Every time I seal a full bag of used Nespresso pods ahead of my short drive to the store to recycle them I cannot help but marvel at the Nespresso brand, marketing and product ecosystem.
Nespresso gives me an empty recycling bag every time I purchase new coffee pods. And when I go back to restock a pleasant salesperson in a crips, clean dark grey outfit and a shiny name tag takes the full bag from me for recycling, and hands me a new empty one. And while I am there they offer me a coffee so I can try the limited edition blends on offer. It is easy. It makes me feel good because I am recycling. And the whole experience is so white-glove that I look forward to it.
Now tamp down the 'first-world problems' negative reaction that may be building inside you and get past how cushy and spoiled this sounds. Instead, focus on how Nespresso has created an experience that is so superior to its closest competitor, Keurig, for only .10 cents more a pod and perhaps $175 more per machine.
Nespresso is a pretty closed product ecosystem. You cannot by generic coffee pods for Nespresso machines, so they have hard-wired customers to 'return' to them for incremental sales. But when you limit choice in that manner you run the risk that customers will be turned off, and perhaps many are. Nespresso counter balances the natural resistance to a lack of choice by creating an exceptional customer experience and doing everything it can to increase the perceived value of the product, which supports a higher price-point.
Location: my Nespresso 'store' -- which only sells coffee and accessories -- is located inside a stand-alone Bloomingdales, nestled between menswear and jewelry. It features a island coffee bar that serves free coffee to anyone. Tucked into the corner is a simple wood counter in front of wall displays that feature the brightly colored boxes of coffee pods, sample machines, and accessories. The staff of three is dressed professionally in dark grey outfits, well-trained, efficient and very friendly. The tend to stay in their positions for a while, so they recognize returning customers. This boutique within a store approach is incredibly smart. Nespresso also has stand-alone boutiques.
Online convenience: You can purchase coffee pods online and have them delivered directly to your home. I buy a lot of things online, including pet food and cleaning supplies, even soda sometimes. But I like going to the Nespresso boutique.
Recycling: In the beginning pod coffee was attacked for being wasteful, so recycling was an important addition to the ecosystem. Making it convenient makes it more likely, and of course more pleasant. Nespresso gives you bags for recycling. You can bring them back to the store, or you can drop bags with pre-paid postage into the mail.
Packaging: The quality of the Nespresso packaging, marketing, and retail -- design, consistency, photography, printing, uniforms, display -- stands apart from everything else in the pod market. It is not debatable.
Coffee: This is subjective, but I think the Nespresso coffee is much better than Keurig. To me the Keurig coffee pod is tying to recreate the taste of a home brewed cup. It is targeting what is familiar and comfortable to the American consumer, but is also generic and pedestrian. A cup of Nespresso tastes like you went to a cafe and ordered a cappuccino or espresso from the barista. Nespresso is targeting a completely different experience. I'd much rather have that 'cafe in my kitchen' experience in the morning than drink a cup of coffee that tastes like it came out of the pot at the office.
Now compare this to K-cup experience. You can buy the pods at a local big box store ... Bed, Bath and Beyond, Staples, Office Depot, Target, Kohl's, etc. Big box stores are the antithesis of white glove, they are high-stress, low-service, soulless experiences. When I had toddlers, and before Target downgraded their retail experience, I was in Target once a week. Now that my kids are teenagers I avoid big box stores as much as possible. I think I go to Target and Bed, Bath, and Beyond no more than once each a year, because they have something I need. Or you can get K-cups at your local grocery store, which is at least part of most people's weekly shopping routine. But both shopping experiences are pedestrian. And when you have a pedestrian shopping experience you expect not only to play less, you expect a discount. And most of the Keurig owners I know are always hunting for the lowest K-cup price, looking for sales and using coupons. Nothing wrong with that, I use coupons and look for sales, but such a shopping mindset puts downward pressure on Keurig's pricing leverage and ultimately their profitability.
