Illy: Planning to Produce More Products in the US

Bloomberg

2 days ago

00:00
We did anticipate a decline because this was you remember last time I was here, I said it's purely speculative. Turns out that has been maybe possibly a surplus in the last crop and is substantial for a forecast for a substantial excess in production for the years ahead. So there are new plants being planted, new areas may develop the stocks which are piling several countries which are producing overperforming. It's typical every time you have the prices reaching bike, then you have production skyrocketing. And so we didn't increase price too much, so we kept our volume right, a increasing market share. And of course, we will have an arbitrage between our costs, our margins and the cost of coffee, which in the meantime is turning in a positive direction. Does it change your outlook? No, no. I would say I was a little bit more concerned after having made a thorough studies. I had a longer trip in the Minas Gerais area where 50% of the Brazilian coffee is grown and 20% of the world coffee is grown. Last year was serious. Why? Because the first time in history the Nino did in fact in three different areas of production, all seven months without one drop of rain in the peak temperature much ahead normal. Was it exceptionally? Probably, yes, because last year the sea did increase as much as it did in the last ten years. So therefore, the Nino was stronger in the area of geographical area of influence has been higher. But good news. Several, many different practices and investment for resilience. Really the resistance agriculture from regenerative agriculture, which is the most say the first step in most promising irrigation, new techniques for, you know, plant rejuvenation, innovation and new area development, as I said. So it's very promising to see how the market is reacting because there is a desperate willingness to produce coffee from the growers side because the demand actually is increasing quite a lot, right, in terms not as much as it used to to increase because, you know, there has been a kind of a level of with the with a global global, let's say, as we as we knew it from years ago is not the same. This a buoyant trend. It is a little bit flatter but China is growing its internal consumption. The US is keeping increasing consumption. Europe is more flat in the Middle East is coming up and India, minor countries, let's say minus the geographies. I know you've always actually spent quite a lot of time looking at agriculture and, you know, doing it sustainably. Do you see any reason to fear a supply shock on the Arabica front this year? I would say no, because as I said already, last year has been quite a shock with the drought in in Vietnam, one drought, severe drought in Brazil, it proved to be extremely resilience as proven by the fact that there has been no physical deficit. It has just been a big alarm, which triggered a gigantic speculation. So this resilience can only increase thanks to the new practices, the new knowledge and the new investment in the in the fields. This initiative, let's say promoted by the G last year with under the Italian presidency, is to launch a public private partnership for mobilising impact. Investment directly in the plantation is significant because it did mobilise effort from any different possible actors like the World Bank, like the Inter-American Development Bank, like many private funds. So there are investments which are, let's say, coming in in the plantation in different countries and all doing the same things which proved to be effective. So this is very positive. And how it when you look at higher retail coffee, I mean, is that impacting some of the consumption or have you seen, you know, consumption change? Do people have higher quality custody but less coffee? Coffee is typically an elastic because we kind of needed in our life. And is it true for journalists? I don't know if it's true for everyone in the portion of the budget that the dries is very, very small at the end of the day. So there is a kind of elasticity, not so much by drinking less cup, but wasting less and maybe down downgrading a little bit to the coffee you buy. So that means too, that volume wise, we don't see a contraction of volume and value. Has been a that's a little bit elastic, but less elastic than other products. How are the Chinese consuming differently to Western to to the Western? They are becoming kind of self internal. So they are trying to consume their own brands. So they are brands which are reacting really strongly to the international, let's say, penetration of American and other brands. So that means that it became a kind of internally focus. And I don't I'm not aware about how much is the Chinese coffee production growing also, because there is a kind of a limit from the ecosystem point of view. But I see that there is it is in line with this idea of China to be kind of nationalistic a little bit in terms of attitude, and they consume it at home or in coffee shops. I remember saying, you know, I remember you telling me actually years ago that the UK, when you have a coffee, people want to sit and spend a long time actually at coffee shops, which is very different to Italy, for example, where you have an espresso and you go, yes, coffee shop is experiential. You typically go to a coffee shop in China to me to also show show off. Yeah, but not necessarily. You drink coffee. This is the point. Home is more. Let's say consumption is a habit and is still predominantly instant coffee although in the let's say area where there are more expats, there is a substantial espresso, espresso based drinks consumption in Shanghai and other coastal cities. And you must have been hit by tariffs right from the US. Did you front load? Was there a big shipments in the US ahead of the tariffs? 10% from the export from Italy to the U.S. and we hope this will be fixed. Will it? I don't know. Will Depends on the negotiation with Europe, which is undergoing those days. Yeah. And yes, it is tricky also because I think at the end of the day, it's a pity we have been there since over 45 years now in the United States. And it would be really a pity to completely, let's say, change our trajectory, which is very much in collaboration with the US. Let's say administration for that. So we are discussing and we are planning maybe to accelerate our decision to produce locally more of the products which are typically consumed in the United States. We'll see.