The coffee capsule system was invented in 1970 by Swiss engineer and Nestlé employee Eric Favré, who patented it under the Nespresso name six years later. When the company first launched in 1986 in the Swiss market, it proved to be a failure; the capsules underwent many changes and improvements until it became profitable for the first time in 1991. Today, Nespresso is part of the Nestlé Group and is positioned in the premium portioned coffee segment. Its brand is recognised worldwide as the producer of high quality coffee capsules and machines.
Despite being the first-mover and an industry giant in the portioned coffee market, Nespresso has been facing increasing competition from other similar companies. Below is my analysis of Nespresso’s competitive environment using Porter’s Five Forces.
Threat of substitutes:
Substitutes for portioned coffee include filter coffee, instant coffee, and traditional espresso. Substitutes for coffee itself are other hot beverages such as tea and caffeine-free products including hot chocolate and roasted grain drinks. Since the portion-coffee system is the most expensive due to the complexity of its machinery, consumers are likely to switch to cheaper substitutes as switching costs are low. Therefore, Nespresso must sustain its product differentiation as a luxury good in order to attract consumers who are willing to pay a higher price for high quality coffee. Since the present rate of total portion-coffee sales is still high, this implies that portion-coffee consumers are not price sensitive and substitutes do not pose a great threat to Nespresso.
Threat of new entrants:
After Nespresso’s 1,700 patents started to expire in 2012, numerous companies such as Lavazza, Senseo, and Tassimo began entering the portioned coffee market with similar capsules, pods, and pads. Nespresso no longer has the monopoly for portioned coffee, and new companies offering their own products in their national markets threaten the profitability of Nespresso overseas. However, initial setup costs are high and products must comply with technical standards and norms, which act as barriers to entry.
Bargaining power of suppliers:
Nespresso’s capsule manufacturers do not have bargaining power, as they manufacture exclusively for Nespresso. Suppliers of raw materials such as aluminium or coffee beans may be able to negotiate pricing; however, due to Nespresso’s well-established relationships with coffee farmers from the Rainforest Alliance, switching costs for suppliers are high and farmers would not want to lose Nespresso as a customer.
Bargaining power of buyers:
Buyers of Nespresso products do not have bargaining power, as Nespresso makes its own decisions on the manufacturing and distribution of its products. Nespresso creates exclusive points-of-sale and does not distribute through traditional retailing channels. Customers would either have to visit one of Nespresso’s concept stores or order its products online. Despite this, sales continue to be high. This suggests that concept stores improve customer experience and help differentiate Nespresso from cheaper brands found in any supermarket.
Competitive rivalry:
Competition among newly established portioned coffee companies is strong. The French-based company Malongo also offers coffee pods in the high-end segment and distributes them to consumers through its own flagship stores. Nespresso is threatened by other units within the Nestlé Group, such as Nescafé’s Dolce Gusto brand of coffee capsules and pods. Senseo and Tassimo coffee machines sell at much lower prices and work with tea and hot chocolate capsules as well. Even though Nespresso owned 34% of the market share in 2014, Dolce Gusto and Tassimo generated the most sales. To compete against these brands on the market, I believe that Nespresso should focus on innovation and advertising to increase its profits.
References:
https://www.slideshare.net/marinescnd/nespresso-marketing-analysis-2014-complete-analysis
https://www.which.co.uk/reviews/coffee-machines/article/nespresso-tassimo-or-dolce-gusto#tassimo
