Nespresso is the brand name of a coffee brewing system developed in the late 1970s by Nestlé, the multinational food company founded and headquartered in Switzerland. Nespresso allows consumers to brew high‐quality coffee at the push of a button by placing hermetically sealed, aluminium covered, coffee capsules into a specially designed machine. While the idea sounds simple, the technology behind Nespresso is, in fact, complex because it requires air and water to be passed through ground coffee at the right temperature and pressure. At the time of its development, Nespresso constituted a major departure for Nestlé from its core operations that were based on the large‐scale production and mass marketing of food products. In the late 1970s Nestlé’s presence in the coffee market centred on instant coffees with products like Nescafé accounting for 80 per cent of its revenue from coffee sales.

Early development

The original technology underpinning Nespresso was developed by the Battelle Institute, an independent research organisation based in Geneva,1 but Nestlé acquired the rights to develop the idea commercially in 1974 and went on to file a large number of patents on the product.2 Camillo Pagano, who was at that time the senior executive in charge, felt that the product had potential despite the fact that sales in the coffee market were sluggish. At the time, the gourmet coffee market was beginning to expand and Nestlé saw Nespresso as a vehicle by which it could expand coffee sales by moving into the restaurant market. Many of Pagano’s colleagues were sceptical about the innovation, questioning whether Nespresso could be commercialised and expressing concern about the amount of time and effort that would be taken up in launching such a niche product that had a poor fit with Nestlé’s mainstream operations. Pagano felt that in order to flourish the Nespresso project needed to be taken outside of Nestlé’s day‐to‐day operations so, in 1984, he established Nespresso as a separate company (100 per cent owned by Nestlé) which was free to develop its own marketing, operations and personnel policies.

Nespresso developed its system in conjunction with a number of partners: it collaborated with a Swiss company to improve the design of the machines; it licensed the manufacture of the machines to Turmix, a Swiss domestic appliance manufacturer; it partnered with Sobal, a distributor, to sell the product to end‐users. The Nespresso system was launched in 1986 in Italy, Switzerland and Japan but the product flopped. By the end of 1987, only half the machines that had been manufactured had been sold and without sales of machines there could be no sales of the specially designed capsules. It looked very likely that Nestlé headquarters would kill off the project but it was decided to give it a further chance by bringing in an outsider to see whether a turnaround could be achieved. The person selected for this role was Jean‐Paul Gaillard, a former executive with Philip Morris, the tobacco company.

QUESTIONS

1. What insights into the innovation process can be gained from this case?

2. The Nespresso innovation took more than 20 years to come to fruition. How would you account for the slow commercialisation of this product?

3. Nespresso’s patents have not prevented competitors from offering coffee pods which fit Nespresso machines. How big a problem is this for Nespresso?

4. Do you think that Nespresso has a sustainable competitive advantage? What suggestions would you make to Nespresso’s management regarding future strategy?