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Nespresso. What Next?1

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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

Nespresso is a premium single-serve coffee brand of the multinational Swiss company

Nestlé. By 2011, Nespresso had sold more than 20 billion of its proprietary aluminium coffee
capsules direct to consumers through exclusive boutiques, tele-ordering and its own e-
commerce websites. And growth remained buoyant (Exhibit 1) with sales tripling between
2007 and 2010 alone—from CHF1.16 billion (Euro 906.25 million) to over CHF 3.2 billion
(Euro 2.5 billion). In terms of volume, the number of Nespresso cups consumed worldwide
i
every minute increased by 23% in 2010, from 10,000 in 2009 to 12,300 cups. At a price of
more than five times the typical per-serving cost of a cup of home-made ground coffee,
Nespresso is firmly targeted at affluent consumers. Nestlé provides no profit figures for
Nespresso, but margins are believed by analysts to be among the group’s highest.

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?

v
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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ground coffee, which by the early 1980s represented the major share of coffee consumption
worldwide. To address this huge market, but aiming to differentiate itself from established
firms, Nestle created the Nespresso system in which individually portioned aluminum
capsules containing roast and ground coffees were partnered with specially designed coffee
machines.
Alfred Yoakim, research and development director at the time of the commercial launch of
Nespresso, said that company executives took their inspiration for Nespresso from a trip to
Italy, where they observed the “effort and skill” with which baristas prepared coffee. Said
Yoakim, “We wanted to replicate what the baristas did. The idea was to guarantee the best
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quality coffee in the shortest possible time.” Thus at the heart of the Nespresso concept
was a simple but revolutionary idea: anyone could, through the capsule and machine
system, create a perfect cup of espresso coffee, just as generations of skilled baristas had.
And, once consumers had purchased the Nespresso machine, they were bound to buy
Nespresso’s patented capsules.
Nespresso's patented and hermetically sealed capsules are
made of coloured aluminium foil to distinguish the variety of
coffee inside. When the capsule is inserted into the machine,
the top is pierced. When the Nespresso machine is activated it
pumps in hot water at up to 19 bars of pressure, comparable to
the pressure of coffee-house machines that is required to
produce high-quality espresso with a thin layer of foam, the
crema. The spent capsule must be removed from the holder;
on some machines this is automated.
In 1986 a new business unit, Nestlé Coffee Specialties (NCS), was launched to develop the
Nespresso concept. Although entirely owned by Nestlé, NCS was established as an
autonomous, stand-alone business, with its own sales and marketing and distribution
management. Nestlé management believed that the success of the business would require
not just organizational processes different from the established coffee business, but also a
very different mindset from Nestlé’s mass-market approach.
Initially, it was difficult to win support for the Nespresso system within Nestlé, where its
soluble (instant) coffee Nescafé was the dominant brand. Nestlé also had no experience in
manufacturing or distributing non-food items, such as the coffee-making appliance and

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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

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households, with men and women aged between 35 and 49. Prices for Nespresso capsules
varied slightly by market, but were generally in the range of Euro 30 to Euro 40 cents per
capsule, with a minimum online order of 50 capsules per purchase. Postage costs were
added to each order. In the United Kingdom for example, there was a £4.95 (Euro 5.94)
postage charge. So for an order of 50 standard capsules, customers would pay 27 pence
times 50 capsules, plus £4.95 postage charge. This equalled £18.45 (Euro 22.14), which
made the nominal price per cup of coffee 36.9 pence (Euro 44.3 cents). This re-targeting
initially met with skepticism at Nestlé, largely due to comparison of the consumer's cost per
cup of Nespresso with other coffee preparation methods like soluble and ground.

