Brewing a Successful Future at Nespresso?

Predicated on the idea that anyone can make the perfect espresso just like those served in the best Italian cafes, in 1987, Nespresso created and dominated an entirely new coffee category, the gourmet single-cup coffee market. The product consists of high quality, individually-portioned coffee in aluminum capsules for use in specially-designed machines, sold at household appliance retailers and the Nespresso shop (See Figure 1a and 1b below). By the 2000s, Nespresso had become Nestle’s fastest-growing product line, growing at 40% annually, and the company continued to expand its coffee expertise by creating unique new blends. Nespresso was regarded as an example of Nestle’s spirit of discovery and ability to innovate and Nestle built a new consumer experience with the unique “razor-razor blade model” for coffee, technology, machine, and capsules.

Figure 1a. Nespresso product line

Figure 1b. Nespresso capsules

Although Nestle enjoyed its success for many years, its success eventually led to the entry of many competitors in this lucrative single-serve coffee business, where profit margins for one capsule could be up to 50%. By 2012, Nestle dominated the single-cup coffee market with a 34% revenue share (See Figure 2), and chief amongst the competition was Keurig Green Mountain, who had become the dominant player in the North American market. In addition, Nespresso’s patents began to expire in 2012, gradually allowing competitors to release similar machines and capsules. For example, competitors such as Keurig Green Mountain (formerly Green Mountain Coffee Roasters) were releasing their own version of single-serve machines and capsules, while other companies such as Ethical Coffee Company SA and Mondelez International Inc. were producing less expensive capsules that were designed to be compatible with the Nespresso machine.

Figure 2. Coffee capsules market breakdown, 2012.

Nestle tried to maintain its grip on the capsule market through the use of its numerous patents and legal action against some of its rivals, but had little success. Furthermore, in 2013, one of Nestle’s patents covering the Nespresso coffee system was revoked, further hurting the conglomerate’s attempts at protecting its brand. As a result of these changes, the Nespresso brand has been losing global market share, by volume, to competitors. Nespresso controlled 11.1% of the global capsule market in 2015, down from 13% in 2011 (See Figure 3).

Figure 3. Nestle’s continued fight against its competitors

As competitors continued to chip away at its market share, Nespresso has been spending heavily on marketing and R&D to stay ahead, two areas in which the company is known to excel. Furthermore, Nespresso, and Nestle overall, have been increasingly looking for ways to innovate and digitalize the company.

How has Nespresso been attempting to digitalize and transform the company?

Nespresso’s overarching goal, or job-to-be-done (shameless BSSE plug), has always been to deliver the perfect coffee experience. Through its incorporation of technology, it has been able to focus even more on the experience aspect of its products and in recent years, Nespresso has created a transformative experience for its customers. Overall, they have enabled simple digital transactions, drove personalization and customization across channels, leveraged digital media to craft and deliver is brand, and blended digital and physical channels for a meaningful experience.

Below are some of the ways that Nespresso has digitalized the company in order to fight its competition:

• Leverages digital channels to release content, with actor George Clooney as the face of Nespresso
• Existence of both online and offline channels, that allows customers to engage with the brand via the website, mobile, airport vending machines, Nespresso retail shops
• Seamless e-commerce experience, where consumers can order any combination of capsules that will be delivered within 2 days
• Nespresso Cube, a digital and fully automated boutique, which offers consumers state-of-the art personalized shopping experiences and limited-edition flavors. After placing their order on a digital screen, consumers can watch robots process their orders at incredible speeds. (Click here for video)
• Leverages a cloud-based customer engagement solution that synthesizes all consumer data (web and app orders, in-store orders, behavioral analytics, interactions with Nespresso kiosks) all in one unified customer view. Allows the company to make recommendations and target media.
• Use of big data to derive insights and personalize products for consumers

However, possibly one of the greatest ways in Nespresso has made strides in its digital transformation is the creation of the Prodigio machine, which makes the Nespresso machine a part of the IoT revolution (See Figure 4). The Prodigio connects the machine to your smartphone via Bluetooth technology and offers additional benefits through the use of its app. The Nespresso app alerts your phone when the coffee machine needs service maintenance or water tank refill and also lets you set a time for the machine to make coffee. Furthermore, the app lets you reorder capsules before you know you need them, allowing you to order with one touch. Because the individual capsules are at the core of Nespresso’s business model, the Prodigio allows Nespresso to go after this revenue.

Figure 4. Nespresso Prodigio machine

While Nespresso has made many changes to help it survive, still more needs to be done. So far, efforts have been defensive, and now Nespresso needs to take initiative to be more active in its digital transformation efforts. Some steps that Nespresso can take to further its changes include:

• Provide a truly seamless cross-channel experience
  While Nespresso claims that it offers a seamless omni-channel experience, the line between digital and physical has not been blurred enough, providing a less cohesive experience. For example, Nespresso should think of ways to allow its consumers to continue an order online that wasn’t finished at the store, since consumers want an experience that caters to where they are. Instead, as of now, consumers must restart their order.

• Unify service with fully integrated customer data
  Since Nespresso is focused on creating the best customer experience possible, its customer service would be much better if representatives could pull up a customer’s profile and get a better idea of who the customer is, what their preferences are, etc.

• Target and personalize experiences for millennials
  Millennials are a notoriously difficult group to capture for retailers. In addition, millennials have been stated to invest less in the single-cup coffee machines than its previous generations. In order to capture this audience known for shopping increasingly on smartphones, Nespresso needs to focus more on its digital channels

 

 

 

Sources:

^[1] David E. Bell and Mary Shelman, “Nestlé”, Harvard Business School case, Rev. October 2012
^[2] Rebecca M. Henderson and Ryan Johnson, “Nestlé SA: Nutrition, Health and Wellness Strategy”, Harvard Business School case, Rev. May 2012
^[3] Michael E. Porter, Mark R. Kramer, Kerry Herman, Sarah Mcara, “Nestlé’s Creating Shared Value Strategy”, Harvard Business School Case, Rev. May 2016
^[4] Nestlé company website, available at http://www.Nestlé.com/, accessed November 2017
^[5] Nespresso company website, available at https://www.nespresso.com/us/en/, accessed November 2017 ^[6] Revill, John, “Nestlé Has Patent for Nespresso System Revoked,” The Wall Street Journal, October 11, 2013, accessed October 2017
^[7] Chaudhuri, Saabira, “Trouble Brewig for Nestlé in Coffee-Pod Market,” The Wall Street Journal, February 23, 2016, accessed November 2017
^[8] Joyce Miller and Kamran Kashani, “Innovation and Renovation: The Nespresso Story”, International Institute for Management Development case, Rev. March 2003
^[9] Kurt Matzler, Franz Bailom, Stephan Friedrich von den Eichen, and Thomas Kohler, “Business model innovation: coffee triumphs for Nespresso”, Journal of Business Strategy, 2013
^[10] Nestlé 2016 Annual Report