1

AND

TECHNOLOGIES

ANALYSIS OF THE NESPRESSO

DIFFUSION

Student No: 0955773 | Word Count: 3000 + 10%

Diffusion of Innovations: Nespresso

THE
DIFFUSION OF
NEW
PRODUCTS

Contents
Introduction .............................................................................3
The Nespresso Journey............................................................4
Strategic Leadership.................................................................5
Main Driving Factors: PESTLE Analysis................................7
Political............................................................................8
Economic..........................................................................9
Social..............................................................................10
Technological.................................................................12
Legal...............................................................................13
Environmental................................................................14

Key Marketing for Innovation Diffusion Nespresso Club..18

Appeal to Opinion Leaders....................................................19
Conclusion..............................................................................20
References..............................................................................21
Appendix 1 Key Survey Results.........................................24

Diffusion of Innovations: Nespresso

Nespresso Consumer uncertainty in process.......................16

3
Introduction
The 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 for
maximum convenience. The process redefined the way coffee lovers around the world could
enjoy their coffee. Key to the vision was a determination for quality, innovation and
perfection. This essay will consider the diffusion of Nespresso over time, through different
markets and countries, identifying the main driving factors in the process through a PESTLE
analysis.
With all innovations comes uncertainty, I will identify potential issues which Nespresso faced
within the diffusion process, considering the consumer characteristics which made this
innovation viable. The essay identifies the key marketing efforts which Nespresso utilised to

Diffusion of Innovations: Nespresso

speed up the diffusion process and develop worldwide consumer acceptance.

4
The Nespresso Journey
In the Late 1970s Nestle dominated the instant coffee market with its Nescafe brand, this
accounted for 30% of worldwide coffee consumption, although Nestle had no significant
presence in the larger roast and ground segment. Senior management realised the
opportunities for growth in this rapidly developing 'gourmet' segment.
The technology behind the Nespresso system originated in Geneva, gaining support from the
food service division, which identified Nespresso as a suitable product to enter the
restaurant market. By late 1987 only half the machines that had been manufactured were
sold and subsequently in 1992 they decided to abandon the strategy in favour of targeting
the office coffee sector, which seemed a good place to build awareness and create a loyal
customer following. They partnered with a Swiss company already present within the office
market with distribution experience; it was felt that compared with households, office

Diffusion of Innovations: Nespresso

managers would be less sensitive to the relatively high unit price of the machine.

5
Strategic Leadership
Shreiber 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 Nestl, Dr Helmut
Maucher listened to the pessimistic consumer surveys for the proposed innovation.
Deschamps (2005) identified the importance of the selecting the right leader to implement
innovation 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. The
Swiss born and US educated Yannik Lang was brought into the Nespresso team, with a
reputation for flair and creativity. He concluded that the prospects in the office sector were
limited, but identified potential in the household market.
They tested this high risk strategy in the single market of Switzerland, deciding that one
market 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,

passion and expertise of espressos. Nespresso obviously were confident in this product,
followed by entry in Japan, one of the world's fastest growing coffee markets.
Due to the shift to the household market, they decided to re-evaluate their old distribution
strategy, the idea of channelling capsule sales through supermarkets was explored, but
selling the coffee capsules in US food outlets failed. The premium consumer segment was
small, 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 considerable
stock of stale coffee capsules, taking up to three months for the Nespresso capsules to

Diffusion of Innovations: Nespresso

launched in Italy, the world's largest espresso drinking nation and a market renowned for its

6
arrive on store shelves, cutting in half the time remaining until the expiry date. With such a
short shelf life quality could not be assured, this strategy of supermarket distribution was
subsequently rejected as it was felt this would transfer the profitability of the business away
from Nespresso. Nespresso seized upon the idea of offering a direct channel to stay in close
contact with the consumer, creating exclusivity at the same time, effectively turning a
technical constraint into an elegant marketing solution. In addition to handling calls it
offered consumers around the clock order taking through the usual channels, with the
advantage 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 and
provide technical assistance. By 1999, Nespresso were receiving 70,000 orders worldwide

Diffusion of Innovations: Nespresso

each day.

