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Nestlé's Strategy in Luxury Coffee War

Nestlé is facing competition in its luxury Nespresso coffee brand from cheaper generic rivals. While Nespresso has been very successful, growing annually at 30%, its dominance of the niche high-end coffee market meant competitors would emerge. Two new competitors have launched coffee capsules compatible with Nespresso machines that are 10% cheaper. Rather than engage in a price war, Nestlé will enhance its luxury marketing of Nespresso by opening more boutiques, launching a home delivery service, and protecting its patents to maintain Nespresso's brand as a high-end luxury good.

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49 views3 pages

Nestlé's Strategy in Luxury Coffee War

Nestlé is facing competition in its luxury Nespresso coffee brand from cheaper generic rivals. While Nespresso has been very successful, growing annually at 30%, its dominance of the niche high-end coffee market meant competitors would emerge. Two new competitors have launched coffee capsules compatible with Nespresso machines that are 10% cheaper. Rather than engage in a price war, Nestlé will enhance its luxury marketing of Nespresso by opening more boutiques, launching a home delivery service, and protecting its patents to maintain Nespresso's brand as a high-end luxury good.

Uploaded by

Hồng Phúc Phạm
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 7_Nestlé refnes its arsenal in the luxury coffee war

In an attempt for Nestlé to refine its arsenal in the luxury coffee war, it employs
segmentation and positioning principles. Nestlé has been thinking about how to
respond to generic rivals threatening to challenge the spectacularly successful
luxury coffee brand, Nespresso. The stakes for the Swiss food Multinational are
particularly high. Only last week, Nestlé reported higher-than-expected first-quarter
revenues, in large measure thanks to the continued boom in demand for its
Nespresso coffee capsules. Since it was launched in 1985, Nespresso has grown at
an annual rate of about 30 per cent. It has become one of the company's so-called
"billionaire brands' with sales last year of SFr2.8bn ($2.6bn). It has also become a
compelling case study in developing a global luxury brand in a niche of an
otherwise mass-market business and in so doing has created what has been called
the Louis Vuitton of coffee. Under the circumstances, it was only going to be a
matter of time before others decided to exploit this business. This month, French
retail outlets began selling espresso coffee capsules compatible with Nespresso
machines made by Sara Lee of the US under its L'Or Maison du Café label. These
are about 10 per cent cheaper than Nespresso capsules and come in four varieties -
'Delizioso', "Decaffeinato', "Splendente' and 'Forza'.
Next month, another rival product is set to hit the market. This one has been
developed by a venture called Ethical Coffee Company set up by Jean-Paul
Gaillard, a former Nespresso chief executive. His capsules, also compatible with
Nespresso machines, will be sold by the French retailer Casino. Why is the
competition targeting its first assault against Nespresso in France? Simply because
the country, along with Germany, is one of the biggest markets for Nestlé's luxury
coffee brand. The latest sales figures show that Europe continues to account for
90% of Nespresso sales with the Americas and Asia each accounting for 5%. So
what is Nestlé going to do? The answer is nothing, or as Richard Giradot,
Nespresso's current chief executive, told the French newspaper Le Figaro on
Tuesday: 'Our response is not to respond. Rather than engage in a price war and
start selling its capsules in mass retailing outlets for the first time, Nestlé has
decided to boost even further its luxury marketing approach for Nespresso. This is
based on what it likes to call its 'trilogy concept'- top quality coffee grandly
described like fine wines as 'grand cru', stylish coffee machines and highly
personalized customer service.
Coffee machines are available in retail outlets but the capsules - there are about
19 varieties - can only be bought online, by telephone or at the 190 or so Nespresso
boutiques scattered round the world. Customers are also automatically enrolled as
members of the Nespresso club and loyalty program. Nestlé plans to open a further
40 boutiques this year and has just started testing a home delivery service in Paris
that will eventually be introduced in other countries. The Swiss multinational's
lawyers are also working overtime to see whether the rival capsules infringe one of
the 1,700 patents it has filed to protect its Nespresso brand. In so doing it is
following the example of litigious luxury goods groups that have traditionally
fought tooth and nail to protect their brands.
Source: from “Nestlé refnes its arsenal in the luxury coffee war”, Financial Times,
April 28, 2010 (Betts, P.).
Discussion questions
1. Why is the niche market occupied by Nespresso attractive to generic rivals?
A niche market does not necessarily mean a small market, but does involve
specific target audiences with a specialized offering. First of all, niche market is a
small subgroup market aimed at specific target, so in capital market or in the global
nature of business that when a company creates a new service or product, it’sonly a
matter of time before a competitor comes along. When marketing to a niche
audience, the impact of a new competitor can have a much more dramatic effect
than when the audience is bigger. Strong relationships and brand loyalty can help to
provide some level of protection for businesses.
Nespresso has succeeded in dominating the niche and engaging the rivals in the
common market by:
- The success of selling its high-end coffee, Nespresso.
- The success of the Nespresso coffee brand in the world's high-end coffee
market.
- Entry of competitors who threaten to challenge success its high-end coffee
brand, Nespresso.
- The entry of other companies that participate in the exploitation of the high-
end coffee business.
2. Why is Nestlé's response to this onslaught 'not to respond'?
- Nestlé does not want to get into a price war with competitors.
- Nestlé did not want to start selling its coffee capsules in retail outlets for the
first time.
- Nestlé decided to further enhance its high-end marketing approach for
Nespresso.
3. What bases could marketers use to segment the coffee market?
Marketers have been based on the facilities below for market segmentation:
- Nestlé plans to open 40 more boutiques.
- Started experimenting with home delivery services in Paris.
- Swiss multinational lawyers work overtime to ensure the competitor's coffee
capsules do not infringe Nespresso's 1,700 patents.

