How will Nespresso cope with competition?
Competition for Nespresso is about to hot up, following news that Mondelez is launching Nespresso-compatible capsules later this year in Germany, France Austria and Switzerland. The capsules will be branded Jacobs and Carte Noire.
So, what does this mean for Nespresso, and what can they do to defend themselves?
1. Benefit from market growth
One positive aspect of new brands of coffee capsule being launched is to further drive market growth. Single serve capsules still only account for 4.6% of the coffee market in the UK, for example, but sales are growing at 40% a year. New brands selling capsules in supermarkets will expose more people to the Nespresso capsule format, given that Nespresso only sell through their own boutiques (online and physical). There's some hope that these people might end up buying a Nespresso machine, and want to try Nespresso capsules with it. So, even if Nespresso's share drops, sales can still increase if the market is growing.
2. Keep product quality up
Key to defending market share will be for Nespresso to continue offering a better coffee experience. Nespresso use a very select blend of coffee, and the technology behind the system is based on 1,700 patents. News following competitive launches that have already happened in the UK and Switzerland tell different stories about how Nespresso has fared so far.
On the positive side, the UK launch of CaféPod capsules in Waitrose seems to have had limited success. The good news is that CaféPod's quality seems to be lowers, despite being priced quite high, at £3.30 vs. £3.00 to £3.50 for Nespresso. Feedback here suggests that CaféPod capsules don't work well with the Nespresso machines, are made of cheaper looking plastic not aluminum, and are more hassle as they are individually wrapped vs. being sold ready to use.
More worrying is the success of the launch of Café Royal by Migros, the leading Swiss retailer. This is credited with slowing down Nespresso growth in Switzerland to "only" 8%. Migros has priced at a bigger discount than CaféPod, at 38 centimes per capsule vs. Nespresso capsules starting at 50 centimes. In addition, Migros have done a much better job at ripping off Nespresso, copying the Italian range names such as Ristretto and having a more premium look and feel. Product quality also seems good, with reports here suggesting that Café Royal’s look and taste beat Nespresso in a Swiss consumer journal survey.
Nespreso can hope that an instant coffee brand like Carte Noire will pose less of a threat than a copycat brand like Café Royal.
3. "Load" your existing customers
Nespresso has a great opportunity to defend against the Mondelez launch by loading its existing customers with product, and so taking them out of the market. This was the tactic used by P&G with Fairy Liquid when Persil launched a competitive dish wash product. 4-packs of Fairy were put on huge gondala ends, taking people out of the marketing during Persil's launch advertising.
The huge advantage for Nespresso is that it has every single customer in a data base, and so can communicate with and market to them all directly.
4. Drive distribution
5. Time to tell a product story?
Nespresso's communication campaign with George Clooney has been lifestyle focused. It will be interesting to see that the post-Clooney campaigns will look like. Perhaps the growth in competition means its time to have a bit more product "sausage" to complement the emotional "sizzle"? However, a watch-out is to avoid becoming too rational and dull. Any product story needs to be romanced, and told in a way that has emotional appeal as well. And Nespresso need to come up with a distinctive brand property strong enough to replace George in peoples' memory structure, which is a big challenge.
In conclusion, my money is on Nespresso continuing to grow nicely. They will benefit, not only loose out, by new brands bringing new consumers into the market. And if they are smart, they can use their direct customer contact capability to take people out of the market during the Mondelez launch.