Nestle’s Nespresso Will Lift Obstacles to French Knockoff

Nestle SA (NESN) offered to lift obstacles to rivals that make knockoff capsules for Nespresso coffee machines in France, aiming to end a probe by the competition regulator in the largest market for the iconic brand.

The world’s biggest coffee maker proposed giving competitors three months notice about technical changes to its machines and promised it won’t discourage consumers against copycats nor automatically revoke warranties on Nespresso machines if compatible capsules are used, according to a statement today from the French Competition Authority.

The ruling “was the first of its kind,” Alain-Sebastian Oberhuber, an analyst at MainFirst, said in a note. “Nestle faces the risk of more such antitrust investigations in other markets,” which could hurt sales and profit, he wrote.

Nespresso, the biggest maker of single-serve coffee in Europe, has been losing market share to capsules made by companies including D.E Master Blenders 1753, Mondelez International Inc. (MDLZ) and Ethical Coffee Co. as some of its patents have expired. Nespresso has been adding espresso varieties and expanding into areas like the U.S. to goose sales as growth has slowed in past years.

The initiatives “demonstrate the company’s commitment to fair and open competition,” Diane Duperret, a Nespresso spokeswoman, said in an e-mailed statement.

Rival Applauds

The competing companies have until May 19 to respond to the proposals, which would be valid for seven years, the regulator said. Nespresso is “confident” that the proposals satisfy the Competition Authority’s concerns, Nespresso’s Duperret said.

Jean-Paul Gaillard, founder of Ethical Coffee, said it was a “very good decision that the French competition regulator is bringing back a fair and honest competitive environment.”

D.E Master Blenders said that while it’s “satisfied” with the proposed measures, they “still allow Nestle to undertake activities” that prevent consumers from choosing what coffee to use inside Nespresso machines, according to an e-mailed statement. Shona Inglis, a Mondelez spokeswoman, declined to comment.

France is the source of more than a quarter of Nespresso’s worldwide sales, according to the regulator. The brand accounts for about 4 percent of Vevey, Switzerland-based Nestle’s 92 billion francs ($105 billion) in sales, Andreas von Arx, an analyst at Helvea, has estimated.

High Penetration

Almost three-quarters of all espresso machines sold in France carry the Nespresso brand, the regulator said. The first knockoffs entered France in 2010, and analysts including Von Arx have said Nespresso’s high penetration in established markets like France, along with the copycats, have damped growth.

“Since early 2010, competitive pressure has been mounting continuously,” von Arx said in a November note. About 15 percent of capsules used in Nespresso machines in France in 2012 weren’t made by Nestle, according to the regulator.

Nespresso’s share of single-serve coffee machines purchased across Western Europe declined to 27.8 percent last year from 33.8 percent in 2008, according to data tracker Euromonitor.

Nestle sold its first single-serve espresso for machines that don’t need regular cleaning in Switzerland in 1986. Since then, Nespresso has won customer loyalty and expanded into about 60 countries by offering quality coffee in an easy-to-use machine -- the company considers that only about 1 percent of the world’s coffee supply meet its standards.

Nestle shares rose 0.8 percent to 67.25 francs at the close in Zurich. They’ve gained 3 percent in the past year.

To contact the reporter on this story: Matthew Boyle in London at mboyle20@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Thomas Mulier, Paul Jarvis

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