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Innovation Blog

Nespresso:  Make Meaning, Make Money – Lots and Lots of It!

By Shlomo Maital



Nespresso pods

The history of coffee is replete with remarkable innovations, that consistently do what all innovators strive to do – take a simple inexpensive commodity, and move it higher and higher up the value chain.  Nestle, the global food company, is remarkably good at doing this, through branding. But Nespresso?  This is another world entirely.  Nestle, through Nespresso, has created an entirely new culture.  Note that the word “culture” has, as its first four letters, the word “cult”.  This is what Nestle has intentionally created – a Nespresso cult.   It has found a way to take a commodity, coffee, and create not a good, not even a service, but a transformational experience – drinking Nespresso – with a new language (color-coded pods, and flowery descriptions of the varieties of coffee in the pods) and an entirely new level of profit margins on selling coffee.    

      Nespresso is a coffee system in which a Nespresso machine forces steam through a 5-gram aluminum ‘pod’ of coffee, to make tasty espresso.  Nestle makes money both from the Nespresso machines and from selling the pods of coffee.

    According to Wikipedia:

    Espresso pods like those from Nespresso have become one of the fastest growing segments of the coffee market, with pods accounting  for 20 to 40 percent of the value of ground coffee sales in the European coffee market that totals USD 17 billion. In August 2010, it is reported that sales from Nespresso have been growing at an average of 30 percent a year over the past 10 years and more than 20 billion capsules were sold since 2000 at a current selling price equivalent to about $  0.43 to $ 0.62 a capsule.

    Let’s run the numbers. I have just spent some NIS 500 (about $135) to buy 23 sleeves of Nespresso pods, each sleeve containing 10 pods.  One pod, then, costs about 60 cents, which is the cost worldwide, on average.  Bought at retail, a pound of coffee can cost between, say, $1.99, up to, say, $5.99 (Starbucks).   Until now, Starbucks has been the gold standard for selling coffee for exorbitantly high prices ($5.00 or more for a latté).   But Nestle takes the prize.  Five grams of coffee (1/200 of a kg.) at 60 cents each means that a kg. (2.2 pounds) of podded coffee costs 60 cents x 200 or $120.00.   Or, one pound of podded coffee costs $120/2.2 =  $55.   In other words, about 10 times the cost of a premium branded Starbucks bag of coffee.  Nestle has managed to run up the price of coffee by an order of magnitude.  

Part of the secret is technology – the Nespresso machines force steam at high pressure through the pods, and thus require using less coffee.  Part of the secret is marketing – creating a culture of Nespresso pods, color-coded, each with flowery descriptions, thus creaming “meaning” for coffee drinkers.  For instance, my wife likes Rosabaya de Colombia,  Colombian coffee; I prefer Kazaar, a limited experiment with very strong coffee that alas has been discontinued.  You cannot buy the pods in a supermarket – that would demean them, and moreover, would force Nestle to share its margin with the retailer. You buy directly from Nestle, usually on-line or in special outlets.  This ‘channel’ innovation also deserves careful study.

      I cannot think of another innovation that has made so much out of so little.  The Nespresso brand should be carefully studied by all innovators, to learn secrets that can transfer to non-food products. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
November 2010
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