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Nespresso is not just a coffee. It is another dimension in the world of coffee. It
is a genuine experience that combines perfection, pleasure, simplicity and
aestheticism.
–Nespresso CEO, Richard Girardot
Introduction
While the world consumes more water and tea, coffee represents the largest market by
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value, with 75% of coffee is consumed at home. In 2010, packaged single portions of coffee
like those from Nespresso still represented only 8% of the total coffee market in terms of
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volume and 25% in terms of value. But they were one of the fastest growing segments of
the coffee market, accounting for up to 40% of the value of ground coffee sales in European
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coffee markets.
The company’s rapid growth and impressive results had attracted the attention of
competitors, who launched their own machines or manufactured Nespresso compatible
coffee capsules. The latter trend was expected to accelerate from 2012 on when many of
Nespresso’s patents were set to expire.
Nespresso’s CEO Richard Girardot was faced with the challenge of how to both defend and
grow the Nespresso franchise. How should Nespresso evolve its business model in the
coming years? How might the company respond to the onslaught of competitive and copycat
brands? And how could Nespresso maintain exclusivity amongst the ever more discerning
coffee consumers in their target market?
Nespresso. What Next?
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Nestlé and the birth of Nespresso
In 2011, Nestlé was the world’s leading food company in both volume and profit. Founded in
1897, the company employed more than 238,000 people, had sales of over CHF100 billion
(Euro 78.1 billion), and operated more than 500 factories in 85 countries. Since the 1980s
Nestlé had been successful in navigating major changes in consumer lifestyles and
preferences, increasing its performance compared to other food companies and in face of
the growing market power of major international retailers. This had been achieved through
dynamic organic growth in its core brands, entry into new markets, a series of acquisitions,
and a focus on research and development.
Nestlé was also the world’s leading coffee producer in 2010. It's coffee
business had seen significant international expansion through its global
coffee brand Nescafé. Nescafé was by far the worldwide market leader in
soluble (instant) coffee. In 2010, the instant coffee segment generated
more than CHF20 billion (Euro 15.6 billion) in worldwide sales—40% of
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the total coffee market, of which Nestlé’s share was about 20%.
From the very beginning of its history, Nestlé’s expertise in coffee and cocoa -powdered
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beverages was a core competency. However Nestlé had not been a player in roast and
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Nespresso. What Next?
initially suffered quality problems. Nestlé intended for Nespresso to enable the company to
expand coffee sales not only into ground coffee, but also beyond the supermarket into other
sales channels, especially restaurants and offices. Nestlé had specifically rejected the
lengthy supermarket distribution channel used for Nescafé for Nespresso capsules, as this
would compromise the coffee’s freshness. The key focus was to be on business customers
who offered the potential for higher margins than Nestlé’s core household brands. However,
its initial foray into the small office market—where it was positioned as an affordable ‘perk’
for employees—fell flat. By 1988, NCS was floundering as a business.
New outside leadership was bought in and several key decisions were made that laid the
foundations for future success:
1. Repositioning Nespresso as a super-premium in-home coffee experience
for espresso connoisseurs
2. Building a direct-to-consumer channel with high service standards
3. Outsourcing the machine side of the business
4. Increasing the degree of autonomy.
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1. Repostioning. It was decided that Nespresso should focus on higher income
Nespresso described the heart of the Nespresso concept as “the Nespresso Trilogy” or the
three pillars of excellence: best in cup quality, premium brand identity, and best-in-class
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service.
Although research commissioned at the time was largely inconclusive, management was
driven by a hunch that Nespresso could catch the wave of increasingly sophisticated and
discerning high-end consumers. By the early 1990’s a whole new “gold standard” of coffee
had emerged, based around the stylish and romantic Italian espresso coffee experience.
The burgeoning of specialty and gourmet coffee shops in the United States (like Starbucks)
and the flourishing of Italian brands like Lavazza and Illy saw consumers leaning toward
more indulgent coffee experiences.
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Nespresso. What Next?
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nothing new in the music and book industries, but was a major break with tradition for Nestlé. It
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sought to give consumers a feeling of being in an exclusive gourmet club, and the experience of
Nespresso did not set out to make a profit on the machine sales, seeing instead the machine
purchase as the essential first step in selling the consumer more Nespresso coffee. Machine
manufacturers earned up to 35% margins on sales. High margins were also conceded to
kitchen appliance retailers to encourage deep and broad distribution of the machines.