PESTLE Analysis

Diffusion of Innovations: Nespresso

Main Driving Factors

8
Political
To further develop, produce and market the Nespresso system, a separate company was
created. The new business involved selling coffee, something Nestle were already the
market leader. The companys top management decided early on that the similarities
between the two businesses were more illusory than real. Nestle were selling instant coffee
to the mass market but Nespresso specifically targeted wealthy and young urban
professionals, positioning itself as an upmarket brand. Nespresso adopted a business model
more 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, while
the values and attitudes of the Nespresso organization were the exact opposite of those in
the traditional Nestle organization.
It was decided that a new unit would be able to move faster in seizing the market
opportunities identified within the newly-created individual portion category. A study of

creation, adoption, and diffusion of innovations. It found that the subsidiaries of Unilever,
ITT and Philips enjoyed considerable strategic and operational autonomy; such a structure
was found to be a better environment for innovation, creation and diffusion. It found that
high levels of centralization could be likely to impede an organization's ability to create
innovations. A separate company provided a more flexible and dynamic entity, with
freedom to experiment. Nespresso could position themselves differently than Nestle, this
separation allowed them to develop separate commercial, distribution and workforce
policies, it seems that this structure was an important success factor.

Diffusion of Innovations: Nespresso

FMCG companies by Ghoshal and Bartlett (1988) considered the effects of subsidiaries for

9
Economic
Cafes inspired the coffee revolution, stimulating the development of coffee drinking,
creating consumers willing to pay vast sums for the 'coffee shop experience
experience. Through
creating interest in the coffee process and provenance, Nespresso have been able to add
value through the 'Grand
nd Cru' offerings.
offering
When
hen a customer purchases the machine, ranging from 119 to 1500
1500, they are tied to
using Nespresso capsules and the closed system allows Nespresso full control to set its
prices. Prices of capsules are fixed at between 0.27 and 0.31 per capsule, much higher
than any other coffee option in the home, over 3 times higher
her than for filtered Nespresso,
interestingly the brand communication very rarely even makes any reference to price, which

'If you have to ask the price, you cant afford it

Diffusion of Innovations: Nespresso

makes me think of quite an apt staying.

10
Social
Aaker (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 machines
to appeal to users within this segment, such as machines designed in a slim format to easily
fit into the smaller spaces, or those with an urban vibe or daring style. A recent model
shown below demonstrates the adaptability of Nespresso, creating a machine for couples,

Diffusion of Innovations: Nespresso

representing flexibility for this group, at the same time retaining its trademark elegance.

11
Primary research of young professionals (Appendix1) identified interesting characteristics
about affluent city dwelling professionals. They were asked How important to you is fashion
and style? Based on 107 responses, 49% responded important, while 28% responded very
important. 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, How
much do you usually spend on a pair of jeans? 25% responded over 80, suggesting an
affluent young and single segment really does exist.
Nespresso utilised the power of celebrity endorsement, picking someone with an image
consistent to the Nespresso brand. George Clooney is a fantastic choice for brand
ambassador, stating they have many things in common, an intense love of style & good
living, both impress their respective fans and stand for incomparable quality. George
Clooney represents a personification of what the Nespresso brand stands for. This method
of linking similarities between the brand ambassador and the brand are detailed in

meanings are able to pass from celebrity to product and from product to consumer. The
article acknowledged that the celebrity can draw powerful characteristics from the roles
they assume while in character, seen to contribute to their personality.
Nespresso have targeted the premium market, finding product champions to represent the
high quality of the product. They have gained more media exposure while amazingly not
diluting any of the products exclusivity. Understanding the social aspects allowed Nespresso
to strengthen their brand image. Greater exposure helped with the diffusion process, subtly
informing the target market, encouraging them to try Nespresso.

Diffusion of Innovations: Nespresso

McCracken (1989), finding the use of celebrity was found to be most effective when

12
Technological
Nespresso machines were successfully developed thanks to the creation of an innovative
culture and environment that allowed and encouraged team members to take intelligent
risks, giving everyone the chance to be an innovator. Kumar & Steenkamp (2007) identified
that successful innovation requires changes in three key processes: new product
development, new product launch, and intellectual property protection. Nespresso have
effectively dealt with these three issues, firstly Nespresso have created technological
pairings with exceptional manufacturers, this can be seen through winning several design
awards from 1996 to the present day.
The Nespresso key strategy is based on its core competency of coffee, they developed
policies to intensify cooperation in the R&D sector with universities, research institutions
and companies. Nespresso created a design award for students of product design, the
support of young talents is an investment in the future, nurturing talented innovative

fast within this high value industry, Mitchell (2007) found cooperation with others brings
new insights and can open new domains and develop the necessary experience. Its
therefore imperative that Nespresso continue to attract and work with industry leaders and
continue their machine evolution, coffee quality and capsule development.