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 catered to these more refined tastes with its “Grand

Cru” coffee range (see Exhibit 2). As the company evolved, it
continued to extend its product range. By 2010 customers had a
wide range of at least 16 roast and ground coffee in capsules with
Italianesque names, from the mild Valluto blend to the more
intense Cosi. Nespresso also introduced limited- edition blends
such as the Onirio, launched in April 2011. Onirio is a light roasted
coffee that offers primary notes of jasmine and citru, the smooth and rounded notes of
vintage Ethiopian beans which are of Sidamo and Yirgachaffe varities. It is meant to be an
alternative for one’s afternoon tea, being light and easy.
The company had also developed a series of accessories to enhance the premium image
and let Nespresso’s consumers buy deeper into the brand experience. All accessories were
styled to reflect Nespresso's identity, with prices varying from Euro 5 for coffee cream to
Euro 170 for a leather square plate.
2. A new sales and distribution approach. A major new initiative was the creation of a loyalty
club concept, the first in the coffee industry: Nespresso Club. The loyalty club concept was

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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

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high-level service and the direct delivery of fresh coffee capsules helped not only to maintain
margins and quality, but also to boost the cachet of the Nespresso brand.
Buyers of Nespresso machines were automatically enrolled in the Nespresso Club. In 2010,
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the number of members grew by over 35% to 10 million. Members can order coffee
capsules 24 hours a day via a toll free call centre, by mail, or by sending a fax. Club
Members can receive personalized advice about coffee flavours or technical issues related
to use of their Nespresso machine from specialist call advisors. Capsules were delivered
promptly, typically reaching consumers within two business days. By the mid-1990s over 70
percent of Nespresso’s employees were in direct contact with consumers—a figure that has
remained consistent as the company has grown. In 2010, to maintain its personalised
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service, the number of Nespresso employees increased by nearly 30% to 5,500.
In addition to its consumer segment, Nespresso also established an out-of-home business
model called Nespresso Professional. Here a dedicated sales team targeted high -end
restaurants, fashion and luxury goods boutiques, professional services firms, hotels and
airlines with the same direct-to-customer ethos and strong after-sales service commitment.
For offices, it tries to promote its brand as a way to “Increase employee loyalty and see your
business prosper”. The company also offered business customers dedicated websites and
call-centre support in different languages.
3. Outsourcing. In 1989, the machine side of the business was outsourced to a Swiss-
based OEM manufacturing who supplied a select group of manufacturers such as Krups and
Philips. These, in turn, distributed it via upscale retailers. As a former Nespresso CEO
remarked: “’it is difficult to do one job well, but to try to do two jobs at the same time is next
to impossible!’ By mixing the coffee side of the business with the machine side, we had a
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recipe for disaster.” Critically, it now became the responsibility of these machine partners to
service and maintain the machines.

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

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footprint of the coffee capsules.
From the late 1990s the Internet emerged as an ideal complementary way to interact with
customers, and Nespresso’s affluent and well-educated clientele proved to be enthusiastic
and early adopters of e-commerce. Nespresso Club websites were rolled out around the
world. Visitors to the website could choose different varieties of capsules, coffee machines
and accessories. By end of 2010 there were over 300 Nespresso websites in 25 languages.
In addition to selling capsules, machines and merchandise, Nespresso websites captured
large volumes of customer data.
From 2004 on, Nespresso boutiques became a key complement to Nespresso's sales
approach. In 2010 alone, Nespresso opened 36 new boutiques, bringing the total number of
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boutiques to 215 worldwide. These boutiques appeared in the exclusive shopping streets
of the world’s leading cities (Nespresso Boutique Miami Beach, shown here). The high
design in Nespresso boutiques aimed to achieve a warm, calm, softly-lit ambiance, like
those of luxury goods boutique brands
Hermes or Luis Vuitton where consumers
could feel privileged and pampered,
intensifying their relationship with the brand.
In Nespresso boutiques, the range was
typically presented in stylish wooden boxes,
like a high-end chocolate selection. More
recently, new flagship boutiques are divided
into specific areas, much in the style of an art
gallery. A Discovery Room, for example,
offers visitors the opportunity to discover all
aspects of the brand and its products—from
unique Nespresso System machines, to the latest collection of purposefully-designed
accessories. An Exclusive Room is dedicated to Club Members who are already familiar with
the brand, and who are looking for a shopping experience at their own pace.
Communications Approach

