Nestle’s Nespresso to Face New Mondelez Copycat Capsule

Nestle’s Nespresso to Face New Mondelez Copycat Capsule

Mondelez International Inc., (MDLZ) the world’s second-biggest coffee maker, will start selling Nespresso-compatible capsules across Europe this fall, posing the sternest competitive challenge yet to the Nestle SA (NESN) brand. Mondelez, based in Deerfield, Illinois, will sell the knock-off capsules under its Jacobs and Carte Noire brands in Germany, France, Austria and Switzerland in the second half of 2013, Roland Weening, vice president of strategy, marketing and innovation, said in an interview in London yesterday. The move brings a deep-pocketed entrant to the fastest-growing part of the $80 billion global coffee market at a time when Nespresso’s growth has slowed. Nestle, of Vevey, Switzerland, has filed patent-infringement lawsuits against some rivals that introduced capsules compatible with Nespresso machines, yet to date has not been able to stem the flow of copycat capsules from producers including D.E Master Blenders 1753. (DE) That comes as Nestle has said sales growth this year may be at the low end of its long-term target.“We want to take our brands and offer all the routes to cup,” Weening said. “We have been evaluating this for quite some time and felt the time was right.”

Bigger Slice

Mondelez wants a bigger slice of the $8 billion single-serve segment, which accounts for 20 percent of the European coffee market, up from 6 percent in 2006, Weening said. Spun off from Kraft Foods (KRFT) last year, Mondelez has sold its own single-serve beverage machine, Tassimo, since 2005. Weening said the move into Nespresso-compatible capsules would not “de-prioritize” Tassimo, which has sales approaching $1 billion.

Nestle, the maker of Nescafe and Dolce Gusto, dominates the European single-serve market with a share of 70 percent, according to Andreas Von Arx, an analyst at Helvea AG. Nespresso cultivates an exclusive image for the brand through ads featuring actor George Clooney, and boutiques that boast tasting salons in locations such as Paris’s Champs-Elysees.

That approach has made Nespresso one of Nestle’s fastest-growing and most profitable brands. In 2010, Nespresso accounted for about 15 percent of Nestle’s growth, Nomura analyst David Hayes has estimated. This year, the brand may account for about a tenth of the 5.12 billion-franc ($5.44 billion) increase in sales expected by analysts.

Competitors will probably sell about 400 million francs worth of copycat capsules this year, Jon Cox, an analyst at Kepler Cheuvreux in Zurich, estimates. “While I think there is still a lot of potential in Nespresso growth outside of Europe, within Europe it is pretty fierce,” Cox said.

‘Competitive Environment’

Nestle fell 0.3 percent to 62.70 francs at 9:07 a.m. in Zurich trading, trimming the stock’s 12-month gain to 14 percent. Mondelez has advanced 19 percent during that period.

Nestle stopped reporting sales details for Nespresso midway through last year due to “the competitive environment,” Chief Financial Officer Wan Ling Martello said at the time. That climate has gotten much more crowded: in 2010 Sara Lee Corp. and Ethical Coffee Co. both introduced knock-off capsules. Last year, Sara Lee spun off its coffee business into D.E Master Blenders, which agreed to be bought by Joh. A. Benckiser in April. The popularity of knock-off coffee pods contributed to a slower start to the year for Nespresso, Nestle has said.

“Pressure has been mounting from compatible capsules,” Von Arx said in a November report. “With key patents either expired or being challenged in courts, currently key Nespresso markets look open for compatible capsule producers.”

Losing Share

Von Arx estimates that Nespresso has lost between 10 percent and 20 percent market share in some countries to the knockoffs. In its most recent fiscal year, sales of D.E Master Blenders’ L’OR capsules, which work in Nespresso machines and are sold across Europe, increased by 60 million euros ($79 million), the company said in August. There are about 50 capsule suppliers across Europe, Weening said, and Nestle has said there are 30 in Switzerland alone.

Nestle’s legal actions, which include lawsuits filed in several European countries, have so far not stopped rivals from selling compatible capsules. The most recent ruling came in April when a Nestle unit lost a patent infringement lawsuit that sought to block Dualit, a U.K. company, from making capsules for Nespresso machines.

