Apocalypse Files - Issue #2 - Nespresso
In each issue (bi-monthly), we'll explore the threats to the current business model of a company or of an entire industry, the forces that could take them down or drive systemic changes, and most importantly we'll imagine possible solutions, looking at new and evolving trends, untapped niches, new business models or venture opportunities...
In this issue, we look at the current and future challenges of an industry that turned coffee into a premium lifestyle product through the example of ... Nespresso. What else? Welcome to the Apocalypse Files.
In 1986, Nestlé wanted to launch a new premium coffee offering. They could have decided to launch it under their existing Nescafé brand, but Nescafé's general appeal was on the cheaper side. This is how Nespresso was born.
From the start, the brand was built around a premium perception, with specific efforts towards educating the consumer in terms of what quality means in the world of coffee. This involved diving into the world of single-origins, and flavor profiles when most of the world considered coffee a useful yet basic commodity. Nespresso was different from other brands because it promised to deliver quality by leveraging their own machines and their own coffee pods, following the now famous consumables model, pioneered by Gillette with razors and blades.
Their biggest differentiator though was that they were not only selling coffee but also a lifestyle, a sense of belonging and community with like-minded coffee "connaisseurs". By inviting customers to join their Nespresso Club, by using celebrity appeal with A-list actors such as George Clooney, Nespresso became more than just a product.
A few years in, after some backlash regarding the coffee pods and the very difficult recycling process they had to go through, Nespresso started unleashing its full marketing powers to change the narrative. They are helping farmers earn decent wages. They are doing everything they can to fully collect and recycle aluminum pods by lowering friction in the consumer experience. Quality and sustainability come at a price however, and with all these initiatives and efforts, Nespresso prices their pods at a premium: 0,43 € per cup on average, versus 0,28 € per cup for competitors’ Nespresso-compatible pods. And considering Nespresso's success… consumers seem happy to pay extra for the quality.
But we have to wonder.. how long will the brand be able to maintain a dominant position in the eyes of consumers?
Waiting on the World to Change
Consumer standards regarding sustainability practices have grown higher and higher in recent years, while tolerance for greenwashing has strongly decreased. Consumers are asking for actual results and impact, not just big slogans and announcements. In some cases, they are even willing to shift away from or even publicly shame brands they feel are not acting fast enough in embodying their values. They also support brands that dare go the extra-mile.
Expectations regarding convenience are evolving too: Starbucks is now allowing customers to bring their own cup to limit waste and offering discounts for those doing so. What would have seemed like a hassle by consumers a few years ago, and a missed opportunity for brands (i.e. not providing a branded cup that can act as free public advertising with every drink) is now perceived as a real sustainability effort, to pull away from single-use materials. For a brand facing unprecedented pressure from their consumers in terms of sustainability: is recyclability enough? How long before consumers shift away from single-use pods altogether?
The world of coffee has changed a lot, moving from the so-called second wave of coffee to the third wave. This refers to the evolving types of beverages and quality expectations, from the flavored coffee drinks made with dark, bitter coffee of the second wave to the focus on quality and country of origin of the third wave. In the 1990s, Starbucks basically started and rode the second wave - while third wave coffee brands are now focusing not on the drink but on the beans: flavor notes, lighter roasts, single-origin and freshness transparency are now the norm for many upcoming brands. In terms of beverages, espresso used to reign supreme, but is now sharing the throne with "slow" filter coffee.
In regards to coffee beans production, supply chains are being stretched to their limits. Rising global demand and increased quality expectations are making the better beans more sought after while global warming is physically reducing the areas fit for production and limiting total supply. Today, the most basic consequences are rising costs for producers, leading to higher prices for consumers, but it may get to a more difficult point in the coming years with frequent shortages and price spikes.
Sugar, We're Goin Down
Facing multiple threats from several directions, how has Nespresso responded so far and how can they safeguard their leader position? Let's look at some ideas that can help other companies facing similar challenges thrive:
Back to the field: for value chains where production plays a key role, established companies tend to pursue vertical integration in order to limit any disruption to their supply chain. Apple have stopped partnering with Intel and started producing their own chips in 2020 (though that did not prevent them from getting hit by recent chip shortages). Luxury brand Emernegildo Zegna purchased a majority stake in an Australian sheep farm in 2014 both to secure supply and to be able to leverage the marketing opportunity it provides. A side benefit of this approach is that it allows companies to design their own quality standards: Nespresso has created the AAA Sustainable Quality™ Program in partnership with the Rainforest Alliance and can legitimately tell a "bean-to-cup" story.
Sustainable innovations or nothing: staying in touch with evolving consumers habits is key, even as a luxury lifestyle brand: trends rise and fall, and offering a suite of products that can stand the test of time is essential to not being considered outdated. In 2014, as third wave coffee was getting traction, consumers had started migrating from concentrated espresso shots towards sugar-free, mellower, filtered brews. Nespresso created a new machine to seize that opportunity: Vertuo. The longer cups it can brew satisfied consumers’ expectations and allowed the brand to create brand new intellectual property - since their patent on original espresso capsules had just expired. For food companies going the dispenser and consumables route, creating a new machine can be fantastic opportunity to innovate beyond flavor...as long as sustainability is not left on the sidelines.
Expanding perspectives: luxury lifestyle brands tend to be B2C. They want to address their final customers directly, creating a rapport and selling an experience as much as a product. However there is an opportunity in also leveraging their premium image in the B2B world: companies installing professional Nespresso machines in their offices as perks for employees hope to be considered more generous, and maybe fancier, by employees and visitors. B2B contracts can also provide some stability and higher recurring revenue than consumer purchases.
The challenges facing Nespresso and other brands in this industry will be many and diverse in the coming years. The key to longevity for these companies lies in how they approach these challenges. Whether they are considered obstacles to simply jump over, or whether they are recognized as systemic shifts requiring drastic business model shifts.
That's all folks!
PS: If you haven't guessed, all paragraph titles are from singles in the 2006 Billboard Hot 100, the year George Clooney's first commercial with Nespresso was aired.
Agree? Disagree? Anything to add?
Have an industry or company in mind you want us to look at? Let us know and we'll add it to our roaster: it might be the focus of our next issue!