Nespresso’s bitter taste of defeat in the $10bn coffee capsule market where it has a market share of roughly one-third

April 24, 2013 7:49 pm

Nespresso’s bitter taste of defeat

By Louise Lucas

Even judges, it appears, are waking up and smelling the coffee. The phalanx of patents designed to protect Nestlé’s Nespresso machine-and-capsule coffee systems has been dented by a UK High Court ruling. The decision hands consumers the option of using rival capsules made by Dualit, the British manufacturer better known for its retro toasters, in their Nespresso machines. Dualit, which spent about £1m on lawyers during the course of the 10-month legal battle, was delighted. Leslie Gort-Barten, managing director, said he already had an appointment next Tuesday with one of Britain’s big four supermarkets that could now consider stocking its capsules.

Nespresso has a powerful grip on the $10bn coffee capsule market. It has a market share of roughly one-third, according to Euromonitor, more than the next two biggest players – Green Mountain and DE Master Blenders – put together. It generates sales of just under SFr4.5bn ($4.75bn), estimates Jamie Isenwater, analyst at Deutsche Bank, and margins on earnings before interest and tax (all of which comes from pods rather than machines) of more than 30 per cent.Losing the UK case does not necessarily set a Europe-wide precedent, but it is a boon for British coffee drinkers. “It’s certainly a common sense victory,” says Nikki Powell, intellectual property lawyer at Addleshaw Goddard. “To anyone outside the world of patent law, the very idea that a purchaser of a coffee machine would not be permitted to obtain and use [any] capsules to make coffee with their machine must be distinctly odd.”

In his ruling Mr Justice Arnold was scathing about the proceedings. “This case is a paradigm example of the regrettable tendency of current patent litigation in this country towards proliferation of issues rather than concentration upon the essentials,” he said. “The result is unnecessary expenditure of both costs and the court’s time.”

Dualit’s written closing submissions ran to 382 paragraphs, “despite the fact that the technology is relatively simple,” Mr Justice Arnold said.

Nespresso shot itself in the foot by sending 40 machines out for chosen customers to test in Belgium and Switzerland in 2004, thus invalidating its patent, according to the ruling. Its argument that the machines were tamper-proof and could not be disassembled got short shrift.

Mr Justice Arnold agreed an ordinary screwdriver was not up to the job, but one with a “hexagonal socket head . . . widely available in hardware stores” meant that a person thus equipped could “disassemble and reassemble a machine without damaging it . . . [and] could discover precisely how the capsule insertion and extraction mechanism worked”.

Nespresso, expressing disappointment, did not drop its fighting talk. “The protection of our intellectual property is an important component of our business strategy,” said Daniel Weston, general counsel of Nestlé Nespresso.

But he added that competition was nothing new. “In fact, Nespresso is today competing against approximately 100 portioned coffee offerings in the market globally, including 11 in the UK alone.”

Jean-Paul Gaillard, a former head of Nespresso who went on to set up the Ethical Coffee Company, has long railed against his old employer, which he claims has held ECC to “ransom” in Switzerland through its myriad patents.

A ruling in Germany last year stated that ECC’s capsules did not infringe Nespresso patents. But the decision would “not necessarily put an end to Nestlé’s desperate attempts to ban the marketing of ECC’s coffee pods in Germany”, he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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