06 Sep 2014 Nespresso opens its coffee machines to knockoffs

The pods, whose profit margins take them out of the grocery aisle and into the domain of luxury goods, have been increasingly under pressure from less expensive rivals, including one founded by a former Nespresso executive.
The company has responded with patent lawsuits and, French anti-trust regulators say, four attempts to tweak its machines between 2007 and 2013 to make competitors’ pods unusable.

Under the agreement announced this week by French anti-trust regulators, the company will give competitors four months’ warning about changes to the machines and hand over prototypes for testing.

Nespresso said it would share the information with manufacturers selling outside France as well.

The decision effectively ends Nespresso’s grip on the extremely profitable pod business as well as allows customers to get pods for their machines in a grocery store rather than exclusively at a Nespresso boutique or online, said Jon Cox, an analyst with Kepler Cheuvreux.

The initial complaint was brought by two competitors, D.E. Master Blenders — formerly of Sara Lee — and Ethical Coffee.

Jean-Paul Gaillard, president of Ethical Coffee and a former Nespresso executive, compared the situation to replacement parts for cars or smartphone accessories.

“Everything is compatible today,” Gaillard said. “Nespresso acted as though it were legal to obstruct competition.”

Nespresso, part of Nestle, lost a 2013 court case in Britain protecting the company from another rival pod-maker, Dualit.

Cox said he expected Nespresso’s influence to diminish, but said the company had built up enough mystique around the machine and pods that some customers will still pay a premium — equivalent to about 70 euros per kilogram ($41 per pound), compared to a US average of $5 per pound for ground coffee.

“The whole model they have — it’s all high-end. You’ve got George Clooney marketing it, the machines look sexy,” Cox said. “It is more a luxury good than a consumer staple.”

The brand’s share of single-serve coffee machines purchased across Western Europe declined to 27.8 percent last year from 33.8 percent in 2008, according to data tracker Euromonitor.

Source: Reuters, BevNet.com