Nespresso brews plans to see off rivals

January 1, 2014 11:13 am

Nespresso brews plans to see off rivals

By James Shotter in Lausanne

Nespresso is aiming to boost the international sales of its coffee capsules, and devote more resources to “long” coffees as it battles to maintain its rapid growth in the face of intensifying competition from cheaper rivals.The coffee maker, which is owned by the Swiss group Nestlé, was one of the pioneers of the technology behind coffee capsules and the machines that serve them. It has built up a dominant position in the $10bn capsule market, with estimated annual sales of about SFr4bn ($4.5bn).

However, over the past year it has suffered a number of legal setbacks as several of the patents that buttress its systems against compatible pods sold more cheaply by rivals have been struck down in various jurisdictions.

“Their legal barriers to entry are in tatters,” said Jon Cox, head of Swiss equities at Kepler Cheuvreux. “As a result of the growing competition from copycat producers, there is a risk that they become more and more commoditised, and at some point their prices may have to come down.”

However, Jean-Marc Duvoisin, who took over as chief executive of the brand in March, believes that bolstering Nespresso’s sales outside its core European markets, such as Switzerland, France, Spain, and Portugal will enable it to maintain its growth.

“We still have a lot of potential in Europe, if I look at the UK, Scandinavia, Italy, and Germany, if we compare these with the levels of penetration we have in Switzerland and France. Those are the next strong growth [markets]” he said.

“Then you have a second level of potential, which are the countries where we are pretty small, and where growth is coming, but which we entered later, for instance Brazil, Mexico and the US.”

Mr Duvoisin also intends to expand Nespresso’s offering in what it calls “long” coffees – those served with larger quantities of liquid, such as milk, rather than the short espresso shots that have so far been its biggest strength. Such coffees, he says, are popular in countries such as Finland, Sweden and the UK and the US.

Analysts have also wondered whether Nespresso, which sells its wares through call centres, via the web, and in its own boutique stores, would at some point also start selling through other outlets, such as supermarkets.

David Hayes, an analyst at Nomura, said: “If they don’t sell through other retail outlets, the question is how much share will they lose? You can understand why it wants to remain prestigious, though.”

However, Mr Duvoisin rules out such a shift in strategy “as long as I am here”, arguing that selling direct to its customers gives Nespresso valuable information about their tastes which it would lose if it sold through supermarkets as well.

“This is a competitive advantage,” he said.