4. Increased autonomy. In 1989, NCS was moved out of Nestlé’s head-quarters in Vevey,
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Switzerland, to its own office premises in Pully, to provide an even higher degree of
autonomy. Today, the company retains its complete autonomy from the Nescafé
organization, and in the words of one company insider:
By the late 1990s Nespresso had developed a dedicated set of processes, and a
culture that was completely different to Nescafé. Its culture was uniquely suited to
affluent target segment that it aimed to serve, while Nescafé with its mass
-market approach was much more like a traditional fast moving consumer goods
company. You could say that there was even a degree of rivalry between the two
businesses.
Growing the Direct Model: Call Centres, the Internet and Boutiques
By 2010, 51% of Nespresso capsule sales were conducted over the internet and 35% via
boutiques. Only 14% of sales occurred via Customer Relationship Centers (CRC) over the
telephone, a channel that had represented 90% of sales in the early years. Nevertheless,
Nespresso continued to invest into call centers and “coffee specialists”: customers are still
calling, even if they do not place orders over the phone. As Arnaud Deschamps, president of
Nespresso France, says: “People actually want to talk to us … this is better than
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communicating with our customers on Facebook or Twitter.” Phone reps are also a core
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source of customer insight, to learn about market trends, such as concerns about the carbon
Like an exclusive fashion brand, Nespresso targeted those seeking self- expression in their
brand choices. Urban professionals in the top 10% of income. This was a group distinct from
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Nespresso. What Next?
the housewives-with-kids segment that Nestlé traditionally targeted with its range of mass-
market food and beverage brands. Nespresso’s marketing strategy was intended to project
subtle social signals and cues that would suggest to peers and guests the Nespresso
owner’s social ranking, good taste and membership of an exclusive group. Nespresso’s
research revealed that over half of new consumers first experience the brand through
interactions with existing Nespresso Club Members.
Nespresso also produced a stylish magazine described as a “bi-annual pleasure guide” for
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high-value customers. The print magazine was published in 6 languages, and grew to have
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a circulation of several million copies. Internally, Nespresso referred to its combination of
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message through the brand ambassador and coffee credentials advertising was meshed
with corporate social responsibility initiatives.
As part of its ongoing efforts to differentiate itself, Nespresso also developed a unique
educational program for world renowned chefs and professional sommeliers: the Nespresso
Coffee Sommelier Program (CSP). Since the program’s launch at the beginning of 2009,
more than 50 sommeliers from renowned Michelin star restaurants in 15 countries had been
introduced to the world of Nespresso’s Grand Cru coffees. The CSP was based upon the
Nespresso Coffee Codex, a methodology developed for professionals by Nespresso coffee
experts and some of the world’s leading wine experts. The aim was to help professionals in
leading restaurants in the task of tasting and pairing premium coffee with a variety of fine
foods and beverages.
Since the early 2000s an increasing number of companies had been developing their own
portioned (single-serve) coffee systems, and several had launched multi-beverage machines
(see Exhibit 3). Some industry analysts believed that the portioned-beverage market would grow
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as much as 10-fold, with predictions that one-fifth of all coffee made would be portioned
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capsules, pods or pads by 2015. Of the estimated worldwide consumption of 800 billion cups of
Senseo
In 1998, Douwe Egberts, a Dutch subsiduary of the US firm Sara Lee, patented its own
personal espresso machine in partnership with Philips. Sara Lee was the world’s third
largest coffee producer in 2010. The Senseo was positioned around “indulgent but not too
complicated” and initially launched via high -end department stores. It utilised circular coffee
pods manufactured from filter paper and a single serve of coffee. Almost 30 million Senseo
machines had been sold worldwide by end 2010. Sara Lee had coffee
pod sales of over Euro 380 million in 2010, and in Europe the company’s
products were typically priced in the range of Euro 0.17 to Euro 0.20 per
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pod—less than half the price of Nespresso capsules .
Part of the reason for the lower prices for Senseo coffee pods was the
fact that in 2006 Sara Lee’s patents were revoked by the European
Patent Office. Following the ruling numerous coffee vendors started
production of Senseo compatible pods. By 2011, Senseo machines and
pods from Sara Lee and others were widely available online, through
department stores, hypermarkets, and home appliance retailers.
