1THEDIFFUSION OFNEW ANALYSIS OF THE NESPRESSOPRODUCTSAND DIFFUSIONTECHNOLOGIES Diffusion of Innovations: Nespresso Student No: 0955773 | Word Count: 3000 + 10%
2ContentsIntroduction .............................................................................3The Nespresso Journey............................................................4Strategic Leadership.................................................................5Main Driving Factors: PESTLE Analysis................................7 Political............................................................................8 Economic..........................................................................9 Social..............................................................................10 Technological.................................................................12 Legal...............................................................................13 Environmental................................................................14Nespresso – Consumer uncertainty in process.......................16 Diffusion of Innovations: NespressoKey Marketing for Innovation Diffusion – Nespresso Club..18Appeal to Opinion Leaders....................................................19Conclusion..............................................................................20References..............................................................................21Appendix 1 – Key Survey Results.........................................24
3IntroductionThe Nespresso story began with a simple but revolutionary idea; ‘The perfect cup of coffee, time after time and cup after cup’To do so Nespresso pioneered the concept of premium portioned coffee, designed formaximum convenience. The process redefined the way coffee lovers around the world couldenjoy their coffee. Key to the vision was a determination for quality, innovation andperfection. This essay will consider the diffusion of Nespresso over time, through differentmarkets and countries, identifying the main driving factors in the process through a PESTLEanalysis.With all innovations comes uncertainty, I will identify potential issues which Nespresso facedwithin the diffusion process, considering the consumer characteristics which made thisinnovation viable. The essay identifies the key marketing efforts which Nespresso utilised tospeed up the diffusion process and develop worldwide consumer acceptance. Diffusion of Innovations: Nespresso
4The Nespresso JourneyIn the Late 1970s Nestle dominated the instant coffee market with its Nescafe brand, thisaccounted for 30% of worldwide coffee consumption, although Nestle had no significantpresence in the larger roast and ground segment. Senior management realised theopportunities for growth in this rapidly developing gourmet segment.The technology behind the Nespresso system originated in Geneva, gaining support from thefood service division, which identified Nespresso as a suitable product to enter therestaurant market. By late 1987 only half the machines that had been manufactured weresold and subsequently in 1992 they decided to abandon the strategy in favour of targetingthe office coffee sector, which seemed a good place to build awareness and create a loyalcustomer following. They partnered with a Swiss company already present within the officemarket with distribution experience; it was felt that compared with households, officemanagers would be less sensitive to the relatively high unit price of the machine. Diffusion of Innovations: Nespresso
5Strategic LeadershipShreiber and Chakravarthy (2007) demonstrated the crucial role of innovation at Nespresso,stating that the project would not have become a reality had the CEO of Nestlé, Dr HelmutMaucher listened to the pessimistic consumer surveys for the proposed innovation.Deschamps (2005) identified the importance of the selecting the right leader to implementinnovation strategies. The key aspects of leadership are to promote and sustain innovation;it seems the Nespresso success could be linked to the selection of an innovative leader. TheSwiss born and US educated Yannik Lang was brought into the Nespresso team, with areputation for flair and creativity. He concluded that the prospects in the office sector werelimited, but identified potential in the household market.They tested this high risk strategy in the single market of Switzerland, deciding that onemarket would be easier to keep in control of and be easier to shut down if not successful.The test proved successful, so a staggered international introduction was followed,launched in Italy, the worlds largest espresso drinking nation and a market renowned for its Diffusion of Innovations: Nespressopassion and expertise of espressos. Nespresso obviously were confident in this product,followed by entry in Japan, one of the worlds fastest growing coffee markets.Due to the shift to the household market, they decided to re-evaluate their old distributionstrategy, the idea of channelling capsule sales through supermarkets was explored, butselling the coffee capsules in US food outlets failed. The premium consumer segment wassmall, they still had an average awareness rate of less than 5% within international markets,while penetration was less than 1% of households. This left retailers with a considerablestock of stale coffee capsules, taking up to three months for the Nespresso capsules to
