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NESTL SA IN HOT DRINKS (WORLD)

September 2014

SCOPE OF THE REPORT

Scope
All values expressed in this report are in US dollar terms, using a fixed
exchange rate (2013).
2013 figures are based on part-year estimates.
All forecast data are expressed in constant terms; inflationary effects are
discounted. Conversely, all historical data are expressed in current terms;
inflationary effects are taken into account.

Microwaves
Refrigeration
Home
60,669
Appliances
Laundry
Large
Cooking
Home Laundry
Confectionary
144,010
121,107
Appliances
Appliances
132,745
121,107
US$185,477 mn

Hot Drinks

Microwaves
60,669

US$138.1 billion

Small
Appliances
Jewellery
1,724,022

Coffee

Tea

Other Hot Drinks

US$80.8 billion

US$40.2 billion

US$17.0 billion

Euromonitor International

HOT DRINKS: NESTL SA

Disclaimer
Much of the information in this
briefing is of a statistical nature and,
while every attempt has been made
to ensure accuracy and reliability,
Euromonitor International cannot be
held responsible for omissions or
errors.
Figures in tables and analyses are
calculated from unrounded data and
may not sum. Analyses found in the
briefings may not totally reflect the
companies opinions, reader
discretion is advised.

Nestl is the global leader in


hot drinks and it is accelerating
its expansion in the US
following the formation of
Jacobs Douwe Egberts (JDE).
The companys presence in
standard fresh ground coffee is
weak and it has been making
efforts to develop coffee pods,
particularly in Western Europe.
Multi-beverage Nescaf Dolce
Gusto outperformed Nespresso
but both are facing competition
from compatible products and
private label. The companys
initiatives in tea pods are bold
and encouraging.

PASSPORT 2

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
MARKET ASSESSMENT
COFFEE OPPORTUNITIES

TEA AND OTHER HOT DRINKS


OPPORTUNITIES
BRAND STRATEGY

OPERATIONS
RECOMMENDATIONS

STRATEGIC EVALUATION

Nestl presence in hot drinks focused on coffee


Nestl SA
Headquarters:

Vevey, Switzerland

Regional involvement:

Global

Category involvement:

Coffee, other hot drinks

World hot drinks off-trade


16.0%
value share (2013):

Within its beverages business, the Nespresso


platform is a high-growth revenue generator and
receives plentiful attention in terms of media
attention and R&D. Nestls 2013 annual report
combined instant coffee, the Nespresso business
and other powder and liquid beverages together,
showing no split between them.

World hot drinks off-trade


8.6%
value growth (20122013):
Nestl SA: Global Hot Drinks Value
Sales 2008-2013

US$ million rsp

25,000

20,000
15,000
10,000
5,000
0
2008

2009

Euromonitor International

2010

2011

2012

Nestl has seven core business segments:


Powder and Liquid Beverages (hot drinks included
here); Water; Milk Powder and Ice Cream; Nutrition
and HealthCare; Prepared Dishes and Cooking
Aids; Confectionery; and PetCare. According to the
company, Water accounted for 7.3% of the groups
CHF sales in 2013, and 5% of trading operating
profit.

2013

Nestl sits at the top spot of global hot drinks by


value, ranking number one in both coffee and other
hot drinks in 2013. Its Nespresso business
continues to grow globally although it showed a
marked slowdown in Western Europe amid
growing competition. The company is expanding in
the US by introducing new machines to take on
Kuerigs dominance.

HOT DRINKS: NESTL SA

PASSPORT 4

STRATEGIC EVALUATION

Nestls more moderate but more profitable growth for FY2013


Nestl SA: Reported Results (CHF million)
FY2012-FY2013
Y-o-y
2012
2013
growth

For the fiscal year 2013, Nestl posted growth slightly


below the 5% long-term target for organic growth, but its
trading operating profit margin rose slightly for the year.

Zone Europe

15,388 15,568

1.2%

Zone Americas

28,613 28,375

-0.8%

Zone Asia,
Oceania and Africa 18,875 18,859
(AOA)

-0.1%

Nestls FY2013 results offer unusual reading. In


contrast to the patterns of recent years, 2013 saw
minimal reported revenue growth in Zone Europe and
levels of growth in the reporting segments
encompassing emerging markets well below recent
levels.

Nestl Waters

7,174

7,231

0.8%

Nestl Nutrition

7,859

9,826

25.0%

Other

11,813 12,299

4.1%

Group Total

89,722 92,158

2.7%

Operating trading
profit

13,464 14,012

4.3%

Profit for the year

10,677 11,060

3.6%

Profit margin (%)

11.9

Source: Nestl Annual Report 2013

Euromonitor International

12.0

Zone Europe delivers positive growth

Although the groups organic growth was broad based,


Europe posted 0.8% growth, Americas 5.1% and the
AOA region 7.4% year on year.
Nestl Nutrition remains the high-growth/high-profit
division
The infant nutrition business, enhanced by the Wyeth
Nutrition acquisition, had a very positive year in
FY2013, particularly in infant formula and infant cereals.
The business delivered double-digit growth in Brazil and
Russia. The US benefited from the continued rollout of
innovations to help prevent colic and allergies, and
strengthening of the Gerber brand franchise.

HOT DRINKS: NESTL SA

PASSPORT 5

STRATEGIC EVALUATION

H1 results in 2014
In the first half of 2014, Nestl delivered organic
growth of 4.7%, with total sales reaching CHF43
billion. In Q1, the extension of the Grand Cru
coffee range, innovative services and new
machines ensured that demand for Nespresso in
established markets remained solid despite
significantly increased competition. Geographic
expansion was accelerated with 14 new boutiques
opened across the world. In North America there
has been a good response to the launch of the
VertuoLine system delivering the long-cup coffees
preferred by US consumers.

Nestl SA: Sales Overview by Business Segment


H1 2014

In zone Asia, Oceania and Africa, the premium


businesses continued to be a growth driver for the
Zone. The continuing rollout of Nescaf Dolce
Gusto delivered double-digit growth. Innovation
also contributed with new launches including Yinlu
Walnut Milk in China (included in soft drinks) and
new portioned packs of Milo in Australia. There
was solid growth for Milo in cocoa and malt
beverages and Maggi in ambient culinary. Russia
saw good growth for Nescaf Dolce Gusto.