Coffee connoisseurs understood that while Senseo machines produced a consistent in -cup
experience, the 1.2 bar pressure produced by the pumps in the machines delivered less
intense flavours and weaker crema. Paper capsules were not hermetically sealed like the
protective aluminium Nespresso capsules, and thus, if Senseo compatible pads were not
correctly stored then the coffee quality would deteriorate rapidly.
Tassimo
In 2004, Kraft, the world’s second largest coffee producer, introduced Tassimo, as a simple
way of preparing a wide variety of over 50 hot drinks, from espresso-based beverages and
filter coffee, to tea and hot chocolate. Kraft’s Tassimo was a consumer coffee machine that
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Nespresso. What Next?
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variety by partnering with well known brands for its capsules, such as Jacobs and Starbucks
In 2006, Nestlé’s Nescafé Division launched a new portioned beverage system with a
proprietary, specially designed capsule in partnership with the German home appliances
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manufacturer Krups. Branded Nescafé Dolce Gusto, the new product was launched by a
central team responsible for global strategy, systems, partnership management and global
operations—similar to the creation of NCS some two-decades earlier.
The Dolce Gusto system is a multi-beverage system that offers with
15-bar pressure only slightly below the pressure of Nespresso’s 19
bar system. Like Nespresso, Dolce Gusto combined patented
technology with airtight capsules to optimize the extraction pressure
for each variety, thereby aiming to deliver the best quality and texture
in every cup and allowing the user to customize each drink to the
preferred strength. Dolce Gusto capsules were not compatible with
the Nespresso system, or with any other encapsulated beverage
machine.
of 2010, prices started at a recommended retail price of Euro 27 cents per capsule for basic
coffee blends, up to Euro 55 cents per capsule for speciality coffees and flavoured
beverages. Machines were designed to be easy to use and clean, and could prepare each
drink variety in less than one minute.
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I would make a bet that Nescafé Dulce Gusto will be a billion dollar brand in the
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next two or three years. This is a business that we launched only three years
During 2009, Nespresso’s competitors had put their own Nespresso compatible capsules on
grocery store shelves in the hope of establishing a beachhead to make inroads throughout
Europe and into the United States. Jean- Paul Gaillard, a former Nespresso CEO, launched
his Ethical Coffee Co. (ECC) to produce Nespresso compatible capsules. ECC’s capsules
were claimed to be legally compatible with Nespresso machines, but were between 20% and
50% cheaper. In addition, they were biodegradable, a very important point as the use of
aluminium capsules produced by Nestlé had attracted increasing criticism from
environmentalists—while Nestlé claimed to recycle some 50% of its capsules in Switzerland
and Germany, the company’s worldwide capacity for recycling was just 25% of total
production.
As of end 2010 Gaillard claimed that ECC had generated sales of 100 million units in France
through an exclusive distribution agreement with the Casino supermarket chain, and 300
million in Switzerland and Germany. Gaillard claimed that production would reach “billions” of
capsules by the end of 2011, enough to meet international orders that had reached well in
excess of four billion. ECC appeared to have the means to match its ambitions of meeting
their target of having 30% market share; fundraising rounds had raised at least Euro 75
million.
Nestlé had launched legal action against ECC, but as of end 2010 had failed to convince the
courts that ECC’s capsules infringed its patent rights. “What they’re doing is similar to
Hewlett -Packard or Epson trying to forbid generic cartridges,” said Gaillard, “They are trying
to stop copies—but our product is not a copy.” Nestlé’s determination to defend Nespresso
was also seen in its legal action against the US-based foods company Sara Lee for the
launch of its plastic perforated Nespresso-compatible capsule, the L’Or. “Nestlé has spent
millions of dollars on innovation and research in Nespresso over many years,” said Richard
Girardot. “So when someone comes along with a pure copy of the product, we have to
protect ourselves”. Sara Lee denied infringing any Nespresso patents. Said the company’s
CEO “We are confident that our product complies with all legal and regulatory requirements,
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and are confident about the outcome of this case.” Within just three months of launching
L’Or in French supermarkets Sara Lee had reportedly sold more than 30 million capsules at
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prices between 20% and 50% cheaper than Nespresso’s own capsules .
