The trend towards premium capsules

As the global single-serve coffee market gets larger, more companies are looking to find profit in the fastest growing segment of the coffee industry. With this inevitable wave of new competition, industry titans are looking towards a marketing tactic often used in the alcohol, chocolate and fashion industry to help sustain growth in a market some analysts say could hit US$12 billion this year. Marketers call the strategy premiumisation. It’s a growing trend in the coffee capsule industry that has companies trying to differentiate themselves from competitors with a more expensive, premium product to increase profits. For capsule manufacturers like Swiss-based Nestlé Nespresso, brand differentiation may be a key ingredient in recovering from a faltering growth rate over the past few years. With a number of patents expiring and several court cases in the works, the once exclusive manufacturer of pods for its Nespresso machine now faces dozens of rivals. Already well positioned as a premium brand targeting their baseline product to a higher end consumer, the company took an even bigger stride in this direction with the launch of Hawaii Kona Special Reserve in October 2012. Made from 100 per cent pure Hawaii Kona Arabica, Nespresso’s media release touted the product as having “earned a global reputation as one of the world’s most prestigious coffees, beloved by true connoisseurs; it boasts a complex aromatic profile, exceptional rarity and specialist growth methods to ensure the coffee classification ‘Extra Fancy’.” At US$2 a shot, the cost was four times the cost of its regular pods, or US$364 per kilogram. It sold out within weeks. Analysts say the launch of the expensive limited edition brew was part of a larger effort to upmarket Nestlé’s food and beverage products that helped its 2012 sales growth. Ravi Dhar, a Professor in Management and Marketing and Director of the Center for Customer Insights at the Yale School of Management in the United States, tells Global Coffee Review that premiumisation is a way for companies to stand out in a saturated market. “The way to think of premiumisation is ‘how do we get people to pay more money for the same product and provide a richer experience?’” Dhar says. He explains that premiumisation leads to building a premium version of the product you have. Diane Duperret, Corporate PR Manager at Nestlé Nespresso, says other limited edition premium blends launched since the Kona brew, such as Trieste and Napoli, were also highly successful.
“Hawaii Kona, like the rest of our limited editions, is part of our constant drive to innovate and offer our consumers new coffee sensory experiences,” she says. Duperret could not confirm whether the company would release similar limited editions to Kona in the future. A matter of quality Professor Dhar says the key to success with brand premiumisation is customer experience. “[Brands should] try to differentiate based on the raw material itself, the process, or the packaging,” he says. “The idea is to give a better, richer customer experience overall, to get the customer to pay more for coffee.” Dhar specialises in consumer behaviour and branding, marketing management, marketing strategy, and bringing psychological insights to the study of consumer decision-making. His research focuses on using psychological principles, such as limited self-control and cognitive limitations in processing information, to investigate fundamental aspects about the formation of consumer preferences and goals in order to understand consumer behaviour in the marketplace. He says there are a number of benefits when premiumisation is successful. “The benefits are pretty obvious,” he says. “The first is that it allows you to differentiate yourself from competition. The second is that people are willing to pay more.” The main risk, Dhar explains, is the inability to convince the consumer that the experience the company is providing is different from its baseline product. “The key is how tangible is your strategy around premiumisation,” he says. Dhar says that while premiumisation is aimed at a higher end customer, the benefits trickle downwards in terms of product branding. He says cell phone producer Nokia has used the strategy for its Vertu line of luxury mobile phones before it was sold to private equity in 2012. While Nokia did sell a moderate quantity of the high end mobile phones, Dhar says the intent was to build the entire Nokia brand as being a leader in its market. The tactic is also used in the fashion industry, when fashion designers release a limited high end line of clothing, as well less exclusive mainstream lines aimed at a broader segment of their market.
