Nespresso Pitches 'Luxury' Coffee for Lean Times

(page 2 of 2)

In Europe as in the U.S., Nestlé has tried to distance itself from the pack by positioning Nespresso as a "luxury" product. The company has opened more than 150 elegant boutiques across the region, including outlets on the Champs Elysées in Paris and in London's swank Knightsbridge shopping district, where customers can sip coffee, buy one of the sleek espresso systems, and order Nespresso capsules—the only kind that fit in the machines.

Taking another page from the luxury business, Nespresso strictly controls distribution of its products. Nespresso capsules are sold only in its boutiques or on the company's Web site, where customers become "club members." The machines are sold in a few other outlets, such as Williams-Sonoma (WSM) and Sur La Table stores. By contrast, Senseo and Tassimo machines are sold at Wal-Mart (WMT), and Keurig machines are sold at Best Buy (BBY) and on the QVC shopping channel.

Girardot, a veteran Nestlé executive who previously managed its Perrier bottled-water business, has stocked his management team with recruits from luxury houses including Salvatore Ferragamo and LVMH Moët Hennessy Louis Vuitton (LVMH.PA). "They've lavished the same sort of attention on Nespresso as Richemont would on one of its luxury marques," says James Amoroso, a Swiss-based food industry consultant. Richemont (CFR.F) brands include Cartier jewelry and Montblanc pens.

"A Creamier Top and Richer Flavor"

Will U.S. consumers go for Nespresso's snob appeal? Keurig, the current U.S. market leader, nearly doubled its sales last year with a more mass-market approach. Its replacement capsules, known as K-cups, are sold in supermarkets and discount stores, and include established U.S. brands such as Celestial Seasonings and Newman's Own. "Nespresso is offering a high-end espresso. I don't know how far that market goes," says Jay Brewer, editor of SingleServeCoffee.com, a Boston-based online newsletter that covers the business.

Espresso purists may snicker at the names of such Nespresso blends as Arpeggio, Capriccio, and Finezzo. But coffee cognoscenti say Nespresso's machine comes closer than its competitors' to a classic espresso-bar model because it operates at higher pressure. "High pressure gives a creamier top and richer flavor," Brewer says.

The machine costs more, too. Nespresso system prices start at $200 vs. about $80 for Senseo and Keurig and $100 for Tassimo. On the other hand, Nespresso's 55¢ single-serve capsules cost about the same as Keurig's K-Cup capsules and only about 5¢ more than Tassimo's. Senseo capsules cost about 30¢ each.

Nespresso's Girardot says the company doesn't expect U.S. sales to boom overnight. "We have a long-term strategy," he says. "Nespresso wouldn't be where it is today without having had investments for years and years, including years when it was losing money."

But Nespresso can't afford to move too slowly. Patents on the design of some of its coffee capsules will expire in 2012, allowing others to make less-expensive generic replacements. And when the economy rebounds, consumers may decide that paying $3 or $4 a cup in a coffee bar isn't so painful after all.

Matlack is BusinessWeek's Paris bureau chief.