Nespresso and the U.S. Market
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For the exclusive use of m. algoblan, 2021. W14362 NESPRESSO AND THE U.S. MARKET Edward Boon, Colin Campbell and Leyland Pitt wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2014, Richard Ivey School of Business Foundation Version: 2014-08-13 You shouldn’t force things. It’s very easy to go out and sell machines, but we don’t sell machines, we sell coffee. [If] you have big sales of machines, people buy coffee at the beginning and then they taste it once or twice and then they stop. That’s the worst thing you can do. So you should make sure the people who buy your machines are entering a pattern of ongoing coffee consumption.1 Jean-Marc Duvoisin, CEO Nestlé Nespresso S.A., 2013 At the beginning of 2012, as they looked back at another year of steady expansion in the United States, Nespresso’s management team was confident that U.S. consumers were finally catching on to the idea of high-quality home-brewed espresso. Although the debt crisis had hit Starbucks and other coffee vendors hard, the sales of single-serve coffee had grown by 66.1 per cent in a single year.2 Yet there were reasons to be concerned. Existing competitors such as Keurig and Senseo were increasing their marketing investment, and several other companies were entering the booming home-brewing segment, including Starbucks with its Verismo line of home-brewing machines and capsules. In addition, paralleling what happened when Nespresso’s patents on its machines and capsules expired in Europe, several supermarkets were starting to sell capsules that could be used in Nespresso machines. This undermined Nespresso’s business model, which focused on developing a long-term relationship with its customers. In previous years, Nespresso had relied on its flagship stores and partnerships with select department stores to persuade consumers of the convenience of its machines and the quality of its coffee. However, there was a risk that the continuation of this strategy would cause Nespresso to fall behind the competition as U.S. consumers were changing their coffee-drinking habits. There were two issues that needed to be addressed. First, although Nespresso had avoided TV advertising to keep investment low and maintain the brand’s luxury positioning, it was possible that the medium could no longer be avoided. 1 http://online.wsj.com/news/articles/SB10001424127887323463704578497350657159118, accessed October 27, 2013. 2 www.nytimes.com/2012/04/30/business/media/nespresso-espresso-machine-maker-plans-tv-ads-in-us.html?_r=0, accessed October 27, 2013. This document is authorized for use only by mansour algoblan in Strategic Marketing Planning taught by YASSER MAHFOOZ, King Saud University from Feb 2021 to Jun 2021. For the exclusive use of m. algoblan, 2021. Page 2 9B14M080 However, a 30-second commercial could never replicate the experience that consumers had when they entered a Nespresso boutique. Second, in order to avoid losing market share, should Nespresso expand its reach by seeking new distribution channels for its machines and capsules? BACKGROUND Nestlé Nespresso Nespresso was launched in 1986 as a subsidiary of Nestlé Business Group, the Swiss food giant known for brands such as Perrier, Maggi, Felix and of course Nestlé chocolate. Nestlé held a dominant position in the 1970s and 1980s with its coffee brand Nescafe and launched Nespresso to target the premium coffee segment. Henk Kwakman, Nespresso’s former CEO, described the brand as “the Armani of coffee.” When he took over in 1997, he recruited a management team from luxury houses such as LVMH (Luis Vuitton, Moët and Hennessey) and Richemont (best known for Cartier and Mont Blanc).3 He moved advertising from TV to print and started a program that offered Nespresso to first-class airline passengers. Research showed that consumers were more likely to buy a machine after they had tested it, so Nespresso began asking retailers to give them 200 square feet for in-store demonstrations. The first department store to accept was the famous Galeries Lafayette in Paris; sales increased from 50 machines per year to more than 700, and other major retail chains followed soon after.4 Following this in-store success, in 1999, Nespresso opened its first branded retail store on the Champs- Élysées in Paris. This led to a phase of heavy growth, with 35 per cent average annual growth between 2001 and 2005. In 2006, Nespresso returned to TV with commercials that featured actor George Clooney, and the boost in store trials that this generated led to another five years