Section D100. Case Synopsis for. Nespresso

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1 Section D100 Case Synopsis for Nespresso Anna Lackner Michael Gao Yan Ting Hui (Sandy) Florian Bonnet Date of submission: November 10 th 2014

2 Synopsis Firm History Nespresso is an espresso company that is wholly owned by Nestle. The Nespresso system was patented by Eric Favre, a Nestle employee, in 1976 (Coffee and its tireless reinvention, n.d.). The system was a concept for encapsulating coffee for home or machine use. Nespresso as a company was founded in 1986 and served four different types of coffee and two mini espresso machines. Nespresso was first tested in Switzerland, Japan and Italy. The brand then expanded into France and the United States. Nespresso formed business relationships with Turmix as their machine partner and Eugster as their exclusive producer. In 1995 Nespresso reached their breakeven point. The company then quickly adapted internet technology, creating a website promoting their product in 1996 and offering online ordering in By the 2000s Nespresso has introduced many more machines and types of coffee. They relocated their headquarters to Paudex, Switzerland and started redefining their corporate brand. This came with a new logo and the introduction of retail stores to promote the brand. Nespresso also built their own dedicated production center in Switzerland, effectively boosting their production 400 per cent. They also promoted sustainable, high quality coffee in collaboration with The Rainforest Alliance, (a nonprofit organization that works to conserve biodiversity). Nespresso exceeded one billion (CHF) in revenue in This is followed by more brand promotion involving celebrity endorsement such as George Clooney. In 2013, Nespresso s revenues are almost 6 billion (CAD). Nespresso has just recently moved into a new international headquarters again in 2010 to Lausanne, Switzerland. The company now is still rapidly introducing new machines and products to the coffee industry (Our History, n.d.). 1

3 External Analysis General Environment: The general environment can be divided into six segments. Below is a brief analysis Nespresso s general environment. Demographic Segment: Nespresso provides its coffee as a luxury product that allows people to brew their own perfect coffee at home. Coffee has become almost necessity for people over the last few years. Economic Segment: In the last years the cost of coffee beans has been rising enormously. As a result coffee companies had to either increase the prices of their products or to accept lower margins on their products. Moreover the inflation rate for coffee was high between 2006 and Political/Legal Segment: As Nespresso is acting in different markets, Nespresso has to follow different regulations and rules depending on the country in which it is acting. Sociocultural Segment: Each cup of coffee produces aluminium waste, because the Nespresso capsules are made out of aluminium. The capsules are 100% recyclable, but people are not generally aware of this and they just throw the aluminium capsules away after using them. Moreover Nespresso has invested in sustainable quality development to reduce the environmental consequences. Technological Segment: Nespresso machines were successfully developed because of the creation of an innovative culture and environment, which allows all employees to be innovators. Nespresso is working with industry leaders to continue their machine evolution and capsule development, as well as increase their coffee quality. Global Segment: As the global economies continue to develop, newly industrialized countries can be seen as high potential consumer markets. The global market is continuously growing and can be seen as a promising future. 2

4 Industry Environment Threat of New Entrants The threat of new entrants is relatively low because Nespresso and the other giants in the coffee market are well developed in their field. As such, it is nearly impossible to threaten them. New entrants would have next to no chance to compete with them. Threats from Buyers The Buyers of Nespresso coffee have nearly no bargaining power. Nespresso is selling their products only in specific shops. As a result if you are a Nespresso buyer you have to go to these several shops or buy it on the internet. Despite the fact that Nespresso is not available everywhere, sales are rising continuously. Threats from Suppliers When it comes to the bargaining power of suppliers, there is one thing that can be problematic. The suppliers of production material such as aluminum and coffee beans can threaten Nespresso. Threat of Substitutes The threat of substitutes in the industry is very high because of the amount of alternative beverages available such as water, tea, coke and energy drinks. There are also a lot of substitutes in the coffee market, such as filter coffee, instant coffee and traditional espresso. The way that Nespresso combats this threat is by offering exclusivity to show the differentiation between the brands and to retain its customers. Industry Rivalry The competition in the market is extremely fierce, due to the high amount of multinational companies that are competing in the coffee market. To protect itself, Nespresso has a patent on their capsules. However, there are currently a great many other companies are producing capsules. As a result, the rivalry between coffee companies is still increasing. 3

