Cafe X Case Study

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Café-X In Search of Strategy: Nestlé’s New Espresso Maker 1 In 1986, the Swiss giant Nestlé introduced a new type of espresso machine in the Swiss market. It represented one of the most innovative new products developed by its R&D department. Through the use of coffee capsules, the patented system combined the taste of real espresso coffee with convenience and ease of use. However, despite an enthusiastic reception from connoisseur coffee drinkers and very promising market research, the first few years after its introduction, the CoffeeMaker was far from living up to its expectations. In fact, the dedicated business unit was losing money. Therefore, in March 1988, Nestlé appointed a new, young Managing Director, called Jean-Paul Gaillard. Gaillard was considering what to do to improve the new product’s fortunes. He realized that, unless sales of the CoffeeMaker would pick up considerably soon, Nestlé would have no choice but to stop investing in the new product. He wondered whether he should give the current strategy more time to play itself out, or should he proceed with a new strategy? Coffee Industry Trends Market research showed that in existing coffee sectors, consumers were becoming more adventurous in their buying behavior and tended to favor the premium and super premium end of the market. These new markets were growing at the expense of instant powdered coffee. Other changes taking place in the coffee market included: (1) increasing popularity of cafes and coffee bars; (2) rising brand consciousness; and (3) the rising price-consciousness of the mass market consumer, who switched to supermarket brands if the price of coffee rose. The Rise of Espresso Espresso coffee is coffee of the greatest possible strength. Its quality is determined by the "fineness" of the coffee used. The fineness of coffee depends on the grind as well as on the type of appliance in which it is used. Espresso machines, in which water and steam are forced through the ground coffee under pressure, need the finest grinds of all in order to produce coffee of the greatest possible strength. Espresso coffee was traditionally popular in Italy, Spain and France but it was also becoming more popular in other European countries and the US. Nestlé’s Positions in Coffee Nestlé held a dominant market position in instant coffee. Soluble coffee was the biggest money-maker for Nestlé. It represented more than 80% of Nestlé’s coffee sales, with the rest being occupied by roast and ground coffee sales. It had strong brands in all the sub-segments of the instant-coffee market, yet Nestlé felt it could not rest on its laurels. Its traditional competitors were becoming more aggressive and supermarket chains were entering the market through their own brands. Nestlé began to segment the soluble coffee market into finer and finer segments. This gave a further boost to the demand for instant coffee but did not attract the high-end consumer who required a foamier coffee, achievable only with the use of pressurized water. 1

This case is based on research by Costas Markides, Professor of Strategic & International Management at the London Business School

History of the EspressoMaker The origins of the new EspressoMaker dated back to the late 1960s. Continuous experimentation over a ten year period had led to the final system that consisted of two parts: a coffee capsule and a machine. The coffee capsule contained 5g of roast and ground coffee. The machine was jointly developed with the Swiss machine manufacturer Turmix. The use of the new system was straightforward. The capsule was manually placed in the handle, which was introduced into the machine. This action pierced the coffee capsule at the top. At the press of a button, pressurized, steamed water was passed through the capsule. The result was a creamy, foamy, high-quality cup of espresso coffee. Strategic Positioning, 1985-87 The success of the EspressoMaker depended not only on the coffee product (i.e. the...
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