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.

Colors

Fiskars is the world’s No. 1 scissors brand. Visit its website and you would notice that the landing page features not the picture of its scissors, but just that of its handles – Orange handles, to be precise. Why?

It’s because Fiskars as a brand is synonymous with its flagship product: The Orange-Handled Scissors™ (yes, they really did trademark this name!). Known for its quality and precision the world over, this particular type of scissors has sold over 1 billion since 1967. What is interesting is that these scissors have become so popular that the company has actually registered its trademark Orange color by the name Fiskars Orange®.

(Image Source: Fiskers PDF – The DNA Of a Design)

Today it is one of the most recognized (and imitated) color for a pair of scissors across the world. So much for a color, you’d think?

On April 1, 2012, Seth Godin (author of the best seller: Purple Cow) wrote a blog post announcing that he would henceforth start filing lawsuits against people that use the color purple! He stated that his “lawyers were able to trademark the terms Purple® and Purple Cow®, and beyond that, to get a design patent on the idea of using Purple® in the marketing of a product”. Of course it was an April Fools joke. Interestingly, exactly 6 months after this blog post, this has actually become a reality. Only, it’s not Seth Godin this time. It’s the world’s 2nd largest confectionary brand – Cadbury.

The brand, which had used the purple for more than 90 years, has apparently been locked in a legal battle with Nestlé for the last four years over the use of this color. Nestlé’s appeal was overturned on October 1st 2012 in the UK High Court, where it was ruled that the color has been distinctive of Cadbury for its milk chocolate since 1914. Thereby Cadbury retains the exclusive use of Pantone 2865C purple. (Interestingly, a 2008 book on Cadbury by John Bradley was named: Cadbury’s Purple Reign)

(Image source)

So much for a color, you’d think?

Not till you realize that Purple as a color is associated with royalty, luxury, sophistication, creativity, mystery, and magic. Moreover, by some studies, Purple has been found to be evocative of ‘desire’ and proven to be a good choice for feminine design. No wonder then, Mondelez International – the snacks division of Kraft Foods uses purple as its signature color. (Milka, another major chocolate brand from Mondelez also comes in purple!)

Evidently, Color plays a very important role in a brand’s subliminal messaging and thereby heavily influences its consumers’ perceptions. So major brands significantly investing in owning colors, for all they are worth, has become a common phenomenon.

Luxury Brands are no exception too. For eg, the distinctive “Tiffany blue color” is protected as a color trademark by Tiffany & Co in a number of countries globally. Befitting its luxury credentials, the color is so exclusive that it is produced as a private custom color by Pantone, with PMS number 1837, the number derived from the year of Tiffany’s foundation.

Today it has come to exude the material symbolism of romance and evokes the emotions of care and pampering. In many ways it is associated with all things exclusive and personal – intimately evoking those waves of ‘free spiritedness’ from deep within a women’s heart. May be that explains why a number of luxury brands try their hand at using this iconic color in their branding.

Can you think of any other distinctive color that is owned by a brand?