Euromonitor International

Jan-June 2014
Business segment
(CHF million)

Jan-June 2014
% organic
growth

Powdered and
Liquid Beverages

9,835

5.3

Water

3,410

5.8

Milk Products and


Ice Cream

8,085

5.7

Nutrition &
Healthcare

5,659

7.6

Prepared Dishes
and Cooking Aids

6,394

0.0

Confectionery

4,184

3.4

PetCare

5,414

5.3

42,981

4.7

Total Group

HOT DRINKS: NESTL SA

PASSPORT 6

STRATEGIC EVALUATION

Nestls strategic directions


Nestls Four Operational Pillars
Innovation and
portfolio
development

Efficiency - highest
quality - lowest cost

Consumer
communication

Product availability
across all
distribution channels

Nestl continuously
Nestl's cost-saving
Intense innovation in
One of Nestls
reformulates products
strategies have been
line with ongoing trends
strategic pillars is the
to enhance their
implemented as per the
and efficient
broadening of
nutritional profile, by
Nestl Continuous
communication of
distribution to increase
reducing unhealthy
Excellence programme.
added-value benefits
consumption
elements and/or
The group has
will be key to the
opportunities. Its
increasing their nutrient
improved operating
success of the groups
multiple channel
content. Central to the
margins over the years.
portfolio improvement
strategy, ranging from
groups innovation
In 2013, both the cost
and to enable strong
traditional retailers to
strategy is the
of goods and
pricing positions to
modern grocery and
development of
distribution expenses
recover significant R&D
online, especially
branded active
rose, but the
investment.
targets impulse
ingredients, through
companys trading
Investment in
opportunities, such as
which Nestl aims to
operating profit grew by
advertising will also be
street vendors, kiosks
highlight its science4% and its trading
key to increasing the
and vending machines,
driven approach and its
operating margin
groups competitive
which are vital to, for
R&D capabilities.
increased by 20 basis
edge and differentiating
example, ice cream
points on 2012.
itself from its rivals.
and confectionery
sales.
Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 7

STRATEGIC EVALUATION

SWOT: Nestl SA
STRENGTHS

Instant coffee

WEAKNESSES

Strength of pod coffee

With a strong global


With Nespresso and
footprint, Nestl's global Nescaf Dolce Gusto
value share of instant
expanding globally,
coffee stood at 48% in
Nestl continues to lead
2013. Its dominance
the global coffee pods
here is and will remain
market, despite its share
secure for some time to being eroded by Keurig.
come.
OPPORTUNITIES

Coffee pods

North America

While Nestl leads


North America has
instant coffee and coffee traditionally been a
pod sales, it has virtually weakness for Nestl in
no presence in standard hot drinks. It is now
fresh ground coffee and addressing this by
it is weak in coffee
introducing Nespresso to
beans.
foodservice and
launching a new
machine.
THREATS

Special.T

The category is growing Nestls bold move with


and Nestl needs to
Special.T is interesting
continue to sustain its
and the premium tea
presence in Western
segment is certainly
Europe and penetrate
worth exploring further
key coffee-drinking
especially in developed
markets.
markets.

Euromonitor International

Standard fresh coffee

Threat to Nespresso

Keurig and JDE

Nespresso-compatible
products and private
label are cannibalising
Nespressos share of
coffee pods.

The competition is
changing, with Keurigs
partnership with multiple
brands and the formation
of major rival JDE.

HOT DRINKS: NESTL SA

PASSPORT 8

STRATEGIC EVALUATION

Challenges in hot drinks


Nespresso compatibles

Innovation

Premium tea

The emergence of Nespresso Although Nestls innovation is


Nestls bold move in single-serve
compatible products is a huge
copied and used by other players, tea-specific machines, Special. T is
threat to Nespresso. The fact that this has not stopped the company still at the experimental stage.
these brands are available in both innovating further. Its launch of
Premium teas and making tea
multiple grocers and online
new machines in the US and the
drinking a long-lasting premium
makes them more accessible to
Nespresso boutique retail concept experience are being explored by
consumers. DE Master Blenders are encouraging moves.
various manufacturers including
(DEMB)s LOr Espresso is
Nevertheless, technology creates DEMB and Unilever. This is a
emerging as a key challenger to
opportunities for Nestl, opens up manufacturer-led movement and
Nespresso in Western Europe.
manufacturers are trying to
possible new sales routes, but,
convince consumers of the
In Western Europe, Nespresso
also invites new competition.
continues to hold 41% of the
Technological innovation does not premium nature of their teas and
the method of tea preparation.
coffee pods market and private
guarantee success.
Therefore, marketing expenditure is
label accounts for around 11%. The formation of JDE is also a
likely to be high in this space.
Nestl has been fighting for
threat to Nestl, as the combined
patent protection but it seems
resources for coffee are enormous Following Nestls launch in tea
likely that it will not keep the
machines, Unilever responded with
and the economies of scale
technology to itself. While a
Tea Fusion endorsed by Lipton.
derived from optimising
devastating blow to the company, technological innovation and
Tea machines is a niche segment
it also highlights Nestls
marketing for its widened portfolio but competition is growing.
leadership in innovation.
of brands considerable.
Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 9

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
MARKET ASSESSMENT
COFFEE OPPORTUNITIES

TEA AND OTHER HOT DRINKS


OPPORTUNITIES
BRAND STRATEGY

OPERATIONS
RECOMMENDATIONS

COMPETITIVE POSITIONING

Nestl slightly outperforms the global hot drinks market in 2013


Nestl continued to outperform the global hot drinks market in 2013, thanks to healthy growth in instant
coffee in major emerging markets and expansion in pods in developed markets. Its strong growth continued
to be supported by Nespresso, Nescaf Dolce Gusto and Nescaf. Nestl will face a greater challenge
following the merger between Mondelezs coffee unit and DEMB.
Mondelez marginally outpaced the market thanks to the strong performance of the beverage system brand
Tassimo. Its multi-beverage capability and relative affordability compared to Nespresso helped it appeal to
the mass market and secure healthy volume sales. The availability of Tassimo in grocery stores has also
proved an advantage in targeting mass-market consumers.

DEMBs overall performance was hampered to some extent by its limited geographic presence and slow
sales of Senseo, which has been one of the losers in the global single-serve coffee boom in recent years.

% y-o-y value growth


2012-2013

Going forward, DEMBs acquisition of Norways Kaffehuset Friele may help its development of single-origin
coffee beans in European markets. However, Keurigs expanded collaboration with established brands and
its potential interests in international markets are likely to see it emerge as an international player in the
medium term.
Global Hot Drinks: Selected Companies % Y-o-Y Growth 2012-2013
12
10
8
6
4
2
0
Nestl