6arrive on store shelves, cutting in half the time remaining until the expiry date. With such ashort shelf life quality could not be assured, this strategy of supermarket distribution wassubsequently rejected as it was felt this would transfer the profitability of the business awayfrom Nespresso. Nespresso seized upon the idea of offering a direct channel to stay in closecontact with the consumer, creating exclusivity at the same time, effectively turning atechnical constraint into an elegant marketing solution. In addition to handling calls itoffered consumers around the clock order taking through the usual channels, with theadvantage of prompt delivery in just two business days. While offering personalised advice,trained coffee specialists were on hand to advise consumers about the different coffees andprovide technical assistance. By 1999, Nespresso were receiving 70,000 orders worldwideeach day. Diffusion of Innovations: Nespresso
7 Main Driving Factors Diffusion of Innovations: NespressoPESTLE Analysis
8PoliticalTo further develop, produce and market the Nespresso system, a separate company wascreated. The new business involved selling coffee, something Nestle were already themarket leader. The company’s top management decided early on that the similaritiesbetween the two businesses were more illusory than real. Nestle were selling instant coffeeto the mass market but Nespresso specifically targeted wealthy and young urbanprofessionals, positioning itself as an upmarket brand. Nespresso adopted a business modelmore akin to a luxury goods manufacturer, not only were the two business models different,they potentially conflicted as Nespresso could be cannibalizing the sales of Nescafe, whilethe values and attitudes of the Nespresso organization were the exact opposite of those inthe traditional Nestle organization.It was decided that a new unit would be able to move faster in seizing the marketopportunities identified within the newly-created individual portion category. A study ofFMCG companies by Ghoshal and Bartlett (1988) considered the effects of subsidiaries for Diffusion of Innovations: Nespressocreation, adoption, and diffusion of innovations. It found that the subsidiaries of Unilever,ITT and Philips enjoyed considerable strategic and operational autonomy; such a structurewas found to be a better environment for innovation, creation and diffusion. It found thathigh levels of centralization could be likely to impede an organizations ability to createinnovations. A separate company provided a more flexible and dynamic entity, withfreedom to experiment. Nespresso could position themselves differently than Nestle, thisseparation allowed them to develop separate commercial, distribution and workforcepolicies, it seems that this structure was an important success factor.
9EconomicCafes inspired the coffee revolution, stimulating the development of coffee drinking,creating consumers willing to pay vast sums for the coffee shop experience’ Through experience’.creating interest in the coffee process and provenance, Nespresso have been able to addvalue through the Grand Cru offering nd offerings.When a customer purchases the machine, ranging from £119 to £1500 they are tied to hen £1500,using Nespresso capsules and the closed system allows Nespresso full control to set itsprices. Prices of capsules are fixed at between £0.27 and £0.31 per capsule, much higherthan any other coffee option in the home, over 3 times higher than for filtered Nespresso, herinterestingly the brand communication very rarely even makes any reference to price, whichmakes me think of quite an apt staying. Diffusion of Innovations: Nespresso If you have to ask the price, you can’t afford it’
10SocialAaker (1997) identified 5 dimensions of brand personality; most relevant for Nespresso is‘Sophistication’, this helps reinforce its premium positioning, while developing exclusivity,differentiating it from the other coffee brands, adding feelings of style and elegance.Nespresso have segmented their target group further by simultaneously launching machinesto appeal to users within this segment, such as machines designed in a slim format to easilyfit into the smaller spaces, or those with an urban vibe or daring style. A recent modelshown below demonstrates the adaptability of Nespresso, creating a machine for couples,representing flexibility for this group, at the same time retaining its trademark elegance. Diffusion of Innovations: Nespresso
11Primary research of young professionals (Appendix1) identified interesting characteristicsabout affluent city dwelling professionals. They were asked ‘How important to you is fashionand style? Based on 107 responses, 49% responded important, while 28% responded veryimportant. The next question ‘How many people live in your household?’ 24% responded‘live alone’. For a greater understanding about levels of disposable income I asked, ‘Howmuch do you usually spend on a pair of jeans?’ 25% responded over £80, suggesting anaffluent young and single segment really does exist.Nespresso utilised the power of celebrity endorsement, picking someone with an imageconsistent to the Nespresso brand. George Clooney is a fantastic choice for brandambassador, stating they have many things in common, an intense love of style & goodliving, both impress their respective fans and stand for incomparable quality. GeorgeClooney represents a personification of what the Nespresso brand stands for. This methodof linking similarities between the brand ambassador and the brand are detailed inMcCracken (1989), finding the use of celebrity was found to be most effective when Diffusion of Innovations: Nespressomeanings are able to pass from celebrity to product and from product to consumer. Thearticle acknowledged that the celebrity can draw powerful characteristics from the rolesthey assume while in character, seen to contribute to their personality.Nespresso have targeted the premium market, finding product champions to represent thehigh quality of the product. They have gained more media exposure while amazingly notdiluting any of the products exclusivity. Understanding the social aspects allowed Nespressoto strengthen their brand image. Greater exposure helped with the diffusion process, subtlyinforming the target market, encouraging them to try Nespresso.
