Nespresso's U.S. Expansion does not Represent the Threat to Starbucks that Some Would Suggest

If you're like most people that I know here in the U.S., you probably aren't very familiar with the Nespresso brand and might not have even heard the name before. According to a recent article in Business Week ("Nespresso Pitches 'Luxury' Coffee for Lean Times," 3/24/09), though, if you're one of the many Starbucks drinkers who are cutting back on your latte-dollars, that may be about to change as Nespresso makes a big push into the U.S. However, the thrust of this article - that Nespresso's push is likely to draw strong interest from Starbucks customers who are spending less away from home - needs to be reconsidered. Let me explain why...


What the article fails to recognize is that the product attributes and factors that will matter most to Nespresso's success actually have very little to do with Starbucks or its customers. Instead, the success of the brand in the U.S. will depend in large part on the willingness of consumers to adopt a more flexible attitude toward home-brewed espresso than they have in the past.

The U.S. has always been a much tougher market for Nespresso: while Nespresso dominates worldwide sales for single serve coffee machines and pods, with $1.7 billion in 2008 (vs. $547 million for Senseo, nearly $300 million for Tassimo and $254 for Keurig), 90% of those sales come from Europe. Nespresso has not yet established its name here in the U.S. in the same big way that those brands have...and with good reason: Nespresso only dispenses espresso while the other brands mentioned primarily focus on coffee. As we know, consumers in the U.S. tend to prefer coffee over espresso and, when deciding to splurge on an espresso machine, many Americans would assume that to achieve the full authentic experience of a European-style espresso or cappuccino coffee, one must buy the espresso coffee or beans oneself, rather than order them in pre-packaged pods.

Another difference between Nespresso and the other brands is that Nespresso is positioned as an ultra-premium quality brand, based on the technology of the machine (operating at a higher pressure than other machines) and the way that it is marketed...and that is a positioning that American consumers have yet to broadly accept when it comes to making coffee at home. Nespresso's machines do come at a higher cost at an average of $200 versus the $80 that it costs for a Keurig machine, but ultimately, at .55 per pod, its price per cup is about the same price as a K-cup. Most consumers will probably not notice this similarity in price, though, assuming that with its high-end stores in swanky neighborhoods, Nespresso's price of entry is beyond what most would pay for a home-brewed cup of coffee.

But Nespresso is willing to bet that even if Nespresso is perceived as a more expensive system than other, non-espresso pod systems like Keurig, the brand's high-quality image will generate excitement among inductees to the brand. Unlike other brands, Nespresso has built its business almost exclusively on its own high quality reputation, through sales on its website and in company-owned boutique stores, rather than through third party retailers and channels. To develop that reputation, everything that Nespresso does is meticulously designed to communicate a level of quality far above anything else. Its sleek machines, "grand cru" coffee varieties, high-end design boutique stores, the glossy magazine it sends to all its "Nespresso Club" members and its v.i.p.-like customer service all work together to drive new users to the brand and cultivate an extremely loyal following. The net result: Nespresso's laser-like focus on delivering a premium customer experience turns something that most of us take for granted as a routine part of our day into something special, almost aspirational. And, as Nespresso and other brands (for example, Apple, when its products were only sold in its own stores) have demonstrated, when you create something cool that people really like, the product practically sells itself without the help of third parties. So...Nespresso does have a fairly good shot.

The question, though, remains: how far can Nespresso take its business in the U.S? Yes, there is a clear opportunity to poach Starbucks consumers who enjoy indulging in lattes, cappuccinos and espressos. But, to do so, Nespresso may need to overcome not just the perception of cost relative to other pod systems but also the perception that espresso is to be consumed outside the home on special occasions, while coffee is to be consumed inside the home on a regular basis. This perception strikes at the heart of any real discussion about Nespresso's potential in the U.S. However, it is also a perception that, if directly addressed through changes to the company's machines themselves, may not play to Nespresso's strengths or best interests.

For Europeans, espresso and cappuccino consumption is a daily ritual, whereas in the U.S., it is an indulgence not meant to replace our daily utilitarian coffee habit. So, in the U.S., a purchase of an espresso machine would likely be additional to a kitchen that already has a coffee-brewer, rather than as a replacement for the coffee brewer. For many, having two coffee-dispensing machines on one counter would simply be one machine too many. Given the trade-off, my guess is that most would decide against buying the espresso machine. I know people who have considered a Nespresso machine but decided against it based on this very same calculus. As a result, while Nespresso may appeal to some Starbucks customers who like the idea of a less expensive latte brewed at home, it may also find that those same customers consider the addition of an espresso machine to their home to be equally unnecessary, at least as it relates to their daily coffee ritual.