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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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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“old media” like television, print and outdoor advertising, and celebrity endorsements
combined with “new media” like its websites, a Facebook presence and exclusively-sited
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boutiques as its 360° marketing approach.
During the first decade of its existence Nespresso avoided mass media campaigns like
those mounted via television and outdoor billboards. Increasingly, as business expanded,
traditional media were used to promote the brand image. Yet this expanded promotion
sought to maintain the brand’s exclusivity. In 2006, then Nespresso CEO Gerhard
Berssenbrugge identified Nespresso as an “aspirational” brand—“a brand that stands for
reputation, not for the mass market.”
The ongoing development of Nespresso’s
brand identity included US actor George
Clooney as ‘’brand ambassador’’ using the
slogan “Nespresso. What else?” The
popular film star embodied the socio-
demographic range of consumers targeted
by Nespresso. Initially the Clooney brand
ambassador promotion was through the
Nespresso Club magazine, the boutiques
and selected print media like high-end
glossy periodicals. Clooney’s introduction
as brand ambassador coincided with an
increase in Nespresso Club membership. So as the brand grew, Nespresso renewed its
contract with Clooney, and used him in traditional media like television, outdoor posters and
quality mass-market magazines.
Nespresso launched several ecological friendly initiatives to reassure consumers of their
commitment to the environment. In 2007, Nespresso became the first major coffee company
using the UK Fairtrade logo, demonstrating its commitment to improve relationships with
coffee growers. In 2009, it launched its “Ecolaboration” concept, with the commitment to
achieve three targets by 2013; to source 80% of its coffee through its AAA Sustainable
Quality™ Program, including Rainforest Alliance certification of the farms; to put systems in
place to triple its capacity to recycle used capsules to 75%; and, to reduce the overall carbon
footprint required to produce every cup of Nespresso coffee by 20%. Hence, a creative

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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.

Competition & Nescafé’s Entry to the Portioned Beverage Segment

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

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coffee in 2010, only 12 billion were made with portioned systems. The two top-selling competitors
in order of number of machines sold were Senseo and Tassimo. These machines worked at less
than half the pressure of the Nespresso system, with some critics arguing that they were
therefore unable to offer a truly top quality espresso experience.

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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prepared one-cup servings of espresso,

regular coffee, tea, hot chocolate, and
various other coffee drinks, notably
those including shelf-stable ultra- high
temperature (UHT) processed “real” milk
such as latte or cappuccino.
Nespresso’s Lattissima (introduced in
2007) and Senseo’s Latte Select (2008)
offer machines to make lattes and
cappuccinos using fresh milk, but these
have removable containers that need to
be stored in the refrigerator. Other multi-
beverage systems relied on powdered milk. Machines were produced in partnership with
Bosch, and worked at up to 3.3 bars of pressure. In Europe, Tassimo’s products were priced
in the range of Euro 18 cents per capsule for basic espresso blends, and up to Euro 27
cents per capsule for milk-blended specialty beverages. Tassimo machines and capsules
were available via hypermarkets, supermarkets, mass market discounters, and home
appliance retailers, and could be ordered online. The Tassimo system today offers a huge

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variety by partnering with well known brands for its capsules, such as Jacobs and Starbucks

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for coffee, Milka for hot chocolate and Twinings for tea.

Nescafé Dolce Gusto

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.

Machines models were distributed through supermarkets, hypermarkets and consumer

appliances stores, with prices of Euro 80 and Euro 120 respectively. Unlike Nespresso,
Dolce Gusto could produce hot and cold coffee, hot and cold chocolate drinks, and foamy
milk and by end 2010 the brand included twenty-two beverage varieties. To make
Cappuccino, Chococcino, Cappuccino Ice, Latte Macchiato and Mocha, one additional
capsule, containing milk powder and cocoa for Mocha, had to be added to the machine.
Used Dolce Gusto capsules were not recyclable, and Nestlé recommended that used
products should be disposed of together with household waste to be land filled or
incinerated.
Whereas the more ‘purist’ Nespresso system targeted the espresso connoisseur, Nescafé
Dolce Gusto was a multi-beverage system positioned as a trendy and convenient way to
enjoy a variety of high quality hot drinks. It was positioned more mainstream at a lower price
point than the super-premium Nespresso and aimed to become the dominant single -portion
coffee brand in the retail market. Capsules could be conveniently purchased at the
supermarket or other retailers where Nescafé products were traditionally distributed, as part
of a weekly shopping trip. They could also be bought via dedicated websites. As of the end
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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.

