.What's brewing at home and on the market?
If you prize convenience when it comes to coffee, but instant isn't to your taste, capsules or pods may be an attractive middle ground. In this report, CHOICE looks into the burgeoning capsule coffee market.
buying more barista-made
coffees and visiting cafes
more often. Looking for
an individual, “artisan”
lovers are increasingly
interested in the type
and origin of their
coffee beans, and
issues such as fair
trade and organic.
At home, coffee
drinkers are also
discerning and turning
away from instant coffee.
In keeping with this trend, the
Nespresso coffee capsule system
was the fastest-growing brand
in the fresh coffee category in
Australia in 2011 and experienced
double-digit growth globally.
Those shiny little aluminium coffee
capsules have so far lured seven million
people to join the Nespresso Club, and
in 2011 global sales are reported to
have reached $US3.2bn. However,
with at least 50 competitors snapping
at its heels, can Nespresso maintain
its top dog status?
Coffee pods launched
The Nespresso capsule machine, made
by Swiss confectionery giant Nestlé,
sprang into existence in 1986 and was
marketed to the office coffee sectors in
Switzerland, Japan and Italy. In 2000
the first boutique opened in Paris, and
in 2006 a marketing campaign using
George Clooney’s good looks saw the
brand explode globally with annual
sales exceeding $US1.8bn for the first
time. By 2012 there were 300 boutiques
in 48 countries.
Very presciently, Nestlé registered
a formidable 1700 patents to cover its
Nespresso capsules and machinery
early on. But since 2010, competitors
have been jostling for a foothold in
the lucrative coffee market, exploiting
a gap in the Nespresso patents. And
it’s no wonder – Nespresso products
have a reported profit margin of
20-30%, and analysts have estimated
a 47% market growth in single-serve
coffees globally, taking sales to
$US8bn in 2014.
The main thrust in the attack on
Nespresso’s market share is convenience
and price. To buy Nespresso capsules
online a customer must join the
Nespresso Club; otherwise, non-members
can purchase capsules at one of the
11 boutiques around Australia. The
minimum online order is 50 capsules
for 68c each, and unless you order
more than 200 capsules, you’ll pay
a delivery fee, starting at $6 for 50
capsules. In comparison,
D’Oro L’Or capsules are sold
in Sydney supermarkets at
65c each. Other, less expensive
can also be purchased online.
An entry-level DeLonghi Citiz
Nespresso machine will set you back
$369, but Aldi and Woolworths are
now selling their own budget-priced
for less than $100.
Nestlé is tackling its lower-cost
competition head-on with the
release of Nescafé Dolce Gusto,
budget coffee capsule system. As
well as coffee, it makes chai tea,
hot chocolate and iced coffee.
Available in supermarkets and
appliance retailers, the cheapest
machine in the range is about $149,
and the cheaper capsules work out
18c less than Nespresso capsules.
On the surface, Nespresso is sanguine
about its imitators. “Competition is
nothing new for Nespresso,” says
Renaud Tinel, general manager,
Nespresso Australia & Oceania.
“Today, Nespresso is competing
against more than 50 competitors.
While competition is an important
driver of innovation and growth,
it must be fair and the players must
respect the rules.”
Unsurprisingly, Nestlé has been very
busy testing the rules around its patents,
having launched a series of lawsuits
against rivals that make Nespresso-compatible
capsules, such as the Ethical Coffee Company and Sara Lee. Nestlé, in turn, has
been counter-sued by the Ethical Coffee
Company, which claimed the Nespresso
brand engaged in unfair competition
practices and a “systematic smear”
campaign against it. In an interesting
twist, the CEO of the Ethical Coffee
Company, Jean-Paul Gaillard, served as
CEO of Nespresso from 1988 to 1998.
The results of the legal challenges
have been mixed for Nestlé, and
industry observers feel the company is
They point out, however,
that the cost of litigation pales in
comparison to the profits that can be
made by holding competitors at bay for
a couple of years.
While Nespresso faces off competition
from cheaper products, it has one
important advantage. Marketers call
it “premiumisation” – the creation
of a strong, high-end “exclusive” brand
that inspires loyal customers who value
the buying experience just as much
as the product and are prepared to pay
premium prices. Only time will
tell whether loyalty trumps cost in the
coffee capsule wars.