Nestlé seeks cosier seat at the US coffee table

Unlike in Europe, the Nespresso coffee wave hasn't made significant inroads into the US Keystone

Conquering $13.5 billion (CHF13.8 billion) market will be key objective when new chief takes reins from January. 

From its headquarters on the shores of Switzerland’s Lake Geneva, Nestlé dominates the global coffee business; its hot drinks are among the world’s best-known brands. There is, however, a weak spot – the US. 

It is a market “we have absolutely to win”, says Patrice Bula, the Swiss company’s marketing director. He promises “a major expansion plan in the US” in the next three years. “We want scale, we want to be recognised.”

Conquering the $13.5 billion US coffee market will be an early challenge for Ulf Mark Schneider, the former boss of Germany’s Fresenius healthcare group, who takes over as chief executive of the world’s largest food and drinks company on January 1. Nestlé’s business model, based on relentless organic growth and leveraging its scale, is threatened by a sluggish global economy and disruptive competitors. 

“Markets are changing at the speed of light – in the past, size was an advantage. Now we see size as an impediment to success,” says Celine Pannuti, analyst at JPMorgan. 

In the US, Nestlé faces a formidable competitor: JAB, the investment group of Germany’s billionaire Reimann family, has spent $30 billion over the past few years building up a coffee empire, including the $13.9 billion acquisition last year of Keurig Green Mountain. 

Schneider is the first outsider to head Nestlé since 1922. While his appointment, announced in June, appeared to signal significant changes ahead, he has so far kept a low profile among analysts and the media.

 “The expectation among investors is that he will bring a fresh pair of eyes. He understands what the market wants and is likely to shake things up – but in which ways, nobody knows as yet,” says Eileen Khoo at Morgan Stanley.

 Schneider’s background in healthcare suggests he will seek growth opportunities for Nestlé’s fledgling “health science” division, which is pushing the group closer towards a pharmaceuticals business.

 But coffee is arguably the more important battleground for the new chief executive. At CHF15 billion ($14.6 billion) last year, the coffee business accounted for 17 per cent of Nestlé’s revenues.

 “It is terribly important for them and they are fighting on many fronts,” says Jon Cox, analyst at Kepler Cheuvreux, in Zurich, who estimates coffee accounts for about a quarter of Nestlé’s operating profits (the company gives no breakdown).

 It also offers significant growth opportunities. Retail sales of coffee capsules have risen by an average of 18 per cent a year since 2010, according to Nestlé estimates, to CHF16 billion in 2015. But its modest exposure to the US left it trailing rivals last year, according to Euromonitor. “Companies with greater exposure to the fast-growing US coffee pods market outperformed the global hot drinks market in 2015,” the market research company reported.

 In other sectors, Nestlé has opted for large-scale acquisitions – expanding in pet foods at the start of the century, for instance, by buying the Purina petcare business for $10.3 billion.

 At Fresenius, Schneider has a record of big acquisitions – and his appointment has fuelled speculation of a similar spree at Nestlé. He could also make significant disposals: despite high recognition of its Kit Kat brand, analysts say Nestlé has fallen behind rivals in confectionery; its US frozen food business has also been turned around, and might be ripe for a sale.

 In coffee, however, Nestlé has historically taken an evolutionary approach. With Nespresso, the upmarket coffee capsules business it launched in 1986, it has helped drive an “extraordinary renaissance” in coffee, according to Bula. Two decades ago, coffee was a “commoditised” low-price category, he says. “Today it’s an explosion of quality, variety, origin, all dimensions.”

 “Nespresso is a story of patience, of consistency, of trial and error – but a lot of patience,” adds Bula.

 Expanding Nespresso – which in 2012 lost a legal battle in Europe to prevent others producing capsules for its machines – is at the centre of Nestlé’s US coffee strategy.

 Two years ago it launched its VertuoLine range of machines which produce larger coffees with a foamy top – or “crema” – to match American tastes. More boutiques will be added to its 43-strong US chain; New York is being considered for new Nespresso cafés, currently being piloted in London.

 Nespresso is marketed as an “affordable luxury” brand, promoted by actor George Clooney. But Bula says Nestlé needs scale in the US. “You cannot be only three boutiques in Manhattan,” he says. “George has a lot of friends.” 

 While the US is a priority, Nestlé has also to buttress its position in other important coffee markets. JAB is making its forays into Asia, last month backing a $1 billion bid by a company it controls for Singapore-listed Super Group, which is Nestlé’s nearest rival in south-east Asian instant coffee.

 In Europe, Nestlé is investing heavily in its Dolce Gusto systems, which also make non-coffee drinks; if Nespresso is the Porsche of Nestlé, says Bula, Dolce Gusto is the Audi version. Beyond Europe, Nestlé last year opened a Dolce Gusto capsule factory in Brazil.

 The global approach to coffee contrasts with a more decentralised approach in other businesses. While Nestlé is keen to keep local accents especially in food products, insiders say Schneider was appointed because of his experience running a sprawling international business and will want greater general efficiency savings.

 “Nestle’s fixed-cost structure is five years behind many of their peers,” says Pannuti.

 But Schneider will have to rely heavily on his top managers in sectors where he is inexperienced. Bula says: “It’s a team . . . We will teach him coffee.”

Copyright The Financial Times Limited 2016