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”

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.” Corinne Gretler, with Benjamin Katz and Thomas Mulier The bottom line As Nespresso’s growth slows, Nestlé is trying to reach casual drinkers who care about price as much as flavor.