Common questions

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Nespresso boutiques are integral to maintaining its luxury brand image by offering a unique retail experience that aligns with its high-end positioning. Boutiques enhance brand perception by fostering exclusivity through personalized service, direct engagement with customers, and limited distribution, reinforcing the brand's prestige .

Nestlé employs market segmentation by targeting luxury-focused customers through exclusive sales channels. They enhance the customer experience with initiatives like opening additional boutiques and experimenting with home delivery services, tailored to affluent clientele seeking convenience. Such segmentation helps them retain brand loyalty despite competitive threats .

France is targeted by competitors because it, along with Germany, represents one of the largest markets for Nespresso. This makes it a strategically significant location for rivals to introduce their compatible, albeit cheaper, coffee capsules .

Instead of engaging in a price war with competitors, Nestlé chooses to reinforce its luxury marketing strategy. This involves maintaining its premium positioning through the 'trilogy concept': ensuring top quality coffee, stylish coffee machines, and highly personalized customer service. The capsules are exclusive to online sales, telephone, and Nespresso boutiques, promoting a sense of exclusivity and luxury .

Brand loyalty provides Nestlé's Nespresso a shield against competitors by fostering strong customer relationships and creating a barrier to entry. Loyal customers value the quality and exclusivity associated with Nespresso products, making them less likely to switch to rival brands, even when cheaper options are available .

The 'trilogy concept' comprises offering top-quality coffee, stylish machines, and personalized service, which positions Nespresso as a luxury brand distinct from mass-market offerings. This strategic focus reinforces exclusivity and elevates the customer experience, enhancing brand differentiation and loyalty .

Gaillard's partnership with Casino leverages his insider knowledge as a former Nespresso CEO to develop and market capsules that directly compete with Nespresso’s, offering cost-effective alternatives to a broad retail audience. This strategy potentially disrupts Nespresso's market share by providing accessible, compatible options to consumers .

Nestlé employs a legal strategy to protect its Nespresso brand, ensuring that the plethora of 1,700 patents filed for Nespresso serve as a strong defense line. Their legal team is dedicated to examining whether competing capsules infringe upon these patents, following the precedent set by luxury goods companies in vigorously protecting their brands .

The emergence of compatible coffee capsules, priced lower than Nespresso's offerings, poses a significant challenge by tapping into cost-sensitive segments of Nespresso’s customer base. This threatens Nespresso’s market share and pressures the brand to innovate and reinforce its luxury appeal to mitigate potential customer loss .

By maintaining premium pricing and exclusivity, Nestlé can reinforce the luxury status of Nespresso, making it a desirable brand for consumers seeking high-quality and exclusive products. This approach capitalizes on consumers' willingness to pay more for perceived value and prestigious experiences, which can be more sustainable than engaging in short-term price wars .

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