There aren’t many retail outlets that manage to attract crowds that line around the block unless, of course, it is sale season. But Nespresso, the single-portion coffee firm owned by Switzerland’s Nestlé, manages to do just that at its Champs-Elysees store in Paris on a regular basis.
The in-store tasting experience that attracts the tourists and locals shopping along one of Paris’ most famous streets has become synonymous with the brand and is in part why sales of single-portion coffee have skyrocketed in the last five years. Sales of coffee capsules make up eight percent of total worldwide coffee sales, a figure that Richard Girardot, CEO of Nespresso, believes could double in the next few years.
“We believe that portion coffee has many drivers, the percentage of portion coffee will double,” he tells CEO Middle East. “Nespresso is on the same [growth] trend [as 2011]; it will be 15 percent,” he adds.
Single-portion coffee, of which Nespresso is the current market leader, is one of the fastest-growing ways to drink one of the world’s favourite beverages. While worldwide coffee sales, including fresh and instant, increased 17.5 percent last year to reach $70.86bn, global sales for single-serve packs grow 31.1 percent to $5.75bn, according to market researcher Euromonitor. Although most popular in Western Europe and the US, market leaders are now eying up new growth opportunities further afield.
Nespresso, which currently has fifteen boutiques across the region, says the Middle East is becoming an increasingly important market for the firm. “[The Middle East]; it’s the future. Nespresso is still a Western European [company] because of the coffee culture in Italy and France, but clearly the brand has the potential to be worldwide. This region is one of the key [markets] for the future; we believe there is huge potential for this region,” says Girardot.
“Our strategy is [to expand in] cities where there are two habits; the habit to appreciate the coffee and the habit of shopping. Clearly this region has a habit of shopping, so here we have to develop,” he adds.
In addition to expanding its boutiques in the region — a figure Girardot declines to give — the Swiss-based firm will also introduce a website that will initially offer delivery services within the UAE before branching out to the wider GCC, says Jean Marc Dragoli, market director for Nespresso, Middle East, Africa and Caribbean.
“Our consumers will then have a third channel; the possibility to go in the boutique, call the call centre or to go through the internet. The UAE is a very important market for us [so we’ll start there],” he says.
Parent company Nestlé launched the Nespresso concept machine and capsules in 1986 in a bid to boost sales in the luxury home coffee market. The company’s growth story is unique in that unlike Nestlé’s other mass-market products, its single-serve coffee wasn’t available in retail outlets until 2002 and was instead sold via call centres before being launched online in the 1990s.
The brand’s sales strategy was transformed under former CEO Henk Kwakman. Kwakman switched the firm’s advertising focus from traditional print to television media (introducing brand ambassador George Clooney to television screens), introduced the coffee machine to more than twenty airlines and persuaded Galeries Lafayette to start serving its coffee in-store. Sales of Nespresso machines at the Parisian department store increased from 50 per year to 700.
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Today, Nespresso is a $3.3bn brand with over 250 retail outlets worldwide, and is Nestlé’s fastest-growing major brand. The firm outsells rival Lavazza in Italy, sells more servings of coffee every year than Starbucks and is now the global market leader with 35 percent of the market. The firm’s factory in Orbe makes 4.1 billion capsules annually and said it plans to double capacity to 8.8 billion capsules by 2012.
It is hardly surprising given Nespresso’s success that competitors are vying for a slice of the action. US-based Sara Lee introduced its Senseo machine in 2001, Kraft Foods launched its Tassimo Hot Beverage System three years later, while Starbucks teamed up with Green Mountain’s Keurig machines to produce its own-label single-portion coffee in 2011.
Nestlé, whose Nespresso concept is subject to 1,700 patents due to expire at the end of 2012, has taken legal action against several of its competitors. It took legal action against Ethical Coffee, which makes cheaper capsules for Nespresso machines, in a Paris court in January 2011 and in June sued Illinois-based Sara Lee in France for alleged patent infringement. A Swiss court in December upheld a nationwide injunction against the sale of Ethical Coffee’s capsules that fit in the Nespresso machine.
Despite the court cases, Girardot says the firm is not worried about its ever-increasing competition. “We have competition; we have had to manage competition for the last ten years. We now have 50 competitors in terms of systems of coffee but we have to manage, that’s the rule of the market,” he says.
“Nespresso is not discouraging competition; what Nespresso is discouraging is some people are entering in our system and yes we have to defend our system, we also have to defend our consumer because in some cases the cap is not safe. We never attack the 50 competitors with a [different] system,” he adds.
It’s a view shared by inventor Eric Favre, who created the first version of the Nespresso in 1976 and has since left Nestlé to set up a competitor. “A plethora of rival capsules will come out,” he said in an interview with Bloomberg in January 2011. “The Nespresso brand is more important than the patents.
“After 20 years, you can’t prevent the opening of the market,” Favre said. “Nestle has the know-how from the start to the finish and because of this will be able to keep its leadership position.”
One aspect of the business Nestle is unable to control is the rising cost of coffee and its impact on its business. Arabica coffee prices reached a 34-year high in May last year as global demand increased, oil prices rose and adverse weather patterns in certain parts of the world led to lower than average yields. The sharp increase forced many coffee merchants, including Nespresso, to increase the cost of their coffee.
Nestle increased the cost of its Nespresso capsules by six percent in May amid rising costs. “Over the last ten months or so, the New York market price for green coffee — in particular, high-grade Arabica — has gone up by more than 85 percent, reaching record highs,” Nespresso spokesperson Julian Liew said at the time. “Despite our current unique sourcing model, Nespresso is not immune to such unprecedented increases in green coffee prices.”
The firm doesn’t expect to have to increase prices again in 2012, says Girardot. “For the moment I can say ‘no’ [we won’t increase the cost]. But there is a key period in South America (the price of crops is defined in Brazil) November-December so [assuming] we have no major problems in November 2012 I can tell you that if we have a price increase it will be 2013, but probably not.”
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