Nespresso – An Unsustainable Business Model?

 Single-serving coffee made at home.  That’s the category Nespresso operates in – a segment estimated to be 8 billion USD in 2012 (source).

Nespresso

Some laudable facts regarding Nespresso to start with:

  •  It took 30 years for Nespresso to get to where it is now.
  • Their first patent was registered in 1976 and it was launched internationally in 1991.
  • As of 2012,  their concept (machine, capsule, service) is subject to 1,700 patents.
  • Features celebrities, such as George Clooney and John Malkovich, as brand ambassadors.
  • At 55 cents for a 4-g capsule, Nespresso coffee works out to a nerve-jangling $62 per lb. ($137 per kg). And the hefty markup doesn’t seem to bother its fans.
  • Is rumored to command gross margins at about 85%, compared with 40% to 50% for regular drip-coffee brands.
  • The company confirmed that  Nespresso is targeting to grow sales by around half a billion francs in 2013.

(sources for the above information: 1, 2, 3, 4)

As a brand, Nespresso has been vaunted as the “Apple of coffee pods” riding high on the classic razor/razor-blade business model – otherwise called as the Vendor Lock In business model.  See an informative video here on the specifics of the Nespresso business model using the framework of Business Model Canvas.

Nespresso Business Model

Now the not so good news for Nespresso is the emergence of nearly 100 competitors around the world including 50 that claim compatibility with the Nespresso system (many of Nespresso’s patents have expired in 2012).  A more recent Reuters report on the latest threat to Nespresso from Mondelez…

Mondelez International, the world’s second-biggest coffee maker, is going head to head with larger rival Nestle by launching capsules compatible with its Nespresso system to steal a share of the premium coffee market.

The capsules will be sold under the Jacobs and Carte Noire brands in many EU markets in the second half of 2013 – the biggest challenge yet for the $4.4 billion (2.8 billion pounds) Nespresso brand that has sued many copycats.

These are just the warning bells for the company as many more brands jump onto the bandwagon of this fast growing coffee segment.

David Taylor on the brandgym blog posits that these moves can be in the larger interest of Nespresso as long as it ensures the following:

  • Benefit from market growth: Even if Nespresso’s share drops, sales can still increase if the market is growing.
  • Keep product quality up: Continue offering a better coffee experience through its select blend of coffee.
  • “Load” existing customers: Defend against the Mondelez launch by loading its existing customers with product, and so taking them out of the market.
  • Drive distribution: Drive distribution in new channels. e.g., store-within-store formats.
  • Tell a product story:  have a bit more product “sausage” to complement the emotional “sizzle”

I would however beg to disagree here, as I suspect if the current business model can be sustainable in the long term. And my argument is equally applicable to the Tassimo’s, Dolce Gusto’s, Keurig’s and Verismo’s of the world. Why?

Insight #1: Which business are the Nespresso’s of the world actually  into

These brands are not in the business of delivering convenient, barista like coffee at home. Instead they are in the business of making cup after cup of a consistent brew of coffee on demand with consistent being the operative word. Guardian reports

..while pod machines might not make great coffee, they do make a consistent cup. This is making them irresistible to high-end restaurants…. Nespresso machines can now be found in the kitchens of around 30% of the world’s 2,400 Michelin-starred restaurants. The appeal is obvious –they’re consistent, cheaper than hiring a barista and take up less space than a traditional espresso machine.

Insight #2: What can I learn from a cup of Starbucks coffee that bears my name? 

One thing I enjoy the most whenever I queue up at a Starbucks for my cuppa is eavesdropping on how different people want their coffee to be customized (a Quadriginoctuple Frappucino anyone?) and finally seeing them hold on to the cup with their name scribbled on it with an affection and warmth that comes out of familiarity and a sense of having co-created the cup coffee (by the sheer act of asking for a slightly personalized brew!)

The scribbled name on the cup just seals the deal in a magical way.  (speak about The IKEA Effect)

starbucks_cup

Now based on these 2 insights…

What if a ‘coffee pod’ sets up a unique proposition of designing a one of its kind, exclusive and a truly unique coffee blend concocted to your minutest specifications and delivered it to you as your own coffee pod  (like that cup of starbucks with your name on it) for you to be able to enjoy this very same cup of coffee day after day using the machine back home?

