Nestlé tries to brew more growth with cheaper cof­fee

More fla­vors and lower prices boost Dolce Gusto’s growth Try­ing to “hit every taste, every bud­get, and every age group”

Bloomberg Businessweek (Asia) - - CON­TENTS - −Corinne Gretler, with Ben­jamin Katz and Thomas Mulier Edited by James E. El­lis

Ne­spresso, be­ware: Your sta­tus as Nestlé’s fa­vorite child is un­der threat from your scruffy kid brother. Nestlé, cre­ator of the high-end Ne­spresso brand of cof­fee pods and espresso ma­chines, is in­creas­ingly lean­ing on a

cheaper range of sin­gle-serve cof­fees that it calls Nescafé Dolce Gusto.

Since Ne­spresso was launched three decades ago, it’s be­come one of the Swiss com­pany’s most prof­itable prod­ucts. In re­cent years, though, Ne­spresso has faded as ri­vals have en­tered the mar­ket and up­starts sell less ex­pen­sive pods that fit Nestlé’s ma­chines. Ne­spresso’s growth has slowed from about 30 per­cent an­nu­ally in the past decade to 7 per­cent in 2015, ac­cord­ing to Bank Von­to­bel es­ti­mates.

Although Nestlé stopped break­ing out Ne­spresso rev­enue in 2012, cit­ing the com­pet­i­tive en­vi­ron­ment, and de­clined in­ter­views about Dolce Gusto, an­a­lysts es­ti­mate sales were about 4.4 bil­lion Swiss francs ($4.5 bil­lion) last year. In Western Europe, Ne­spresso’s core mar­ket, its share of pod de­liv­er­ies fell from 32 per­cent in 2010 to 25 per­cent in 2015, ac­cord­ing to re­searcher Euromon­i­tor In­ter­na­tional. In the same pe­riod, Dolce Gusto’s rose from 8.1 per­cent to 12 per­cent, and its sales now top 1 bil­lion francs.

Nestlé in­tro­duced Dolce Gusto in 2006 as a cheaper al­ter­na­tive. In Europe, a Ne­spresso cap­sule costs about 52 to 57 Swiss cen­times (53¢ to 58¢), com­pared with about 39 cen­times for a Dolce Gusto cap­sule. While Nestlé says it takes only the top 2 per­cent of cof­fee beans for Ne­spresso, Dolce Gusto pods are filled with lower-qual­ity blends, and some milky va­ri­eties such as Café au Lait and Cor­tado use in­stant cof­fee. Dolce Gusto “is for a dif­fer­ent con­sumer, who doesn’t love cof­fee but likes and wants cof­fee and is a lot more price-sen­si­tive,” says Jonny Forsyth, an an­a­lyst at re­searcher Min­tel Group.

Dolce Gusto has the po­ten­tial to reach more mil­len­nial con­sumers and pen­e­trate emerg­ing mar­kets, ac­cord­ing to Pa­trik Sch­wendi­mann, an an­a­lyst at Zürcher Kan­ton­al­bank. Nestlé last year opened its first Dolce Gusto fac­tory out­side Europe, in Brazil, adding it to fa­cil­i­ties in Spain, Ger­many, and Bri­tain. And in Ja­pan, the brand this year rolled out matcha green tea pods. “With Dolce Gusto,” Sch­wendi­mann says, “Nestlé has ce­mented its lead in cof­fee and can hit every taste, every bud­get, and every age group.”

Nestlé faces grow­ing com­pe­ti­tion in cof­fee pods, a mar­ket it cre­ated with Ne­spresso’s 1986 in­tro­duc­tion. To­day, ri­vals Senseo, Star­bucks, and Tas­simo of­fer com­pet­ing pod/ma­chine com­bos, and dozens of oth­ers sell cap­sules billed as com­pat­i­ble with Ne­spresso ma­chines. In March, JAB Hold­ing, the in­vest­ment com­pany of Aus­tria’s bil­lion­aire Reimann fam­ily, bought Keurig, the most pop­u­lar sin­gle-serve java sys­tem in the U.S., as part of a $30 bil­lion ex­pan­sion of its cof­fee em­pire.

A two-pronged ap­proach makes sense, says Robert Wald­schmidt, an an­a­lyst at Liberum Cap­i­tal in Lon­don. The Ne­spresso and Dolce Gusto brands, which he says have sim­i­lar profit mar­gins of about 25 per­cent, are the big­gest in the global cof­fee­pod busi­ness, which is likely to ex­pand 45 per­cent, to $19.6 bil­lion, by 2020, ac­cord­ing to Euromon­i­tor. “The ba­ton is be­ing passed,” Wald­schmidt says. “Ne­spresso was out as the lead run­ner, and now Dolce Gusto as the sec­ond or third guy is com­ing in to take the ba­ton and move for­ward.”

The bot­tom line As Ne­spresso’s growth slows, Nestlé is try­ing to reach ca­sual drinkers who care about price as much as fla­vor.

Re­tail cof­fee sales in Western Europe

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