American consumer.”30

However, despite this acknowledgement, Lavazza could not reap the benefits of its strong product portfolio in the US market. Its continued emphasis on its espresso blends belied its vast portfolio of products more suited for US consumers.

Lavazza’s attempts to convince US consumers to change their coffee preferences by leveraging its strategic partnerships with restaurants and grocery chains across the US market also remained unsuccessful, for two reasons. First, most restaurants and hotels served Lavazza coffee under their own brand and used their own signature recipes, reducing Lavazza’s visibility among US consumers. Second, the most important segment of the US coffee market was the specialty coffee bars that emerged from the coffee shop revolution led by Starbucks. Success in the specialty coffee bar segment also meant success in the household consumer segment. Leading household brands such as Dunkin’ Donuts LLC (Dunkin’), McCafé, and others were present in both the coffee bar and ground coffee segments.

However, unlike its peers and despite the success of its boutique cafés in Europe, Lavazza had a negligible presence in the specialty coffee bar marketin the United States. After relying on key partners to cater to US consumers for twenty-five years and failing to make a mark, Lavazza’s management decided to take direct charge of their US operations.

In 2018, Lavazza also acquired Mars Drinks, the beverage division of Mars Inc., for $650 million and renamed it Lavazza Professional to directly serve its US consumers. Soon after, Lavazza’s retail sales in the US market grew by over 17 per cent in 2019 and 22 per cent in 2020.

However, Lavazza’s marketing strategy failed to reflect the more inclusive product portfolio of the company. Even as Lavazza tried to position itself as a premium coffee brand in the United States, it aggressively marketed its espresso-based beverages to US consumers. Commenting on the competition from Starbucks and Folgers in the US markets, Baravalle said, “Compared to these giants, we are small potatoes. The only thing we can do is be very careful about ouridentity. . . . And we focus only on coffee.”

LAVAZZA AND THE CHANGING INDUSTRY ENVIRONMENT

Lavazza primarily competed globally in the ground coffee market within two segments—the household market and the B2B market. The former direct-to-consumer retail channel made up 60 per cent of Lavazza’s global revenues, while the latter B2B sales accounted for the remainder. Given the industry standards, Lavazza was overexposed in the B2B segment, and it made sense for Lavazza Professional to focus on this segment exclusively. Lavazza Professional concentrated on creating custom coffee machines and coffee products for its business customers according to their requirements of space and taste, and it ran special marketing campaigns in conjunction with its B2B customers.

Beginning in 2020, Lavazza sought to cross-leverage its learning from the B2B segment to serve its household market segment. Lavazza’s household segment had witnessed tremendous growth in recent years, outperforming analyst expectations and offsetting Lavazza’s losses in the B2B segment. As the COVID-19 pandemic hit globally, Lavazza’s B2B sales declined sharply amid lockdowns and office closures. Lavazza’s B2B sales in the United States alone fell by over 66 per cent in 2020.38 Despite the intensifying competition in the global coffee market and significant losses in the B2B segment due to the pandemic, Lavazza posted a 15 per cent growth in its retail business globally in 2019.39

Further, as the pandemic rendered many individuals housebound and unable to visit their favourite local baristas, consumers increasingly gravitated toward purchasing more sophisticated or specialty coffee machines. Coffee machine sales became the next avenue for growth for Lavazza (see Exhibit 3). To capitalize on this opportunity, Lavazza started to customize its coffee machines, which had primarily been sold to business consumers, to reduce costs and make them affordable for the household market. Even with such customization, the specialty coffee machines sold by Lavazza usually cost around $200.

Eyeing the potential of this market and the hurdle of high costs, Lavazza launched a coffee-pod subscription service, first in Europe and then in the United States, which enabled its consumers to lease Lavazza coffee machines for significantly lower prices and served to increase sales of Lavazza’s single-serve coffee pods.

COMPETITIVE LANDSCAPE OF THE US MARKET

In essence, Lavazza faced competition from two fronts in the US markets: on the one hand were rivals such as Starbucks and Dunkin’, which sold ground coffee products and services such as handcrafted coffee, specialty coffee, and the café experience, and on the other hand were rivals such as Folgers, Keurig Dr Pepper Inc. (Keurig), and Stok, which only sold ground coffee products, but on a much grander scale through extensive retail distribution channels throughout the United States. Folgers, Keurig, and Maxwell House led the ground coffee market, while Starbucks and Dunkin’ led the coffee bar segment.

