Hot Drinks Market in France

Hot Drinks - France

EXECUTIVE SUMMARY

Fragile recovery of hot drinks’ value sales

After a rather bad year due to the recession and the sudden end of inflation, sales of hot drinks recovered but still recorded under-average value growth in 2010. This improvement notably stemmed from the recovery of unit prices after a new surge in raw material costs. In addition, despite the weak recovery of the local economy, French consumers were still ready to pay a premium for the most sophisticated and convenient hot drinks, more particularly in green tea and in espresso, which contributed to the better fate of the overall market in 2010. Nonetheless, in terms of volume sales, hot drinks continued to wane slightly due to the erosion of its share of throat (competition from soft drinks) and the “coffee by the cup” trend.

“Coffee by the cup” and espresso pods drive the market

More than ever, sales of and shares in hot drinks were driven by the launch of increasingly sophisticated machines and their pods. Even though filter coffee machines remained the most common coffee machine in France, French consumers are especially enthusiastic towards pods machines. This was particularly true in the espresso category where coffee pods machines also symbolise trendy lifestyles. This way of consuming hot drinks saw growing fortune on the back of the explosion of espresso machines, including Nespresso, Nescafé Dolce Gusto but also newcomers such as the Special T machines in tea or Nespresso’s copycats in pods in 2010.

Nestlé and Kraft Foods remain co-leaders in hot drinks

In a rather concentrated competitive environment dominated by multinationals, Nestlé France and Kraft Foods France represented a large proportion of total value sales of the overall hot drinks market. Nestlé captured the market leadership during the last couple of years by virtue of Nespresso and Nescafé Dolce Gusto. Lagging far behind, Douwe Egberts ranked in third position in 2010. While its Senseo brand, which still leads in pods, began to reach maturity in 2009-2010 due to the competition from private label, its L’Or Espresso pods (that can be used in Nespresso machines) came at the right moment to counter-balance the hegemony of Nespresso in espresso pods in 2010.

Lack of space in grocery retailers

Supermarkets/hypermarkets remained the main distribution channel for hot drinks in 2010 in France. Due to the expansion of the hot drinks assortment, especially in coffee, with the numerous innovations and the development of coffee pods, grocery retailers struggled to provide space on their shelves for all branded products and private label. As pods achieved increasing success, retailers tended to provide more room for pods than for standard products. As a result, hot drinks manufacturers will need to provide low prices and various promotions in order to keep their place on grocery stores shelves.

Ongoing upgrading expected, particularly in coffee

In 2010, some experts feared hot drinks could be driven by a downgrading movement due the explosion of private label and low-cost brands in all sectors, more particularly in coffee pods. However, the new surge of prices of coffee, tea and cocoa and the recent entrance of copycat alternatives to Nespresso pods totally reshaped the market. Although ECC and Douwe Egberts espresso pods are cheaper than Nespresso, it could paradoxically further popularise the espresso system of high pressure machines while a similar concept is just emerging in tea via Special T by Nestlé. However, all these new sophisticated pods should further cannibalise standard ground coffee while basic tea is also likely to continue waning. This could result in a slight progression of overall market sales in the forecast period, in line with the performance of hot drinks over the previous five years.

KEY TRENDS AND DEVELOPMENTS

Hot drinks better fuelled by recovery of inflation than by the economy

In recent years, the economic and political situation deteriorated in France, even before the beginning of the global economic downturn. In 2008, consumer confidence was thus already low, and was only made worse by the financial crisis, which started to hit the banking sector in mid-2008. The rate of unemployment started to increase again towards the end of 2008, after a period of decline, and took off to reach 9.5% in 2009 and almost 10% in early 2010. It was close to 20% among younger workers in 2009. Export performance slipped relative to historical trends and compared with other Eurozone countries. The slide has led several analysts to suspect a loss in competitiveness. The number of bankruptcies increased by 11% to reach 61,595 in 2009 over the previous year, the highest figure from 1993. INSEE (the local national statistic institute) and other sources said in March and August 2010 that the recovery should be “shaky” and “without tonus”. This was confirmed by a GDP growth of only 0.2% and 0.6% respectively for the two first quarters of 2010.

