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a blog from young economists at Nova SBE

Coffee war, “what else?”

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Nestlé was the pioneer in the market for single-serve coffee, by selling Nespresso machines and its corresponding coffee capsules, since 1986. For a long time, Nespresso saw its popularity and sales increasing and Nestlé was enjoying its monopoly in the European market, due to their effort in advertisement but, more importantly, due to the patent of its own product. Eventually, Nespresso’s dominance would come to an end.

Like we also see in the case of the printer and ink cartridges market, the purchase of the Nespresso machines could be done at a relatively low price, whereas the fitting capsules were sold at high prices. Moreover, its strategy involved selling those products in exclusive Nespresso boutiques, with a certain level of service. In the meantime, other Nestlé’s brand, Nescafé machine and capsules Dolce Gusto, appeared as a cheaper alternative for consumers. Nespresso was very well know, but Nescafé, without the same level of service, was becoming dominant and increasing sales. Nespresso ads resulted in positive externalities for other Nestlé’s products.

The single-serve coffee business became so profitable that, other suppliers, namely Sara Lee started to sell its own low-cost version of espresso machine, the Senseo, and its capsules in supermarkets in France. The Ethical Coffee Company began to supply biodegradable capsules.

Yet, due to Nespresso product’s convenience and high-quality reputation a significant group of consumers had already purchased the machine. Those consumers were in a situation of tying. This means that they had bought the Nespresso machines, and were now forced to purchase several times more expensive Nespresso capsules if they wanted to still make use of their machine. The key profits were coming from the pods.

Nestlé’s dominance happened to be under more serious threat when new rivals capsules that are compatible with Nespresso machines arrived. “Real” competition started. This new generic pods were cheaper and sold in grocery stores, making it much more accessible to consumers. Nestlé has sued its rivals, accusing them of violating the intellectual property regarding their creation of this homemade coffee system. It could have tried changing its strategy, either by initiating a price war, or increasing distribution. Instead, Nespresso have tried to protect its dominance through the use of patents and legal actions or even by creating new machines with small hooks inside to make all rival capsules incompatible. However, Nespresso’s legal intents to block the rivals have been revoked by the European competition courts. It was argued by the rivals that Nestlé’s actions were harming consumers’ choice, by abusing its dominant position, and other manufacturers were needed to supply alternatives. Hence, as patents expired in 2012 and competition was showing up in whole Europe, Nespresso decided to keep the same strategy for more exclusive consumers. Despite, some shift of demand to the new generic capsules, most consumers’ loyalty may be due to the high quality of Nespresso’s coffee. Besides, some complaints regarding rival’s low coffee quality, or even generic capsules ruining Nespresso machines show how this vertical restraint can be used to protect the quality and reputation of the product.

 

Beatriz Luís, #648

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Author: studentnovasbe

Master student in Nova Sbe