Nestle’s Nespresso Growth Hit by Swiss Contender Migros: Retail

In kitchens across Switzerland, a supermarket retailer is staking a claim on the world’s biggest food company’s growth, one coffee capsule at a time.

The popularity of knock-off coffee pods sold by Migros, the second-biggest retailer in a country with a population smaller than New York City, contributed to a slower start to the year for sales of single-serve Nespresso, said Nestle SA’s investor relations chief Roddy Child-Villiers. Nespresso has been among the fastest-growing major brands at Nestle over the past decade.

Migros’s capsules, on sale since May, probably squeezed Nespresso’s quarterly sales growth to 8 percent, the slowest pace in the brand’s history, according to Jon Cox, an analyst at Kepler Capital Markets in Zurich. Nespresso faces increased competition throughout Europe as food companies seek to tap the expanding $8 billion single-serve segment of the global coffee market. Nestle has sued rivals after they introduced capsules compatible with Nespresso machines.

“The introduction by a big competitor locally is meaningful and local legal cases have so far not gone Nestle’s way,” Cox said. Migros’s entry could result in “flat sales” this year for Nespresso in Switzerland, which Cox estimates accounts for about one-fifth of Nespresso’s annual revenue of 4 billion Swiss francs ($4.3 billion). The country is Nespresso’s second-biggest market, according to Kepler.

Slowest Growth

The maker of Nescafe and Dolce Gusto posted the slowest first-quarter sales growth since 2009 and said April 18 that full-year revenue growth will be at the lower end of its forecast, amid a slowdown at the unit that includes Nespresso. Revenue was also hit by the destruction of a factory in Syria and as demand for frozen food and weight-loss products slipped.

Nestle’s price-to-earnings ratio fell below rival Unilever’s this month as the shares slipped ahead of its sales report. The company now trades at 19.6 times earnings while Unilever, based in Rotterdam and London, at 19.9 times in Dutch trading. Nestle stock dropped 3.1 percent last week.

Migros, whose annual profit last year was about 7 percent of Nestle’s, began selling five flavors of Cafe Royal capsules that fit in Nespresso machines last year. Migros priced the capsules at 30 centimes a serving for the first three weeks, then raised the price to 38 centimes. Nespresso capsules start at 50 centimes each in Switzerland.

Capsule Contest

Cafe Royal’s lower prices and wider distribution -- Migros has 556 stores -- appeal to price-conscious Swiss coffee lovers who don’t want to schlep to one of Nespresso’s 22 shops. And Cafe Royal’s look and taste even beat Nespresso in a June survey of 130 coffee drinkers conducted by Kassensturz, a Swiss consumer journal. Monika Weibel, a spokeswoman for Migros, based in Zurich, said sales of the capsules are “above our expectations.”

“People appreciate the very good quality and the availability in the stores,” Weibel said in an e-mail. Some customers have complained about the capsules not slotting into Nespresso machines, so “small adjustments were made and now they fit perfectly.”

Nestle is building a new Nespresso factory in Switzerland, and has unveiled more blends to keep users coming back.

Key Market’

“Competition is not new for Nespresso,” spokeswoman Diane Duperret said in an e-mail. “Switzerland remains a key market for the company, and Nespresso continues to have significant growth potential.”

New Nespresso boutiques in Manor AG, Switzerland’s biggest department-store chain, “have increased our proximity to consumers,” Duperret said. She declined to provide sales figures for the new locations, the first of which opened in May 2012. Nespresso has added a new permanent blend, dubbed Linizio, to replace a discontinued line, and has offered two new limited-edition varieties.

Nestle sold its first single-serve espresso for machines that don’t need cleaning in Switzerland 27 years ago. 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 deems only about 1 percent of the world’s coffee supply to meet its standards.

George Clooney

Nespresso also 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 previously estimated. This year, the brand may account for about a 10th of the 5.12 billion-franc increase in sales expected by analysts.

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 environment has gotten much more crowded: in 2010 Sara Lee Corp. and Ethical Coffee Co. both introduced knock-off capsules compatible with Nespresso machines. Last year, Sara Lee spun off its coffee business into a new company, D.E Master Blenders 1753 NV, which agreed to be bought by Joh. A. Benckiser on April 12.

The competition includes former Nespresso executives like Ethical Coffee Chief Executive Officer Jean-Paul Gaillard, who is a former chief of Nespresso, as well as Eric Favre, the inventor of the capsules, who owns a company that makes competing machines.

Nespresso faces 20 competitors “in Switzerland alone,” Nespresso spokeswoman Duperret said. All of them are battling for a bigger slice of a single-serve coffee market that’s growing about 24 percent a year globally, according to data tracker Euromonitor, compared with 4 percent growth for the broader coffee sector.

For the moment, at least, the Migros ones are finding fans, in part because of Nestle’s success.

“I really enjoy the Migros ones, just as much as Nespresso!” read one post on English Forum, an online community for English-speaking Swiss residents. “The ease of access is nice -- sometimes the lines at Nespresso are killer.”

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