However, France continues to be the world’s third most favoured destination for FDI (after the US and the UK) and is expected to retain that position throughout the global downturn. According to Euromonitor International, France underwent a relatively shallower downturn than other major Western European economies in 2009 and early 2010. This is partly due to a lower reliance on manufacturing, which accounted for only 11.2% of GDP in 2008, and exports, which were equivalent to 21.1% of total GDP – far less than Germany, for example. The public sector also plays a comparatively stronger role in the French economy, with the government a major employer and provider of generous welfare benefits. The prominent role of the state weakens the competitiveness of the French economy but has helped to offset job losses in the private sector, while state incentives such as tax breaks, increased benefits and aid for businesses have helped to sustain domestic consumer spending.

Despite the efforts of the French government, the consumer confidence index was still too low at the end of 2009 and during the first half of 2010. First, there was a real fear surrounding declining purchasing power. Although the purchasing power of French consumers probably did not drop as in most other European countries, French people had the feeling that the cost of living was rising and increasing more than their wages. The perception of divide between social classes in France has also increased, with some consumers having to pay closer attention to their expenditure on necessities, including food, while others continue to spend freely.

Current Impact

The fate of hot drinks is directly linked with the health of economy. A non-favourable GDP growth rate and consumer confidence index can act as a drag on this market. French consumers tended to pay more attention to their expenditure in order to save money. As in many markets, 2009 started very badly for hot drinks. This resulted in a slowdown of value growth in overall sales of hot drinks, up only 1% in current value terms in 2009. This also coincided with the drastic drop of inflation in 2010.

2010 should not be too bad for hot drinks however, notably thanks to a recovery of coffee and cocoa prices and production costs. The situation improved during the first half of 2010. Overall value sales could finally increase by 3% in current value terms in 2010. Nonetheless, the psychological effect of the recession of 2009, the too weak recovery, the still high level of unemployment and threats about pensions is such that there is still a real obsession with purchasing power.

Therefore, due to a weak level of inflation during the first half of 2010, the performance of hot drinks in 2010 remained lower than the average performance of the market over the review period. Even so, they were still ready to pay a premium for the most sophisticated and convenient hot drinks, more particularly in espresso, which contributed to the recovery of 2010.

Outlook

The outlook for the French economy is ambivalent, but with a risk of budget drift. In early 2010, the crisis was expected to be less severe in France than in many other European countries such as Ireland and Spain or Greece. In January 2010, the IMF predicted the economic growth in France would be between 1% and 2%, while it anticipated a much more modest rate a few months ago. In December 2010, INSEE stated that GDP growth is set to be 1.6% for 2010 and 2% in 2011 – while in Germany it should already surpass 3% in 2010. In fact, what enabled France to be somewhat spared by the crisis in 2008-2009 - the low share of manufacturing in its economy - should dampen the chances of quick recovery of the French economy in the short term. The gap between the reprieve of France and border countries in northern Europe could persist, mainly if France continues to focus on a belt-tightening policy.

Indeed, regarding the budget and debt, the outlook is rather bleak in the short term. A fiscal stimulus plan valued at 1.5% of GDP was implemented in 2009 followed by another stimulus package in 2010. Meanwhile, plans to balance the budget that were shelved temporarily in 2009 (notably with the “Great Loan” in December 2009) became tougher in 2010. The French Government took the decision to limit the public deficit from 8% of GDP (EUR138 billion) in 2010 to 6% in 2011 and then under 3% by 2013. In the meantime, it forecast GDP growth of 2.5% for 2011 – an impossible goal if France continues to strongly reduce its deficit according to many economists.

Without reform, demographics, although favourable compared to several other European countries, are likely to dampen potential growth. Financial problems add to the pressure of the country’s ageing population. The government’s recent fiscal spending coupled with age-related spending in future years requires a speedy return to financial sustainability. By 2040, there will be only one worker per pensioner, whereas currently there are two. The government had hoped to balance the budget by 2012, but that seems unlikely in the present weak economic environment.

Even though food prices stabilised in 2009-2010, the cost of living will remain a main worry for French consumers in the forecast period, mainly due to the new increase in petrol prices since the summer of 2010. French sociologists detected a growing fear of loss of social position. French people are worrying about losing their jobs and many are pessimistic about their likely retirement lifestyles.

