Small Appliances in Europe: Time to Look Beyond Nespresso

Looking to boost their profitability, almost all appliance companies in Western Europe are seeking ways to tap into the premium small appliances category, even those companies which have never produced such products before. With air conditioners largely out of reach, mainly due to the predominance of Asian and Turkish players, manufacturers have been forced to look elsewhere, especially when considering that air conditioner volumes in 2013 have reached just two-thirds the level of sales seen back in 2008. Hot on the heels of the phenomenal success of Nespresso, manufacturers appear to have all focused on the pod coffee business, with differing rates of success.

Does investing in pod coffee machines still make sense for those which have not done so already? Indeed, the coffee machine category has experienced a boom in recent years, with value sales driven by so-called closed brewing systems such as Nespresso in Europe and K-Cup from Keurig in North America. However, while in North America high volumes and premiumisation are set to drive pod coffee machine value sales up by 64% over 2013-2018, in Western Europe the situation will be quite different.

Here, the unit volume of pod coffee machines will grow by a rather modest 7%, and increased competition is set to drive prices down, meaning that pod coffee machine value growth will also slow considerably. If we look at sales by individual products in Western Europe, while over 2008-2013 pod coffee machines were the single biggest value driver, over the next five years increased coffee machine penetration and tougher competition will change the environment, putting other categories under the spotlight.

Over the next five years we expect cylinder vacuum cleaners to oust pod coffee machines in terms of recording the strongest absolute value growth. So, is it still worth investing in coffee machines as a profit booster? We take a look at the coffee machine strategies of the top appliance players and analyse their mixed success in light of this future scenario.

Sales Breakdown of Selected Small Appliance Companies, 2013

Source: Euromonitor International

The Best Performer

It was an early understanding of the risks posed by Asian competitors and increased market saturation that led De’Longhi in the early 2000s to shift its focus from air treatment and heating products to coffee machines and small kitchen appliances. This strategy has indeed paid off as De’Longhi emerges today as the best performing small appliance player in Western Europe. The company achieved the strongest absolute volume growth over 2008-2013, almost four times that recorded by Groupe SEB, the region’s leading small appliance company by volume sales. Over the same period, SEB recorded a rather lukewarm 4% gain, while Philips, Western Europe’s second-ranked small appliance company, saw its sales rise by 10%. Half of De’Longhi’s value increase in Western Europe can be attributed to food preparation appliances, in particular blenders, while another 16% derived from coffee machines alone. Today, 20% of all De’Longhi appliances sold in the region are coffee machines, making it Western Europe’s third coffee machine manufacturer by units sold. So far, growth in small kitchen appliances has been enough to counterbalance flat sales of vacuum cleaners, air treatment and heating appliances. However, it is time for De’Longhi to start investing in floor care appliances to maintain its momentum, given the good performance expected from vacuum cleaners in the future.

Top Eight Coffee Machine Manufacturers in Western Europe, 2013

Source: Euromonitor International

The Market Leader

The sluggish growth recorded by SEB should not hide the incredible success that the company has had with its coffee machines, which alone accounted for a staggering 55% of its volume sales growth over 2008-2013. SEB is also the largest hard pod coffee machine manufacturer in Western Europe, having sold almost 2.4 million units in 2013. This success can be attributed to its early alliance with Nestlé with regard to the production of Nespresso and the Nescafé Dolce Gusto systems under its Krups brand. Nestlé’s brewing systems now account for 51% of SEB’s coffee machine sales. Nonetheless, losses in personal care products and fairly flat growth in irons and vacuum cleaners leave the company overly reliant on coffee machine sales.

The Game Changer

Philips has instead decided to exit the hard pod coffee category altogether, terminating its partnership with Lavazza for the production of Lavazza A Modo Mio, which is now produced by Electrolux. Behind this lies a mix of disappointing sales and the decision to focus solely on its soft pod Senseo machine, while investing in premium standard coffee machines. In particular, the company will focus on added-value filter coffee machines and high-end espresso coffee makers following its acquisition of Italian professional coffee machine manufacturer Saeco.

The Newcomers

Electrolux has decided to enter the hard pods category, replacing Philips in the partnership with Lavazza for the production of A Modo Mio coffee machines. Will Electrolux do better than Philips? Only time will tell. Sales so far have not been exceptional but a better shelf positioning together with investment from Lavazza in more convincing advertising could enable the product to better compete against Nespresso. Indeed, Electrolux is probably one of the best placed companies to capture value growth in the vacuum cleaners category, already having made great efforts to boost premium sales. This was quite clear at IFA, where, alongside Dyson and German players BSH and Miele Electrolux was indeed at the forefront of vacuum cleaner innovation with a focus on both cylinder as well as rechargeable stick vacuum cleaners. And it is indeed this kind of innovation that is driving consumers to spend more on floor care appliances.

Troubled Italian white goods manufacturer Indesit has also launched a premium small appliance range in 2013 in an attempt to revive its bottom line. Firstly, it launched its own espresso pod machine, this time as a system open to multiple coffee partners. This means that consumers will be able to use different branded pods, depending on the number of coffee brewers willing to partner Indesit – a model which resembles that of US coffee machine giant Keurig. This is part of a long-term strategy to achieve greater profitability by repositioning the whole company’s portfolio within the mid-to-high-end spectrum. Nonetheless, this alone will unlikely be enough to revive the company’s bottom line in the mid-term. The premium segment is already fairly crowded, with no sign of Nespresso losing its dominant position in the coffee machine category.

Time to Look Beyond Pods

Going back to the coffee business, it is indeed time for all newcomers and game changers to invest in further innovation in other coffee machine formats than pod coffee makers. As we already said last year, the best way to cannibalise future Nespresso sales is to invest in open systems, such as traditional espresso coffee makers, offering premium automatic machines such as the so-called bean-to-cup models at more affordable prices. Consumers do not love pods per se, but what they do love is the experience of getting a good coffee at the touch of a button.

Until manufacturers successfully introduce further innovations, it is unlikely that the coffee machine category will repeat its phenomenal performance of the recent past. Thus, it may be time to also look for something else as a profit booster.