5 Internal analysis Resources Tangible resources: Nespresso has three plants to produce capsules. The plants are located in Switzerland and are very modern and efficient. Indeed, Nespresso invests a lot in its production tools so as to secure the quality and the production costs of its capsules. For instance, Nespresso invested 250 million to build the last plant which started production in Furthermore, Nespresso has at least one logistic platform in each country in which it operates, that is to say at least 50 logistic platforms around the word. Nespresso has company owned stores in each country, mostly in wealthy and chic areas of big cities, with one flagship store in each country. Intangible resources: Nespresso has very strong reputational resources. Indeed, Nespresso has a very good image, notably thanks to its high-end customer service. Via the Nespresso Club, Nespresso tries to make its products exclusive to its members. Additionally, Nespresso s customers are very loyal and bring new customers thanks to word of mouth advertising. The firm also has very good advertising, specifically through its commercials starring George Clooney. Capabilities: Nespresso has a very high end product, hard to copy. The firm works with local farms all around the world to produce the best coffee. Plus, Nespresso adapts its product to its different markets (cultural adaptation). The company has a strong culture of innovation. Nespresso always comes up with new ideas for its coffees so as to keep one step ahead of competitors and satisfy its more demanding customers. Nespresso s marketing strategy is very valuable and efficient, specifically through the exclusivity of the Nespresso Club and high quality customer service. 4

6 The distribution channels are well managed. With their Nespresso Club strategy, they do not sell the capsules in shopping centers but only in their own stores so as to keep the exclusivity. This is to deter customers from comparing the prices and offer the best coffee experience. Moreover, this exclusivity of this distribution channel allows them to better know their customers thanks to their efficient customer relationship management. Plus, 50 percent of Nespresso sales are online. Nespresso has a very good brand management, specifically through its communication. The company promotes its brand through different channels of communication, most notably through co-branding strategies. There are three co-branding strategies: with machines manufacturers (Krups, Siemens, Miele), promotion by Hollywood stars in the commercials (George Clooney, John Malkovitch) and promotion of events (Roland Garros, Nespresso Cup sailing event). Nespresso has valuable partnerships, specifically with local coffee producers (Columbia, Brazil). Core competencies: Capability Valuable? Rare? Costly to imitate? High end product Yes Yes - Yes Cullture of innovation Yes - Yes - Marketing strategy Yes - - Yes Distribution channels Yes Yes - Yes Brand management Yes Yes Yes Yes Partnerships Yes - No - Organized to be exploited? Competitive consequences Sustained competitive advantage Sustained competitive advantage Sustained competitive advantage Sustained competitive advantage Sustained competitive advantage Temporary competitive advantage Performance Implications? Current strategy Business level strategy At the industry competitive level, Nespresso adopts a differentiation strategy. With the mission of producing high quality coffee to consumers, it positions itself as a luxury brand and this positioning makes consumers have a sense of high social status by consuming its products. Therefore, Nespresso 5