Therefore, in the short term, the only way that Nespresso might seriously threaten both the Keurigs and the Starbucks types of competitors here in the U.S. would likely be for it to develop a machine capable of dispensing premium espresso blends as well as regular coffee, a model that both Senseo and Tassimo have already adopted. But doing so would be a mistake: Nespresso's singular focus on espresso coffee enables it to drive home its premium focus in a way that regular coffee, no matter how good its quality, cannot. So, my guess is that as a premium-focused brand, that approach is not part of Nespresso's plans, at least not any time soon.

The initial upside of Nespresso's push into the U.S. may be limited to a more limited population of consumers who prefer espresso coffee over regular coffee for their daily ritual. However, in the long run, Nespresso's focus and emphasis on quality will drive its growth for years to come and will also potentially excite interest in the brand and product from traditionally more coffee-minded consumers. We have seen other companies such as Starbucks shy away from their premium image in order to appeal to wider audiences, a move that has arguably come at a great deal of risk to the company's future.

Opening more of its concept stores in the U.S. may not catapault Nespresso above other household brand names such as Starbucks or Keurig, but it will help provide a showcase for the ultra-premium qualities of the brand that it has worked so hard to develop. If considering single-cup coffee brewers such as Keurig as part of its competition, Nespresso may never dominate the category here in the U.S...but ultimatley, I'm not so sure that is the point.

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The Craft Beer Dilemna: How to Get Noticed in a Big Beer World

We all know how difficult it can be for a brand owner to launch a new brand - key challenges include building excitement and interest in the brand, generating trial, and creating sticky relationships with customers and consumers. But, what about this process is unique for a new craft beer? On the one hand, craft beers have the benefit of living in a category that by its very nature, lends itself to trial - but, on the other hand, the very same consumers who enjoy trying new craft beers may also inherently be less loyal to a new brand.

So, what type of support (marketing, promotion, other) does a new craft beer need from its brand owner and from the bars and bartenders that serve it, in order to maximize its exposure in the category? Do any bartenders or consumers have some perspectives on this? What has worked well?

I also posted this discussion in LinkedIn's US Bartenders Directory. Andrew Lakatos of BarBop posted a comment:

"I feel that in the small specialized breweries the crowds seem more "Beer Educated" and are likely to try all brands once and stick with a fave. They pretty much know what they like. However, I think the larger bars that I have worked with the more typical crowd have less knowledgeable beer patrons. I mean, I can literally say "Is that the best beer you have had in a while or what" and they respond with an enthusiastic yes, good or bad." - Andrew Lakatos, CEO of BarBop"

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Eight O'Clock Coffee's Brand Image Re-design Gives Us More to Think About than Just Visual Appeal

A discussion on LinkedIn's CPG Branding and Marketing Forum caught my attention.

Eight O’clock Coffee recently launched a sweepstakes promotion asking consumers to vote for their choice of new packaging (See link: http://www.coffeemakeover.com). In response to the promotion, a LinkedIn member had posted a question a couple of weeks ago asking what people thought of the new Eight O'Clock Coffee packaging options. Specifically, the member was asking "what people think of the new options when compared to the current version" and "what people think about companies that engage consumers in the branding process?"

Although the promotion is now over, I realized that no one had addressed an even more fundamental question of when and why a brand should re-brand. One cannot reasonably evaluate a new brand identity without understanding the rationale for changing it in the first place. A re-branding effort should not be conducted just for the sake of refreshing the image and identity of the brand - there must be a stronger rationale or strategic basis for the decision. That may seem obvious, but in many instances, brands reset their images just because they can - a new brand manager wants to imprint his/her mark on the business and, what better way to pump life into a brand with a slow innovation pipeline than to conduct a re-branding on a brand that has maintained the same look for a long time. However, I believe that any critic of a new brand identity must first understand the strategic need for a re-branding and the problem with the existing brand identity. Rebranding is a costly proposition, so updating a brand identity should not be taken lightly or done to merely enhance an existing identity. I once worked on a re-branding assessment for a company that, by acquisition, had, over time, acquired multiple entities which continued to be in use, resulting in some level of confusion among the company's customers, making the need for a streamlined brand very apparent.

In the case of Eight O' Clock coffee, I see the brand's interest in rebranding to be illustrative of a larger need: the need to grow the brand's franchise and identity beyond its core consumers.

Therefore, I have a slightly different take on Eight O' Clock's sweepstakes than some of the people who responded to the post's questions on strictly aesthetic bases...

Eight O' Clock is a brand with a lot of history and equity as a bagged, whole bean, premium value brand - at about $6 per pound it is positioned above the Folgers of the world but below many of the newer and higher priced bagged brands such as New England, Dunkin and Starbucks. In the 1920's and 1930's, Eight O'Clock Coffee had over a quarter of the U.S. market share and many of those fiercely loyal consumers were the ones who kept the brand going for so long. As such, it has become one of those nostalgia brands with a need to maintain its historic equities and loyal consumer base while appealing to potential new customers. It has developed a loyal, but older-aged demographic with a sticky price sensitivity, keeping the brand strong, but possibly at the expense of future growth if it fails to refresh its consumer base as its core consumers (forgive my morbidity) quite literally, die.

