New Espresso Maker 1 In 1986. the Swiss giant Nestle introduced a new type of espresso machine in the Swiss market. It represented one of the most advanced new merchandises developed by its R & A ; D section. Through the usage of java capsules. the patented system combined the gustatory sensation of existent espresso java with convenience and easiness of usage. However. despite an enthusiastic response from cognoscente java drinkers and really promising market research. the first few old ages after its debut. the CoffeeMaker was far from populating up to its outlooks. In fact. the dedicated concern unit was losing money. Therefore. in March 1988. Nestle appointed a new. immature Pull offing Director. called Jean-Paul Gaillard. Gaillard was sing what to make to better the new product’s lucks. He realized that. unless gross revenues of the CoffeeMaker would pick up well shortly. Nestle would hold no pick but to halt investment in the new merchandise. He wondered whether he should give the current scheme more clip to play itself out. or should he continue with a new scheme?
Coffee Industry Trends Market research showed that in bing java sectors. consumers were going more adventuresome in their purchasing behaviour and tended to prefer the premium and ace premium terminal of the market. These new markets were turning at the disbursal of blink of an eye powdered java. Other alterations taking topographic point in the java market included: ( 1 ) increasing popularity of coffeehouse and java bars ; ( 2 ) lifting trade name consciousness ; and ( 3 ) the lifting price-consciousness of the mass market consumer. who switched to supermarket trade names if the monetary value of java rose. The Rise of Espresso Espresso java is java of the greatest possible strength. Its quality is determined by the “fineness” of the java used. The choiceness of java depends on the swot every bit good as on the type of contraption in which it is used. Espresso machines. in which H2O and steam are forced through the land java under force per unit area. necessitate the finest swots of all in order to bring forth java of the greatest possible strength.
Espresso java was traditionally popular in Italy. Spain and France but it was besides going more popular in other European states and the US. Nestle’s Positions in Coffee Nestle held a dominant market place in instant java. Soluble java was the biggest money-maker for Nestle . It represented more than 80 % of Nestle’s java gross revenues. with the remainder being occupied by joint and land java gross revenues. It had strong trade names in all the sub-segments of the instant-coffee market. yet Nestle felt it could non rest on its awards. Its traditional rivals were going more aggressive and supermarket ironss were come ining the market through their ain trade names. Nestle began to section the soluble java market into finer and finer sections. This gave a farther encouragement to the demand for instant java but did non pull the high-end consumer who required a foaming java. accomplishable merely with the usage of pressurized H2O.
This instance is based on research by Costas Markides. Professor of Strategic & A ; International Management at the London Business School
History of the EspressoMaker The beginnings of the new EspressoMaker dated back to the late sixtiess. Continuous experimentation over a 10 twelvemonth period had led to the concluding system that consisted of two parts: a java capsule and a machine. The java capsule contained 5g of joint and land java. The machine was jointly developed with the Swiss machine maker Turmix. The usage of the new system was straightforward. The capsule was manually placed in the grip. which was introduced into the machine. This action pierced the java capsule at the top. At the imperativeness of a button. pressurized. steamed H2O was passed through the capsule. The consequence was a creamy. foaming. high-quality cup of espresso java. Strategic Positioning. 1985-87 The success of the EspressoMaker depended non merely on the java merchandise ( i. e. the java capsules ) which Nestle controlled. but besides on the quality of the contraptions used ( outside Nestle’s control ) and on the ability to bring forth and sell to a mass market.
This dependance on foreigners was unusual for Nestle . In add-on. the merchandise threatened to cannibalise the gross revenues of other Nestle merchandises. Nestle set up a joint venture with a Swiss-based operator called Sobal to sell the new product2. The joint venture ( Sobal-EspressoMaker ) purchased the machines from Turmix and the java capsules from Nestle and so distributed and sold everything as a system—one merchandise. one monetary value. A separate unit called EspressoMaker S. A. supported the joint venture and provided proficient and selling advice. As shown in Exhibit 1. 22 other distributers were given permission to sell EspressoMaker machines. Choice of Customers With the EspressoMaker. Nestle would no longer be selling simply a merchandise. but besides the needed hardware and the related services. This needed Nestle to concentrate on the production of high quality java capsules. a service offering to reassure the client. the fabrication of dependable machines. the preparation of people on how to run the system. and the organisation of a care work force. Once the mark states were chosen ( ab initio Switzerland. Italy. France and Japan ) . Nestle farther defined mark market sections. Nestle felt that the high cost of the machines and of the capsules meant that family users would non happen the EspressoMaker merchandise attractive.
