Case Study: The Origins of an Espresso Maker
In the 1980's, Nestle was already a global food business with activities stretching across continents and spanning many food categories, including chocolates, tea, coffee and condensed milk and prepared foods.
Soluble (instant) coffee was a key business for the company. It represented more than 80% of Nestle's coffee sales, with the rest being split between roasted and ground coffee sales. The company's Nescafe coffee sub-brands dominated in all of the sub-segments of the instant-coffee market. But traditional competitors were becoming more aggressive and supermarket chains were entering the market with private label brands. Nestle began to segment the soluble coffee market into finer and finer segments. This gave a boost to the demand for instant coffee but the company could not rely on multiplying sub-segments and flavor extensions for sustained growth.
Research showed that the coffee market was undergoing subtle changes:
cafes and coffee bars were growing in popularity across Europe and the US, beyond their traditional geographies (Italy, Spain and France)
high-end consumers required a foamier coffee, achievable only with the use of pressurized water.
even within existing consumer groups, people were becoming more adventurous in their buying behavior and tended to favor the premium and super-premium end of the market. These new markets were growing at the expense of instant powdered coffee.
yet the mass market consumer was increasingly price-conscious and would switch to supermarket private label brands if the price of coffee rose.
A Few Details on Espresso
Espresso is a coffee beverage and brewing method, it is not a specific bean. Espresso coffee is brewed by forcing a small amount of nearly boiling water under pressure through finely ground coffee. Its quality is determined by the "fineness" of the coffee used as well as the type of appliance in which it is made. Compared to other coffee brewing methods, espresso has a thicker consistency, a higher concentration of suspended solids, and richer foam.
New Product Development
Nestle engineers had been working on an EspressoMaker since the late 1960s. Continuous research and development efforts spanning over a decade had led to a revolutionary system that consisted of two parts: a coffee capsule and a machine. The coffee capsule contained 5g of roast and ground coffee. It was manually dropped into the handle, which was introduced into the machine. This action pierced the coffee capsule at the top. At the press of a button, pressurized, steamed water was passed through the capsule. The result was a creamy, foamy, high-quality cup of espresso coffee, and Nestle thought it had the ability to reach new heights in the coffee market.
Production, Selling and Distribution
With the introduction of the EspressoMaker, Nestle would no longer be selling only a product, but also the hardware and the related services. The success of the EspressoMaker depended not only on the quality of the coffee product, which could be manufactured and thus controlled by Nestle, but also on the quality of the appliances used, which was outside of Nestle's competencies as a food company.
Nestle had worked with a Swiss machine manufacturer to develop the machine and created a partnership to have the company reliably produce the machines to Nestle's specifications. Nestle also set up a joint-venture with a Swiss-based appliance distributor to sell the new product. The joint venture would purchase the machines from the appliance manufacturer and the coffee capsules from Nestle and then sell the combined product at an established price. Other partnerships were created to ensure the training of people on how to operate the system and the organization of a maintenance workforce.
Once the costs associated with producing, distributing and maintaining the EspressoMaker had been established, Nestle felt that the price of the machines and the capsules would be too high for household users. Offices and small businesses were thought to be less price-sensitive and more likely to buy the EspressoMaker system as a perk for their employees. Small and medium-sized companies were therefore identified as the primary target market - these companies were unlikely to buy a sophisticated, large-scale espresso machine but would be receptive to the EspressoMaker system as an attractive alternative due to its relatively cheap price and its ease of use and reliability.
In-market testing showed that coffee made with an EspressoMaker machine was indeed excellent but also revealed that there were few customers willing to buy a machine for SFr. 600 and pay an additional SFr. 0.30 per cup of coffee. It was therefore decided that potential customers would receive machines on a trial basis. Coffee capsules would now be sold at SFr. 0.60 a piece. For Nestle, the lending of machines to customers would stimulate demand in the new system. For the customer, the trial approach was very attractive.
And so, in 1986, Nespresso was launched in Switzerland, Italy, France and Japan.
Critically reflect on the Nespresso business of the 1980’s by answering the following questions:
- How would you describe the target segment? What do you think were their needs? (the WHO)
- What benefits did Nespresso offer its target segment? Who was Nespresso competing with? How was Nespresso’s customer value proposition different to competitors? (the WHAT)
- What was Nespresso’s competitive advantage? (the HOW)
Remember to be specific (and discuss why each of these are real, “tough” choices) and to assess how whether and why these are mutually consistent and reinforcing, either after identifying and describing the business model or while you are introducing the “WHO, WHAT, HOW”.
Based on the information contained in the text and your own hypotheses or assumptions, write a vision statement and a mission statement for Nestle’s espresso machine business using your new skills acquired in Chapter 2 of Fred David's "Strategic Management: Concepts".
What are some strategic challenges that you can anticipate, based on the information presented here?
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