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Nestle : Nespresso serves up a big-cup system to stay ahead in coffee war

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10/05/2018 | 09:11am EDT

INTERNATIONAL -The Nespresso coffee-capsule system has been derided as an expensive and environmentally unsound device that clutters up the kitchen counter. Nestle SA says you should get a second one.

The Swiss food giant is pushing a machine into Europe that uses the same principle as the original espresso maker touted by George Clooney, but with some notable differences: the pods are bigger to brew a larger cup, meaning they’re incompatible with existing Nespresso machines. But they’re also patent protected for many years, letting Nestle lock in a market that’s slipped from its control on the smaller pods competing with knock-off models.

Nestle has to make some bold steps if it wants to preserve its lead in the tumultuous coffee market, which is undergoing a dramatic transformation as new players like Coca-Cola Co. muscle in and JAB Holding Co.’s years-long takeover spree of java brands continues unabated. Nestle has responded with some strategic moves of its own, buying the majority in Blue Bottle Coffee, a niche U.S. player that’s popular with millenials, and splurging on a partnership with Starbucks.

Nestle originally created the system, called Vertuoline, for the U.S. market a few years ago because consumers there prefer bigger servings to the diminutive espresso. It’s now making a bet that the rest of the world, too, wants to drink large. After an initial push into France and the U.K., it’s targeting eight additional countries by the end of this year.

“The whole coffee category and coffee consumption habits are evolving quite quickly,” Nespresso Chief Executive Officer Jean-Marc Duvoisin said in an interview in Lausanne, Switzerland. “In the long run, I’m convinced Vertuoline will make sense everywhere, or almost everywhere.”

Marketing Heft

Nestle is packing its formidable marketing punch into the new line. Stroll into the Nespresso boutique in Berlin’s KaDeWe store, and the colorful domes of Vertuoline sit prominently on display, with shop assistants steering prospective customers to the machines. There’s a promise of a 40-euro rebate towards buying a machine, and credit to the same amount on the first batch of pods.

The company, which has launched recycling initiatives for Nespresso capsules to blunt criticism of the waste it produces, may have further convincing to do to reel in more buyers. The larger pods cost almost twice as much as many of the smaller servings. Then there’s the risk sparking domestic disputes over the use of scarce counter space.

“I wouldn’t buy the new machine because I don’t want two devices standing around, especially not again with extra capsules,” said Verena Romer, a 34 year-old social worker in Elsau, Switzerland.

Nestle Chief Executive Officer Mark Schneider has identified coffee as a key growth driver, but the company needs a jolt after the weakest sales growth in more than two decades. Already, Nespresso has welcomed coffee-giant Starbucks into its home by producing pods with the U.S. company’s branding, effectively entering the knockoff capsule market.

Rivals are doing their part to shake up the market. Coca-Cola Co. became the latest company to throw down the gauntlet with its acquisition of U.K. chain Costa, after years of growing competition from JAB Holding Co., backed by the billionaire Reimann family, which spent more than $30 billion building a coffee empire. Nestle countered with a $7.2 billion deal to market the Starbucks capsules, as well as their beans.

Waiting Game

Vertuoline, armed with a slew of patents until at least 2030, allows consumers to choose among five cup sizes. It works only with capsules that have bar codes inscribed on the edges. The machine sells for $199 in the U.S., compared with $149 for a Nespresso Essenza Mini. If customers in France subscribe to receive capsules for at least a year, they get a machine for a nominal price of 1 euro.

One large-cup Vertuoline pod costs as much as $1.20, 67 percent more than an original Master Origin capsule. The price in Europe is 70 Euro cents for the most expensive, but there are also espresso servings that cost 45 euro cents, only a slight premium to the small capsules.

“Vertuoline will better secure the resilience of the business, as it’s not compatible with other capsules,” said Pierre Tegner, an analyst at Oddo Bhf in Paris. “It’s more for new consumers. But would new consumers like an exclusive system?”

Nespresso struggled for about a decade, and only when the company invested heavily in a network of boutiques—turning the mundane task of stocking up on coffee into a luxury indulgence—did the concept take off. But the market has evolved since its patents expired earlier this decade, allowing rival capsules to muscle in and dent sales. Other players have also created own capsule-systems. Many Nespresso-machine users now only buy cheaper knockoff pods.

Nestle stopped breaking out Nespresso revenue in 2012, citing the competitive environment, but its sales are estimated at 5 billion Swiss francs ($5.2 billion). Nespresso is counting on Vertuoline for a boost in Western Europe, its key market, where it’s been unable to gain market share since 2009, according to Euromonitor International.

At least in North America, Vertuoline has helped Nespresso reach “strong” double-digit sales growth in a region that’s historically been a weak spot for the company. Nestle Chief Financial Officer Francois-Xavier Roger said in February that Vertuoline contributed almost one third of Nespresso’s organic growth in 2017.

“I wouldn’t mind having to exclusively use Vertuoline capsules,” said Katharina Seyffart, a 40-year-old product manager in Duderstadt, Germany, who likes to drink a big cup of coffee in the mornings and an espresso in the afternoons and said she’s interested in the new device. “But I’d probably sell my current Nespresso machine on Ebay due to lack of space in the kitchen.”

A general view of the Nestle Nespresso Production and Distribution Centre in Avenches


(c) BusinessReport 1999 - 2018 Independent Newspapers (Pty) Limited. All rights strictly reserved. Provided by SyndiGate Media Inc. (Syndigate.info)., source Middle East & North African Newspapers

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COCA-COLA COMPANY (THE) -1.24% 51.12 Delayed Quote.9.31%
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Financials (CHF)
Sales 2019 95 245 M
EBIT 2019 16 347 M
Net income 2019 11 325 M
Debt 2019 33 201 M
Yield 2019 2,60%
P/E ratio 2019 25,82
P/E ratio 2020 23,08
EV / Sales 2019 3,50x
EV / Sales 2020 3,36x
Capitalization 301 B
Duration : Period :
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Technical analysis trends NESTLÉ
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Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 28
Average target price 102  CHF
Spread / Average Target 0,50%
EPS Revisions
Ulf Mark Schneider Chief Executive Officer & Director
jeff hamilton President
Paul Bulcke Chairman
Magdi Batato Executive Vice President-Operations
François-Xavier Michel Marie Roger Chief Financial Officer & Executive Vice President
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1st jan.Capitalization (M$)
NESTLÉ26.57%307 670
DANONE22.39%58 816
GENERAL MILLS37.83%32 155