Future Impact

Latest figures from INSEE showed that the consumption of French households declined again in October 2010 after an irregular development during the year. Again, fast-moving consumer goods products still progressed while half-durable and equipment goods waned, notably due to the drop of car purchases (not included in Euromonitor). This disparate development should continue in the short term. The polarisation observed over the review period should continue, with a better fate for upmarket products such as espresso pods and machines on the one hand and low-cost products and private label on the other hand.

Thus, there is still uncertainty among players about the future performance of hot drinks in the forecast period. The risk of new global recession should have a strong effect on consumer spending in hot drinks. During periods of economic slowdown, consumers generally allocate less of their budget to some areas of expenditure. Consumers could become increasingly price sensitive and begin to make choices between products they consider more crucial or value for money and those that are considered more superfluous.

However, sales are expected to post a CAGR by 1% in constant value terms over 2011-2015, in line with the performance of the market over the review period. Combined with an ongoing movement toward trading up and the growing success of coffee and even tea machines, sales of hot drinks should also be artificially fuelled by a new surge of cocoa and coffee prices on a global scale. Manufacturers will also have to pass the costs of predicted higher import duties in the coming years.

French consume fewer but more sophisticated hot drinks

Hot drinks is subject to a long term phenomenon: a progressive erosion of volume sales even in off-trade notably due to the competition from soft drinks. This market rose by 2% in off-trade volume in 2010 thanks to a general improvement of sales in bottled water, fruit juice and even carbonates. Within this market, the most dynamic product was energy drinks, notably thanks to the ongoing breakthrough of Red Bull that only gained a foothold in France at the beginning of the review period.

However, hot drinks benefited from a trend toward more comfort and cocooning. Over the last few years of the review period, magazines and advertising extolled the virtues of wellbeing and comfortable lifestyles. Consumers were encouraged to consume in order to have pleasure and not only to cover basic needs, but also other more luxurious or non-essential types of goods.

Within hot drinks particularly, Douwe Egberts and Nestlé managed to renew the rather old-fashioned image of traditional filter coffee machines by introducing designer Senseo and Nespresso coffee pods machines prior to the review period. Targeted at high income households, Nespresso based its development strategy and communication on high-end lifestyles, illustrated by the notorious advertising campaign featuring actor George Clooney. The French market for small domestic appliances also registered a surge in sales of automatic and semi-automatic espresso machines. On the other hand, other players such as Douwe Egberts introduced pods machines targeted at medium/low income households. Thanks to its affordable Senseo machines (priced at between EUR90 and EUR200), Douwe Egberts reaches all types of consumers and leads in the coffee pods sector.

Current Impact

Even if the share of throat of hot drinks waned over the review period in France, French consumers are calling for more sophisticated hot drinks.

Since other coffee players such as Nescafé and Malongo launched their own coffee pods systems, consumers benefited from a large offer in terms of machines and coffees. Prices, however, remain higher than filter coffee machines and the usual ground coffee. Pods correspond to the current hedonistic trend and to comfortable lifestyles. Although French consumers still tended to complain about their declining purchasing power in 2009, they did not hesitate to pay for expensive coffee pods in 2010 in order to enjoy premium and tasty coffee and improve “coffee time”, which is an important time of the day.

As a result, coffee pods’ sales continued to post double-digit value growth, more particularly in espresso pods. They continued to boost fresh ground coffee sales in value but not in volume terms due to cannibalisation of traditional filter coffee by coffee by the cup which enables less waste. As retailers tended to extend the shelf space available to pods, standard ground coffee lost some visibility. Surprisingly there was a notable recovery of fresh coffee beans that was concomitant with the renewed success of traditional espresso machines. Thus, overall sales of coffee increased by a robust (but nevertheless under-average) 3% in 2010 in comparison with the CAGR of 4% for the category over the review period.

Outlook

As in the past, competition from soft drinks should impact sales of hot drinks. The former market is set to increase by 3% in total volume, boosted by increasingly warm summers, the success of fruit juices and the comeback of carbonates. Energy drinks should still progress strongly, albeit at a slower pace than during the review period due to a natural phenomenon of maturity.

Despite ongoing sluggish recovery of the economy, the need for comfort at home should develop. More than ever, consumers will find themselves withdrawing into the comfort of their homes, a trend that has been termed “cocooning”. This has led to French people spending more time at home, notably during evenings or at weekends, in order to offset their increasingly hectic lifestyles during the week. Experts observed that French people increasingly receive and cook at home during the weekend instead of going to full-service restaurants. A corollary of this trend is the ongoing drop of traffic and sales in consumer foodservice, although it seemed to decline less in 2010. In such a context, the market for sophisticated coffee machines still has room for growth, more particularly for espresso.

