Pod of Gold

By Joshua Levine Monday, Mar. 07, 2011
    • Guido Krzikowski / Bloomberg / Getty Images

    A wall of Nespresso coffee capsules is seen in one of the company's shops in Munich. Each color represents a different brew

    (2 of 2)

    In Gaillard's telling, he signed on in 1987 to develop a system purchased years earlier from the Battelle Memorial Institute, a kind of industrial think tank in Columbus, Ohio. Growth was painfully slow, and Nestlé funded the project grudgingly, almost pulling the plug several times. "For the first four years, I spent most of my time fighting the bureaucracy," says Gaillard. "Nestlé didn't really believe in the product."

    He left Nespresso in 1996. Sales were only $250 million a year, but by then the course was clear. Nespresso had brought bling to coffee. Gaillard climbed higher on the Nestlé corporate ladder, but he always considered himself more a cowboy than a company man, and eventually he quit.

    Three years ago, he says, he was reading over Nespresso's patents and found something Nestlé had overlooked. The upshot is a capsule made entirely out of biodegradable cornstarch; Nespresso's capsules are aluminum. (The company spends heavily to give customers options for recycling them.) "The maze of patents is supposed to impress people, but it doesn't impress me," says Gaillard. "I created that bullshit! People say I'm killing my baby, but business is business."

    The question of whose coffee tastes best — Gaillard's, Sara Lee's or Nespresso's — is endlessly debated on blogs throughout France, the only market where all three are available. But the bigger question is whether cheaper, comparable-tasting coffee capsules can pry some of Nespresso's massive profits out of its strongbox. "I would love a third party to come out with an alternative," says Nespresso fan Radlauer.

    Expect to see a lot more third parties. For instance, HSB, Morocco's largest Coke bottler, is working on Nespresso-compatible pods just for that market. "If you work on a smaller scale, take smaller margins and stay in one country, you have a pretty good business model," says Andrew Hetzel, a coffee consultant who is advising HSB. "It's always easier to buy better coffee in smaller quantities — like wine."

    Nespresso is hardly back on its heels. After a false start, it has relaunched its assault on the U.S. with big new boutiques in Miami and SoHo this year. A new machine automatically dumps steamed milk into espresso, the way Americans like to drink it. "The U.S. is the market where we must succeed. They drink lots and lots of coffee," says Girardot. Still, Americans may prove tougher nuts to crack with their habit of toting around coffee in a cardboard vase, which consultants call a companion cup.

    Nespresso also just opened big flagship stores in Sydney and Shanghai, whose tea-swilling residents might appear an even tougher sell than Americans. Don't underestimate the smirky charm of George Clooney, Nespresso's spokesman outside the U.S. He's been worth every penny Nespresso has paid him — $2.4 million his first year and probably a lot more since he's made Nespresso's "What else?" tagline maddeningly unforgettable around the world.

    Nestlé is even testing the proposition that what works for coffee should work for tea. The Special.T machine, being tested in France since September, reads a pod and then automatically adjusts for ideal water temperature and brewing time for 25 fancy tea varieties.

    Everything else comes straight from the Nespresso playbook, from the tightly controlled distribution to the expansive language. "I'm not saying that what you drink every day is bad tea, but it's not ... optimal," says Special.T CEO Henk Kwakman. Even if Special.T garners just a sliver of the global tea market, at 2 trillion cups a year, it's a big pie.

    In the end, it might not be so bad for Nespresso that it's got compatible competition. "If I were Nespresso, I wouldn't mind losing share if the other guys were helping to grow the category," says Richard Haffner, head of global beverage research at Euromonitor International. Says Hetzel: "Single-serve is clearly the future of the coffee business. If it gets even 15% of what is now the drip-coffee market, we'll all be pledging allegiance to King Nespresso."

    3. 1
    4. 2
    5. Next Page