Mondelez International Inc., (MDLZ) the world’s second-biggest coffee maker, will start selling Nespresso-compatible capsules across Europe this fall, posing the sternest competitive challenge yet to the Nestle SA (NESN) brand.
Mondelez, based in Deerfield, Illinois, will sell the knock-off capsules under its Jacobs and Carte Noire brands in Germany, France, Austria and Switzerland in the second half of 2013, Roland Weening, vice president of strategy, marketing and innovation, said in an interview in London yesterday.
The move brings a deep-pocketed entrant to the fastest-growing part of the $80 billion global coffee market at a time when Nespresso’s growth has slowed. Nestle, of Vevey, Switzerland, has filed patent-infringement lawsuits against some rivals that introduced capsules compatible with Nespresso machines, yet to date has not been able to stem the flow of copycat capsules from producers including D.E Master Blenders 1753. (DE) That comes as Nestle has said sales growth this year may be at the low end of its long-term target.
“We want to take our brands and offer all the routes to cup,” Weening said. “We have been evaluating this for quite some time and felt the time was right.”
Mondelez wants a bigger slice of the $8 billion single-serve segment, which accounts for 20 percent of the European coffee market, up from 6 percent in 2006, Weening said. Spun off from Kraft Foods (KRFT) last year, Mondelez has sold its own single-serve beverage machine, Tassimo, since 2005. Weening said the move into Nespresso-compatible capsules would not “de-prioritize” Tassimo, which has sales approaching $1 billion.
Nestle, the maker of Nescafe and Dolce Gusto, dominates the European single-serve market with a share of 70 percent, according to Andreas Von Arx, an analyst at Helvea AG. Nespresso cultivates an exclusive image for the brand through ads featuring actor George Clooney, and boutiques that boast tasting salons in locations such as Paris’s Champs-Elysees.
That approach has made Nespresso one of Nestle’s fastest-growing and most profitable brands. In 2010, Nespresso accounted for about 15 percent of Nestle’s growth, Nomura analyst David Hayes has estimated. This year, the brand may account for about a tenth of the 5.12 billion-franc ($5.44 billion) increase in sales expected by analysts.
Competitors will probably sell about 400 million francs worth of copycat capsules this year, Jon Cox, an analyst at Kepler Cheuvreux in Zurich, estimates. “While I think there is still a lot of potential in Nespresso growth outside of Europe, within Europe it is pretty fierce,” Cox said.
Nestle fell 0.3 percent to 62.70 francs at 9:07 a.m. in Zurich trading, trimming the stock’s 12-month gain to 14 percent. Mondelez has advanced 19 percent during that period.
Nestle stopped reporting sales details for Nespresso midway through last year due to “the competitive environment,” Chief Financial Officer Wan Ling Martello said at the time. That climate has gotten much more crowded: in 2010 Sara Lee Corp. and Ethical Coffee Co. both introduced knock-off capsules. Last year, Sara Lee spun off its coffee business into D.E Master Blenders, which agreed to be bought by Joh. A. Benckiser in April. The popularity of knock-off coffee pods contributed to a slower start to the year for Nespresso, Nestle has said.
“Pressure has been mounting from compatible capsules,” Von Arx said in a November report. “With key patents either expired or being challenged in courts, currently key Nespresso markets look open for compatible capsule producers.”
Von Arx estimates that Nespresso has lost between 10 percent and 20 percent market share in some countries to the knockoffs. In its most recent fiscal year, sales of D.E Master Blenders’ L’OR capsules, which work in Nespresso machines and are sold across Europe, increased by 60 million euros ($79 million), the company said in August. There are about 50 capsule suppliers across Europe, Weening said, and Nestle has said there are 30 in Switzerland alone.
Nestle’s legal actions, which include lawsuits filed in several European countries, have so far not stopped rivals from selling compatible capsules. The most recent ruling came in April when a Nestle unit lost a patent infringement lawsuit that sought to block Dualit, a U.K. company, from making capsules for Nespresso machines.
“We have done our homework and are confident on the legal side,” Weening said yesterday.
The executive declined to say how much Mondelez’s capsules would cost, or in which retailers they would be sold. Nespresso capsules cost about 35 euro cents per cup. He also said the move into Nespresso-friendly capsules was not related to volatile coffee-bean prices, which have plummeted over the past year. Lower coffee prices shaved 1.3 percentage points off Mondelez’s so-called organic sales growth in its most recent quarter.
“The lower revenue has been offset with lower input costs, so coffee remains a profitable business for us,” Weening said. Mondelez generates about $4 billion in global coffee sales, and buys 6 percent of the world’s coffee.
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