A wall of capsules in a Munich shop. Each color represents a different brew.
Mike Radlauer stumbled across the Nespresso machine during a demonstration in a gourmet shop in SoHo in New York City. The customer next to him was rhapsodizing. "She said, 'Toms just loves the crema,'" he recalls. "I had no idea what she was talking about, but I said to myself, Hell, if the crema is good enough for Toms, it's good enough for me." (Crema, by the way, is the tan foam that floats atop a well-made espresso.)
Count Radlauer as another Nespresso convert. He now pops at least one 55 single-serving espresso pod into his machine every day. "The price of the pods is ridiculous, but it's still the best contraption I've ever bought," says Radlauer, a New York City software developer. "Fifteen seconds, and you've got as close to a barista espresso as you can get at home."
That, in a demitasse, explains Nestl's remarkable patented crema-crankin' money machine--fast, tasty, idiotproof espresso under a generous layer of marketing froth to make the steep prices seem less daunting. How steep? At 55 for a 4-g capsule, Nespresso coffee works out to a nerve-jangling $62 per lb.
The result is that Nespresso now dominates the fastest-growing part of the global coffee industry: single-serving coffee made at home, whose worldwide sales are up an average of 28.6% a year, compared with 5.9% for drip. In Nespresso's stronghold of Western Europe, its pods account for only 1% of total fresh-coffee volume but 7% of its $11 billion value, according to Euromonitor International. Nestl doesn't publicly break out profits, but a former executive puts gross margins at about 85%, compared with 40% to 50% for regular drip-coffee brands.
Nespresso's hefty markup doesn't seem to bother its fans, who can go pretty gaga over a cuppa joe. "I bow down to the artists in Switzerland!" wrote Berlin's Bianca Melanie Jahn on Nespresso's Facebook page when the brand hit 500,000 friends. Nespresso says raves like that from its 10 million customers generate half its sales. For the past decade, the brand has grown an average of 30% a year, steaming straight through the recession. Sales in 2010 were $3.6 billion, making it Nestl's fastest-growing brand.
There are other single-serving coffee makers, of course, but so far, Nespresso has enjoyed a comfortable lock on the top end of the market, where the big profits are. The machines, licensed to several small-appliance manufacturers, start at about $130, but even the much pricier models don't make much money for anybody. Their niftiest feature--for Nestl, that is--is that they accept only Nespresso capsules.
It's the classic razor/razor-blade business model. Nespresso calls its captive audience "club members," and it lavishes perks on them accordingly. Capsules can be delivered by courier within 24 hours--at no extra charge for sizable orders. Liveried personnel in Nespresso's 250 jewel-box boutiques around the world offer customers a monogrammed china cup of the company's latest exotic blend, or grand cru in Nespresso's flowery winespeak. At the Nespresso store on Paris' elegant rue du Bac, there's almost always a long line to buy capsules, and no one looks remotely grumpy about it. But the fact is, they've got no choice; it's Nespresso or nothing.