12TechnologicalNespresso machines were successfully developed thanks to the creation of an innovativeculture and environment that allowed and encouraged team members to take intelligentrisks, giving everyone the chance to be an innovator. Kumar & Steenkamp (2007) identifiedthat successful innovation requires changes in three key processes: new productdevelopment, new product launch, and intellectual property protection. Nespresso haveeffectively dealt with these three issues, firstly Nespresso have created technologicalpairings with exceptional manufacturers, this can be seen through winning several designawards from 1996 to the present day.The Nespresso key strategy is based on its core competency of coffee, they developedpolicies to intensify cooperation in the R&D sector with universities, research institutionsand companies. Nespresso created a design award for students of product design, thesupport of young talents is an investment in the future, nurturing talented innovativeinventors and creating an interest in coffee machine innovation. The pace of innovation is Diffusion of Innovations: Nespressofast within this high value industry, Mitchell (2007) found cooperation with others bringsnew insights and can open new domains and develop the necessary experience. It’stherefore imperative that Nespresso continue to attract and work with industry leaders andcontinue their machine evolution, coffee quality and capsule development.
13LegalNespresso commercialise the machines under license, while remaining in strict control ofthe capsule content, only available in Nespresso stores or boutiques. The pod technologymeans that no drinks other than what Nespresso intend can come out of a Nespresso co-branded machine, such control over the licence can ensure a buzz is created through itsexclusivity.The concept of Nespresso, the machine, capsules and service is protected by 70 patentswhich acts as a suitable barrier for potential competitors and imitators. Suppliers mustconform to the restricted set of standardised designs and this level of control and exclusivityensures an exceptionally high quality, while Nespresso can gain leverage from respectedmachine manufacturer brands such as Krups and the ultra premium machine brand Miele,pictured below. Diffusion of Innovations: Nespresso
14EnvironmentalIt seems Nespresso are content meeting the minimum ethical and environmentalexpectations of consumers, knowing that taste and luxury are more important to thissegment. There is large waste-per-cup with this product, while aluminium recyclingprograms have been limited to only a few markets. Starting in 2009, New York boutiquesstarted taking back used capsules, it is suggested this initiative should be rolled out globally.To counteract criticism Nespresso have participated in various sustainability principles suchas collecting rainwater and local community heat exchange, while an automatic standbyfunction was introduced to help reduce energy consumption. Nespresso make littleecological claims on their products, avoiding a hypocritical approach. While much of thecoffee industry is being sold through fair trade markets, Nespresso instead invest insustainable quality development, which is hoped to result in higher quality beans. Coffeefarmers who are part of program are rewarded with not only higher prices but throughcreation of long term partnerships. Diffusion of Innovations: NespressoIt seems Nespresso have taken a clever approach, avoiding the high priced fair-trade marketmeans that they can be more profitable, while investing in an exclusive program whichdifferentiates their product from the fair trade offerings which already saturate the market.I have travelled to the coffee farms and met some farms that supply Nestle beans, shown inthe picture below is a similar coffee organisation called UTZ certified, which promotestraceability for coffee, such sustainable projects are mutually beneficial, with the potentialto become more viable than the artificial price setting Organic and Fair-trade movements.
16Nespresso – Consumer uncertainty in the processThe premium pricing of this product could potentially restrict the successful diffusion rate ofthe innovation, to protect against this Nespresso made sure to emphasise at everyopportunity its high quality, moving it away from a commoditised coffee drink, promotingthe ultimate coffee experience. Nespresso have added value by establishing the line ofGrand Cru coffees in a similar way that Grand Cru distinguishes a top quality wine. Theassociation with Gourmet suggests that special care and attention has been devoted,adding value and differentiating it from all other coffee. The premium positioning thatNespresso have taken makes it difficult to compare with other home consumption coffees,the only thing coming close to Nespresso is a cafe espresso, and in this comparisonNespresso is much cheaper at 30p per shot compared with around £2.00.There is potential uncertainty among consumers that the range is quite small, clubmembers’ feedback was used to develop new and exciting coffees, each year they addlimited edition local discoveries. The special club and limited edition coffee appeals to Diffusion of Innovations: Nespressoconsumers who enjoy exclusivity and limited edition products to feel special. Nespressohave tried to counteract the limitation on coffee choice by allowing consumers to expressthemselves with a stylish range of machines, specially designed for city goers and retrolovers, the latest CitiZ machine was developed based on club members’ feedback, it ishoped that this involvement would help product acceptance.Nespresso toyed with the idea of making the Nespresso machine capable of handling otherhot drinks; however this approach was scorned, which subtlety suggests superiority. ‘Whywould you want to drink something other than coffee?’ Although advertising doesdemonstrate the ability of Nespresso to make cappuccino and latte, the focus of this
17machine is towards espresso, to enjoy coffee it at its best; no compromise, no gimmicks.The barrier to successful diffusion of Nespresso is potential resistance from coffeetraditionalists who are anti-technology and loyal to the old methods. Nespresso openedboutique bars in glamorous locations to position Nespresso as a suitable rival, proving theexperience is exactly the same, if not better!Research found 60 per cent of the sensory experience of drinking espresso comes from theretail environment so they launched a chain of upmarket coffee outlets partially to enhancethe appeal of their home-prepared product, Soars (2009). The way that Nespresso promotesampling has been successful to achieve acceptance from the traditionalists.The café culture ties in well with the Nespresso image, a benefit of the coffee houseexperience is the coffee education, a development of what you learn in Starbucks,Nespresso is the next step of coffee appreciation, they want to recreate the Italian espressobar experience. Adverts appeal to those who are likely to have an urban apartment,assuming they care about the design and are house-proud, they want to encourage the cafe Diffusion of Innovations: Nespressoculture without even leaving your own home, it’s sociable and flexible!