Dhar says premiumisation is a good model for companies like Nespresso who are seeking to expand in markets already ripe with competition, such as the US. “The question becomes ‘how many dollars are spent on my coffee?’ And not ‘how much coffee do I sell?’” He cautions, however, that premiumisation might not be an effective strategy in developing markets. In this environment, Dhar says the best strategy for brands would be to develop a basic offering and then move up and differentiate as competitors move in. US expansion A 2013 report from the National Coffee Association (NCA) this year pronounced the US as the world’s largest consumer of coffee. With that same NCA report finding that 83 per cent of Americans adults drink coffee, averaging about three cups a day, it’s no wonder the US is such a significant battleground for the single-serve market. While Nespresso’s effort to grow its US presence is likely to be felt by its American single-serve rivals, coffee giants Starbucks and Green Mountain Coffee Roasters (GMCR) don’t see this as direct competition. However, the two US-based companies do have premiumisation on the corporate agenda and are working together in hopes that Starbucks’ clout as a premium brand will help them gain a larger share of the market. They renewed their partnership last May with a five-year contract that will triple the number of K-Cup packs Starbucks makes for GMCR’s Keurig brewing machine. The initial launch of Starbucks K-Cup packs in 2012 was so well received that it was named one of the year’s top 10 food and beverage product launches by Information Resources, a market research company focused on the consumer packaged goods. “Our customers had been clamouring for Starbucks in the K-Cup format,” says Mike Conway, Executive Vice President, Global Channel Development for Starbucks. “We had and have a lot of existing customers who brew using a Keurig at home and were excited when we entered the premium single cup market.” According to Nasdaq analysts, Starbucks, through its VIA Ready Brew instant coffee and K-Cup packs, now commands almost 22 per cent of the premium single cup market, which is a significant growth from its zero presence in this segment a few years back. Conway believes the quality of its product, along with their partnership with GMCR, were instrumental in this success. “Our goal is to offer the highest quality coffee products to our customers in multiple formats and channels,” he says. “We worked closely with GMCR, leveraging our strong coffee knowledge to create a Starbucks K-Cup pack that delivers the quality and taste our customers expect from Starbucks.” In addition to limited edition seasonal blends, the Starbucks will expand its line of K-Cup pack varieties to offer caramel and vanilla varieties this fall. GMCR’s Vice President of Corporate Communications and Investor Relations, Suzanne DuLong, explains that partnerships with companies such as Starbucks have been mutually beneficial, helping them meet the demands of consumers by offering a premium product. “We are at the intersection of two very important consumer trends,” DuLong says. “One is the trend towards premium coffee. We believe the Keurig system has taken that and combined it with the trend of consumer desire to have that experience in their own homes.” DuLong tells the Global Coffee Review it is these kinds of partnerships with fellow coffee manufacturers that have been key to the company’s success with the Keurig machine. “Consumers clearly are trending towards more premium beverages,” she says. “We realised what was more important to them in their purchase decision [for a single-serve machine] were the brands and variety available to them in the coffee system. “The Keurig system has taken the quality, the convenience, and most importantly, the variety that consumers want, and put it right on their kitchen counters.” Conway is also optimistic about growth in the single-serve market with its Verismo System, a premium single-serve machine that makes espresso and brewed coffee. “We have seen early success with our Verismo System by Starbucks, which crafts a true espresso shot using patented high pressure technology as well as brewed coffee all on one machine,” he says. “There is plenty of room for growth in premium single cup.” GMCR is also taking strides towards premiumisation for its own brand of coffee. It released a limited edition premium brand of coffee, Colombia Geisha Special Reserve, last November. The company promoted the product as an “extremely rare and sought after variety that is known for its sweet, dynamic citrus-like flavour profile,” with a highly refined manufacturing process that involves picking the beans every eight days. At a suggested retail price of US$31.99 for a K-Cup pack of 18 capsules, the cost works out US$1.78 per capsule, or US$137.95 per kilogram. In comparison, GMCR’s lowest costing baseline capsule sells at US$16.49 for a box of 24. It also sells Diedrich and partner brand Eight O’Clock Coffee varieties for as low as US$0.62 per capsule. DuLong says their special reserve sold out quickly. While she cannot pre-announce future product plans, she says GMCR is open to future premium releases. “It’s definitely a niche opportunity that consumers seem interested in,” she says. “As we come across special opportunities like this, we will likely look to pursue them.” Worth the money? So who is the target customer that is willing to pay up to eight times the amount of a regular cup of coffee? There are different schools of thought. For Starbucks’ Conway, the answer is simple.
“It all comes down to quality and taste,” he says. For Professor Dhar, it’s a combination of quality and consumer experience. “They are enthusiasts,” he says, “they are knowledgeable, and they really want the ultimate experience. It’s a combination of not just having money, but to be seen as a maven of the category.”
GMCR’s DuLong says it stems from the consumer’s growing exposure to variety. “Consumers are increasingly exposed to wonderful specialty coffees,” she says. “As they are exposed to them, their palettes develop.” She explains the experience is not unlike consumer relationships with wine. “Once you have exposure to different varieties of wine… it’s not unusual for consumers to search out other options and other experiences.”

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