Diffusion of Innovations: Nespresso

inventors and creating an interest in coffee machine innovation. The pace of innovation is

13
Legal
Nespresso commercialise the machines under license, while remaining in strict control of
the capsule content, only available in Nespresso stores or boutiques. The pod technology
means that no drinks other than what Nespresso intend can come out of a Nespresso cobranded machine, such control over the licence can ensure a buzz is created through its
exclusivity.
The concept of Nespresso, the machine, capsules and service is protected by 70 patents
which acts as a suitable barrier for potential competitors and imitators. Suppliers must
conform to the restricted set of standardised designs and this level of control and exclusivity
ensures an exceptionally high quality, while Nespresso can gain leverage from respected
machine manufacturer brands such as Krups and the ultra premium machine brand Miele,

Diffusion of Innovations: Nespresso

pictured below.

14
Environmental
It seems Nespresso are content meeting the minimum ethical and environmental
expectations of consumers, knowing that taste and luxury are more important to this
segment. There is large waste-per-cup with this product, while aluminium recycling
programs have been limited to only a few markets. Starting in 2009, New York boutiques
started taking back used capsules, it is suggested this initiative should be rolled out globally.
To counteract criticism Nespresso have participated in various sustainability principles such
as collecting rainwater and local community heat exchange, while an automatic standby
function was introduced to help reduce energy consumption. Nespresso make little
ecological claims on their products, avoiding a hypocritical approach. While much of the
coffee industry is being sold through fair trade markets, Nespresso instead invest in
sustainable quality development, which is hoped to result in higher quality beans. Coffee
farmers who are part of program are rewarded with not only higher prices but through

It seems Nespresso have taken a clever approach, avoiding the high priced fair-trade market
means that they can be more profitable, while investing in an exclusive program which
differentiates 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 in
the picture below is a similar coffee organisation called UTZ certified, which promotes
traceability for coffee, such sustainable projects are mutually beneficial, with the potential
to become more viable than the artificial price setting Organic and Fair-trade movements.

Diffusion of Innovations: Nespresso

creation of long term partnerships.

Diffusion of Innovations: Nespresso

15

16
Nespresso Consumer uncertainty in the process
The premium pricing of this product could potentially restrict the successful diffusion rate of
the innovation, to protect against this Nespresso made sure to emphasise at every
opportunity its high quality, moving it away from a commoditised coffee drink, promoting
the ultimate coffee experience. Nespresso have added value by establishing the line of
'Grand Cru' coffees in a similar way that 'Grand Cru' distinguishes a top quality wine. The
association with 'Gourmet' suggests that special care and attention has been devoted,
adding value and differentiating it from all other coffee. The premium positioning that
Nespresso 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 comparison
Nespresso is much cheaper at 30p per shot compared with around 2.00.
There is potential uncertainty among consumers that the range is quite small, club
members feedback was used to develop new and exciting coffees, each year they add

consumers who enjoy exclusivity and limited edition products to feel special. Nespresso
have tried to counteract the limitation on coffee choice by allowing consumers to express
themselves with a stylish range of machines, specially designed for city goers and retro
lovers, the latest CitiZ machine was developed based on club members feedback, it is
hoped that this involvement would help product acceptance.
Nespresso toyed with the idea of making the Nespresso machine capable of handling other
hot drinks; however this approach was scorned, which subtlety suggests superiority. Why
would you want to drink something other than coffee? Although advertising does
demonstrate the ability of Nespresso to make cappuccino and latte, the focus of this

Diffusion of Innovations: Nespresso

limited edition 'local discoveries'. The 'special club' and 'limited edition' coffee appeals to

17
machine 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 coffee
traditionalists who are anti-technology and loyal to the old methods. Nespresso opened
boutique bars in glamorous locations to position Nespresso as a suitable rival, proving the
experience is exactly the same, if not better!
Research found 60 per cent of the sensory experience of drinking espresso comes from the
retail environment so they launched a chain of upmarket coffee outlets partially to enhance
the appeal of their home-prepared product, Soars (2009). The way that Nespresso promote
sampling has been successful to achieve acceptance from the traditionalists.
The caf culture ties in well with the Nespresso image, a benefit of the coffee house
experience 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 espresso
bar experience. Adverts appeal to those who are likely to have an urban apartment,

culture without even leaving your own home, its sociable and flexible!