Euromonitor International

Mondelez

Unilever

Total Hot Drinks


Market

HOT DRINKS: NESTL SA

DEMB

Strauss/So Miguel Strauss Group Ltd

PASSPORT 11

COMPETITIVE POSITIONING

Global top 10 hot drinks companies by value in 2013


Top 10 Hot Drinks Companies
2013

Company
Nestl SA

% value
16.0

Mondelez International
Inc

6.9

Unilever Group

3.6

DE Master Blenders
1753 NV
Green Mountain Coffee
Roasters Inc

3.4
2.0

Tchibo GmbH

1.5

JM Smucker Co, The

1.3

Associated British
Foods Plc
Tata Global Beverages
Ltd
Lavazza SpA, Luigi

Euromonitor International

1.3
1.2
1.1

Compared to soft drinks, hot drinks is a very fragmented industry,


with the top 10 hot drinks players making up only 38% of the global
market in 2013. Nestl continues to occupy the top spot in the global
hot drinks market. Its leadership is underpinned by its consistent
growth in both instant coffee in emerging markets and fresh coffee in
developed markets, while its presence in tea is limited. Its strong
presence in other hot drinks also helps to support its overall hot drinks
position.
Despite the split from Kraft, Mondelez maintained its second position
and kept a solid distance between itself and Unilever. Unilevers third
position is due to its strong leadership in tea, with wide geographical
coverage. However, tea is an industry lacking a coffee pod moment,
meaning there is no single tea category or type driving large-scale
consumer trading up across developed markets. Unilevers potential
expansion of the newly-acquired Australian T2 premium tea retail
brand will help Unilevers ambition to expand into premium tea.
Mondelez and DEMBs future partnership - JDE - will move to the top
of global coffee by retail volume, but it will stay in second place
behind Nestl in retail value terms. The combined strength of
Mondelez and DEMB will be a compelling force in the global hot
drinks market and a real threat to Nestl.

HOT DRINKS: NESTL SA

PASSPORT 12

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
MARKET ASSESSMENT
COFFEE OPPORTUNITIES

TEA AND OTHER HOT DRINKS


OPPORTUNITIES
BRAND STRATEGY

OPERATIONS
RECOMMENDATIONS

MARKET ASSESSMENT

Nestl SA: North America remains a weak spot


Asia Pacific and Latin America are set to be the growth engines for hot drinks over 2013-2018, with the two
regions contributing over half of global growth over the forecast period. Strong growth in both Brazils coffee
and Chinas instant tea markets is set to be key to this growth. Nestl has invested in Chinas Yinlu local
beverages but it is unlikely that Nestl will be interested in expanding into instant tea. In Western Europe
and Australasia, hot drinks growth will be more subdued, with CAGRs of 1-2%. North America appears to
show a more positive picture. In the US, Nestl introduced the VertuoLine system especially designed for
the local long-cup market, a bold move given Keurigs dominance.
Nestl SA: Hot Drinks Presence 2013 and Growth Prospects 2013-2018 by Region
6

% CAGR 2013-2018

Latin America

4
Asia Pacific

Middle East and Africa

North America
Western Europe

2
Australasia

Eastern Europe

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Market size 2013 (US$ million rsp)


Note: Bubble size shows company share of region in 2013. Range displayed 3.8-43.2%

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 14

MARKET ASSESSMENT

Nestl SA: Dominant in instant and focusing on growing pod coffee


Instant coffee is Nestls primary interest in hot drinks, a category it dominates with a 48% retail value
share in 2013. Instant coffee sales are expected to post a CAGR of 3% in off-trade value terms over 20132018, with emerging markets Asia Pacific, Eastern Europe and Middle East and Africa key growth
contributors. Nestl, as the global leader in the category, stands to benefit disproportionately and it has
dominant positions in key growth markets such as China (75% share), Mexico (74%) and the UK (42%).
While Nestl was late to standard fresh ground coffee, it has focused on growing its presence in premium
fresh coffee pods with Nespresso and Nescaf Dolce Gusto. Mid-ranged Nescaf Dolce Gusto is being
rolled out globally and achieved higher growth than super premium Nespresso. Nescaf Dolce Gusto is
now present in 73 countries, according to the companys annual report.
Nestl leads global other hot drinks sales through its Milo and Nesquik brands based largely on its
emerging market presence. It also has an emerging presence in premium tea with the Special.T system (a
pod-based system similar to Nespresso), although its sales here remain modest.
Nestl SA: Hot Drinks Presence 2013 and Growth Prospects 2013-2018 by Category
% CAGR 2013-2018

10

Fresh Ground Coffee Pods

8
6

Fresh Coffee Beans

Instant Coffee

Standard Fresh
Ground Coffee

0
-2
-5,000

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Market size 2013 (US$ million rsp)


Note: Bubble size shows company share of category in 2013. Range displayed 0.8-47.7%

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 15

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
MARKET ASSESSMENT
COFFEE OPPORTUNITIES

TEA AND OTHER HOT DRINKS


OPPORTUNITIES
BRAND STRATEGY

OPERATIONS
RECOMMENDATIONS

COFFEE OPPORTUNITIES

Global opportunities will remain biased in favour of fresh coffee


Within the major coffee growth markets, fresh coffee will generate much higher value growth over 20132018 than instant coffee. Globally, growth in instant coffee will be driven by emerging markets, primarily in
Asia Pacific, headed by China. Some developed markets, such as Canada and Germany, are likely to see
sluggishness or even decline in instant coffee.
Brazil, the US, Canada and Spain are major forces for growth in fresh coffee. In Brazil, Nestls weakness
in standard fresh ground coffee affects its pace of share gain in overall coffee. Its key competitors are
Strauss/So Miguel, DE Master Blenders and potentially the entity, JDE, formed by the merger between
DEMB and Mondelezs coffee unit. Currently, there is little competition in coffee pods and Nespresso
dominates the category.
In the US and Canada, Nespresso is expanding and taking on Keurigs strong position there. It is crucial for
Nestl to grow the new beverage machine VertuoLine by scale and its beverages should be designed to fit
local consumers palates and lifestyles.
Fresh vs Instant Coffee: Strongest Absolute Value Growth Markets 2013/2018
Absolute value growth
(US$ million) 2013/2018

2,000
1,500
1,000
500
0
-500
Brazil

Euromonitor International

US

Canada

China
UK
Fresh Coffee

Spain
Instant Coffee

HOT DRINKS: NESTL SA

Mexico

Russia

Ukraine

Germany

PASSPORT 17

COFFEE OPPORTUNITIES

Nestls position still strong in overall coffee in 2013


Nestl leads the global coffee market, with a retail value share of
almost 23% in 2013. Nestls strong position is underpinned by
its successful expansion via instant coffee in emerging markets
%
Company
and coffee pods in developed markets.
value
Jacobs Douwe Egberts (JDE) will be a strong second player by
Nestl SA
22.7 retail value sales, with a potential 16% share, thanks to
Mondelez International Inc
10.9 Mondelezs good international coverage and DEMBs wide
presence in Europe. At the time of writing, DEMB is in the
DE Master Blenders 1753 NV
5.4 process of acquiring a premium coffee bean company,
Kaffehuset Friele (owner of House of Coffee), based in Norway.
Green Mountain Coffee Roasters
3.4 DEMBs target market for its bean business is mainly Western
Inc
Europe.
Tchibo GmbH
2.5
Keurig (GMCR) currently operates in the US only; however,
JM Smucker Co, The
2.3 international expansion cannot be ruled out. The Coca-Cola Co
Lavazza SpA, Luigi
1.9 recently acquired a 10% stake in Keurig, and the partnership will
allow Coca-Cola in a capsule format to be dispensed in Keurigs
Strauss/So Miguel
1.5 cold beverage machine. The partnership may give Keurig further
Strauss Group Ltd
1.5 confidence to expand beyond its domestic comfort zone.
World Top 10 Coffee Players by Retail
Value Share 2013

Kraft Foods Group Inc

Euromonitor International

1.5

Strauss and its Brazilian joint venture Strauss/So Miguel both


appeared in the top 10 in 2013. However, Strauss Group has
seen its global share decline as a direct result of its slow entry
into pods.

