Nespresso Case Study

Nespresso Case Study Problem Statement Nespresso is facing the problem with their current business plan of attempting to create long term customers for their espresso machines. They are facing competition from other companies creating home-brewing single serve coffee machines such as Starbucks and Keurig. Other companies began to create capsules to use in Nespresso’s machines and cut into their market share. They are facing the question of lowering their luxury brand status and finding new distribution channels besides their boutique shops to maintain their market share. Situational Analysis I believe a SWOT Analysis to begin with would benefit this case. Strengths – Nespresso provides a high-quality brand of coffee for consumers to drink daily. It is offered to first and business class flight customers and their machines are used at Michelin Star restaurants. Nespresso was able to piggy back off of the expansion of Starbucks in the 90s as Americans began to develop a taste for higher quality coffee. Their machines were aesthetic, but were capable of producing espresso at intense pressures that rivaled much bigger and expensive machines. Every customer was automatically enrolled in the Nespresso Club which provided feedback to the company and enticed consumers with exclusive offers. Weaknesses- Despite the quality coffee that Nespresso offered, it came with a title as a luxury brand that was very exclusive. Nespresso is more expensive than their direct competitors. Their channels of distribution were limited to premium magazines, boutique stores located in high-end areas of major cities, or online from their website. Also, their European patents were expiring which allowed other brands to develop compatible single-serve cups to use with Nespresso machines to reduce their continual income. One weakness out of Nespresso’s control is the fact that Americans tend to drink coffee with milk and sugar compared to Europeans who enjoy a shot of espresso. Their flagship machine only produced espresso and their machine that could produce steamed milk cost $600 Opportunities- In 2011, capsule coffee grew by 66.1 percent, so Nespresso was positioned in a growing industry. Coffee sales in the US are projected to grow from 7,332 million in 2008 to a projected 15,515 million in 2018 which is over 200% in a 10 year span. Nespresso has a chance to grow its market share and capture more lifetime customers for their espresso machines. They also have an opportunity to increase their number of distribution channels so they can increase their market share and profits. Television ads are another possibility, so more people will know about Nespresso. Threats- Threats to Nespresso are other companies that produce home-brewed single serve coffee machines and capsules. Their main competitors are Keurig, Starbucks’ Verismo, cheaper and easier available capsules, and supermarkets who offer brands that are compatible with Nespresso’s machines. Nespresso’s cheapest machine is $179 compared to Keurig’s which is $90. Other brands are also least expensive, but Keurig is Nespresso’s largest competitor. Some of the distinctive competencies that Nespresso possesses is their perception as a high-quality luxury brand. They offer premium coffee, and they allowed consumer to try out their machines before deciding to purchase them. Their machines are also able to produce high amounts of pressure that rival professional machines, and only took a couple of seconds from start to finish. Nespresso also had around 35% annual growth between 2001 through 2005 and continued with 30% annual growth from 2006 to 2010. They have large market shares in Europe which produces some of the best coffee in the world. Nespresso also conducted TV advertisements in Europe with George Clooney as their head spokesperson which led to an increase in trials and growth. Disadvantages that Nespresso possesses is the lack of distribution channels they possess compared to their competitors. Their machines are only available through their boutique stores, their official website, and select retailers compared to their competitors which are available at local supermarkets and are much easier to obtain. They also only produce black espresso on their flagship machine with their machine that can produce steamed milk being much more expensive than any other machine on the market. Consumers especially in the US may opt for other brands to be able to add milk products directly into their coffee. They may also opt to go with a cheaper brand as they may not see the value in high quality coffee at the same convenience as other home brewed machines. Alternative Analysis Nespresso can choose to have their espresso machines become available through more distribution channels than from their select few like they have done so far. This would open their products to more consumers and increase their market share to US consumers since their brand name would be more recognized. Some downsides to this decision is that Nespresso would more than likely lose their luxury brand status even if they still produce high quality products. Their costs would also increase as they would have to increase inventory to be more available in retailers without the guarantee of a sale. Nespresso may choose to develop television ads for their US market like they have done with their European market. They can continue to use George Clooney as their spokesperson. This would maintain their luxury brand status, but also increase the awareness of US consumers towards their brand. Cons to this decision is that their costs would increase and there isn’t a guarantee that consumers would view these ads as TiVo and online streaming are becoming more popular. It also doesn’t offer much insight into Nespresso as many US consumers may be unfamiliar with their products. Recommendation and Implantation My recommendation for Nespresso is to open their products to more distribution channels. I believe that this option would increase their market share in a highly competitive market that is expected to grow over 200% in 10 years. They would possibly lose their luxury status, but their profits would grow substantially at the same time. Their current customers can obtain Nespresso products with ease instead of having to order in advance which may force them to use another brand in the meantime. They can begin to increase their channels in markets that have a larger percentage of coffee drinkers such as in Seattle, New York, and Chicago and begin to expand to other areas of the US within a five-year period. This would allow them to gauge their success before attempting to expand across the entire US. I would create a $2 million budget which would provide roughly 10,000 machines in the US market before a decision to increase production or other channels could be made. Despite the increase in costs, I believe this recommendation would benefit Nespresso against their competition.