Future Impact

There will still be a slow but an ongoing shift in volume share of throat from hot drinks to soft drinks. Sales in the former are likely to decline by 2% over 2010-2015. Hot drinks still has potential in value owing to a premiumisation movement toward more convenient and mainly more sophisticated concepts. Products and solutions such as pods, pure origin, green tea specialities, and flavoured instant coffee, should bring additional growth by targeting increasingly interested middle classes.

Included in fresh ground coffee that is likely to grow by 10% in constant value terms over 2010-2015, espresso coffee pods should forge ahead. If the economy does not experience a new downturn, such pods are expected to continue their development in terms of assortment and brands. Manufacturers are likely to focus on innovation in the form of flavours and coffee origins in order to satisfy all consumer needs and will be obliged to find pods compatible with their machines. For another category of consumers, pods and even ground Arabica will continue to be far too expensive, benefiting Robusta mixes and coffee beans with new interest. Coupled with the ongoing success of espresso pods, this should help coffee to register constant value growth of 8% over the forecast period.

However, not all coffee products will progress. Despite the success of some premium specialities, instant coffee will pay for the success of convenient and tastier coffee pods. In vending, instant coffee sold in forecourt retailers should continue to bear the brunt of the progression of energy drinks such as Red Bull. Although it could begin to exhibit signs of maturity in the short term, this brand gained a foothold in France only at the beginning of the review period.

Despite the downturn, health and wellness and sustainability still matter

The desire to consider both one’s own health and that of the environment is also influencing sales of hot drinks. French people are aware that their lifestyles can negatively impact their health. The French health ministry set up regular communication campaigns concerning diet and the importance of eating five pieces of fruit and vegetables per day in order to preserve good health and wellbeing. The health trend has positively affected consumer attitudes towards healthy products. A significant number of consumers are more inclined to switch to healthier versions of their favourite products, rather than thoroughly modify their diets. At the same time, the trend is encouraging manufacturers to reformulate their products.

French consumers appreciate and desire comfortable lifestyles, but are also concerned about the environment. Under pressure from environmental associations, the French government is likely to set up programmes for sustainable development and preservation of the environment over the forecast period. Thanks to media and various TV documentaries, French people have become increasingly conscious that their lifestyles impact on the environment. They pay more attention to recycling materials such as plastic and are predicted to use eco-friendly products more often than they did during the review period. As a result, manufacturers may have to adapt their products to this new environmental sentiment across all industries.

Meanwhile, quality labels such as “organic” and “fair-trade” became key selling points for manufacturers in industries such as food, and cosmetics and toiletries and more specifically products such as baby care. In the hot drinks market, quality labels became more significant thanks to brands such as Malongo and quality certifications expanded in both brands and private label.

Current Impact

In order to satisfy the growing demand for healthy hot drinks, fuelled by growing health concerns amongst consumers, leading manufacturers are gradually broadening their portfolios of organic products and products perceived by consumers as healthy and natural. Players are taking advantage of the natural properties of plants such as tea, and chicory (included in other plant-based hot drinks and more dynamic than usual in 2009-2010) in order to promote healthy drinks.

Up 9% in current value sales in 2010, green tea benefits mostly from the health trend as it contains high levels of antioxidants. According to industry sources, green tea is notably appreciated by “not-the-average” tea drinker. Due to the increasing popularity of green tea, brands such as Twinings by Foods International and private label expanded their range in this area, especially in flavoured green tea. Key players are also eager to update the image of herbal tea, which is often associated with elderly people and after-dinner consumption. However, this and the success of green tea were not sufficient to offset the drop of black tea. Coupled with the ongoing indirect competition for sophisticated coffee pods, this resulted in under-average growth of 1% in overall sales of tea.

French consumers are increasingly sensitive to the sustainable development concept in the form of eco-friendly hot drinks, fair-trade coffee and teas and organic products. Thus, a growing number of players insist on the sustainable cultivation of coffee and tea, while the use of eco-friendly packaging was still not common in 2010. Leclerc and Carrefour expanded their private label ranges of organic and fair-trade coffee. Grocery retailers are able to provide cheaper fair-trade coffee than specialised brands such as Lobodis and Malongo offered under the fair-trade quality label, Max Havelaar. As pods are individual and they seemed to be rarely recycled until 2009 at least, environmental associations became increasingly worried about this new packaging. This could represent a significant threat to the development of pods over the forecast period in France.