My sense, though, is that in the current new economy, as Americans shift their coffee dollars to home brewing instead of away-from-home purchases (see:http://www.reuters.com/article/newsOne/idUSTRE52K1RY20090321 ), the Eight O' Clock brand offers new relevancy and appeal to consumers that are looking to recreate the experience of coffee shop coffee in their own home. This relevancy is bringing new attention to the brand, with Consumer Reports in February rating Eight O' Clock as the "Best Cup O' Brew" for its taste profile and value at less than half the price of premium priced brands such as Peet's (see: http://www.freerepublic.com/focus/f-chat/2178988/posts). I have no doubt that the sweepstakes presented Eight O' Clock with a unique opportunity to engage and draw potential new consumers into the franchise by freshening up its image and providing a forum to do so through a medium that younger users tend to favor.

According to Eight O'Clock Coffee's image makeover website, "we understand during these uncertain and changing times that Americans are looking for consistency. We respect that and have decided to postpone changing our for the time being." While Eight O' Clock's core consumer (i.e., older) loyalists may have ultimately had the last say in maintaining the same brand image as a measure of reassurance, in the long run, Eight O' Clock can only benefit from its efforts to engage and attract consumers in new and innovative ways.

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Somebody's Doing Something Right: Panera's Expansion in Down Market No Mere Coincidence

An article that I recently read about Panera Bread's expansion plans gave me hope in this troubling economy (see: "Panera Looks to New Venues in Expansion," Reuters, 3/19/09). A national bakery chain with a well-developed brand name, high quality ingredients, convenient and competitive food offerings, and plenty of room for growth, Panera has developed a formula that should help guarantee solid returns for years to come. Panera currently has 1,250 locations with plans to open an additional 80-90 locations this year, an increase of about 7% of its current locations. In California, Panera has just 80 locations, so there are considerable opportunities within that state alone. Since becoming wholly independent from Au Bon Pain Co. in 1999, Panera's stock has grown thirteen fold, and in 2006, was recognized as the top performer in the restaurant category for one-, five- and ten-year returns to shareholders, so it's success is nothing sudden - it has been growing slowly and steadily.

Personally, I love Panera. The bread is freshly baked, the menu offerings are well-thought out, the atmosphere is inviting and warm, and the price is reasonable...and, I personally can't think of a fast casual cafe chain that comes even close to winning vs. Panera on any of those dimensions. Au Bon Pain was created on the same premise that brought Panera success - hospitality, quality, fresh baked goods - but it is, in my opinion, a pale comparison. Take for instance, hospitality - in most Panera locations, you are given a beeper while waiting for your food, so there is no confusion when your food is ready and in many cases, someone behind the counter will go out of their way to bring your food to your table. The food is served on actual plates with real silverware and the seating includes comfortable booths and cozy armchairs. In Au Bon Pain, the silverware is plastic, the chairs are stiff and you must bring the food to your table yourself and the order process involves a less personal approach of filling out a form and handing the form to the order taker. In terms of quality and freshness, Panera also wins hands-down. The bread is served right out of the oven and they sell their baguettes to take home, something that Au Bon Pain either does not do or does not effectively communicate that it does.

We all know how a hot sandwich can bring out the ingredients' flavors - Panera understands this and offers paninis - a style of grilling sandwiches that has become very popular. At Au Bon Pain, instead of paninis, it offers 'hot sandwiches', which are sandwiches that are continuously kept warm under a heat lamp. If you've ever had food that is kept warm that way, you'll know that it just doesn't taste very good or very fresh. For a place that promotes the quality and freshness of its breads, Au Bon Pain simply does not do as good a job executing. Finally, as far as I can tell, Panera also wins on value. At Panera, your order of a sandwich automatically comes with a bag of chips and a pickle thrown in and they smartly offer a half-sandwich and soup or salad combination, appealing to health-conscious customers. At Au Bon Pain, almost every ingredient is line-itemed and you certainly don't get the pickle...leading to a tab that is almost always$1-$2 more. So, what went wrong with Au Bon Pain? In 1999, it went public and then got shuffled around to different private equity groups. It certainly hasn't changed much over the years and hasn't tried to improve its offerings relative to Panera's.

Perhaps, owing to its success over the years and a lack of a serious competitor, it hasn't had to. But, let's get real - in a health conscious, quality, value driven economy like the one that we live in - where would you rather go for lunch? To me, the answer is obvious. -Elias Soussou is a management consultant at Auctive, a firm that focuses on strategies relating to distribution, channel and brand development opportunities within the food and beverage industry. He can be reached at esoussou@auctive.com.

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