Nespresso

In 1975, Eric Favre, an employee of Nestlé, noticed that a coffee bar near the Pantheon in Rome had a disproportionately large number of customers. He found that the only difference between that bar and the many others using the same machines was that operators pumped the piston many times before releasing the coffee, while others did so only once. Oxidization occurs as the pumping action pushes water and air into the ground coffee. This increases the flavor in the coffee and creates the foam seen on top, called crema.

Favre invented the Nespresso system. The pod containing coffee was sealed, keeping it fresh. In use, it ensured greater aeration, like the repeated pumping that Favre had noticed. In operation, a sharp-pointed spout pierces the capsule and injects pressurised hot water, forcing the foil against a spiked plate, which bursts it inwards, letting the espresso flow out of the spout.

The system was patented by Nestlé in 1976. Early prototypes were complicated machines with large tanks, pumps and tubes – the machine remained unfit to market for a decade. It was first introduced to the Swiss market, looking like large traditional commercial espresso machines, but it initially met with limited success. Nespresso first tested its new concept in Japan in 1986, and rolled it out to consumers in Switzerland, France, Italy and Japan the same year. A decade later, the product became far more successful, largely due to Jean-Paul Gaillard's efforts. He introduced the Le Club community, which gave Nestlé a large database of customers and their preferences; lowered machine prices while increasing capsule prices; repositioned the machine from an office appliance into a luxury consumer brand; and licensed production to other companies. In 1990s, Nestlé signed a contract with Turmix, which started to sell Nespresso machines in Switzerland. Thereafter, other contracts were signed with Krups, Magimix, Alessi, Philips, Siemens and De'Longhi. Starting out as an e-commerce business, Nespresso only opened their first boutique in Paris in 2000 as a concept store. Today, Nespresso has a global network of more than 802 boutiques in 515 cities.

In later years there was friction between Favre—who devised the concept and developed the first machines—and Gaillard, who made the machine a commercial success. Favre resigned in 1990 after personality clashes, and the two men were critical of each other. Gaillard left Nestlé in 1997 after falling out with CEO Peter Brabeck-Letmathe. He claimed that the original idea for Nespresso was bought by Nestlé in 1973, and did not come from Favre, though Nespresso denies this. In 2008, Gaillard launched a company that sold biodegradable capsules for Nespresso machines, competing with Nespresso.

In 2022, Nespresso became a certified B Corporation.

Business model

Patent expiry and focus on image

In 2010 the concept (machine, capsule, service) was still subject to 1,700 patents which protected Nespresso's ownership of the concept until their expiry, leading to comparisons of Nespresso with printer manufacturers that block the sale of generic ink cartridges to achieve a vendor lock-in effect. That contrasts with some other prepackaged coffee preparation systems.

Nespresso's patents began to expire in 2012, gradually allowing competitors to offer capsules and machines compatible with the Nespresso system. By 2010, Nestlé was working on ways to prevent competitors from doing this. The service part of Nespresso's business model—the Nespresso Club and Nespresso stores and cafes—was aimed to be a long-term defense for the brand, its elevated image and premium pricing. Beyond attentive customer service and being the only places where most customers can replenish their 'pods', the brand has been able to maintain images of exclusivity and suave connoisseur-ship. Actor George Clooney appeared in ads for Nespresso, with company representatives insisting that he had been elected by Club members to become the brand's ambassador (vs the brand 'buying his sponsorship'), in a form of celebrity advertising that emphasizes the status of the brand over that of the endorsing star.

Market

Packaged portions of espresso coffee, like those from Nespresso, has become one of the fastest growing segments of the coffee market, accounting for 20 to 40 percent of the value of ground coffee sales in the US$17 billion European coffee market. In August 2010, it was reported that Nespresso sales had been growing at an average of 30 percent per year over the previous 10 years, and more than 20 billion capsules had been sold since 2000 at a selling price equivalent to about US$0.43 to US$0.62 per capsule.

Nespresso reported annual sales of CHF 3 billion in 2011, growing by 20% during the fiscal year.

Litigation

In March 2011, the Swiss discount supermarket, Denner, won a court battle with Nestlé over the sale of plastic Nespresso-compatible capsules, at about half the retail price of Nespresso capsules.

By 2014, Nespresso had been involved in further legal disputes about pods with competitors in the UK, Germany, France, Belgium, and the Netherlands; one media report said "Nestlé has lost in just about every one of those conflicts." In France—Nespresso's largest market, which made a quarter of its global sales at the time—the antitrust watchdog Autorité de la concurrence said that "it appears that Nespresso may have abused its dominant position by tying the purchase of its capsules to that of its coffee machines, with no fair justification, de facto ousting rival capsule makers". The company agreed to cease making the warranty on its single-serving coffee machines conditional on using only Nespresso pods, and to remove warnings against the use of third-party pods.