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One of the most important things to consider is the fact that coffee is the second most valuable commodity after oil. It is worth approximately $30 billion and therefore it is wise to invest in products that would help deliver quality coffee to consumers worldwide. For Nestle – the largest food company in the world – the best marketing strategy is to corner the instant coffee market. It was proven to be an excellent decision because soluble coffee represented 80% of Nestlé’s coffee sales.
But its major competitors are becoming more aggressive. Furthermore, there are significant changes in the coffee market which can be partially explained by the emergence of signature coffee brands such as Starbucks, the popularity of bistros, cafes, and coffee bars as well as the entry of supermarket chains into the coffee market using their distributor-owned-brands. It is time for Nestle to be more aggressive and to focus on expanding its presence in the roast and ground coffee market as well as provide a new product for the high-end customer. These are the people who love the rich and foamy coffee that can only be found in coffee bars or restaurants.
This kind of coffee experience can only be achieved with the use of an espresso machine. Nestlé’s solution is to develop a new system of delivering coffee – the Nespresso. The new product was launched in 1986 but the project is losing money. Mr. Jean-Paul Gaillard the new Commercial Director of Nespresso S.A. is tasked to turn things around. Based on his experience at Philip Morris, his former post before joining Nestle, the Nespresso experiment should be terminated and the company should cut its losses.
There is only one problem. Mr. Gaillard is not in the upper echelon of the company; in other words, he is not the CEO. Looking at Exhibit 10, Nestlé’s organizational structure, one cannot find Mr. Gaillard’s name in any of the top positions. Therefore, he has no power to terminate the Nespresso project. Furthermore, he is a newcomer and he is expected not to rock the boat too much. Finally, he was placed as Commercial Director under Nespresso S.A., this means only one thing: he was expected to improve the performance of Nespresso.
In order to move forward, one has to examine the current strategy and compare it to an alternative strategy that Mr. Gaillard can use. In the current strategy, Nespresso was being marketed to offices and small companies. Strategists from Nestle believed that they can easily penetrate this market because the HORECA (Hotel, Restaurant, and Catering) segment would like a much more sophisticated machine that can produce more than one cup at a time. They also made the conclusion that offices and small companies are less price-sensitive and they will purchase the Nespresso system as a perk for their employees.
The product is no longer a simple package of coffee granules or R&G coffee. It now comes as a system: a coffee machine and coffee capsules. The capsules contain roast and ground coffee. After activating the machine and after loading the capsule that hermetically sealed 5 grams of roast and ground coffee, the electric heater will then heat the water and then the electric pump would press the water into the capsule producing a creamy, foamy, and high-quality cup of coffee.
Nestlé was able to deal with the issue of how to deliver the product by setting up a joint venture with Sobal, a Swiss company selling a wide variety of products. Sobal was chosen because a few years before the launching of the Nespresso, Sobal was able to sell, 6,000 small coffee machines called Trialbar on the Swiss market. This means that Sobal has the knowledge and expertise on how to sell coffee machines. Together with Nestle, they can create a formidable partnership and there is no reason why Sobal could not duplicate the same feat of selling thousands of small coffee machines. But it turned out that these are all assumptions.
First of all, Nestlé did not provide the necessary support needed so that Nespresso can generate more sales. The Center was preoccupied with the production and marketing of soluble coffee. The whole world was used to buying instant coffee and the tremendous demand for this product forced Nestlé to prioritize the improvement of soluble coffee products. There was a half-hearted commitment to Nespresso. Nestlé believed that they should venture more into the roast and ground market as well as cater more to high-end consumers but they were playing it safe by not giving full support to Nespresso.
Secondly, the machines that were manufactured for the Nespresso system were not of good quality. This means that the machines would break down easily. One has to understand that consumers who buy a coffee machine are not buying an appliance that they will use sparingly. This is not a hobby. The consumers who purchase Nespresso expected the machine to work 24 hours a day, seven days a week, and 365 days a year. This simply means that they demand a more reliable machine. These types of customers are coffee connoisseurs and they crave coffee, Nestlé could not afford to give them a system that deprives them of their coffee experience.
A machine that breaks down easily can easily discourage customers to consider a long-term relationship with the product. An office or small company must not be bothered by a defective machine. These business establishments pride themselves on getting high-quality equipment so that their work will not be interrupted by constant calls to technical support and waiting for technicians to come over and fix the said equipment. If the Nespresso machine was purchased as a perk for the employees then one can just imagine the effect that a broken machine can have on the workforce.
To improve the performance of Nespresso, Mr. Gaillard must attempt greater things for this product. Instead of simply focusing on the offices and small companies segment, Nestlé should be more aggressive and sell to individuals and households. This bold strategy can be tempered by selling to selected countries only. It is interesting to note that the U.S. market is susceptible to trends. Thus, a well-conceived marketing campaign can help influence American consumers to try this new product. With a population that can rival any major European country, the U.S. market is a lucrative one and if Mr. Gaillard can penetrate this market, he could save Nespresso S.A. from going bankrupt.
One of the best ways to do this is to market Nespresso, not as an innovative product such as selling it as a system: a coffee machine that can be loaded with coffee capsules and producing an espresso-like coffee concoction. It should be marketed as a new “coffee experience” and the use of the capsules can be marketed as an efficient way of producing high-quality coffee minus the high upkeep required in other more sophisticated machines. Nestlé can enlist the expertise of advertising companies to develop a sleek and smart way of telling the public that this is the next best thing. The ad should convince potential customers that if they needed a foamier and a much better tasting coffee they do not have to leave the comfort of their homes for they can make one in their kitchen.
The next major step is to subcontract the manufacture of the machine to a prestigious OEM. This way Nestlé can be assured of a high-quality machine that matches the kind of coffee it can produce. According to researchers at Nestlé the Japanese market is enthusiastic about a small coffee machine that can be used in the homes. If this is true then they can look for a Japanese manufacturer that has a good track record in developing appliances and devices similar to a Nespresso machine.
The next major challenge for the Nespresso team is the price of the capsules and the price of the machine. Their previous strategy in lending the Nespresso machine and then get back the cost by charging for a slightly more expensive capsule can work in countries like the United States and other European nations willing to experiment with a convenient way to have an espresso-type of the coffee drinking experience. The customer can try out the system without having to pay for the machine. But if the capsules are more expensive than the ones that they can get in a nearby coffee bar then this strategy will not work. Mr. Gaillard has his work cut out for him.
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