Many of Nespresso’s patents were set to expire in 2012, and a legal case against one
generic coffee capsule manufacturer had already gone against Nestlé as a commercial court
in Zurich ruled that the competitors’ capsules did not violate intellectual property rights. More
and more competitors were lining up to launch Nespresso machine compatible capsules,
including a Swiss start-up Nexpod.ch which was offering empty capsules which could be
filled with coffee (or tea) by the buyer, and a South African company which sold Nespresso-
compatible capsules under the brand name Café-Caps.
There were rumoured to be intense debates going on within Nestlé about how to respond to
the growth of substitute competition to Nespresso. Some company insiders believed that the
company’s Nescafé coffee business should aggressively enter the emerging market for
Nespresso-compatible capsules to defend the lower - cost segment before companies such
as ECC and Sara Lee became even more strongly established. Others argued that
Nespresso itself should launch a lower-cost sub-brand to fight it out in the supermarket
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channel, a view that was seen as sacrilege by long-standing Nespresso purists who saw the
Nespresso’s exclusive distribution approach as one of the keys to its success. “If there are
cannibals in the jungle, then it is best to keep the cannibals in the family” said one coffee
industry analyst.
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Nespresso. What Next?
What Next?
By start of 2011, Nespresso Club membership exceeded seven million in 50-plus countries
and the company had become the clear market leader in the premium encapsulated coffee
market that it had created. The economic downturn that started in 2007 had little impact on
Nespresso's business growth, and CEO Richard Girardot was able to say:
In the context of the economic downturn, the hallmarks of the Nespresso brand—
highest quality and continuous innovation—have proved again to be our growth
engine even in an extremely challenging year. As a business and as a brand
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Nespresso will continue to deliver a very strong performance.
So far, Nespresso had a great success story built on the original business model of
exclusivity. But at the same time the high-growth strategy that Nestle had focused upon had
led to a growing ubiquity of Nespresso as a mainstream in-home coffee machine. This had
eventually led to a more mass-market orientation for Nespresso, and now that the
company’s patents were expiring substitute coffee capsule manufacturers were lining up to
try to steal market share. At the other end of the scale, the evolution of ‘high - end’ fully
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automatic machines also posed a new threat. The expression “What else” was at the heart
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of Nespresso’s branding message, but a key question for CEO Richard Girardot was “what
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Exhibit 2: Nespresso Coffee Range
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Exhibit 1: Nespresso Sales Growth (Nespresso, March 2011 Corporate Backgrounder)
Nespresso. What Next?
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Exhibit 3: Competitor Positioning
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Nespresso. What Next?
Endnotes
i http://www.nespresso.com/mediacenter/index.php?page=international‐press‐detail&id=1
ii Euromonitor International
iii http://www.nespresso.com/mediacenter/index.php?page=international‐press‐detail&id=1
iv Liz Alderman (2010‐08‐21). "Nespresso and Rivals Vie for Dominance in Coffee War". New York
Times. http://www.nytimes.com/2010/08/21/business/global/21coffee.html?
v For a more detailed history of the Nespresso launch, see the IMD case study “Innovation and
Renovation: The Nespresso Story,” by Joyce Miller and Kamran Kashani (2003), IMD‐5‐0543.
vi http://www.marketresearch.com/search/results.asp?sid=96721023‐502827108‐
406540315&qtype=2&bquery=Global+Instant+Coffee+market+size&title=&publisher=&datepub=0&lprice=&u
price=®ionid=87&categoryid=0
vii http://www.independent.co.uk/life‐style/food‐and‐drink/features/the‐cult‐of‐nespresso‐could‐it‐
really‐be‐ the‐best‐cup‐of‐coffee‐money‐can‐buy‐395944.html
viii http://www.nespresso.com/mediacenter/index.php?page=international‐press‐detail&id=6
ix http://www.nespresso.com/mediacenter/index.php?page=international‐press‐detail&id=1
x http://www.nespresso.com/mediacenter/index.php?page=international‐press‐detail&id=1
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Constantinos Markides and Daniel Oyon (2000), “Changing the Strategy at Nespresso: An
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Interview With Former CEO Jean‐Paul Gailllard,” European Management Journal, Vol. 18, No. 3, pp. 296‐
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