Big news in the European coffee markets: the monopoly of Nespresso capsules might be over. These single-serving espresso capsules have dominated the European coffee markets for years now, and brought Swiss owner Nestlé huge revenues and even bigger profits.
Formally it was already over since the appearance of the L’Or copycat products a few years ago. But the product failed to rival Nespresso on its main strong point: impeccable quality. So Nespresso was not really challenged. It didn’t help that L’Or was not present in all European markets.
This all could change. Nestlé’s arch rival Mondelez has announced that it will start with Nespress-compatible coffee capsules later this year. Now some of us might have forgotten who Mondelez is: it is the former international division of food giant Kraft. Kraft has been split in two parts: the American operations are now called Kraft Foods Group and the rest is Mondelez. Nestlé is the global leader in food with 100B revenue of that about 11B is profit and Kraft used to be runner-up, having about 53b revenue before the split. So Nestlé can prepare for some real competition.
So what are the data of the coffee market? Global revenue in coffee is about 70 B dollar, it is after oil the second commodity. Nestlé holds about 22% of this market; Mondelez is distant second with 10%, and third is Dutch coffee roaster Douwe Egberts with 5%, former part of Sara Lee and recently sold to German investment group JAB, owned by the Reimann family, Germany’s five-richest family. The Reimanns co-own Reckit Benckiser, maker of cleaning, household and cosmetic products. Nestlé’s flagship product is still instant coffee Nescafé, which counts for about 70% of business. They have two capsule systems: Nespresso, which is high-end, coffee-only, and distributed in special shops and on-line, and Dolce Gusto, which is a multi-beverage system including coffee, cappuccino, tea and cocoa and sold in supermarkets. Both are ‘real’ espresso, using 15 bar pressure. Douwe Egberts (the smallest) makes the copycat L’Or capsules.
And Mondelez? They have Tassimo, a low-pressure which is a 2.5 bar multi-beverage system, sold with reasonable success on most Europea markets. Here the history of Tassimo is interesting: it was developed in cooperation with hardware maker Braun, the makers of the shaver. Braun is famous for their groundbreaking modern design in the German Bauhaus style, and served as “inspiration” for most Apple products. Braun is part of Gilette and problems arose when Gilette was sold to Proctor&Gamble, a competitor of then Kraft. P&G sold the hardware to BSH (Bosch/Siemens appliances) so now Tassimo is sold as a Bosch product. They completely redesigned the hardware. Tassimo has an unique feature: the capsules, called T-Discs, have a barcode which sets the brewing parameters of water quantity and temperature. Mondelez does have two very strong coffee brands: Jacobs in Germany, and Carte Noir in France.
So Mondelez was in a squeeze. They could have developed their own high-end capsules, but because the patents for Nespresso have run out, it makes much more sense to go after the leader. There are two important considerations when challenging Nespresso: quality and distribution. If Mondelez does not get the quality right, it might not be a success, just as L’Or failed. Second aspect, distribution, is easy: of course Mondelez will sell their capsules in the normal food channels, just as L’Or does, and not limited as Nespresso. And price? Some Nespresso capsules sell for 37 Eurocents, for 6 grams of coffee in an aluminum capsule. That explains the huge profits of Nespresso. Still, the failure of L’Or, which was about the same price, shows that taste comes first, and price is no problem. But what if Mondelez scores on all three points? Offer perfect taste, easy purchasing and set the price in the 20-25 cent range? Still enough to be profitable, and a real saving for the consumer. Why would a consumer stay loyal to Nespresso if the quality is the same but the price is way lower and getting the product in your home is so much easier? And what happens if other companies, such as German low cost food giant Aldi enters this market with capsules in the 10-20 cent range? One can imagine that Nestlé management has a lot to worry when the summer of 2013 is over.