HOT DRINKS: NESTL SA

PASSPORT 18

COFFEE OPPORTUNITIES

New rival: Mondelez/DEMBs partnership proposal for JDE


Nestls global position in coffee may be challenged by the arrival of Jacobs Douwe Egberts. In May 2014,
Mondelez and DE Master Blenders 1753 (DEMB) jointly announced the decision to combine their
respective coffee businesses to create the worlds leading coffee company, with annual revenues of over
US$7 billion. The new company, called Jacobs Douwe Egberts (JDE), will be based in the Netherlands.
This deal will be one of the most significant in the global coffee market in many years, and is likely to
reshape the competitive landscape.
The parties have entered into an agreement to combine Mondelezs wholly-owned coffee portfolio (outside
France) with DEMB. In conjunction with this transaction, Acorn Holdings BV (AHBV), owner of DEMB, has
made a binding offer to take over Mondelez's coffee business in France. The parties have also invited
Mondelez's partners in certain joint ventures to join the new company. The transactions remain subject to
regulatory approvals and the completion of employee information and consultation requirements. In 2013,
Mondelez's wholly-owned coffee business generated revenues of around US$3.9 billion, and DEMB
generated some US$3.4 billion. Upon completion of all proposed transactions, Mondelez will receive cash
of approximately US$5 billion and a 49% equity interest in JDE. AHBV will hold a majority share in the
proposed combined company and will have a majority of the seats on the board, which will be chaired by
current DEMB chairman Bart Becht. AHBV is owned by an investor group led by JAB Holding Company
Sarl. Mondelez will have certain minority rights. The transactions are expected to be completed during the
course of 2015, subject to limited closing conditions, including regulatory approvals.
The proposal includes DEMBs tea business, which is highly complementary as Mondelez has little
presence in tea. However, Mondelezs chocolate drinks are excluded from the deal. JDE will be the global
brand owner of all the coffee and tea brands of both companies. As this is only at the proposal stage, the
details regarding how these brands will cross leverage each others networks have not yet been disclosed
or discussed in public.
Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 19

COFFEE OPPORTUNITIES

The potential impact of JDE


If the deal is approved, JDE will assume the number one position in the worlds coffee market by retail
volume, with a 15% share, overtaking market leader Nestl (12%). However, in value terms, JDE will be
placed second, with a 16% share, overshadowed by Nestl (23%). Nestls high value positioning is
underpinned by its strong presence in coffee pods, and its wide coverage in instant coffee, particularly in
emerging markets.
The deal is a strategic fit and highly complementary for both Mondelez and DEMB, particularly in terms of
coffee brands and geographic profile. JDE would have a much wider brand portfolio than the two
companies have at present, encompassing Jacobs, Carte Noire, Tassimo, Kenco, Douwe Egberts, LOr,
Pilo and Senseo, and these brands will potentially have immediate access to an established network in
key markets. For example, Mondelez is absent from Brazils coffee market and can leverage DE Master
Blenderss strong leadership in Brazil to make a relatively smooth entry. DE Master Blenders can also use
Mondelezs strength in China to expand.
From a competitors point of view, the deal is a threat to Nestl, as it must face not only JDE globally but
also Keurig in the US. The Coca-Cola Cos acquisition of a 10% stake in Keurig has made the situation
even more challenging, as Keurig has strengthened its financial position. The emergence of copycat
Nespresso-compatible products, private label and generic single-serve products has already put pressure
on Nespressos share. Nestl may have to expand aggressively into the US coffee pods category and
strengthen its position in major emerging markets. Nespressos recent launch of VertuoLine in the US,
which allows the machine to produce a large cup of espresso, is a good experiment.

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 20

COFFEE OPPORTUNITIES

New order in competition pyramid by off-trade volume with JDE


JDE will lead
the global
coffee market
by volume with
a good margin
between itself
and Nestl.
Nestl is
unlikely to be
challenged by
those
companies
below. Over
2013-2018,
Nestls key
battle will be in
the US and with
new rival JDE.

JDE
(15.3%)

Nestl (11.8%)

JM Smucker (4.1%),
Strauss/So Miguel (4.0%),
Tchibo (2.3%), Kraft (2.2%),
Melitta (1.9%), Lavazza (1.8%)

Others

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 21

COFFEE OPPORTUNITIES

Case study: Challenging landscape in single-serve coffee

Nespresso saw its growth slow down upon the


emergence of Nespresso-compatible products
and rival brands such as LOr Espresso. The
potential formation of JDE and its wide brand
portfolio will represent a threat to Nespresso.

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 22

COFFEE OPPORTUNITIES

Global pods: Nespresso overtaken by Keurig amid US growth


Globally, most major coffee players are engaged in
the pods business to varying degrees. While
Nespresso has global coverage, Green Mountain
Coffee Roasters is strong in the booming US market.
In March 2014, GMCR changed its name to Keurig
Green Mountain, to reflect its business of selling
Keurig coffee makers. GMCRs Keurig pod system
overtook Nespresso for the first time in 2013 to
become the number one brand by value in pods
globally, thanks to its strategy of allowing established
beverage brands to be made compatible with its
system.
Nestls strong rival will be JDE, which will have four
major single-serve beverage system/pod brands in
the top 10: Tassimo, Senseo, LOr Espresso and
Jacobs, covering a spectrum of price points. The fact
that these pods are available in the grocery channel
helps them attract more consumers doing their
weekly shopping. Mondelez recently launched
Nespresso-compatible pods for the Jacobs and Carte
Noire brands in Switzerland, Germany and France to
target Nespressos core markets, and JDE may have
a chance to steal some share from Nespresso.

