Brewing coffee war gathers steam

Nespresso looks to repel all boarders. AFP

Coffee is set to make a splash in the French courts after Swiss food giant Nestlé was stirred into launching legal action against a rival this week.

The exact nature of the patent infringement suit to protect the Nespresso coffee brand against an imitation from the Sara Lee Corporation is not yet known. But experts believe the battle could have profound consequences for companies and consumers.

Nestlé filed the action claiming that Sara Lee should not be allowed to sell its coffee capsule L’OR that has been designed to work in Nespresso machines. The cheaper cuckoo capsule was launched in French supermarkets in April with 12 million being snapped up so far.

The likely success or not of the legal fight has got experts scratching their heads. The Nespresso brand is covered by 1,700 of patents – dozens on the capsule alone.

Nespresso was first created in 1988 and patents normally expire after 20 years. However, the brand has since expanded, with different machines and fine tuning creating yet more patents.

“If there are technical changes to a product then it is normal to see new patents being filed,” expert Marco Bundi from Swiss law firm Meissner and Partners told swissinfo.ch. “It’s then a question of whether the new patent is really new or not.”

Inventor turns poacher

Sara Lee is adamant that its capsules are “completely different” from those produced by Nespresso. “They are a different shape and size, are made with different materials and have different coffee in them,” spokesman Ernesto Durant told swissinfo.ch.

In a separate twist to the intriguing saga, former Nespresso boss, Jean-Paul Gaillard, has since moved on to form his own firm, Ethical Coffee Company, that also threatens to sell Nespresso compatible capsules in the coming months.

Speaking to the Swiss Bilanz business magazine, Gaillard said he hoped Nestlé would sue his brand. “That would be the best advertising for us,” he said.

The uncertain outcome of legal proceedings has spooked some analysts into downgrading growth estimations at Nestlé and daughter company Nespresso. But Nestlé is adamant that the SFr2.77 billion ($2.43 billion) revenues achieved by the luxury coffee brand in 2009 would achieve double digit growth again this year.

In an effort to expand into different markets, Nestlé has licensed various manufacturers to produce Nespresso machines and has said it welcomes fair competition. But the company has also stated it would “take appropriate action” to protect intellectual property rights.

Fair return?

Jon Cox, an analyst at Kepler Capital markets, believes the legal fight over patents will soon become a more important corporate battleground than the trade in coffee itself.

Swiss-based food industry consultant James Amoroso has doubts whether a judge would stop Sara Lee from selling a coffee capsule that works in a Nespresso machine. He compares the action to British food giant Unilever losing a court case to stop retailers stocking freezers it had supplied to shops with goods from other competitors.

But he does have some sympathy for Nestlé that has invested a lot of money and time developing an innovative concept that even has the backing of Hollywood actor George Clooney.

“In terms of commercial reality and fair play, Nestlé has not yet got a fair return for decades of investment,” he told swissinfo.ch. “Despite recent revenue growth, Nespresso has not gained anything near the levels of penetration it would like in most countries.”

Luxury costs

Amorosa added that allowing a rival to step into Nespresso’s territory now might send out the wrong signals to the food and other industries.

“If that is the reward for carefully building up a completely new category (machine capsule espressos), then why should anyone else bother to create something innovative?” he asked.

However, Amorosa believes the proof of L’OR’s success in cutting in on Nespresso may be in the taste of the pudding – or in this case the coffee.

Nespresso has positioned itself in the luxury segment and customers are willing to pay high prices for quality and taste, according to Amorosa. L’OR has to live up to this standard in order to thrive.

“I don’t think Nestle really has anything to worry about,” he said. “L’OR has to persuade Nespresso users to trade down and I don’t think they will. They have already shown that they are prepared to pay for the most expensive cup of coffee that you can produce at home.”

Nespresso

The Nespresso coffee capsules entered the market in 1986, and after a slow start soon became a huge seller for Nestlé.

The unit’s sales rose by 22% to SFr2.77 billion ($2.6 billion) in 2009 and Nestlé is aiming for sales of more than SFr3 billion in 2010.

Hollywood star George Clooney has helped boost sales by starring in a series of commercials to promote the product.

Headquartered in Paudex, canton Vaud, the business line employs some 4,500 people worldwide and distributes to over 50 countries.

Nespresso capsules and machines are only sold in its own branded boutiques or over the internet.

Nestlé announced last month that they would soon start expanding the Nespresso production and distribution centre in Avenches, canton Vaud.

The expansion is due to be completed in 2012, raising Nestlé’s outlay on this site to more than SFr400 million ($350 million).

The expanded Nespresso Centre of Excellence would be able to treble production once work has finished.