Nestl wants to help you kick your Starbucks habit. The Swiss food giant is mounting a major push into the U.S. with its Nespresso coffee system, which lets users make caf-style espresso at home. The company has opened six Nespresso boutiques in major U.S. cities—including three since January—in upscale locales such as New York's Madison Avenue and Boston's Newbury Street. More openings, in New York and Miami, are coming shortly.
With the economy mired in recession, it seems an odd time to urge consumers to spend $200 to $800 for an espresso machine that can only be used with prepackaged capsules that cost 55 a serving. But Nestl (NESR.F) is betting that coffee lovers will do the math: Just one cup a day from a local coffee bar can add up to more than $1,000 a year, vs. less than $200 annually for Nespresso capsules, plus the cost of a machine. "People still want little daily luxuries, but there's a return to consumption at home," says Nespresso Chief Executive Richard Girardot.
Starbucks (SBUX) clearly has been struggling, with U.S. same-store sales dropping 8% during the fourth quarter of 2008. The Seattle-based company has slashed more than 18,000 U.S. jobs and is closing 977 stores worldwide. But can Nespresso really pick up that slack?
George Clooney's Continental BoostNespresso has already established a strong base in Europe, which accounts for about 90% of its $2 billion annual sales. Indeed, it's now Nestl's fastest-growing brand, with sales up more than 30% annually for the past eight years. Nestl first introduced Nespresso in the 1970s, trying unsuccessfully to market it to offices and restaurants before relaunching it as a consumer brand.
In the past few years the brand has gotten a big boost from advertising featuring George Clooney, including a lighthearted series of TV spots that show beautiful young women ignoring the actor as they reach past him for a cup of Nespresso. (Alas for Nestl, Clooney's contract doesn't allow the company to show him in U.S. ads.)
Though Nestl doesn't disclose profits for individual brands, Julian Hardwick, a London-based analyst with ABN Amro, says Nespresso "certainly is profitable," and has helped Nestl widen its overall profit margins. These previously lagged those of European rivals Unilever (UN) and Danone (DANO.PA), but now are healthier.
Nespresso on the Champs ElysesWorldwide, Nespresso is well ahead of competitors. The Senseo system from Philips (PHG) and Sara Lee (SLE) brewed up $547 million in coffee sales last year (Philips doesn't break out sales of the coffee machines alone). The current U.S. market leader, the Keurig system from Green Mountain Coffee Roasters (GMCR), booked revenues of $254 million from machines and coffee combined. Another rival, the Tassimo from Kraft Foods (KFT), saw sales near $300 million, Kraft says.
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