In its corporate strategy presentations, Nescafé explicitly stated

that Dolce Gusto was intended to encourage people to
“upgrade” from soluble beverages and other single-serve
systems. More than five million machines had been sold, with
over 2 million consumers registering online. The system had
th
become the 4 highest selling single-serve beverage system
worldwide in just three years, and had overtaken Tassimo.
Worldwide sales of Nescafé Dolce Gusto had grown to over CHF
450 million (Euro 351.5 million) by end 2010, and Nestlé forecast
that the brand’s revenues would exceed CHF 1 billion (Euro 780
million) by 2014. According to CEO Peter Brabeck, Nestlé had
high ambitions for the brand:

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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

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ago. It's already earning more than half a billion today, and it's growing like
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crazy.
Substitute Capsules

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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xviii
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.

Automatic Coffee Machines

Nespresso was not only under attack

from low- priced capsules, but also at
the high end. One effect of the
growing sophistication of consumers,
and the increasing market for in-
home espresso, had been the growth
in sales of high-end automatic (non-
capsule) coffee machines which
included a coffee grinder. One such
machine was the Jura fully automatic
espresso maker, manufactured by
Jura Elektroapparate AG of
Switzerland. Jura placed a strong focus upon marketing and design, and the company
produced no low- budget machines. The company’s brand ambassador was Roger Federer,
an internationally recognized Swiss tennis player. Said one industry insider:
For real coffee connoisseurs, Nespresso is becoming too main-stream. This
also happened to former luxury brands like Pierre Cardin and Jaguar, which
also went too mass market. Luxury is all about status and exclusivity, so once
all of your friends have a Nespresso machine you need to do something
different to stand out. High-end coffee machine brands like Jura are positioning
themselves as a real alternative to the Nespresso experience.
Worldwide there were 270,000 fully automatic espresso machines sold for the home market
in 2010, an increase of 5% on the previous year. Although fully automatic espresso
machines were expensive, like Nespresso they delivered a consistently good in cup
experience. Some coffee connoisseurs believed that high-end espresso makers such as
Jura represented a more authentic, more environmentally-friendly coffee culture that had
become even more exclusive than Nespresso.

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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
xx
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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next?”

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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?

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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=&regionid=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
xi

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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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301.
xii Larry Kramer (2010), “How French Innovators are Putting the ‘Social’ back in Social Networking,”
Harvard Business Review, October.
xiii http://www.nespresso.com/mediacenter/index.php?page=international‐press‐detail&id=1
xiv http://www.nespresso.com/mediacenter/index.php?page=international‐press‐detail&id=6
xv http://www.nytimes.com/2010/08/21/business/global/21coffee.html?pagewanted=2
xvi For a more detailed history of the Nescafé Dolce Gusto launch, see the London Business School case
study “Nestlé' and the multi‐beverage machine market (B),” by Laura Winig, Costas Markides and Daniel Oyon
(2008), LBS‐308‐258‐1.
xvii “Nestlé's Brabeck: We have a ‘huge advantage’ over big pharma in creating medical foods” Interview by
Shelley DuBois. April 1, 2011 (accessed May 03, 2011):
http://money.cnn.com/2011/04/01/news/companies/nestle_brabeck_medical_foods.fortune/index.htm
xviii http://www.ft.com/cms/s/0/fc762d9e‐1e5c‐11e0‐bab6‐00144feab49a.html#axzz1EK7rI7nv
xix Ibid.
xx http://www.nespresso.com/mediacenter/index.php?page=international‐press‐detail&id=6

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