Nespresso

In 1986, Nestlé, already a giant in the food industry, decided to venture into the world of premium coffee. They had an idea: bring barista-quality espresso into homes with a capsule-based system. It sounds obvious now, but back then, it was revolutionary.

The early days weren't smooth sailing. Nespresso's first CEO, Jean-Paul Gaillard, recalls, "At the original launch the product was wrong, the positioning was wrong and the targeting was wrong. It had cost a lot of money and brought nothing".

The company initially targeted offices, thinking businesses would jump at the chance to have in-house espresso machines. They were wrong. The machines were clunky, and only four types of capsules were available. The market response was lukewarm at best.

But Nestlé didn't give up. They brought in Gaillard, a tobacco industry veteran, to turn things around. His mission was clear: make Nespresso work, or it would be scrapped.

Gaillard's insight was to shift focus from businesses to affluent households. He saw the potential for Nespresso to become a lifestyle brand, not just a coffee maker. This pivot was the spark that ignited Nespresso's success.

The company redesigned its machines, making them sleeker and more home-friendly. They expanded their range of coffee flavors and started selling directly to consumers. This direct-to-consumer model was a game-changer, allowing Nespresso to control the entire customer experience.

As coffee culture boomed in the 1990s, Nespresso was perfectly positioned to ride the wave. They offered a way for people to have "barista-style coffee at home, and Nespresso were able to provide it at a relatively low cost".

But success brought its own challenges. As Nespresso grew, so did concerns about the environmental impact of its aluminum capsules. The company faced criticism and potential backlash.

Nespresso responded by doubling down on sustainability efforts. They launched recycling programs and committed to sourcing coffee sustainably. As one industry observer notes, "Nespresso's customers worry about sustainability and fair trade, and so Nespresso worry about it too".

The company's growth has been impressive. Growing to US$7bn in revenue. They've expanded to 81 countries, transforming from a Swiss experiment to a global powerhouse.

Rory Sutherland, vice-chair of Ogilvy, puts it succinctly: "If Nespresso had been a startup from Silicon Valley, everyone would be hailing them. They're like a Swiss Apple".

Lessons

Lesson 1: Embrace the razor-razorblade model. Nespresso's success isn't built on selling coffee machines. It's built on selling coffee pods. The machines are loss leaders, often sold at cost or even below. But once a customer has a Nespresso machine, they're locked into buying Nespresso pods. This creates a steady stream of recurring revenue. Jean-Paul Gaillard, former CEO of Nespresso, put it bluntly: "We're not in the coffee business. We're in the business of creating an addiction." The lesson? Sometimes, your real product isn't what customers buy first.

Lesson 2: Create an air of exclusivity. Nespresso doesn't sell its pods in supermarkets. You can only buy them from Nespresso boutiques or their website. This exclusivity makes the product feel more premium and desirable. Rory Sutherland, vice-chair of Ogilvy, observed, "If Nespresso had been a startup from Silicon Valley, everyone would be hailing them. They're like a Swiss Apple." Consider how you can make your customers feel like they're part of an exclusive club.

Lesson 3: Leverage your parent company's strengths. Nespresso benefited from Nestlé's resources and expertise in the food industry. But they also maintained their own distinct identity. This balance allowed them to grow rapidly while developing their unique brand.

Lesson 4: Control the entire customer experience. Nespresso doesn't just sell coffee machines and capsules. They control every aspect of how customers interact with their brand. From sleek boutiques to their direct-to-consumer model, they ensure a consistent, high-quality experience. This approach allows them to maintain their premium image and justify higher prices. It also builds customer loyalty. Create a holistic brand experience that goes beyond just your product.

Lesson 5: Turn a commodity into a luxury. Coffee is a commodity. But Nespresso managed to turn it into a luxury product. They did this through sleek design, premium packaging, and clever marketing. They even created a whole language around coffee, with terms like "Grand Cru" borrowed from the wine industry. Rory Sutherland, vice-chair of Ogilvy, observed: "Nespresso didn't just sell coffee, they sold a lifestyle." The lesson? Even the most mundane product can be elevated with the right positioning.

Lesson 6: Master the art of the upsell. Nespresso doesn't just sell coffee. They sell machines, accessories, and even lifestyle products. Each purchase is an opportunity to introduce customers to other parts of the Nespresso ecosystem. A customer who comes in for coffee pods might leave with a new machine, a milk frother, and a set of designer cups. As one retail analyst noted, "Nespresso's boutiques are masterclasses in gentle upselling." The lesson? Think beyond your core product to create additional revenue streams.

Further Readings

• How Nespresso Maintain Market Dominance
• What Nespresso's First Coffee Shop Teaches Us About Brand Building
• At the Heart of our Business: The Nespresso Sustainability Story
• Dispatches: Starbucks and Nespresso: The Truth About Your Coffee
• FACTS & FIGURES | Nestlé Nespresso
• How Nespresso's coffee revolution got ground down