Berkeley MBA 211 - Nespresso's Brewing European Coffee War

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!Nespresso’s(Brewing(European(Coffee(War(Ethical(Coffee(Company(and(Sara(Lee(Enter(A(Monopolist’s(Market(Anup(Anajpure,(Erik(Kiewiet(de(Jo nge,(Ign acio(Larrain,(Rai mundo(S ilva(! ! Anajpure,!Ki ewiet!de!Jonge,!Larrain,!S ilva!!1!Executive(Summary(The! case! is! a! subset! of! the ! coffee! w ar! currentl y! brewing! in! Western! Europe! between! Nestl é,!Sara!Lee!and!Ethical!Coffee.!Nestlé!is!the!incumbent!in!the !market!with!a!monopoly!over!its!home‐coffee! system! with! 1,700!patents.! T he! c offee! machine‐coffee!podsmodel! is!almost!id ent ical!to! the!raz or‐razor! blade! busin ess ! m odel! where! Nestlé! makes! m oney! primarily! on! the! coffee ! pods.! The!case!outl ines!how!two!new!companies!one!large!(Sara!Lee) !and!one!small!(Ethical!Coffee)!enter!the!coffee!pod!market!in!Fran ce.!The!inflexibility !of!Nestlé!to!price!compet itiv ely,!flood!the!market!or!potential ly! legally! defend! its! patents! pre sents! an! opportunity! for! new! en trants.! Sara! Lee! openly!declares!commitment!to!entering!this!market.!E thical!Coffee!signals!to!Nes tlé!that!it!is!n ot!violating!any!pa tents!and!thus!also!lends!c red ibility!to!Sara!Lee’s!entry,!which!will!most!likely!bear!the!cost!of!a!legal!battle!with!Nestlé.!Ethi cal!Coffee!will!get!free!rider!benefits!of!the!legal!fight!between!the!two!large!companies!and!minimizes!its!e xposure!t o!legal!battles.!!Nestlé(and(Nespresso(George! Clooney! famo usly! asks,! “What! else?”! in! his! role! as! the! face! of! Nespresso’s! brand.!!Nespresso,!a!whol ly!owned!subsidiary!of!the!glob al!f ood!conglomerate!Nestlé,!has !led!the!high‐ end,!individua l! espresso! c offee! br ewing! business! since ! bringing! its! first! product! to! market! in! 1986.!!Clooney’s!association!with!this!h igh‐end!brand!works:!Nespresso!has!held!a!mo nopoly!on!this!chic!personal! espresso! system! cited! by! some! as! the! “’most! expensive! coffee! you! can! bu y! per ! cup’! for!home! use.”1!!!The!Nespres so!SA!company!was!founded!in!Vevey,!Switzerland!i n!1986!under!the!ownership!of!the!Nest lé!Group .!!Nespresso!partnered!with!a!Swi ss!manufacturer,!Turmix,!to!produce!and!launch!the! first! Nespresso! coffee! syste m! in! the! office! coffee! market! i n! Switzerl and! and! Italy.! ! Nestlé!produced!the!first! coffee!c apsules!at!i ts!Swiss!factor y!in!Orbe.!!Ne spress o.!!Nestlé!traces! the!roo ts!of!Nespresso!back!to!the!belief!that!consumers!wanted!to!h ave!café‐style!espr esso!experiences!in!the!home! and! work! place.! ! Nespresso! beli eved! that ! the! per fect! combinatio n! of! the! h ighest! quality!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1!Business!Week!(B loomberg).!!Mulier,!Tom. !