Outlook

The trend towards health and wellbeing is set to continue between 2010 and 2015, supported by a growing focus on health issues by the media and increasing investment in health initiatives by the French Government. France will surely face an increase in health problems such as obesity and cardiovascular diseases over the forecast period. A survey on obesity rates in France by ObEpi-Roche, published in November 2009, shows that the number of overweight people increased by 70% between 1997 and 2009. The survey also indicated that 14.5% of the French population suffered from obesity in 2009. In the forecast period, campaigns by the French Health Ministry and the French Agency for Health Products, AFSSAPS, will continue to educate and inform consumers, making them more aware of the potential danger of food constituents. Furthermore, as life expectancy will continue to increase by 2015, people will be eager to maintain their physical and mental capacities via sport, food, drinks and dietary complements. Consequently, both manufacturers and retailers will put greater efforts into convincing consumers that they have improved the quality of their products and that healthier alternatives have been developed.

Lastly, there will be a growing awareness of locality, sustainability and fair-trade. Consumers are likely to pay more attention to ethical labels over the forecast period than they have in the past. Under pressure from the French government, manufacturers may increase their offer of organic and fair-trade labels. Companies could also put more effort into the constituents present in all types of products from furniture to food in order to avoid allergies and bad publicity. Both the reinforcement of legislation and communication campaigns from fair-trade and eco-friendly trade associations in France are likely to develop between 2010 and 2015 therefore increasing awareness of environmental and ethical issues amongst the French population.

Future Impact

As most coffee and teas do not contain added sugar, hot drinks players could insist on the diet and healthy nature of tea and coffee in order to develop new consumption habits over the forecast period. Health and wellness should continue to be a key driver of tea during the forecast period, especially for green tea, fruit/herbal tea, and other tea. Up by a predicted 22% in constant value terms, the former is expected to post the strongest growth over the forecast period. Tea companies could market the importance of high consumption of green tea in order to preserve health and youth. However, due to the maturity of basic black tea, tea should record modest growth of 3% in constant value terms over the forecast period.

In other hot drinks that benefited from the popularity of chicory sales in 2010, manufacturers could experience some difficulties in their future campaigns against obesity in France. As flavoured powder drinks often contain high levels of sugar, their consumption has to be limited in order to avoid weight gain.

In line with green concerns of the French population, hot drinks manufacturers are also expected to improve research in order to create new technology for pods. For instance, the L’Or Espresso copycat of Nespresso pods are biodegradable while Nespresso can now be recycled in France, as had previously been the case in Switzerland.

Hot drinks companies could focus on the working and living conditions of the farmers in coffee and tea plantations in order to reassure consumers that they are not profiting from their ill treatment. Private label is certain to expand its range of ethical products over the forecast period. In coffee specifically, manufacturers could imitate Malongo and provide coffee decaffeinated with water and not solvents.

On-trade sales impacted by the drop of traffic in consumer foodservice

The fate of on-trade sales of hot drinks is obviously directly linked with the health of the consumer foodservice industry. Although 2010 seemed to fare better, 2009 was a bad year for this market with strong drops in consumer traffic in cafés/bars and full-service restaurants. In the latter, marketers observed an element of downgrading. For instance, at noon, one course out of three often disappeared (starter plus main course or main course plus dessert). While the glass of wine previously tended to replace the bottle of wine, tap water is now replacing the glass of wine. Coffee also often tended to be forgone at the end of the meal.

Cafés/bars experienced a further drop in consumer traffic and sales in 2009-2010. While cafés/bars traditionally lost 100 outlets per year due to changing consumer habits, this number had previously doubled both in 2008 and in 2009. Industry sources pinpoint the economic crisis, the zero tolerance policy of the French Government on drinking and driving and the subsequent disaffection for beer and many other alcoholic drinks in bars. The ban on smoking also continued to affect the category in 2009-2010 as according to the trade magazine Boissons de France, the majority of clients who frequent bars were smokers.