By contrast. offices and little companies were thought to be less price-sensitive and more likely to purchase the EspressoMaker system as a fringe benefit for their employees. Small and medium sized companies were hence identified as the primary mark market—these companies were improbable to purchase a sophisticated. large-scale espresso machine but would be receptive to the EspressoMaker system as an attractive option due to its comparatively inexpensive monetary value and its ease-of-use and dependability. Selling and Distribution The EspressoMaker machines were sold either by Sobal- EspressoMaker or by 22 other distributers. SobalEspressoMaker approached clients through a direct mailing run all over Switzerland. If interested. the client filled out and returned a simple signifier at which point the Sobal sales representative approached him/her. The EspressoMaker machine would so be delivered to the client. The joint-venture had no gross revenues force. so it depended on Sobal forces. However. the Sobal gross revenues force consisted of two representatives and two technicians for whom the sale of EspressoMaker machines was merely one of their legion duties. As a consequence. the 22 other distributers of the EspressoMaker machines played an of import function.
Sobal was a little company active in the distribution of a broad assortment of merchandises ( contraptions. cosmetics. etc ) .
The client could order java capsules either straight from the Sobal- EspressoMaker joint venture or from the distributers. The joint-venture preferred to sell the machines at a high monetary value but kept the monetary values of the java capsules low. On the other manus. the distributers favored leasing of the machines and selling the capsules at a high monetary value. It was in the sale of capsules that the distributers made their money. Production It was decided that one of SPN’s ( Societe des Produits Nestle ) little java mills located in Switzerland would be responsible for the production of the java capsules. The production of the machines was a more hard issue. Natural spouses to fabricate the machines included companies whose bing concern included the industry and distribution all sorts of family contraptions. including java machines.
Sub-contracting fabrication to one of these companies was hazardous because they had small incentive to advance the EspressoMaker machines. Most of these possible spouses were already in ownership of a machine for joint and land java which they were selling under their ain trade name name. However. Nestle believed that these subcontractors would recognize that it was better for them to cannibalise their ain merchandises than for one of their rivals to make it for them—especially with an invention every bit promising as the EspressoMaker system. Therefore. the existent issues for Nestle related more to the volumes and the borders that it would be willing to accept from these subcontractors than whether to farm out to them or non. In the terminal. Turmix was selected as the chief subcontractor for the production of the machines to be sold in Europe. Pricing and Services Test markets showed that java made with a EspressoMaker machine was first-class but that there were few clients who would purchase a machine at SFr. 600 and pay an extra SFr. 0. 30 per cup of java.
It was hence decided that possible clients would have machines on a test footing. Coffee capsules would now be sold at SFr. 0. 60 a piece. For EspressoMaker. the loaning of machines to clients would excite involvement in the new system. For the client. the “try now. purchase later” attack was really attractive. Those interested in having a machine could buy the machine with or without services ( services included a five twelvemonth guarantee and on-site aid ) . The java capsules were manufactured by SPN in Orbe. Switzerland. and sold to the joint venture. As with the machines. the capsules were either straight sold to clients of the joint-venture or through traders. Consequences of the first two old ages: 1986-1987 Table 1 nowadayss the consequences of the first two old ages in footings of machine gross revenues. The marks were far from being reached and the existent consequences hardly amounted to half of the targeted figures. Table 1: Machines Model Manufactured Sold Number of machines manufactured and sold in 1986/87 ( in units ) C 100 15. 662 9. 852 C 1100 3. 939 2. 487 C 1101 2. 800 Entire 22. 401 12. 339
In footings of java capsules. the volume sold in the first two old ages was besides far below the prognosis volume. Despite a major leap in 1987. the volume sold in dozenss of java did non make the sums expected by Nestle at launch clip in 1985. Unless the gross revenues of machines picked up well. there was small hope that java capsule gross revenues could better a batch.
The fiscal Numberss ( Table 2 ) . reflected the dissatisfactory gross revenues of machines and java capsules. Investings in the launch of the EspressoMaker system in Japan worsened the state of affairs. It should be noted that R & A ; D costs exhausted up-front ( about Sfr. 1. 756. 000 ) are non accounted for in Table 2. There were other warning marks on the skyline. The machines were non dependable. taking to uninterrupted care and service. Defective parts led to high costs of fix which frequently outweighed the cost of a new machine. On the distribution side. distributers had non reached gross revenues marks. doing EspressoMaker’s endurance hard. Table 2: Operating consequences for EspressoMaker S. A. and worldwide. 1986-87 1986 Gross saless Cost of goods sold Operating border Fees on machines sold R & A ; D Operating consequences of EspressoMaker S. A. 1. 485 -1. 512 -1. 082 71 —–1. 011 1987 3. 842 -3. 357 -1. 979 197 -500 -2. 282
Operating consequences of EspressoMaker S. A. Operating consequences of Nestle Japan Loss on transportation pricing Operating consequences of SPN Gains on revenue enhancements Financial costs
-1. 011 NA NA NA NA NA -1. 011
-1. 782 -1. 974 -343 -277 1. 167 -90 -3. 799
What to make? It was clear that the current scheme was non bring forthing the coveted consequences but Jean-Paul Gaillard was diffident whether the scheme had to be changed or whether it was a merely a affair of leting the current scheme to play itself out. Even if he decided in favour of altering the current scheme. the inquiry was. “change to what? ”