“We have done our homework and are confident on the legal side,” Weening said yesterday.

Lower Prices

The executive declined to say how much Mondelez’s capsules would cost, or in which retailers they would be sold. Nespresso capsules cost about 35 euro cents per cup. He also said the move into Nespresso-friendly capsules was not related to volatile coffee-bean prices, which have plummeted over the past year. Lower coffee prices shaved 1.3 percentage points off Mondelez’s so-called organic sales growth in its most recent quarter.

“The lower revenue has been offset with lower input costs, so coffee remains a profitable business for us,” Weening said. Mondelez generates about $4 billion in global coffee sales, and buys 6 percent of the world’s coffee.

To contact the reporter on this story: Matthew Boyle in London at mboyle20@bloomberg.net

Updated June 11, 2013, 4:10 p.m. ET

Mondelez Stirs Nestlé Challenge

By JOHN REVILL

ZURICH—A coffee war is brewing for Nestlé NESN.VX -1.43% SA.

Mondelez International Inc. MDLZ +0.74% said it will begin selling coffee capsules from its Jacobs and Carte Noire brands that are designed to fit Nestlé’s single-serving Nespresso machines. The U.S. snack-food company will begin offering the capsules later this year in Austria, France, Germany and Switzerland, before moving into other regions.

The launch of Mondelez coffee capsules represents the biggest challenge to date for Nespresso, a high-end product whose annual sales growth has topped 20% in recent years before tapering off to about 10% last year in the face of mounting competition. Mondelez launched its own machine-and-capsule system Tassimo in 2004, whileStarbucks

Corp. SBUX -1.04% and D.E. Master Blenders 1753 NVDE.AE +0.37% have also crowded into the home-brew market.

Now, Deerfield, Ill.-based Mondelez is borrowing from the playbooks of Swiss supermarket chains Denner and Migros, both of which sell capsules filled with their own coffee that fit Nespresso makers. Other coffee providers, including Switzerland’s Ethical Coffee Co. and the U.K.’s Dualit Ltd., have also sold capsules that fit the Nestlé machine, whose adverts feature actors George Clooney and Penélope Cruz.

Vevey, Switzerland-based Nestlé has taken legal action against its rivals, but failed to secure a ban on their products. In April, Nestlé suffered a setback when a U.K court ruled Dualit’s coffee pods didn’t infringe on Nestlé patents. It lost a similar case in a German regional court last year.

Nespresso Chief Executive Jean-Marc Duvoisin said the company would continue to attract customers because of the quality of Nestlé’s coffee and services. “Competition is an innovation driver for us,” Mr. Duvoisin said in an email.

The single-serve coffee market is expanding rapidly and sports high margins. Euromonitor International forecasts it will grow to $12.58 billion by 2015, up nearly 57% from $8.03 billion in 2012, and analysts estimate the capsules carry margins as high as 30%.

Nestlé, the world’s biggest coffee maker, doesn’t break out the performance of individual brands, but analysts estimate Nespresso sales reached 4.3 billion Swiss francs ($4.6 billion) in 2012 and will rise to about 4.8 billion francs in 2013.

Mondelez, the world’s No. 2 coffee processor, generated $4 billion in revenue in 2012.

Roland Weening, who runs Mondelez’s coffee business, called the single-serve coffee market “a significant commercial opportunity for Mondelez.” He said the company will also step up investment in Tassimo.

Nestlé will likely succeed in protecting the Nespresso brand in the near term because of the experience offered by the company’s boutiques and online presence, which encourage consumer loyalty, said Lorenza Della-Santa, an analyst at Euromonitor International. However, Nestlé is vulnerable in the U.S. market, where Nespresso is struggling to make inroads.

Other analysts say Mondelez’s copycat capsules represent a serious challenge for Nespresso. The U.S. company’s size gives it more marketing muscle and stronger links to retailers than Nespresso’s existing competitors.

“Mondelez is going to be a much bigger competitor than Nespresso has faced before,” said Jon Cox, an analyst at Kepler Cheuvreux who expects copycat capsules to double to around 400 million francs this year. “It will be a threat.”