One of the only pieces of good news for on-trade sales of hot drinks was the ongoing emergence of US-style concepts such as North American style specialist coffee shops during the latter half of the review period. This range witnessed the explosion in the number of McCafé outlets in 2009-2010 and the entrance of new competitors for Starbucks, namely Quick Café and Presse Café.

Current Impact

With fewer people dining and drinking away from home, and revenues of cafés/bars and the number of outlets shrinking, hot drink sales through the on-trade channel were obviously negatively impacted. On-trade volume sales of hot drinks fell by 5% during the review period and this drop sped up in 2009-2010, more particularly in coffee in 2009. Furthermore, sales in 2009 and even 2010 were affected by the warm spring and summer that resulted in the cannibalisation by competing drinks, beer and soft drinks, on café terraces. Lastly, despite its very promising success, specialist coffee shops remained niche in comparison with the overwhelming share of declining traditional cafés/bars. Its effects on on-trade sales of coffee were thus fairly insignificant, especially given that few French people drink their coffee on-the-go.

This ongoing drop in consumer footfall to cafés/bars and to a lesser extent to hotels in 2009-2010 in France also strongly affected on-trade sales of tea, with this product waning by 1% in this channel in 2009 and 2010 respectively. On-trade consumption of tea remained relatively low and is not as well developed as it is in the off-trade.

Meanwhile, the off-trade channel still largely outperformed the on-trade, notably thanks to the aforementioned cocooning trend and the upgrading to pods machines in coffee and to a lesser extent tea and other hot drinks. Although off-trade volume sales of hot drinks still waned in 2010, its off-trade share was 86% in 2010, representing an increase of one percentage point over the review period.

Outlook

Due to the weak economic recovery, French consumers are still likely to cut back their household expenditure in some areas. Like clothing and footwear, consumer foodservice could be one of the areas in which they will look to make savings. Consumer traffic and transactions will continue to wane in the consumer foodservice market in 2011, before a possible recovery during the second half of the forecast period.

The worst situation should be in cafés/bars whose overall constant value could recede by 10% over 2010-2015. Traditional other cafés/bars should suffer from the competition from home activities and other leisure and more convenient formats in foodservice. According to trade press, cafés/bars, “still have a reputation linked with tobacco and alcohol” but are, “losing their image of conviviality”.

Meanwhile, the niche of specialist coffee shops should forge ahead owing to the emulation of Starbucks, McCafé and other new entrants. Specialist coffee shops provide facets that are lacking in other cafés/bars, namely a convivial place, an assortment of snacking and fast internet access (wifi) and increasingly healthy and flavoursome food and drinks. By contrast with the beginning of the decade when they suffered from a relative mistrust by French consumers, specialist coffee shops should be accepted by a larger part of the French population owing to the adaptation of these outlets to their likes and tastes.

Future Impact

In a continuation of the review period, hot drinks consumption in the off trade is expected to clearly outperform that of the on-trade over the forecast period. Whilst on-trade volume sales of hot drinks are expected to continue seeing declines during the forecast period, off-trade volume sales should see ongoing growth.

Other than the continuous drop of traffic in cafés/bars and to a lesser extent to hotels, off-trade sales should be bolstered by the cocooning trend. Home is also a place where they can drink a quality espresso at a much cheaper price than in a café/bar. On-trade volume sales of coffee look set to drop again over 2010-2015. Meanwhile, other hot drinks and mainly tea should progress in the on-trade but not enough to offset the drop in coffee. Again, the niche of specialist coffee shops that has plenty of room for growth in France will not provide sufficient impetus to on-trade sales of coffee.

New concepts and juridical battles to drive the competitive environment

New machines and concepts were the most important factors and events driving the competitive environment in hot drinks in recent years. During the first half of the review period, the ongoing impressive breakthrough of Senseo machines by Douwe Egberts France resulted in the explosion of the “coffee by the cup” trend. Thanks to its affordable prices, Douwe Egberts is within the financial reach of all types of consumers and leads in coffee pods.

Espresso also became increasingly popular in a country which benefited Nespresso machines and pods in recent years and resulted in the launch of Nescafé Dolce Gusto at the end of 2008, a trickle down of the Nespresso technology in the grocery channel. Within the upper-middle classes, a growing number of consumers also adopted automatic and semi-automatic espresso machines in 2009-2010.