18Key Marketing for Innovation Diffusion - The Nespresso ClubPrior to the Nespresso club, the company relied mainly on word of mouth, which waspossible due to the existence of an extremely loyal customer base, resulting in step by stepgrowth. Liebermann (1999) found membership clubs (MCs) to have a concrete potential ofenhancing members’ patronage, the empirical results show that MCs enhance three areas:image, sales and marketing. In the annual satisfaction survey, 95% of the 1 millionrespondents were Totally Satisfied’, suggesting brand loyalty created a special and uniquerelationship. The Nespresso club database allowed segmentation according the consumptionpatterns and length of membership, the database was set up to handle orders for capsulesand customer details, including ordering patterns. This database subsequently provides awealth of information about usage, attitudes and behaviour, providing valuable data, whichhas proven instrumental the successful relationships Nespresso have developed.Nespresso have total control of all sales coming through this channel, with the ability toclosely track new members. It’s felt that long term consumption habits are formed by usage Diffusion of Innovations: Nespressopatterns established early in the relationship, allowing them to work out the potentiallifetime value, thereby placing an appropriate level of care. Heavy capsule users (more than100 per month) were followed up by Nespresso club staff if these users failed to place anorder by an anticipated date they would get in touch to make sure their machine wasfunctioning, take orders or answer questions. This enabled identification if machines neededservicing, arranging for free home pick-up and return, while a replacement would be loaned,all contributing to the development of customer intimacy.
19Appeal to Opinion LeadersWord of mouth proved to be a successful but slow process, other means were considered tospeed up the awareness and diffusion process of the Nespresso concept. Over the last 8years the number of Nespresso club members worldwide jumped from 600,000 to morethan 6 million, with an additional 2.2 new members added in 2008 alone. 50% of allNespresso club members first experienced the brand through existing members.Valente and Davis (1999) researched the role of opinion leaders, finding they accelerate thediffusion process and opinion leaders usually were identified as heavy users. Nespressodeveloped a model to target the innovative consumers and develop strong relationshipswith them. Through WOM, sponsorship and PR, the customer base has steadily expandedamong the elite of espresso lovers, Nespresso reported that Heston Blumenthal, chef of therenowned English Michelin-3-star restaurant "The Fat Duck", succumbed to the exceptionalquality of Nespresso coffees, suggesting mainstream gourmet acceptance.The strategy to further internationalise and position Nespresso as a premium product wasstrengthened through the patronage of British Airways and Cathay Pacific among many Diffusion of Innovations: Nespressoother airlines who now serve Nespresso Coffee on-board first class, as each day more than10,000 Nespressos are served in onboard this is diffusing the Nespresso concept further.
20ConclusionMost people previously consumed espresso away from home, in restaurants, hotels, barsand cafes, vending machines, offices and public areas. Home consumption was limited duethe perceived high price of espresso. In cafes, espresso was inexpensive and widelyavailable, but only 1 in 5 Italians consumed espresso at home.Consumers have moved away from traditional coffees and developed a taste of inventive,upscale, premium priced speciality coffee, the trends suggested that traditional coffeepopularity is declining, the gourmet coffee world was revolutionised by Starbucks, leading toespresso being perceived as a trendy, socially elite drink. The typical espresso drinker can bedefined as a city dweller with discerning tastes in food some may say a ‘bon vivant’.Nespresso identified well educated and affluent, 35-45 year old, who enjoyed drinking caféquality espresso at home, finding this segment would constitute a profitable segment forthe Nespresso system.Nestle identified over time that the household market was suitable for building long term Diffusion of Innovations: Nespressobusiness, they recognised that demanding consumers would need to receive high levels ofattention to retain their loyalty. Investments were made in the training of sales clerks inretail stores to encourage the first connection, promote tastings and reflect the keyattributes of the product to emphasise the points which matched the consumer’s lifestyle.The opportunity was there for a home gourmet coffee experience and Nespressosuccessfully innovated a fantastic product to fulfil this need.
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24Appendix 1 – Summary of Key Survey Results Diffusion of Innovations: Nespresso