7 pays attention to the whole business process, from selecting coffee beans to delivering the final products to the end customer. For example, the careful selection of coffee trees and coffee beans (the raw materials used to produce a cup of coffee) could make the difference in the taste of coffee which would influence the quality. It leads to higher quality, higher priced, higher margin capsules,. In order to broaden its market segment, Nespresso also develops a wide range of coffee machines with different features and different price ranges to make them affordable for target customers. There are five types of coffee machines. The INISSIA and U models with basic functions are for those lowerincome buyers. Other models like the Lattissima, which comes with more accessories included, are higher priced, with the target customers in higher-income classes, business sectors, and coffee lovers. The setting up of the Nespresso Club helps maintain good relations with customers, as well as enable quick response to changes in the market. Corporate Level Strategy Nespresso has the corporate level strategy with moderate levels of diversification. It has a wide range of coffee-related products. Another main coffee-related product their development of easy-to-use and stylish Nespresso coffee machines. The Nespresso capsules are exclusively used with the Nespresso coffee machines. A cup of high quality coffee can be produced by the interaction between the coffee capsules and the coffee machine. Other coffee-related accessories include tableware (i.e. coffee cups), tasting kits, Nespresso chocolates, etc. International Strategy Nespresso has its products sold worldwide. Recently, Nespresso adopted a Transnational Strategy to meet the demands of global and multi-domestic forces in the global market. In 2013, it planned to revive the production of coffee in South Sudan, which has a long coffee-production history and supplied a large amount of high quality coffee beans. In 2014, Nespresso launched a new Vertuoline system of machine and capsules in the U.S. and Canada. This new machine enables people to produce a larger cup of coffee. Together with the Original Line system, these machines help cater for different market needs for different segments of customers. 6

8 Cooperative Strategy Nespresso has less cooperation in the capsules and coffee machines production. It cooperates with Eugster/Frismag, which is a Swiss coffee-machine-making company, in the production of coffee machines. But it has high-level of cooperation in terms of business sustainability. With the goal of providing high-quality coffee to consumers, Nespresso is also committed to social and environmental sustainability. It collaborates with a large number of organizations in coffee sourcing and environmental protection. For example, it launched the AAA Sustainable Quality TM Program in 2003 with The Rainforest Alliance to make a commitment to protect the natural and living environment during the selection process of raw materials. Current challenges The price of capsules from Nespresso is three times higher than alternative brewing methods. This has enticed other companies to produce Nespresso compatible capsules. This might lead to Nespresso customers using more affordable capsules than the ones from Nespresso. Sustainability is currently a business objective that is getting more and more important. Nespresso was slandered for their non-recyclable capsules. It is true that each cup of Nespresso produces aluminum waste, but Nespresso tries steadily to make their products more environmentally friendly. In 2012 Nespresso exceeded its recycling capacity goal. Starbucks is launching its own espresso machine called Verismo TM at the moment to compete with Nespresso. The espresso machine system would be similar to Nespresso. Starbuck s goal is that their customers are able to produce their favourite coffee from Starbucks at home. Thus the launch of Verismo TM presents a significant threat for Nespresso, as Nespresso may lose customers to Starbucks. Coffee beans selected are mainly from Arabica, Brazil. Due to the serious drought in Arabica, it affects the supply of coffee beans. The decrease in supply leads to the rise of costs by over than 60%. The cost would directly lead to the increase in price of capsules, which would increase the burden of customers and discourage them from buying at higher prices. 7

9 Nespresso has its own distribution channels by having its products sold in Nespresso Boutiques worldwide. This enables a closer relationship between the company and its customers. To strengthen the proximity to customers, the company may benefit by having more distribution channels to reach our target customers. However, developing a new distribution channel is difficult as it can easily damage the brand image. Future outlook Nespresso aims to double its revenues in the United States (from 250 million to 600 million). The company is considering setting up a factory in the USA (while the three existing plants are in Switzerland) if the commercial results are as good as expected. Nespresso is willing to strengthen its market shares in Europe because of the new big competitors (e.g. Starbucks and the merger between Senso and Tassimo) and because experts estimate that the capsule coffee market is not yet mature in Europe. Simply, the market growth potential is huge. Even in the most mature markets like France and Switzerland, only 50% of the coffee consumers have a machine and consume capsules. The firm aims at accelerating its conquest of the professional market. Nespresso is developing new machines targeting restaurants and hotels, cinemas and of course business organizations. However, competitors (like Lavazza for instance) are very strong in this segment and Nespresso has only two percent market share in this segment. 8

10 References Nespresso website: Coffee and its tireless reinvention. (n.d.) - Our History. (n.d.) - Les Echos, August 27, Alliancy, March 27, The Guardian, February 7, SCMP, April 18, Environmental Leader, September 12,

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