Based on overall revenues, the two most significant competitors of Lavazza in the United States were Folgers and Starbucks, both of which had similar value propositions but used different business models (see Exhibit 4):

Folgers emphasized household sales and retail distribution, while Starbucks focused on developing its chain of boutique cafés serving specialty and handcrafted coffee to individual US consumers and acting as the point of sales for its bulk products.43 Lavazza also faced competition from other aforementioned coffee brands with a significant presence in the ground coffee and coffee bean market.

Starbucks

History and Business Model

Even though Starbucks opened its first outlet in 1971 in Seattle, Washington, the quintessential Starbucks café was born only in the late 1980s. Howard Schultz, then director of marketing for Starbucks, got the inspiration for Starbucks cafés when he travelled to Italy, where baristas served handcrafted specialty coffee.

Soon, the Starbucks cafés became a popular alternative to work and home for professionals and led to Starbucks’ meteoric rise in the United States and globally. Product and Positioning By 2020, Starbucks was leading the global coffee market with revenues of more than $19.16 billion, primarily contributed by two key markets: the United States and China. Starbucks owned more than 80 percent of the coffee shops in the United States.46 In the past decade, Starbucks had sought to increase its market share in key European markets besides the United Kingdom and Turkey (where it had the most stores)—albeit with limited success thus far.

In September 2017, Starbucks ventured into the Italian coffee market by opening its first store in a historically important location in Milan, Italy. However, as of 2021, Lavazza, Nestlé SA, and Illycaffè SpA remained the market leaders in the Italian coffee market, while Starbucks was yet to break into the to twenty coffee brands in Italy. Starbucks’ weak performance in Italy appeared to mirror Lavazza’s travails in the United States.

Folgers

History and Business Model

In 1850, J. A. Folger founded Pioneer Steam Coffee and Spice Mills, which became J. A. Folger & Company in 1854. Folger introduced the idea of cup testing and sold his products based on the quality of the brewed coffee. In 1900, when Folgers began selling its products through grocers, coffee samples, and elaborate in-store displays designed by Folgers, salespeople remained a key strategy. In 2020, Folgers recorded total revenue of $2.3746 billion, primarily from its domestic coffee market.

In 1963, Folgers was acquired by Procter & Gamble Company, who began selling Folgers nationally through multiple retail distribution channels, and Folgers soon became the number one coffee brand in the United States.

In 2008, Folgers was acquired by the J. M. Smucker Company and remained one of the most popular coffee brands in the US household market.

Product and Positioning

One of the key strategies for Folgers’ success in the US markets was its ability to appeal to US consumers with a customized menu in four segments—fresh and ground coffee, premium coffee, single-serve coffee, and instant coffee—at affordable rates.

In addition, Folgers also leveraged its cultural heritage with older US consumers. However, despite its market leadership, Folgers was witnessing a steady decline in its market because its appeal among younger consumers was decreasing with each passing day.54 To remain relevant for millennials and Generation Z, Folgers needed to present a more modern approach, but doing so could undercut its market of older consumers, who had had Folgers coffee all of their lives and would be resistant to change.

CHALLENGES AHEAD

Since its inception in 1895, Lavazza had continued to pioneer new product innovations in the coffee industry. However, despite Lavazza’s innovativeness and diverse product portfolio, its presence in the US coffee market remained limited, stilting the coffee maker’s global growth aspirations. Even though Lavazza was the third-largest company in the global coffee market, its global market share remained less than 3 percent.56 Meanwhile, even as Lavazza struggled in the US market, it also faced increasing competition in its domestic markets from the entry of major competitors such as Starbucks and suffered a marginal decline in sales.

This further underscored the importance of growing its share of the US market. Lavazza had since realized that its primary constraints in growing its market share in the United States were (1) the lack of products that would specifically cater to US customers, (2) limited brand recognition among US consumers, and (3) limited ability to influence retail sales due to Lavazza’s absence in the food service segment.

Between October 2018 and September 2021, Lavazza raised approximately €1 billion58 from a group of Italian banks to pursue the coffee maker’s expansion strategy in the United States and improve its brand awareness among US consumers to increase its market share. However, the specific steps Lavazza needed to take to gain more traction among US consumers remained unclear.