Nespresso a division of Nestle s SA pioneered the development of
Nespresso, a division of Nestle’s SA, pioneered the development of the single serving coffee ma chine in 1986. By 2009, Nespresso had achieved sales of over $2.6 billion with double-digit growth projected for the next several years. The machines which have been imitated by more than twenty competitors, use a capsule or “pod” to make a single serving of coffee by pumping hot water through the pod under tremendous pressure. From the outset, Nespresso’s business model was based on the sale of its exclusive coffee pods protected by many patents to generate most of the sales and profits for the company rather than on sales of the machines. The pod to coffee machine relationship is analogous to the cartridge and printer whereby the printer manu facturers rely on sales of print cartridges for the bulk of their revenues and profits. Nespresso recognized the extreme importance of maintaining the exclusivity and premium price of its coffee pods by stringently controlling their distribution channels. Consequently, Nespresso’s coffee pods are sold only in its own stores, its online site, or by phone directly from Nespresso. Recently, competitors Sara Lee Corp. and Ethical Coffee Co., announced plans to introduce their own coffee capsules that will work in Nespresso machines. These capsules will be cheaper and more widely distributed than the Nespresso pods. Nespresso says it will take legal action if the competitors’ products infringe on any of its patents. Do you think Nespresso’s distribution strategy based on tight control of the channels for its coffee pods can provide an effective means for dealing with the competition if the legal action fails to stop the competition from selling their Nespresso-compatible capsules? Why or why not?
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