of better than 30 per cent annual growth (from 2006 to 2010).5 In 2012, Nespresso was Nestlé’s fastest-growing brand, representing 20 per cent of its overall growth. Nespresso’s 2011 global revenue was 3.5 billion Swiss francs (US$3.9 billion). It had 300 boutiques in major cities worldwide and sold its products in almost 60 countries. Nespresso’s online boutique had 180,000 unique visitors daily, and its Facebook page reached 1.8 million fans. Exhibit 1 shows a timeline of key moments in Nespresso’s history. Nespresso machines were manufactured by a number of different licensees, including Krups, Turmix and Delonghi. Although there was some variation between them, they were typically well-designed and compact in size. Capsules could be inserted into the machine from the top; when the machine was activated (by pushing a single button), it punctured the capsule and pumped hot water through it under high pressure. The coffee was poured within 10 to 15 seconds, and the used capsule was collected in a small container that could be emptied periodically. Capsules contained about five grams of ground coffee and produced either a 40 millilitre (ml) espresso shot or a 110 ml lungo (long) shot. Nespresso machines did not produce milk-based coffee, although consumers could add milk and/or sugar after the coffee was poured. In 2011, Nespresso launched the Maestria, a machine that included a steaming/frothing wand, which could be used to make cappuccino. 3 www.businessweek.com/globalbiz/content/mar2009/gb20090324_886251.htm, accessed October 27, 2013. 4 www.fastcompany.com/1781304/triggering-demand-how-coffee-maker-nespresso-turned-drips-gushers, accessed October 27, 2013. 5 Ibid. This document is authorized for use only by mansour algoblan in Strategic Marketing Planning taught by YASSER MAHFOOZ, King Saud University from Feb 2021 to Jun 2021. For the exclusive use of m. algoblan, 2021. Page 3 9B14M080 However, this came at the expense of convenience, as it took several minutes to steam milk and the machine required more effort to clean. The Nespresso Maestria was also more expensive — it cost approximately US$600 versus US$200 for the base model. Brand Positioning Nespresso positioned itself as a luxury coffee brand. It advertised in premium magazines, sponsored prestigious events such as yachting cups and the Cannes film festival and located its boutiques in fashionable areas of major cities, such as the Champs-Élysées in Paris and Union Square in San Francisco. The coffee varieties (or “grand cru”) had names such as Arpeggio, Capriccio and Rosabaya de Colombia, and the brand also regularly featured limited edition varieties. According to Nespresso CEO Duvoisin, George Clooney was the ideal spokesperson for the brand, as “[Clooney] brings a kind of humoristic distance. People see him as a real person.”6 Possibly the most important aspect of Nespresso’s brand identity was the quality of its coffee, and the company spent much of its communication efforts emphasizing that its machines brewed “the perfect cup of coffee, time after time, cup after cup.” This claim seemed to be substantiated: many airlines served Nespresso to their business and first-class passengers, and several Michelin-starred restaurants used Nespresso machines, including Heston Blumenthal’s Fat Duck in the United Kingdom and L’Arpège in France.7 Equally important for Nespresso were technology and design, sometimes eliciting comparisons to similarly design-conscious brands such as Apple.8 Its machines might be easy to operate, but its technology, which enabled Nespresso machines to brew coffee under much higher pressure than those of competitors, was protected by 1,700 patents. The machines were designed to look good on a kitchen counter, as were the shiny aluminum capsules and the various holders for them. This emphasis on design could also be found in Nespresso’s flagship boutiques, which acted as physical expressions of the brand.9 Exhibit 2 shows photographs of various design elements. Nespresso distributed its capsules through a closed system. Capsules could only be purchased through its online shop (and at its flagship stores), and when customers made their first purchase, they automatically became members of the Nespresso Club. This program provided Nespresso with valuable feedback, and members who signed up were given access to special offers such as limited edition blends and a range of accessories such as cups, tableware and candles. Finally, in line with its premium positioning and its Swiss heritage, Nespresso emphasized environmental protection, sustainable farming and fair trade.