Nespresso: A Case Study

(Names removed for anonymity)

Overview

1. Introduction

2. Customer selection

3. Value proposition

4. Value capture method

5. Strategic control

6. Scope of activities

The Technology - Machine and Capsule

Nespresso - What else?

• Independent unit of Nestle, based in Switzerland originally.

• Now available in 35 countries worldwide. • It is a food company with no prior experience in

selling or inventing hardware technology

Nespresso Timeline

1986 1989 19961995 1998 2000 2003 20082006 2009 2011

Nespresso S.A. is founded, first machines were introduced in Switzerland. 

Nespresso Club launched.

Nespresso S.A. reaches breakeven point, club reaches 180,000 members.

First B2B machines, ES100 is launched.

First Website is introduced.

Breakthrough machine design.

AAA Sustainable Quality Program is announced, first Boutique Bar in Munich.

"NESPRESSO, What Else?" campaign, revenue exceeding CHF 1 billion.

Passing CHF 2 billion mark in revenue. Patents

expiring

Enhance coffee range, Ecolaboration platform.

THE PIONEERING YEARSINNOVATION AND EXPANSION

ICONIC AND INTERNATIONAL BRAND

ENSURING SUSTAINABLE DEVELOPMENT IN THE NEAR

FUTURE

Nespresso's Sales Growth (1986 - 2006)

Nespresso's Market Share (1995, 2005)

Customer Selection 

They are espresso drinkers, who are for:

1.Home consumption (B2C)  

• 35 years and above• Sophisticated taste for style

and quality• Well educated• Affluent• Top of household market

Customer Selection

2.    Professional Use

• For individual consumption in offices (B2C)• For businesses to sell to other customers e.g.

restaurants, cafe, hotel etc. (B2B)• Contributes to 18% of Nespresso SA's sales

The Blue Ocean Strategy

• Existing firms were targeting restaurants and offices market, not individuals and households.

• Ironically, in the 1970s, Nespresso started out doing just that too and achieved mediocre results.

• In 1996, Nespresso crossed back to the Red Ocean by selling to offices and restaurants

Success depends on a wise starting

point!

Nespresso's Value Proposition to B2C Customers

The Ultimate Coffee Experience

Service•Excellent Customer

Relations•Exclusivity

Coffee quality• Perfection in quality•Variety of choice

Simplicity•Modern Design•Aestheticism

Source: Personal Evaluation

Nespresso's Value Proposition to B2C Customers

Value capture method

•License

•Markup in production of machine and capsule

•Similar to Printer-cartridge model–makes more money on consumable

Two Key Questions

1.How much of Nespresso's success can we attribute to its first-mover advantages?

2.What factors have affected how Nespresso organizes its value chain or scope of activities over time?

Nespresso's First Mover Advantages•IP protection

•Brand loyalty

•Switching cost

•Secure strategic resources

•Opportunity to promote an capsule standard

Patents

It is protected by 70 patents 

Machines• In 1976, Nestec files the first patent for the pressurized

coffee extraction with capsule process.

Capsules• Nestlé is suing Sara Lee for patent infringement on its

Nespresso capsules, June 2010. 

• French authorities seized 50 Ethical Coffee capsules at two factories after a complaint by Nestle SA

Process

Weak Appropriability? 

Brand Loyalty

• Shaped consumer preference

• Direct customer relationship encourages brand loyalty.• Nespresso Club

• Survey shows that 95% are “satisfied totally”. (Source: The Economist Intelligence Unit)

Switching Cost - Machine

Machine cost

 

Source: BIO Intelligence Service, 2010

Switching Cost - Emotional attachment

A combined result of:

•Quality customer relationship

I got a second hand machine from one of my clients and I tried to order cups. A call center called me and registered all my information. 

“What is your machine ID?” they asked.  “Mmm… that is not your machine isn’t it? It is from 72dpi! Wow! Last

month I bought my own machine as the other broke down finally. 