As for lead generation, my wife and I were aware of Nespresso, but never considered purchasing one. We were ground coffee snobs. We thought it was better, and we were turned off by the thought of spending more than we had to. Nespresso was famous for marketing primarily through its own customers. It runs broadcast advertising now, but in the beginning it was marketed more like an exclusive club relying on word of mouth referrals. But they also had a hotel program that introduce the brand through trial. We encountered our first Nespresso machine seven years ago while staying in a hotel in London. I had found a really nice two-bedroom suite with a shared living room and kitchen space on the South Bank at a high-end hotel that reserved a few floors off of a private elevator bank for longer stays. (Once again, sounds cushy and elitist, but the price point for London was relatively low. At current rates of $150 per room you can get two tiny adjoining rooms for a family of four in a mid-tier central London hotel, which would cost you $2,100 a week. I found our room through a short-term let broker and was spending $1,500 a week for a beautiful two bedroom suite with amenities, great service, and a river view.) In our room was a Nespresso machine and four pods, two regular and two decaf, were restocked every day by the maid service. It was incredibly convenient, and it was a brilliant introduction to the Nespresso brand and the experience. Nespresso has a hotel program that puts machines in high-end hotels across the world. I have no idea how profitable that line of business is, but it is a phenomenal marketing tool.
Back to the economics of the ecosystem. Yes, buying bulk coffee and brewing it in a large pot is much, much less expensive than buying pod coffee. No one will argue that. And Nespresso is easily the most expensive pod coffee option, costing .40 cents per pod, .50 cents for a special edition, compared to .30 cents for a K-cup, which can often be found for less in discount stores. (I was stunned to see that the coffee shops in LaGuardia Airport had all converted to pod coffee from pot coffee. It takes longer and it has to cost them more. I haven't looked into it, so the economics of that decision seem bizarre to me, but I don't have enough information to really comment on it. )
But Nespresso has changed how my wife and I drink coffee, which has a big impact on our coffee financials and coffee lifestyle. We used to brew a pot of coffee and drink most of it. And we were both likely to drink some more coffee later in the day. My wife would stop by noon, but I might have a cup or two in the afternoon. We bought good whole bean coffee and ground it before brewing. It was perfectly good, but it was not as good as the Nespresso coffee. We now drink one, maybe two cups in the morning and we are done for the day. We drink a lot less coffee per day, and my stomach is really pleased.
So financially this is not a straight line comparison. We went from spending .30 cents per cup for brewed coffee to .40 cents per cup for pod coffee. The cost increase was not particularly significant because we ended up drinking less coffee. But we also went from brewing six to eight cups per day for between $1.80 to $2.40 to drinking two to for cups per day for between .80 cents and $1.60.Remember, even if you don't finish the pot the grounds have been used, the money spent. Now if the cost of the coffee maker into the comparison the numbers shift. A basic $45 Cuisinart coffee maker and a $20 grinder depreciated over five years is going to add .4 cents a day. A $300 Nespresso machine will add .16 cents a day. So our daily expenditure went from $2.44 on the high end, to $1.96 on the high end. Still a financial win, and the coffee experience is better. It tastes better and it is more satisfying.
Now if I switched to Keurig with the same drinking habits, I'd spend less. Even if we drink two cups each per day, Nespresso will cost us .40 cents a day more for four cups of coffee plus another .09 cents a day over five years for the more expensive $300 machine versus a $125 Keurig machine. That .49 cents a day ands up to ~$175 a year, (my machine is 5 years old and in perfect working order, so the cost difference is actually less). But I am happy to pay an extra $175 a year for the white, glove, high-quality Nespresso experience over the more everyday, lower-quality Keurig experience. Many coffee drinkers spend $175 a year for just one cup of coffee per week habit at Starbucks. I've seen studies that suggest the average American worker spends $1,100 a year buying coffee during the day, over and above any cost for making coffee at home. I estimate our total household coffee expenditure doesn't exceed $1,000 a year.
Bottom-line, I find the Nespresso ecosystem is impressive. From the outside it looks like a well-run, well-focused operation that has figured out how to drive margin by creating a high-end, loyalty-inducing customer experience that is not significantly more expensive to customers than its competitors. And by significantly I am not talking about the nearly 40 percent increase in cost over Keurig, which in isolation sounds like a lot. I am talking about an estimated $175 a year difference for something I do every single day. An extra $175 in annual discretionary spending is not something limited to the wealthiest 1 percent. It is more like the annual difference of a family of four buying 1-ply vs. 2-ply toilet paper.
The coffee pod market growth curve has slowed significantly after 15 years of fast growth. And now in Europe Nespresso, owned by Nestle, is apparently facing tough competition from another Nestle brand, Dolce Gusto, and other competitors, like Tassimo. Nespresso is the market leader globally, with 11 percent of global share in 2015. In the US Keurig is the market share leader, but I don't see much competition at Nespresso's high-end position. And as the market levels out in the U.S., As a business owner I think I'd rather have the higher margin business, even if it is smaller. And as a consumer, I'll pay .49 more a day for the superior experience.