The benefits are obvious: enduring consumer relationships, deeper consumer insights, a treasure trove of data on how people love their coffee, a truly unique blend that only you can deliver, resulting in pods that consumers are willing to pay a premium for and finally pods that cannot be easily replicated by the “me too’s” of the world.

Speak about infusing authenticity to the  vendor lock in business model.

Conversations with Yourself

Ads that featured a ‘Before – After’ theme have been around since the dawn of mainstream media and have spanned several categories like beauty, wellness, automobilesapparels, TV channels, hairdressers,beverages, pest control, fitness etc over the years.

Today, while most ads that execute this ‘before-after’ theme, smack of predictability…

Image

There are those few that stand out for their sheer creativity and ingenuity – like the Reynolds Marker ad below: Image

Medifast – a US based Weight Management Centre recently came out  with a great spin to this Before-After theme of advertising. Their campaign called Conversations With Yourself features actual people that underwent their weight loss program with a twist: the heavier version of the participant actually talks with his/her lighter self. Thanks to some clever editing and a ‘straight from the heart’ dialogue, these spots make for a very engaging viewing and strike a very strong chord with the viewers. Do check out all their 3 spots.

(Agency: Solve)

See all the 3 spots featuring Tina, Joseph and Kimberly here. Read more about the making of these spots here.

A great execution that powerfully lands (and personalizes) the key message around change

Interestingly, in 2012,  a Norwegian Yoghurt brand called Tine, made use of this very construct to communicate the opposite – of some things NOT changing despite growing up. Check out the brilliant execution here:

Conversations with Yourself – as a construct – is rife with possibilities and can be a powerful  means to land ideas that resonate emotionally with the consumer and become strong hooks to the category.

Immensely liked the power and the simplicity of these spots.

Art Of Making Noise. Perfected

How would you make branded noise without making any ‘noise’?

We might need to ask Selfridges, the high end department store chain in UK (which has been voted Best Department Store in the World in the Global Department Store Summit, Paris 2012).

As part of their recent drive called No Noise – Selfridges embarked on a bold new initiative to offer a unique experience to its shoppers that is de-cluttered, de-branded and ‘de-noiseified’.

1. De-cluttered: By featuring fashion/apparels/beauty products that are a ‘carefully curated edit’ of minimalist design from brands like Jil Sander, Uniform Wares etc.  

curated-edit

2. De-branded: By featuring flagship products from brands like Heinz, Levi’s, Beats by Dre, Marmite, Crème de la Mer & Clinique that are (surprise..surprise..!) stripped off their logos. As it says on the website

  “Some of the world’s most recognizable brands have taken the symbolic step of removing their logos in our exclusive collection of de-branded products.”

No Noise Assortment

and ..

3. De-Noise -ified:  by getting equipped with Headspace pods and a re-instated ‘Silence Room’ – dedicated oasis of silence and contemplation amidst the usual frenzy of brands and bargains where shoppers can get access to guided meditation modules  and an ambiance  to help calm busy heads.

This is how they explain the No Noise initiative on their website:

As we become increasingly bombarded with information and stimulation, the world is becoming a noisier place. In an initiative that goes beyond retail, we invite you to celebrate the power of quiet, see the beauty in function and find calm among the crowds.

A couple of thoughts on No Noise:

  1. The initiative sounds like a very unique (and a first of its kind?) anti-retail concept by a retail brand 
  2. Sounds like the high street fashion’s foray into the space of low-fi living – the recent lifestyle trend that is picking steam where less is said to be more
  3. And obviously, contrary to the stated purpose, these products with stripped off logos end up creating buzz and making the greatest magnitude of noise.  For, after all, any partially fleshed out visual element that only leaves out the name and yet succeeds in making the shopper recognize its identity in no uncertain terms is a clever way to trigger imagination, engage attention, and reinforce the shoppers’ memory structures about the brand’s visual identity.
  4. Finally and more importantly it is clearly a self bragging loud statement by these brands on the iconic status of their visual identity elements so much so that these ‘unbranded’ products are being offered as exclusive collector’s items (Selfridges has even debranded its own bag).

To sum it up, as Tim Nudd aptly notes in AdWeek:

Throw in all the communications surrounding “No Noise,” and it seems the company is making more noise than ever this year.

Talk about the next level of sophistication in making noise without making noise.

Reminded me of Andrew Miller’s experiment Brand Spirit in 2012  – check out my  related post.