Euromonitor International

Global Top 10 Fresh Ground Coffee Pods


Brands by Value Ranking 2008/2012/2013
Brand

2008

2012

2013

Keurig

Nespresso

Nescaf Dolce
Gusto

Tassimo

Senseo

L'Or Espresso

Cafissimo

Lavazza Systems

Jacobs

13

10

10

Delta

HOT DRINKS: NESTL SA

PASSPORT 23

COFFEE OPPORTUNITIES

Global prospects for coffee pods by market


Forecast Value Growth in Coffee Pods by Country 2013-2018
1,400

45.0

40.0

35.0
1,000
30.0
800

25.0

20.0

600

% CAGR 2013-2018

Absolute value growth (US$ million) 2013/2018

1,200

15.0
400
10.0
200
5.0

0.0
US

Canada

Spain

Germany

Italy

France

Portugal Sweden

Absolute Growth US$ million

Euromonitor International

Brazil

Belgium

UK

Switzer- Australia
land

CAGR % 2013/18

HOT DRINKS: NESTL SA

PASSPORT 24

COFFEE OPPORTUNITIES

The future of pods

Developed markets the


driver

Beverage machines or
beverage

Collaborations

Growth to be found mainly in


developed markets due to high
initial cost of purchasing the
machine and low affordability in
most developing markets. It is
important for Nespresso to
strengthen its position in
developed markets in terms of
both the machines and the
drinks. In Western Europe,
Nestl will need to fight hard
against Nespresso-compatible
products and make a
considerable effort to retain
consumer loyalty.
In the long term, pod machines
will filter through to major coffee
growth developing markets,
such as China. Nestls strong
position in instant coffee in
these markets will thus help it to
expand in fresh coffee.

Beverage machine operators


and beverage brand owners
have to be clear how to develop
their systems and technology in
association with their coffee
brands.
As patents for machines will
expire, the machine owners
have to maximise the value of
innovation before this occurs.
The emergence of Nespressocompatible pods has alerted
both machine and beverage
brand owners regarding
consumer loyalty to the drinks.
Patents on technology can be
vulnerable. Investment in R&D
is not a guarantee financial
success.

For pod marketers, the


investment in machines can be
huge and it is a complex issue
to market, distribute and
maintain the machines. A
number of alliances and
collaborations have been
formed: Starbucks and Keurig,
Keurig and The Coca-Cola Co
(for cold beverages), Keurig
with Lavazza etc.
The direction of development of
machines is tending towards
user-friendly, interactive and
digital formats. However,
consumers are increasingly
sophisticated and they are
looking for good value for
money in innovation rather than
superfluous modifications.

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 25

COFFEE OPPORTUNITIES

Nestls big challenge in Brazil


Brazil has a concentrated coffee market, with the top three players
making up over half of total retail value sales. Nestls rivals include
newly-created JDE, the Strauss/So Miguel joint venture, Melitta and
other smaller companies.

Brazil: Coffee by
% Company Value Share
2013

Nestl Brasil has a strong position within instant coffee as its brand is
well known among consumers. Nestl has 14 exclusive stores and an
online portal to sell Nespresso coffee pods to consumers. At the
same time, its Nescaf Dolce Gusto brand has more widespread
distribution due to its more accessible price.
Nestls key current rival is DEMB, which is long established in Brazil
in both the off-trade and on-trade. DEMBs strength lies in fresh
ground coffee, where it has been leader for many years. Standard
fresh ground coffee dominates coffee sales in Brazil and will continue
to do so over the forecast period. However, the pods category is
advancing rapidly and has attracted growing interest from both
consumers and industry players. Nestl dominates the pods category
and Melitta has introduced pods; however, sales and distribution
remain limited. Strauss/So Miguel has not registered category
shares in pods yet. In view of the categorys anticipated rapid growth,
DEMB may build a solid platform for L'Or Espresso and Senseo to
grab share from Nespresso, as consumers are already aware of its
corporate offering and are familiar with its brands in fresh ground
coffee.
Euromonitor International

HOT DRINKS: NESTL SA

DE Master Blenders 1753 NV


Strauss/So Miguel
Nestl SA
Melitta Unternehmensgruppe Bentz KG
Indstrias Alimentcias Marat Ltda
Cacique de Caf Solvel, Cia
Others

PASSPORT 26

COFFEE OPPORTUNITIES

Nestl to see JDE as formidable rival in pods in Western Europe

Post JDE Competition Landscape in Western Europes Pod Market 2013


% value share
Category
Major company
2013
Fresh Coffee Beans Mondelez International Inc
11.8
Lavazza SpA, Luigi
11.7
Tchibo GmbH
8.2
Alois Dallmayr oHG
6.6
DE Master Blenders 1753 NV
4.4
Fresh Ground
Nestl SA
41.0
Coffee Pods
DE Master Blenders 1753 NV
15.2
Mondelez International Inc
9.4
Standard Fresh
Mondelez International Inc
18.1
Ground Coffee
Lavazza SpA, Luigi
9.2
DE Master Blenders 1753 NV
8.4
Instant Coffee
Nestl SA
47.5
Mondelez International Inc
16.2
DE Master Blenders 1753 NV
2.0

Euromonitor International

HOT DRINKS: NESTL SA

JDE % value
JDE rank 2013
share 2013
16.2
1

24.6

26.5

18.2

PASSPORT 27

COFFEE OPPORTUNITIES

Case study: US - Pod battle

Nespresso is facing tremendous challenges in


the US coffee market: Keurig and chain coffee
shops are solid barriers. However, pockets of

opportunity exist in foodservice.

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 28

COFFEE OPPORTUNITIES

Nestl faces big challenges on all fronts


Nespressos business model will continue to have a
tough time in the US. Consumers there are very loyal to
their favourite hot drinks brands and will pay a premium
for a Keurig coffee machine because it brews all their
favourite branded drinks at the touch of a button and at a
price that is still perceived as reasonable. To succeed, it
will not be enough for Nespresso to focus on coffee size.
The right pricing and brand awareness and availability in
retail outlets such as grocery are also important.

US Coffee Pods: Competitive


Landscape % Company Value Share
2013

The North American fresh coffee market is very


concentrated, with the top two companies, Kraft and JM
Smucker, jointly commanding over one third of off-trade
fresh coffee volumes. Despite volume sales just one fifth
of JM Smucker, Green Mountain is North Americas most
valuable coffee company as almost all of its sales derive
from its Keurig pods which are premium priced.
In the US, specialist coffee shops are by far the most
popular places for consumers to enjoy a cup of coffee
outside the home. In 2013, specialist coffee shops
generated sales of around US$18 billion and this is
expected to rise by a further 13% over 2013-2018.
Starbucks is the major player in this field, accounting for
around 60% of specialist coffee shops sales in 2013.
Euromonitor International

HOT DRINKS: NESTL SA

Green Mountain Coffee Roasters Inc


Nestl SA
Mondelez International Inc
Others

PASSPORT 29

COFFEE OPPORTUNITIES

The K-Cup barrier: Open system carrying multiple coffee brands


In North America, there are only a few coffee brands that consumers brew at home, with one also being the
main specialist coffee chain where the same consumers enjoy their coffee when out.

In this context, Green Mountain has been able to thrive. The company has been able to find success by
combining its pod technology with stable partnerships with several popular licensed regional coffee brands.
Green Mountain has agreements with 25 different coffee brands to produce K-Cups, including four of the
top five brands by value in the US fresh coffee market - Keurig itself, Folgers, Dunkin Donuts and
Starbucks.
This strategy has helped Green Mountain attract customers who would normally hesitate in purchasing a
pod coffee machine but are nonetheless interested in the possibility of brewing their favourite brand of
coffee at the touch of a button. Crucially, this partnership strategy has also limited the incentive for
competitors to launch rival pod systems and is in turn attracting further cooperation agreements. Even
Lavazza, the Italian coffee brewer, which in Europe partners Electrolux for its pod system, has decided to
cut out the Swedish company from its US pod expansion and has partnered with Green Mountain instead.
Lavazza purchased a 7% stake in Green Mountain and in 2012 launched its Keurig Rivo.

The Coca-Cola Co has purchased 10% stake in Keurig and started investing in the cold beverage system.
TCCCs investment strengthened Keurigs confidence to expand and ensures that Keurigs innovation
pipeline will not run short.
Currently, Keurigs sales are mainly in North America. As the company grows, its international ambition
may become more apparent. By then, Keurig will become Nestls global rival.

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 30

COFFEE OPPORTUNITIES

Exploration in foodservice

Positioned as a premium product, available only


through Nespresso boutiques or online retailers,
Nespresso is targeting only high-margin
restaurants to showcase its coffee. The brands
restaurant pitch echoes that of its individual
consumer: Nespresso can offer an unparalleled
combination of convenience and quality. Traditional
espresso machines used by higher-end
foodservice establishments require trained
professionals to operate, substantial maintenance,
and of course, a constant supply of fresh beans.
Euromonitor International

Nespresso machines, on the other hand, are


simple to operate, require minimum care, while the
vacuum-sealed pods last up to 11 months.
Furthermore, though a premium product,
Nespresso machines are more economical than
standard espresso machines: not only is the initial
price of a Nespresso machine generally less
expensive, but the running costs are also much
lower. Thus far, Nespressos campaign has been
convincing. According to Nespresso sources, 30%
of the worlds Michelin-starred restaurants, many
within the US, have made the switch to Nespresso
machines.
US Coffee Pods: GMCR vs Nestl
% Y-o-Y Retail Value Growth 2008-2013
% y-o-y growth

Part of Nespressos plan to boost its share of the


US market is to increase its brand exposure via
professional customers, such as restaurants. In
May 2013, Nespresso launched the Aguila, a
machine designed especially for US foodservice
outlets to help with this goal. While Nespresso may
be successful in gaining entry into US restaurants,
it is still unclear whether this will translate into a
larger presence in the US retail coffee pods
market.

150
125
100
75
50
25
0

HOT DRINKS: NESTL SA

2008-09
Keurig

2009-10

2010-11

Nestl

2011-12

2012-13

Pod Market Growth

PASSPORT 31

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
MARKET ASSESSMENT
COFFEE OPPORTUNITIES

TEA AND OTHER HOT DRINKS


OPPORTUNITIES
BRAND STRATEGY

OPERATIONS
RECOMMENDATIONS

TEA AND OTHER HOT DRINKS OPPORTUNITIES

Global other hot drinks outlook

600

7.0

500

6.0
5.0

400

4.0
300
3.0
200
2.0
100

CAGR % 2013-2018

Absolute Growth (US$ million)

Other hot drinks includes chocolate powder, malt drinks and local products. China represents a strong
growth market, but Nestl has limited presence there. Chinas market is highly fragmented, with VV Group,
the market leader, commanding around 7% of retail value sales in 2013. Nestls strategy for China
changed upon its acquisition of Yinlu, which gave it a presence in local beverages and it does not try to
convince Chinese consumers to try Western style drinks. In Brazil, Nestl leads other hot drinks with strong
brand Nescau and Nesquik. Both PepsiCo and TCCC is present but other hot drinks are not their core
beverages in Brazil. Thus, Nestl has a good opportunity to sustain its leadership given its investments in
marketing campaigns and research and development of new products, pack sizes and flavours..
Other Hot Drinks Prospects by Country 2013-2018

1.0

0.0
China

Brazil

Indonesia

Nigeria

India

Argentina

Absolute Growth US$ million

Euromonitor International

Russia

Mexico

Venezuela

United South Africa


Kingdom

CAGR % 2013/18

HOT DRINKS: NESTL SA

PASSPORT 33

TEA AND OTHER HOT DRINKS OPPORTUNITIES

Chocolate powder to drive future growth of other hot drinks


Chocolate powdered drinks is likely to be the growth driver in the other hot drinks market. Emerging
markets are the key growth geographies, including Brazil, Mexico, Indonesia and Venezuela.

In Brazil, Nestl (Nescau) and PepsiCo (Toddy) are the key players. The fact that the combined share of
Nescau and Toddy is nearly 70% of the market makes it a real barrier for other potential entrants. Nescau
is a fortified chocolate-based flavoured powder drink with Actigen-E, a combination of vitamins and
minerals, in its formula. A marketing campaign focusing on adolescents is its key strategy to boost sales in
this category.

1,000

4.0

800

3.0

600

2.0

400

1.0

200
0

0.0
Chocolate-based Flavoured
Powder Drinks

Malt-based Hot Drinks

Non-Chocolate-based Flavoured
Powder Drinks

Absolute Growth US$ million

Euromonitor International

CAGR % 2013-2018

Absolute growth
(US$ million)

In Mexico, chocolate-based flavoured powder drinks registered the strongest growth in 2013, driven mainly
by advertising which helps develop the perception among consumers that these are high quality products,
and in turn limits the impact of price increases on consumers purchasing decisions. Nestl Mxico
registered the strongest growth in other hot drinks in retail value share terms in 2013 due to the improved
performance of Nesquik in chocolate-based flavoured powder drinks. This was due to the recent launch of
the product containing stevia, an all-natural sweetener, which is considered healthier and potentially helpful
in curbing childhood obesity.
World: Other Hot Drinks Prospects by Category 2013-2018

Other Plant-based Hot Drinks

CAGR % 2013/18

HOT DRINKS: NESTL SA

PASSPORT 34

TEA AND OTHER HOT DRINKS OPPORTUNITIES

Asia major driver and rising premiumisation in developed markets


Emerging markets are set to drive global tea growth. Asian emerging markets will continue to raise their
profile, becoming attractive investment destinations, on the back of organic growth in demand for valueadded products, and consumers trading up.
China is forecast to account for over 40% of global absolute value growth over 2013-2018. The emerging
middle class, changing lifestyles and urbanisation should be recognised and fully explored by
manufacturers. Missing the growth opportunities may risk weakened global status in the medium term.
The US will continue to see good expansion in tea sales, thanks to the healthy image of tea and
premiumisation in the tea industry. Starbucks acquisition of Teavana and its increased interest and
activities in tea will help to create a premium tea moment.
Unilevers acquisition of T2 (premium tea specialist outlets) and further established a store in London
means it has started exploring high end tea store.

3.0

10.0

2.5

8.0

2.0

6.0

1.5
4.0

1.0

2.0

0.5
0.0

% CAGR 2013-2018

US$ million rsp

Major Tea Growth Markets 2013-2018

0.0
China

India

Pakistan

Indonesia

Russia

Absolute Growth US$ million rsp

Euromonitor International

Brazil

Germany

US

% CAGR 2013/18

HOT DRINKS: NESTL SA

PASSPORT 35

TEA AND OTHER HOT DRINKS OPPORTUNITIES

Global top 10 tea companies in 2013


The top four tea companies maintained their global rankings in 2013.
The positions of these major companies are not expected to show
significant change without major acquisitions.
Unilever, TGBL and ABF are the only truly global companies in the top
10. Although TGBL has ambitions to expand, its widening interests and
corporate objective to engage in a diverse range of beverages may
mean its hot tea business is given limited resources. Consequently,
TGBL and ABF are unlikely to pose an immediate challenge to
Unilever, unless they make significant acquisitions in major tea
markets.
Orimi and Ahmad Tea have profited from the consumer boom in
Eastern Europe, with consumers trading up to tea bags and a variety of
loose teas, thanks to stabilised economies. The economic downturn did
not have a significant impact on tea consumption, as tea is a staple
beverage in the two companies core Eastern European region.
Tea has never been a core category in Nestl vast fmcg basket. RTD
tea Nestea is Nestls most globally recognized tea beverage brand.
Interestingly, Nestl entered the premium tea category by high profile
launch of Special.T single serve tea specialist machine in 2010 and
now the machine is distributed in Belgium, Luxemburg, Germany,
Netherlands, France, Japan and Switzerland. It is reported that the
sales of Special.T exceeded Nestls expectation and the company is
increasing its investment in the field.
Euromonitor International

HOT DRINKS: NESTL SA

Global Top 10 Tea Companies


by Retail Value Share 2013
%
share

Company
Unilever Group

11.9

Tata Global Beverages


Ltd
Associated British Foods
Plc

3.3
3.0

Orimi Trade OOO

2.3

Ahmad Tea London Ltd

2.3

Teekanne GmbH & Co


KG
Zhejiang Xiangpiaopiao
Co Ltd
Guangdong Strong
(Group) Co Ltd

1.7
1.6
1.5

Ito En Ltd

1.5

Mai Kompanya OAO

1.4

PASSPORT 36

TEA AND OTHER HOT DRINKS OPPORTUNITIES

Special.T: A bold move with encouraging signs of progress


In Europe, Special.T has its own website in each country in
which it is present and the products can be purchased
through online Special.T shops.
In March 2013, Special.T was launched in Japan, its first
market outside Europe. This is a bold approach, as Japan
is a highly mature tea-drinking market and Nestl is
unknown there for offering tea. However, Nespresso
continues to see strong double-digit growth in retail value
sales in Japan, which offer some encouraging signs for tea
pods. Special.T carries green tea and other varieties, such
as black, blue, white and organic herbal teas. It claims to
offer a selection of fine teas sourced from the top 1% of the
worlds tea plantations to attract sophisticated Japanese
consumers.
Japan has sophisticated and affluent tea drinkers, hence
Nestls selling Special.T as a high quality product.
Crucially, Special.T will be available in grocery stores to
help it reach critical mass. Demographically, Japan's
population of 128 million will fall by more than a third by
2060, and about 40% of the population will be over the age
of 65. People living alone will tend to prefer smaller
beverage packs. Japans ingrained tea-drinking culture and
the traditional preparation of a cup of tea is challenged.

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 37

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
MARKET ASSESSMENT
COFFEE OPPORTUNITIES

TEA AND OTHER HOT DRINKS


OPPORTUNITIES
BRAND STRATEGY

OPERATIONS
RECOMMENDATIONS

BRAND STRATEGY

Nestl has narrow hot drinks portfolio and relaunches Nesquik


Compared to Nestls water business, Nestls hot drinks business has a smaller brand portfolio. Nescaf,
Nespresso, Nescaf Dolce Gusto, Milo and Nesquik are the key brands. Apart from the tea beverage
machines and its associated tea products, Nestl has no established tea brands. Nescaf Dolce Gusto
showed the strongest performance thanks to its multi-beverage feature and mid-priced appeal. The fact that
the Dolce Gusto is available in grocery stores makes it convenient for consumers to top up supplies for their
machines, thus, increasing consumption frequency. Nesquik is a key other hot drinks brand and it has been
relaunched in Europe with 10% less sugar and fortified with OptiStart, containing vitamins and minerals to
complement milk and optimal mix of nutrients to support growth and development. The launch started in
France and covered most of Europe by the end of 2013. The Middle East and North and Latin America are
following at the time of writing.
40.0

14,000

35.0

12,000

30.0

10,000

25.0

8,000

20.0

6,000

15.0

4,000

10.0

2,000

5.0

0.0
Nescaf

Nespresso
US$ million rsp

Euromonitor International

% CAGR 2008-2013

US$ million rsp

Nestl Major Hot Drinks Brands Value Sales 2013 and % CAGR 2008-2013
16,000

Nescaf Dolce Gusto

CAGR % 2008/13

HOT DRINKS: NESTL SA

PASSPORT 39

BRAND STRATEGY

Nescaf remains Nestls key brand in hot drinks


Nescaf is Nestls number one selling brand in hot drinks based almost exclusively on its position in
instant coffee. There is no single rival brand that challenges Nescaf although the combined strength of
Mondelezs instant coffee brands is considerable. Growing demand for instant coffee, primarily in emerging
markets, has helped it to grow despite growing premiumisation in mature Western European and North
American markets which favours fresh coffee sales.
In 2014, Nescaf is launching a unified, global look and feel across all products in the 180 countries where
the coffee is sold. The purpose of the REDvolution campaign is to attract the attention of young consumers
and make the brand still relevant as coffee consumption trends evolve. Nescaf is also launching RTD
coffee Shakissmo in seven European markets to further capitalise on Nescafs brand equity.

15,000

15.0

10,000

10.0

5,000

5.0

% y-o-y growth
2012-2013

US$ million rsp

Japan, China and Russia are Nescafs major markets. While Japans market is mature and Nescaf saw
continuous slow growth, China was the growth driver, increasing by 15% in 2012-2013. There are still many
years of strong growth in instant coffee in China as coffee culture spreads further. The company has also
been acting as a coffee ambassador in traditional tea-drinking markets in Asia Pacific. Nestl is among
the most adept at tailoring its products to meet local requirements.
Global Major Instant Coffee Brands Value Sales 2013 and % Y-o-Y Growth 2012-2013

0.0
Nescaf

Jacobs

Maxwell House
US$ million rsp 2013

Euromonitor International

Maxim

Carte Noire

Tchibo

Moccona

% y-o-y growth 2012-2013

HOT DRINKS: NESTL SA

PASSPORT 40

BRAND STRATEGY

Luxury Nespresso faces challenge from compatible products


Nespresso is based around a coffee club concept with retail taking place online from Nestl or through
any one of its boutiques, some of which are stand-alone retail stores, but with most others operated as
shop-in-shop formats in premium-positioned department stores rather than through supermarkets.
Nespresso has seen growing competition from not only new arrivals every year and private label, but also
Nespresso-compatible brands. The potential formation of JDE will also put some pressure on the pace of
growth for Nespresso globally. To maintain growth, Nespresso, with 320 boutiques, will continue to open
stores, but insists that it will not go down the grocery route. Instead, it is developing the Nespresso
Business Solution and Automated Boutique concept to boost sales. Nespresso Cube, a digital, fullyautomated Nespresso Boutique, was launched in Western Europe in 2014. Nespresso is launching the
VertuoLine system in the US and this will prove a challenge as the pod market is dominated by Keurig.
Global Major Coffee Pods Brands Value Sales 2013 and % Y-o-Y Growth 2012-2013
40.0
35.0

US$ million rsp

2,500

30.0
2,000

25.0

1,500

20.0
15.0

1,000

10.0
500

% y-o-y growth 2012-2013

3,000

5.0

0.0
Keurig

Nespresso

Tassimo
US$ million rsp 2013

Euromonitor International

Nescaf Dolce Gusto

Senseo

L'Or Espresso

% y-o-y growth 2012-2013

HOT DRINKS: NESTL SA

PASSPORT 41

BRAND STRATEGY

Nespresso Cube - new automated retail vending concept


The Nespresso Cube is the latest
innovation, offering a unique retail
concept and an automated boutique,
providing consumers with easy and
convenient access to the brands 22
permanent Grands Crus as well as
Limited Editions. The system aims to
allow Nespresso to expand into new
premium locations. Specifically, the
cube contains 25,000 capsules in
2,500 sleeves and the system can
process an order of 10 sleeves in 20
seconds and all visible through a
window. Club members can buy
using their club card and other
consumers can use a credit card.
Cube is now present in Switzerland,
Spain and Portugal.
Only brands with economies of
scale and innovation capabilities can
afford to do this.

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 42

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
MARKET ASSESSMENT
COFFEE OPPORTUNITIES

TEA AND OTHER HOT DRINKS


OPPORTUNITIES
BRAND STRATEGY

OPERATIONS
RECOMMENDATIONS

OPERATIONS

Nestl focuses on coffee investment in hot drinks


In terms of financial reporting, Nestl included Nespresso, Milo and other hot drinks brands in the Powder
and Liquid Beverages segment in its 2013 annual report. There is no clear split for these brands within the
segment. At corporate level, the company has around 460 factories in over 80 countries and its products
are sold in around 140 countries. The company employs some 250,000 people and has a very active
research and development programme and has around 30 R&D facilities in North America, Europe and
Asia.
In 2014, Nestl opened the System Technology Centre in Orbe, Switzerland to bring together the expertise
behind the Nespresso, Nescaf Dolce Gusto and Nestl BabyNes systems. STC unites 120 experts from
25 countries to work on design, technology, packaging, engineering, electronics and robotics.
Production investments in coffee
Nestl attempts to reduce costs and make its products closer to local markets. Therefore products are
normally produced regionally or locally. In hot drinks, most of the investments in terms of production are in
coffee, highlighting the strategic importance of the category to the company. The company has invested
heavily in expanding facilities for Nescaf Dolce Gusto in recent years to keep pace with demand for coffee
pods, including a new factory in Germany.

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 44

OPERATIONS

Highlights of production activities in recent years


In 2014, Nestl announced a ready-to-drink beverage factory in Malaysia for brands such as Nescaf, Milo
and Nestl Low Fat Milk, and opened a Nescaf factory in Vietnam.

In May 2012, Nestl announced a CHF300 million investment in a third factory for Nespresso capsule
production, in Fribourg, Switzerland. This follows a CHF300 million investment in Nespressos second
production and distribution centre in Avenches, Switzerland in 2009.
In 2012, Nestl also announced a 220 million investment in a new Nescaf Dolce Gusto factory in
Germany. The factory aims to produce about two billion coffee capsules a year for the German market, as
well as for export to Eastern Europe and Scandinavia.

Nestl also continues to invest in its Nescaf instant coffee, including a project in Russia designed to meet
domestic demand, as well as for export to other CIS countries.
In 2013, Nescaf opened a new coffee centre of excellence in the Philippines to improve the quality and
quantity of the coffee crop in a country where demand for beans far outstrips supply. The facility, in
Batangas City in the central Philippines, was set up as a one-stop shop for coffee-growers in the region to
give farmers access to the best of Nestls coffee farming technology and training.

Euromonitor International

HOT DRINKS: NESTL SA

PASSPORT 45

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
MARKET ASSESSMENT
COFFEE OPPORTUNITIES

TEA AND OTHER HOT DRINKS


OPPORTUNITIES
BRAND STRATEGY

OPERATIONS
RECOMMENDATIONS

RECOMMENDATIONS

Develop counter strategy to deal with JDE formation


Instant coffee

Latin American fresh


coffee
Nestl should continue to
Nestl should consider
strengthen its position in major
increasing its presence
instant coffee-drinking countries
in fresh coffee in Latin
by marketing campaigns or new
America. The Brazilian
product development. In view of
market will dominate
the formation of JDE in 2015,
regional growth and
Nestl should design an
should therefore be the
appropriate strategy to cope
primary focus. The
with the new competitive
market remains highly
situation. For example, in JDEs
fragmented, but with
stronghold regions, Nestl
JDEs formation there is
should now consider or design a likely to be significant
strategy to handle the future
leveraging between
combined force of DEMB and
DEMB and Mondelez
Mondelez.
and subsequent
consolidation. Nestl will
In China and Russia, for
need to move now to
example, Nestl needs to think
ahead about what to do if DEMB avoid losing out on the
strong growth
leverages Mondelezs presence
anticipated here.
to launch its own instant coffee
brands.

Euromonitor International

Pods: Coffee and tea


Nestl has good penetration in coffee pods
in most markets except the US. Facing the
influx of Nespresso-compatible products
and private label, Nespresso is right to
widen its distribution and expand into
institutional sales. The launch of Nespresso
Cube is a positive trial to make its products
more visually and directly accessible.
The launch of the large cup VertuoLine
system in the US is a good move despite
the tough situation there. The US pod
market is already concentrated and
consumers loyalty to their brands means a
long battle to win them over.
Nestls bold move in single-serve teaspecific machines is still a work in progress.
The initial launch in select Western
European markets appears encouraging
but the emergence of premium tea leafs
variants may distract consumers attention
from Special.T.

HOT DRINKS: NESTL SA

PASSPORT 47

FOR FURTHER INSIGHT PLEASE CONTACT


Hope Lee
Senior Analyst Beverages
hope.lee@euromonitor.com
Twitter@HLee_emi

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HOT DRINKS: NESTL SA

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