Coffee capsules

With demand for these convenient capsules on the rise, we put Nespresso and its competitors to the test.
 
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01 .What's brewing at home and on the market?

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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.

We:

Coffee culture

Cafe culture in Australia is booming; Australians are buying more barista-made coffees and visiting cafes more often. Looking for an individual, “artisan” experience, coffee 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 becoming more 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. 

A competitive marketplace

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, Nespresso-compatible Piazza D’Oro L’Or capsules are sold in Sydney supermarkets at 65c each. Other, less expensive Nespresso-compatible capsules 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 non-Nespresso-compatible machines for less than $100.

Nestlé is tackling its lower-cost competition head-on with the release of Nescafé Dolce Gusto, a non-Nespresso-compatible 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, the owner of the Piazza D’Oro L’Or brand, which has sold eight million capsules in Australia since 2012. 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 fighting a losing battle. 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.

 
 

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