Lastly, in 2010 the introduction of two copycats of Nestlé’s Nespresso, namely L’Or Espresso and the coffee pods from Ethical Coffee Company (ECC) distributed by Casino supermarkets and hypermarkets altered the competitive environment. For the first time, the strategic monopoly of Nespresso on the strategic segment of high pressure pods for espresso began being threatened by other players.

Current Impact

More than “conventional weapons” such as media campaigns, in-store promotions or even new product development, all these innovations and events in the area of machines deeply impacted the competitive environment in hot drinks in recent years.

In a rather concentrated competitive environment, Kraft Foods was the market leader in hot drinks until the middle of the review period. This stemmed from its strong presence through its brands Jacques Vabre, Carte Noire, and Grand’Mère - three brands present both in ground and pods – as well as Tassimo and its specific pods, and Maxwell in instant coffee.

Nonetheless, the company made less progress than its main contender Nestlé, which captured the market leadership towards the end of the review period. Despite a slight slowdown during the second half of 2010 due to competition from Nespresso’s me-too product, Nestlé was by far the most dynamic player over 2009-2010. The ongoing impressive breakthrough of Nespresso pods in the alternative channel of internet retailing and the success of Nescafé Dolce Gusto pods really paid off. While the former forged ahead with a new campaign featuring George Clooney and John Malkovich in November 2010, Dolce Gusto also benefited from a huge media campaign. In addition, in instant coffee, Nestlé was the only company to increase its shares in 2009 and 2010. It was also the absolute leader in other hot drinks thanks to brands such as Nesquik and Ricoré.

Lagging far behind, Douwe Egberts ranked third in 2010. While its Senseo pods began to reach maturity in 2009-2010 due to competition from private label, its L’Or Espresso pods came at the right moment to counter-balance the hegemony of Nespresso in espresso pods in 2010.

Outlook

As in 2010, the first half of the forecast period should witness key events and launches that should further impact the competitive environment. Although the monopoly of Nespresso pods will be jeopardised by copycats, Nestlé claims the quality of its pods is much higher. Nestlé should use all affordable means to delay the entrance of Nespresso’s competitors on grocery retailers’ shelves, although despite its efforts it will be unable to avoid what many consider to be inevitable.

Therefore, Nestlé is notably capitalising for the short term on Special T. After the success of Nespresso and Nescafé Dolce Gusto in coffee, Nestlé has high hopes from a test in France of the same sophisticated pod concept in tea with a special machine and rigid pods available on its website. The process is more accurate than in coffee because the machine identifies the pod and adapts the temperature of water according to the speciality of tea.

However, the multiplication of new concepts and pods will further pose the problem of placement on retailers’ shelves. Indeed, most players in coffee propose all types of products: classic ones such as beans, ground, Arabica and Robusta, in standard or decaffeinated; and new ones based on pods. The result is that product positioning on shelves will prove challenging for retailers and often confusing for consumers.

Future Impact

Therefore, the fight between the two co-leaders Nestlé and Kraft Foods and Douwe Egberts should become more intense. Even if the result of the juridical battle between the former and the latter is uncertain and not for the short term, Nestlé could surprisingly benefit from the predictable success of its Nespresso’s copycats. Owing to their increasingly lower price, the popularisation of espresso pods should result in a new wave of purchases of Nespresso machines leading to success for Nestlé’s partners, Magimix or Krup.

This could be damaging for Tassimo or Douwe Egberts’s Senseo as their users could be tempted to trade up to the Nespresso or Nescafé Dolce Gusto technology first with L’Or Espresso or Casino pods – and eventually to real Nespresso pods. Some experts deem that a purchase of the EEC by Nestlé could be a pertinent choice. However, others suspect that the Swiss company may have found the ideal way to lock the distribution of espresso pods two years before the end of the first patterns of the Nespresso technology. It is keeping intact the smart and glamorous image of Nespresso but is progressively building crucial bridgeheads in the strategic segment of more value-for-money espresso pods and machines – Nescafé Dolce Gusto, L’Or Espresso and ECC.

The big question on new products for 2011 will be the performance of Special. T. Some industry sources believe that Special T could revolutionise the tea category by introducing the pod technology and encouraging consumers to trade up to more sophisticated specialities in loose tea. Some experts have doubts about the chance of success of this test in France as French consumers really prefer coffee and could also be put off by the high price of the concept.