“Sara!Lee!Answers!Clooney’s!N espresso!Query!with!Cheap er!Coff ee.! !April!7,!2010.!Quote!from!Ja mes!Amoroso,!a!food!industry!c onsultant!based!in!Walchwil,!Switzerland.!! ! Anajpure,!Ki ewiet!de!Jonge,!Larrain,!S ilva!!2!coffee,!water!and!air!pressure!was!necessary!to!deliver!a!supe rior!espresso.!!With !this!thinking!the!Nespresso!system!was!born.2!Sin ce!1986!Nespresso!has!expanded!beyond!its!initial!partn ership!with!Turmix!for!prod uction !of!its!Nespresso!machines.!!Toda y,!Nespre sso!counts!as!partners!such!precision!manufacturers!as!DeLonghi,! Jura,! Koenig,! Krups,! Miele! and! Siemens,! all! of! whom! provide! a! global! distribu tion!network! of! precision! Nespresso! machi nes.! ! These! machines,! starting! at! €149! ($200),! are! sold! a t!over!12, 000!points!of !sale!gl obally ,!predominately!in!large!department!stores.!!!Nespresso!has!also!cul tivated! a! prestigious! boutique ! presence! in! gl obal! cities! like ! London,! New! York! and ! Pa ris.! ! T o!complete! the! Nespresso! system,! Nespresso! produc es! its! aluminum,! hermet ically! sealed! coffee!capsules!in!Nestlé’s!Swiss!f actories.!!These!capsules!are!sold!through!Nespresso’s!exclusive!online!coffee!club!a nd!specialty! coffee! retailers.3!!Nespresso! has! enjoyed! a! monopoly! status! in! the! h igh‐end! personal! espresso! system! marke t!since! 1986.! ! A! complex! web! of! an! estimated ! 1,700! patents! pr otect! its! systems! from! competitive!infringement,4!meaning!that!once!cu stomers!have!pur chased!a!Nespresso!mac hine,!they!are!locked!in!to!buying!Nespresso ‐on ly!coffee!capsules.!!This!monopoly!position!has!resulted!in!strong!prici ng!power:! a! 10‐pack! sleeve! of! Nespresso! capsules! sells! for! as! much! as! €3.70! ($ 4.95)! in! France,! a!whopping!€0.3 7!a!ca psule.!!To!soften!the!high!price,!N estlé!claims!that!only!1%!of!the!world’s!coffee!supply!meets!its!exacting!stan dar ds.5!!Nestlé!doe s!not!disclose!profit s!on!caps ules,!though!analysts!say!Nespresso!makes!mo st!of!it s!money!from!pods6!–!a!classic!razor!and!razor!blade!strategy.! !Sara(Lee(Sara!Lee!Corporation!is!a!Downers!Grove, !IL!–!b ase d!global!food !conglomerate!with!brands!like!Ambi!Pur,!Ball!Park,!Douwe!Egberts,!Hillshire!Farm,!Jimmy!Dean ,!Kiwi,!Sanex,!Senseo,!and!Sara!Lee !in! its! portfolio.! ! Found ed! in! 1 939! b y! Nathan ! Cummings’! purchase! of! C.D.! Kenny! Company! in!Baltimore,!MD,!the!Sara!Lee!Corporation!went!by!many!names!until!officially!consolidating!under!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!2!Nespresso.!! “Abou t!Us!–!Our!History.”!3!Ibid.!4!Business!Week!(B loomberg).!!Mulier,!Tom. !!“Nespresso!Rival!Say s!Orde r!Book!Full!at!4!Billion!Capsules.”!March!31,!2010.!!5!Business!Week!(B loo mb erg).!April!7,!2010.!6!The!Wall!Stree t!Jo urnal.! Passariello,!Christina.!“Nestle!Stakes!Its!Grounds!in!a!European!Coffee!War.”! April!28,!2010.!!!! ! Anajpure,!Ki ewiet!de!Jonge,!Larrain,!S ilva!!3!the!Sara!Lee!Corpor ation!banner!in!1985.!!Sar a!Lee!first!dip ped!its!toes!in!the!c offee!market!with!an!inv estment!i n!the!257!year‐old!Dutch !coffee !and!grocery!company!Do uwe!Egberts !in!1978.7!!!Not!until!2002!did!Sara!Lee!enter!the!personal!coffee!machine!business!with!its!Senseo!system,!led!by!Douwe! Egberts! a nd! part ner!Philips! Electronic s! in!the! Netherlands.! ! Sara!Lee! l aunched! the!Senseo!system!in!the!United!States,!Unite d!Kingd om !and!the!D enmar k!in!2004.8!!The!Senseo!system!target s! mid‐mark et! customers! a nd! does! not! carry! the! same! prestige! as! the! Nespresso! system.!!Coffee ! capsules! are ! sold! globally! throu gh! tradit ional! supermarket! and! retail! channels .! ! Senseo!ma chines ! start! at! around! $50! in! t he!


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