Diffusion of Innovations: Nespresso

assuming they care about the design and are house-proud, they want to encourage the cafe

18
Key Marketing for Innovation Diffusion - The Nespresso Club
Prior to the Nespresso club, the company relied mainly on word of mouth, which was
possible due to the existence of an extremely loyal customer base, resulting in step by step
growth. Liebermann (1999) found membership clubs (MCs) to have a concrete potential of
enhancing members patronage, the empirical results show that MCs enhance three areas:
image, sales and marketing.

In the annual satisfaction survey, 95% of the 1 million

respondents were 'Totally Satisfied, suggesting brand loyalty created a special and unique
relationship. The Nespresso club database allowed segmentation according the consumption
patterns and length of membership, the database was set up to handle orders for capsules
and customer details, including ordering patterns. This database subsequently provides a
wealth of information about usage, attitudes and behaviour, providing valuable data, which
has proven instrumental the successful relationships Nespresso have developed.
Nespresso have total control of all sales coming through this channel, with the ability to

patterns established early in the relationship, allowing them to work out the potential
lifetime value, thereby placing an appropriate level of care. Heavy capsule users (more than
100 per month) were followed up by Nespresso club staff if these users failed to place an
order by an anticipated date they would get in touch to make sure their machine was
functioning, take orders or answer questions. This enabled identification if machines needed
servicing, arranging for free home pick-up and return, while a replacement would be loaned,
all contributing to the development of customer intimacy.

Diffusion of Innovations: Nespresso

closely track new members. Its felt that long term consumption habits are formed by usage

19
Appeal to Opinion Leaders
Word of mouth proved to be a successful but slow process, other means were considered to
speed up the awareness and diffusion process of the Nespresso concept. Over the last 8
years the number of Nespresso club members worldwide jumped from 600,000 to more
than 6 million, with an additional 2.2 new members added in 2008 alone. 50% of all
Nespresso club members first experienced the brand through existing members.
Valente and Davis (1999) researched the role of opinion leaders, finding they accelerate the
diffusion process and opinion leaders usually were identified as heavy users. Nespresso
developed a model to target the innovative consumers and develop strong relationships
with them. Through WOM, sponsorship and PR, the customer base has steadily expanded
among the elite of espresso lovers, Nespresso reported that Heston Blumenthal, chef of the
renowned English Michelin-3-star restaurant "The Fat Duck", succumbed to the exceptional
quality of Nespresso coffees, suggesting mainstream gourmet acceptance.

strengthened through the patronage of British Airways and Cathay Pacific among many
other airlines who now serve Nespresso Coffee on-board first class, as each day more than
10,000 Nespressos are served in onboard this is diffusing the Nespresso concept further.

Diffusion of Innovations: Nespresso

The strategy to further internationalise and position Nespresso as a premium product was

20
Conclusion
Most people previously consumed espresso away from home, in restaurants, hotels, bars
and cafes, vending machines, offices and public areas. Home consumption was limited due
the perceived high price of espresso.

In cafes, espresso was inexpensive and widely

available, 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 coffee
popularity is declining, the gourmet coffee world was revolutionised by Starbucks, leading to
espresso being perceived as a trendy, socially elite drink. The typical espresso drinker can be
defined 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 caf
quality espresso at home, finding this segment would constitute a profitable segment for

Nestle identified over time that the household market was suitable for building long term
business, they recognised that demanding consumers would need to receive high levels of
attention to retain their loyalty. Investments were made in the training of sales clerks in
retail stores to encourage the first connection, promote tastings and reflect the key
attributes of the product to emphasise the points which matched the consumers lifestyle.
The opportunity was there for a home gourmet coffee experience and Nespresso
successfully innovated a fantastic product to fulfil this need.

Diffusion of Innovations: Nespresso

the Nespresso system.

21
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Diffusion of Innovations: Nespresso

Appendix 1 Summary of Key Survey Results

Diffusion of Innovations: Nespresso

25