Nespresso Opens Its Coffee Machines to Knockoffs

No more worries about the warranty, the machine breaking or — worst of all — a botched cup of coffee.

After years of surrounding its coffee machines and their pods with
patents, Nespresso agreed Thursday to open up to knockoff capsules to
competitors around the world. 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 Thursday 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 U.S. 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.”

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