Keurig or Nespresso? The implications for enterprise software vendors
If you’re a non-US reader then hearing aboutKeurig might be new. Just as if you’re a US reader, hearing about Nespresso might be new-ish. Even so, what looks like the shaping up of a battle royal in the ‘home-prepared but brain dead easy gourmet coffee’ market category tells us plenty about the ‘as a Service’ economy.
In a topically interesting read on Keurig, Ben Epstein, MD of Bolt.io makes the observation that:
The initial sale of a $120 Keurig brewer isn’t that difficult or costly. Keurig doesn’t spend a lot on marketing or advertising and the product isn’t complex to manufacture or service. In my rough estimation, the BOM for a brewer is around $40, giving Keurig about a 25% gross margin on the product. Time from PO to FOB is likely less than 2 months, yet high-margin K-cup sales start immediately and continue for years. Keurig spends less than $0.015 on each K-cup and charges 100% more per unit than bagged, ground coffee. Yet few people complain about this cost.
Co-incidentally, I’d been thinking about this from a different perspective but as it relates to Nespresso.
European coffee drinkers will likely know that Nestlé brought the Nespresso concept to market close to 30 years ago but it is only in the last five years or so that the concept has really taken off. Whatever your opinion about the quality of Nespresso brewed coffee, the fact remains Nespresso capsules sell very well in Europe but more to the point, are incredibly profitable. Things are different in the US market. Last year, Bloomberg reported:
North America accounts for about 30 percent of the $8 billion single-serve coffee market, second only to Europe, according to Euromonitor. Over the past decade, single-serve has grown to almost 10 percent of global coffee sales from about 2 percent, fueled in large part by Nespresso, which controls about one-third of the single-serve sector. Last year Nespresso added about 500 million Swiss francs ($563 million) in sales, the company said Feb. 13.
Nespresso represents about 25 percent of Nestle’s coffee sales and 4 percent of its 92.4 billion francs in total revenue, Bernstein estimates. The brand has more than two dozen boutiques dotted across the U.S., according to its website, and last year opened its largest in Beverly Hills, California, complete with two 13-foot-tall cacti.
And it was in 2014 that Nespresso introduced the Vertuoline machine to the US market at an initial ticket price of $299. Today, that same machine is bundled with the Aeroccino milk frother at the‘bargain’ price of $249. Nespresso positions this as a celebration of their first year in market. I position it as Nespresso’s best effort at getting a firmer foothold in a market where Keurig dominates.
In bringing Vertuoline to market, Nespresso recognized that its existing product line of machines would not necessarily work for a US market that prefers to ‘go large.’ Despite being 10 years in market, the Nespresso machines and capsules with which many Europeans are familiar were almost invisible. The Vertuoline promises to change that where:
…consumers prefer large cups of java from Green Mountain, Starbucks Corp. or Dunkin’ Donuts Inc. over the smaller espressos favored in Europe.
I can see why. It ain’t just about the quality of the product.
While the European style of Nespresso machine is (almost) idiot proof, Vertuoline takes that requirement to an entirely new level. It really is impossible to screw up making a coffee with this machine. Here’s how it works: open the lid, pop in a capsule, close the lid, swing the closing arm to the left, hit the go button and you’re done. When you want another, simply swing the arm to the right, open the lid and the machine expels the spent capsule into a waste tank and off you go again.
The final product is visually eye-catching, even if it does look like a badly poured half pint of Guinness. Taste wise it is streets ahead of Keurig for a market where the ‘gourmet’ moniker is splashed around with almost no regard for the meaning behind the word. At least in my opinion. To cap it off, the Vertuoline ‘knows’ the difference between an espresso sized capsule and its bigger brother.
Given Nespresso’s pedigree and changes in its market positioning, I am surprised it isn’t creaming (sic) the US market. But logic suggests Keurig’s long standing decision to effectively ‘open source’ their capsules to any provider willing to take a punt appears to be the right strategy, even if the final product is less than optimal. Starbucks for example provides a range of capsules that work with Keurig machines. Nespresso on the other hand keeps a tight control over the entire experience (and supply chain) by only selling its own capsules.
As Epstein points out, the ‘as a Service’ market for many consumer items is set to grow as the imagination of product innovators bring us new things to consider. Not all will succeed and while Nespresso may have built and marketed the best product offering I wonder whether we are witnessing a case of VHS v Betamax playing out. Those unfamiliar with that story might wish to note that while technically superior at the machine level, Betamax lucked out to VHS which was ‘just good enough’ and was able to reach a wider market. Check this useful explanation.
By this stage you might be wondering what on earth any of this has to do with enterprise technology. Well – apart from the fact Nespresso has developed an incredibly efficient supply chain for its goods and services, this has profound implications for the enterprise software market where we see many vendors attempting to pivot from old models to new.
In meeting after meeting we hear a lot of hand wringing as executives ponder how their beloved software can possibly fail when it enjoyed so much past success. Even where vendors ‘get it,’ the transition is hardly easy. Technical change is not enough. ‘as a Service’ requires a drains up fresh mindset that has to address each geography on that geo’s terms, not the terms the vendor thinks might apply globally. That’s why for example, Xero is finding it hard going in the US when pitched against Quickbooks. It is why a rank outsider CRM solution recently won an impressive win in the most unlikely of places. (Sorry – details under non-disclosure but trust me, this one is mind boggling.)
In the meantime, I’m rooting for Nespresso but then I’m something of a coffee snob and like to believe that winning in today’s market is as much about quality as it is about being ‘good enough.’