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Gold rush of compatible coffee capsules

Mocoffee’s Pascal Schlittler warns that current practices in compatible coffee capsule marketing may be leading a race to the bottom of coffee quality.

At 25 new companies launching Nespresso compatible coffee capsules from 2011 to 2012, Mocoffee’s Pascal Schlittler just stopped counting. “We’re seeing a lot of big companies who are after a quick dollar, they see a chance to enter the market without having to invest into a machine,” says Schlittler.

From a short-term business perspective, Schlittler admits that launching a compatible capsule makes sense. Market entry is relatively simple. From a manufacturing perspective, a coffee roaster can purchase a specialised grinder and filling machine, or even just contract out the capsule making process. From a sales perspective, virtually all of these compatible companies are taking an undercutting strategy, under the assumption that surely price savvy customers will go for the lesser-priced compatible capsules.
As many of these companies have learned, however, the path to success isn’t quite so simple. With some already failing, and Nespresso still holding on to its record-breaking profits, Schlittler warns that there is a lesson to be learned: the compatible “gold rush” isn’t the easy money-making path that it seems to be.
Working alongside Eric Favre, the inventor of the Nespresso capsule, Schlittler is well-placed to know that it takes more than a capsule for market success.

“Eric always says that he didn’t invent the capsule, what he invented was the formula,” says Schlittler. “It’s not just a cylinder, but a careful combination of a certain level of oxygen and water passing through coffee at a certain pressure. It’s this formula that produces a quality espresso.”
With this in mind, Schlittler says producing a compatible capsule that works with a machine is simple in theory, i.e. it will produce a cup of coffee. However, the practice won’t replicate the quality that the full Nespresso system was originally designed for.

“When you look at the technology, there are big issues here versus the original,” says Schlittler. “Most of these capsules are not protected. They are made of plastic and perforated, and there is a big impact on quality.”
It’s this sacrifice of quality that Schlittler is observing as a dangerous trend among compatible systems. While lesser price points are one part of the equation, Schlittler says they can’t be taken in isolation.
Since it was quality, alongside convenience, that led to the success of capsules in the first place, Schlittler says sacrificing quality to enter the market simply doesn’t make sense.
“These substandard products will lose out to Nespresso, even without a fight,” says Schlittler. “At the end of the day, what these products are really doing is boosting Nespresso’s business.”
Schlittler points to proprietary systems that have had some success. Importantly, he says that these proprietary systems are ensuring that customers have a choice.
“Will we end up with a Microsoft situation?” asks Schlittler. “It would be sad for the market, and for the development of coffee.”

Mocoffee currently produces a private label solution for companies looking to enter the market. The turnkey solution provides companies with the tools to provide their own system, while maintaining top quality.
Schlittler says launching a system onto the market is a viable alternative to compatible capsules, because customers have shown that they are willing to purchase new systems.
“Even Nespresso offers 30 models of its own machine,” he says. “People are looking to buy new machines. Now that price is no longer an issue, people are tempted by change… Globally, it’s a big business and there is money to be made in new markets. But you need to offer a good product.”

So what approach should companies take when they look to enter the capsule market? The first advice Schlittler offers is to get familiar with the technology.
“Once you decide to enter the market, do your homework,” says Schlittler. He advises roasters to carefully research exactly how capsule systems function before deciding to jump in bed with any specific system.
Next, Schlittler says companies should consider setting up a separate marketing and distribution strategy. As a distinct product, capsules need their own marketing approach.
He reminds that the key to Nespresso’s success has not just been its product, but the luxury brand that’s been created thanks to its stylish advertising campaigns and 300 boutiques around the world.
Schlittler says roasters with strong brand recognition should similarly take note, and charge for their capsules accordingly.

“There are roasters out there who have been on the market for hundreds of years. They are proud of their coffee, yet they won’t even sell their capsules for the equal price of Nespresso,” he says.
A good retail strategy is similarly important to success. Having a capsule to sell is one thing, however getting that capsule into the “buying circle” of a customer is paramount to commercial success, