Rivals serve Nespresso a bitter brew

A display of Nespresso coffee capsules at the Nestle SA headquarters in Vevey, Switzerland. Nespresso sells its products in its own boutiques, which are modelled after luxury stores.
A display of Nespresso coffee capsules at the Nestle SA headquarters in Vevey, Switzerland. Nespresso sells its products in its own boutiques, which are modelled after luxury stores.PHOTO: BLOOMBERG

JAB-Keurig deal set to cost Nestle its global single-serve coffee crown

ZURICH • Nespresso's failure to dominate the United States and a deal that brings together two of its main rivals are set to cost Nestle its global single-serve coffee crown.

With about 28 per cent of the world's portioned coffee market, Nestle will be overshadowed by the Reimann family's investment company JAB Holding.

After the latter's US$14 billion (S$19.7 billion) takeover of Keurig Green Mountain, JAB's share of coffee sold in prepacked pods or capsules will rise to almost 41 per cent, according to Euromonitor estimates.

Taking Keurig Green Mountain private will give JAB Holding an opportunity to press for higher margins and even increase prices for the single-serve K-Cups used in about 21 million US homes, analysts and industry bankers said.

The emergence of rival systems and copycat capsules are denting sales growth at Nespresso, one of Nestle's most profitable businesses.

While JAB is likely to focus initially on consolidating its hold over the US, the planned takeover of Keurig raises the possibility that the Luxembourg-based group may eventually take fuller aim at Europe, Nespresso's main market, according to Mr Alain Oberhuber, an analyst at MainFirst Bank AG.

"In the mid-term there will be a price war," said Mr Oberhu-ber. "JAB is showing itself to be aggressive."

He estimates that Nespresso and Dolce Gusto, Nestle's main single- serve businesses, have an operating margin of about 25 per cent, compared with about 15 per cent for Nestle as a whole.

Keurig's K-Cup system allows users to choose capsules from 75 brands, such as Folgers, Swiss Miss or Krispy Kreme, and makes up to 300ml cups. Nespresso machines are generally used with the namesake capsules, though copycats have gone on sale. They make coffees as small as 30ml.

A spokesman for Nestle declined to comment.

Keurig dwarfs Nestle in North America, controlling 61 per cent of the market compared with the Swiss company's 4 per cent, according to Euromonitor. Keurig's coffee system has taken a hold over US consumers who prefer paying 62 US cents for its K-Cups compared with as much as US$1.10 for Nespresso VertuoLine capsules.

In the longer term, JAB may expand Keurig machines into Europe, according to Mr Pablo Zuanic, an analyst at Susquehanna Financial Group. The appliances start at about US$79.99, while the least expensive model on Nestle's US webpage sells for US$149.

Nestle has made several attempts to boost its popularity in the US, where tiny espressos remain a niche market.

They include the Dolce Gusto machine, which makes more American-style coffees, and VertuoLine, a revamped Nespresso machine that uses centrifugal force to make bigger cups of joe.

In October, Nespresso ran ads featuring George Clooney in the US for the first time. Last year, Nestle even introduced K-Cups for the Keurig system containing Coffee-Mate creamer.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on December 10, 2015, with the headline 'Rivals serve Nespresso a bitter brew'. Print Edition | Subscribe