Case 19

Nespresso
Case Objectives

1) To demonstrate the importance of channel control as an integral part of marketing

strategy.
2) To understand the importance of market behavior as an influence of channel design and
management.
3) To illustrate how effective channel management can reinforce a premium pricing
strategy.

Problem Situation

Nespresso, a division of Nestle’s SA, pioneered the development of the single serving coffee
machine in 1986. By 2009, Nespresso had achieved sales of over $2.6 billion with double-digit
growth projected for the next several years. From the outset, Nespresso’s business model was
based on the sale of its exclusive coffee pods which were protected by numerous patents. This
method was used to generate most of the sales and profits for the company on the sales of the
coffee pods rather than on sales of the machines themselves.

Nespresso recognized the importance of reinforcing the image of exclusivity and premium price
of its coffee pods by stringently controlling their distribution channels. Consequently,
Nespresso’s coffee pods are sold only in its own stores, its online site, or by phone directly from
Nespresso. Recently, competitors Sara Lee Corp. and Ethical Coffee Co., announced plans to
introduce their own coffee capsules that will work in Nespresso machines. These capsules will
be cheaper and more widely distributed than the Nespresso pods. Nespresso says it will take
legal action if the competitors’ products infringe on any of its patents.

Students should review chapters 8 and 10 before reading this case.

Teaching Suggestions

With over 200 company owned stores known as Nespresso Boutiques, Nespresso is attempting to
build upon its premium brand image. The Nespresso Botiques seem to add a touch of upscale
elegance to its luxury image. It is interesting that another well known brand, Apple, has also
chosen to use company owned stoers to demonstrate it products and reinforce its brand. Both
brands use distribution to build brand equity. Ask students to identify ways in which distribution
affects brand equity and pricing policy. What are the similarities between the way distribution is
used by Apple and Nespresso? What are the differences? Finally, what aspects of market
behavior are addressed using company owned stores?

Case Discussion

1
The machines which have been imitated by more than twenty competitors use a capsule or “pod”
to make a single serving of coffee by pumping hot water through the pod under tremendous
pressure. Nespresso's pricing and luxury image require strict control of the distribution of its
coffee machines and pods to support its overall pricing strategy. As the text suggest, shorter
channels such as the ones designed by Nespresso, enable manufacturers to maintain greater
control of all aspects of their marketing. For example, without channel partners Nespresso does
not need to negotiate margins or promotion with outside distributors but can implement pricing
and promotion as it sees fit.

Bringing in other channel partners would loosen Nespresso's death grip on its marketing strategy
of exclusivity, especially for the coffee pods which represent an ongoing revenue stream for
Nespresso. The Nespresso business model relies heavily on direct and exclusive distribution to
build the premium brand image and regulate the sales of its coffee pods. The pod to coffee
machine relationship is analogous to the cartridge and printer whereby the printer manufacturers
rely on sales of print cartridges for the bulk of their revenues and profits.

Actions by Sara Lee Corp. and Ethical Coffee Co., threaten to block Nespresso's exclusive grip
on sales of coffee pods for Nespresso machines. These actions challenge lucrative sales of its
brand of coffee pods by offering lower cost substitutes for its machines. Therefore, Nespresso is
not content to fight only in the market place; it is now taking the battle to the courts in an attempt
to forestall its competitors' actions.

If the legal action by Nespresso against its "knock off" competitors fails, their current
distribution strategy may be in jeopardy. Having built its business model on the sale of its
exclusive coffee pods, Nespresso will be vulnerable to similar products that are priced
competitively. Ultimately it will be up to consumers to decide whether they are willing to pay a
premium price for Nespresso coffee pods. If not, it is likely that Nespresso will revisit its
distribution strategy. It is interesting that Apple, an iconic brand with all of its success,
broadened its distribution to include Wal-Mart, AT & T, and Radio Shack. Perhaps the loss of
exclusive product rights will cause Nespresso to also intensify its distribution network to remain
competitive.