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Nestlé SA ranked number one in hot drinks in 2010, with a 15% retail value share. 70% of Nestlé’s sales in hot drinks take place in instant coffee. Sales of instant coffee outpaced those of fresh coffee over the 2005-2010 period, due mainly to increased demand from emerging markets. Nestlé has capitalised on this by maintaining a leading position in Asia Pacific and Eastern Europe.
The Russian market was Kraft’s top performer in coffee over 2005-2010, with an increase of US$337 million over the period. Kraft is ranked number two overall behind Nestlé, its key competitor at the global level as well. Though Kraft was the leading fresh coffee seller, Nestlé out-ranked Kraft in instant coffee and on this basis, claimed the leading position overall. In the longer term, Russians will begin to trade up to fresh coffee, sales of which are expected to grow by US$278 million over 2010-2015. Nestlé will face some pressure as this transition speeds up post 2015.
While there is a clear division between the two in terms of fresh versus instant, in some markets, most notably France, Nestlé has seen sales of Nespresso gain strength, while Kraft vigorously pursues sales through Carte Noire. In the French market, with instant coffee sales set to decline by US$41 million from 2010-2015, competition for fresh coffee sales will also intensify.
The success of systems such as Nespresso has helped to increase global coffee prices for Arabica beans. Systems such as these call for the highest quality coffee beans and this fact combined with supply issues in key growing countries such as Colombia may force further price increases by companies such as Nestlé. This could have a knock-on effect on demand for coffee brewing systems. The question is how far prices can rise for Arabica coffee before consumers start substituting it with cheaper varieties.
In order to sustain growth rates for its Nespresso system, Nestlé will need to further break into the US market. This market, however, has become intensely competitive. Nestlé should consider acquiring a strong regional producer such as Peet’s or look to partner with other coffee producers to expand its range with brands better known by the US consumer than Nespresso. In lieu of this, strong investment in marketing will be required to increase the brand’s profile and this should include rolling out new Nespresso boutique locations in the US.
Nestlé’s global value share of instant coffee stood at 51% in 2010. Its dominance here is and will remain secure for some time to come. Growing demand for instant coffee primarily in the emerging markets has helped it to grow despite a trend towards premiumisation in the mature Western Europe and North America markets which favour fresh coffee sales. The brand, however, faces growing competition from Starbucks in the US, UK and now in China, as the company rolls out its Starbucks Via Ready Brew brand relying on its extensive network of Starbucks locations to build sales, as well as a growing presence in US and UK supermarkets.
The Nescafé range is extensive and caters to local preferences. In an effort to benefit from some reports that coffee beans contain antioxidants, Nestlé launched Nescafé Green Blend, which contains more antioxidants (polyphenols) than regular instant coffee. The Green Blend launched focused on mature markets including Australia. In the Philippines and Mexico a similar product was launched – Nescafé Protect, which was also marketed as having extra antioxidants compared to standard instant coffee. Nescafé Body Partner is a range of instant coffees with additional ingredients such as ginseng and chamomile.
Nestlé has adopted a strategy “Popularly Positioned Products Programme” to adapt to the particular needs of its high-growth, but price-sensitive emerging markets. The strategy involves selling Nestlé brands in smaller quantities and in cheaper packaging to sustain margins, but to encourage volume growth. The company is also adapting its distribution network, for example. its floating Brazilian supermarket and the use of micro-distributors in markets such as Thailand, which offer 15 days credit to customers and receive a mark-up on products sold, taking a cue from direct sellers such as Herbalife and Avon Products.
Nestlé should also consider further increasing its presence in Latin America fresh coffee. The Brazilian market will dominate regional growth and should therefore be the primary focus here. The market remains highly fragmented and with Sara Lee having recently acquired a local producer, Nestlé will need to move now to avoid losing out on the strong growth anticipated in the region through 2015.