How to Succeed in the North American Pod Coffee Machine Market: It is Not Just Coffee Size Which Counts but Also the Business Model

Nespresso’s business model (one brand, one drink) will continue to have a tough time in the US. Consumers there are very loyal to their favourite hot drinks brands and will pay a premium for a Keurig coffee machine because it brews all their favourite branded drinks at the touch of a button and at a price that is still perceived as reasonable. To succeed, it will not be enough for Nespresso to focus on coffee size. The right pricing and brand awareness are even more important.

North American Consumers are Loyal to Just a Few Coffee Brands…

The North American fresh coffee market is very concentrated, with the top two companies, Green Mountain and JM Smucker, jointly commanding almost 40% of fresh coffee volumes. Despite volume sales just one fifth of JM Smucker, Green Mountain is North America’s most valuable coffee company as almost all of its sales derive from its Keurig pods.

In 2013, Keurig accounted for over 74% of fresh coffee pod sales in the region. This was no surprise considering the fact that Green Mountain is the owner of North America’s biggest pod coffee machine manufacturer, Keurig. In 2013 alone, Green Mountain sold 10.4 million Keurig brewers, accounting for a 40% volume share of the world’s single-serve coffee machine market.

… and Devoted to One Specialist Coffee Shop Chain – Starbucks

In the US, specialist coffee shops are by far the most popular places for consumers to enjoy a cup of coffee outside the home. In 2013, specialist coffee shops generated sales of US$18.2 billion and this is expected to rise by a further 24% in real terms by 2018.

If the fresh coffee market in North America is concentrated, the specialist coffee shop business is even more so. Almost 60% of sales are generated by Starbucks, followed by a number of other smaller players, the biggest of them being Barnes & Noble, holding just a 2% share. Significantly however, Barnes & Noble only serves Starbucks coffee, meaning that when out US consumers drink Starbucks coffee almost exclusively.

The K Factor – Same Brewing System, Multiple Coffee Partners

In a nutshell in North America there are only a few coffee brands which consumers brew at home, with one also being the main specialist coffee chain where the same consumers enjoy their coffee when out.

In this context, Green Mountain has been able to thrive. The company has been able to find success by combining its pod technology with stable partnerships with several popular licensed regional coffee brands. Green Mountain has agreements with 25 different coffee brands to produce K-Cups, including four of the top five brands by value in the US fresh coffee market – Keurig itself, Folgers, Dunkin’ Donuts and Starbucks.

This strategy has helped Green Mountain attract customers who would normally hesitate in purchasing a pod coffee machine but are nonetheless interested in the possibility of brewing their favourite brand of coffee at the touch of a button. Crucially, this partnership strategy has also limited the incentive for competitors to launch rival pod systems and is in turn attracting further cooperation agreements. Even Lavazza, the Italian coffee brewer which in Europe partners Electrolux for its pod system, has decided to cut out the Swedish company from its US pod expansion and has partnered Green Mountain instead. Lavazza purchased a 7% stake in Green Mountain and in 2012 launched its Keurig Rivo.

What is There for Nespresso?

North American consumers have proved to be very loyal to their coffee brands and their favourite specialist coffee chain. By leveraging consumer loyalty, Green Mountain has been able to thrive in the pod coffee business with its Keurig pod coffee machines. Its single-serve brewing system, although patented, is open to all coffee manufacturers willing to partner the company. This has helped Green Mountain discourage coffee brewers from partnering other appliance manufacturers and launching their own coffee systems.

Nespresso has long tried to establish itself in the US, but so far with no great success. This struggle has often been attributed to Keurig’s strong market leadership and the size of coffee that Nespresso machines brew, which would not meet local tastes for a bigger cup of coffee. In turn, this has convinced Nespresso to abandon the espresso coffee size to launch the expensive VertuoLine, a pod machine which brews a single cup of filter coffee, with a touch of coffee froth on top.

However, while competition and local preferences are certainly key factors, it seems that the greatest obstacle for new entrants such as Nespresso is more radical, and has to do with their business model. Consumers in North America are not inclined to pay a premium for the experience of drinking one coffee brand. They prefer to pay extra for a pod coffee machine that is able to brew all their favourite branded drinks at the touch of a button, and at a price that is still perceived as reasonable.

As a result, Nespresso is likely to fail. Not only does it not address the branded coffee issue, but it has also stuck to a price point that will still be too high to appeal to US consumers.