The joint venture combines illycaffe's knowledge of the coffee business with Coca-Cola's marketing experience and distribution channels.
The product will be based on illyfreddo, a cold coffee drink sold in illy's coffee shops in Italy and abroad. It will launch in 2008 in the key markets of Italy, Greece and Germany, before going global.
The companies said the ready-to-drink coffee category is valued at just under US$10 billion (7 billion EUR), and has grown at a rate of about 10 percent annually over the past five years in most markets, except Japan, where it has already peaked.
"This deal will allow us to unite the reputation of a top quality brand like illy with our capacity to develop a brand and our distribution," Coca-Cola Chief Operating Officer Muhtar Kent said in a statement.
The president of Trieste-based illy, Andrea Illy, said the joint venture will allow the company to reach new customers.
Morningstar senior analyst Matthew Reilly said it was a good move for Coca-Cola, which dissolved its partnership with Nestle earlier this year.
"It opened them up to do things like this," Reilly said, noting that the Nestle deal restricted Coca-Cola's ability to seek other partnerships. "It hits on the trends very well."
While the market for carbonated drinks has stagnated, analysts have tagged the non-carbonated drink market as growing. So far, Pepsi has had a slight edge in that market, which also includes iced teas and flavored waters. Among its brands are three ready-to-drink beverages for Starbucks: Doubleshot, Frappuccino and Iced Coffee.
The Starbucks-Pepsi joint venture launched in the North American market but is expanding, Reilly said, with plans to move into China.
The family owned illycaffe boasts an exclusive blend that it creates from coffees selected from Brazil, Central America, India and Africa. The company distributes its coffee in more than 140 countries and reported sales of 246 million EUR (US$349.96 million) in 2006.
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