•Intelligent branding

 

Securing strategic resources

Strong presence in key espresso drinking countries

Partnership • 9 renowned household appliance manufacturers

Krups, DeLonghi, Alessi, Jura, Miele, Siemens & Gaggia etc• Prestigious department stores  

Globus, Harrods, Les Galleries Lafayette, Kaufhof, De Bijenkorf, Krëfel in Belgium, La Rinascente, Bloomingdale’s, and Ginza etc

• Luxury hotels & resorts       Swissôtel, Radisson, Relais & Châteaux • Airlines

Lufthansa, Swiss International Air Lines, British Airways Cathay Pacific, Malaysian Airlines, Etihad Airways and Qatar Airways

• Gourmet restaurants

Capsule Standard

• Nespresso Aluminium Capsules–Closed system– Exclusive to Nespresso only

• Competing standard: Easy Serving Espresso (ESE) pods–Open System

• Currently 165 types of ESE machines

• However, consumers say the quality is not consistent.

Nespresso' s First Mover Disadvantages ?

Uncertainty in • demand (B2B initial idea)• business model

Risk• Why not sold their own machines, instead of

licensing it out? 

Influences from Nestle

Could they have become global from day 1 if it were not for Nestle?• Financial support• R & D • Legal support• Purchasing power • Global marketing

Factors affecting Nespresso’s value chain organization over time?

• What is Nespresso’s Scope of Activities?

• How is Nespresso’s value chain organized?

• Is the value chain vertically disintegrated?

Value Chain

Scope of Activities

• To seek for and ensure high quality standards for coffee• Nespresso Green Coffee Expert• Long Term Relationships with farming communities• AAA Sustainable Quality Program

• Capsule Manufacturing• Capsules are produced and sold solely by Nespresso only• Nespresso Production Centres (Switzerland)

• Machine Manufacturing• Research and development of new machines designs• Patented extraction and brewing system (including capsules)• Sole Manufacturing Partner with Eugster/Frismag• 9 Licensed partners to sell Nespresso System Machines under their own

brand names• Started selling machines with only Nespresso branding in 2000

Scope of Activities

• Retailing • Global Boutiques to sell coffee capsules and machines• 191 boutiques are located around the world• Online/Phone ordering of capsules• Direct sales to the customers, removing the need of a

third party retailer and distributor

• Services• Nespresso Club• Personalized customer service and information network• Privileged and direct relationship with consumers• More than 70 independent agents representing Nespresso

Professional • Customer Care Centres• All queries will be answered within 1 working day and purchased

products to be shipped to home within 48 hours

Value Chain

Nespresso

Machine License Partners

Consumers

Machine Manufacturers

Coffee Farms

Retail Outlets

Coffee: Raw Material

OEM Machines

License Fee

OEM Machines

Machines

Machines

Machines Capsules

Value Proposition to other stakeholders

• Farming Community– Long-term contracts & favourable income

• OEM Partner (Eugster/Frismag)– The only OEM partner

• Machines License Partners– Opportunity to sell premium products at high profit

margins (30-35%) Source: IMD• Retailers of machines

– High profit margin (20-25%)

Reasons for disintegrating value chain

• Coffee Farms• Least involved in areas of machine

manufacturing –Not a hardware company

• Owns the most crucial parts of the value chain• Capsules to control quality and make most money

on it• Direct selling to and direct contact with customers

• Ensures that machines produced and sold by license partners meet the Nespresso standards• Only one exclusive manufacturer

• Main objective is still to provide an integrated Coffee Experience

Maintaining control despite being vertically disintegrated

Future Challenges

• Impending patent expiry–Not really a issue because of strong

branding and customer relations• Low cost competitors– Stick to selling premium products– Establish long term contracts with B2B

partners• Social Responsibility– Ecolaboration and fair trade

Conclusion

• Business Model is effective.• Nespresso's success is due to both first mover

advantages and Nestle's backing.• Blue-ocean strategy, once successful, can help firms

expand to red-ocean.• The organization of value chain could play a role in

creating sensational customer "experience".• Customer relation is important where IP protection

is weak.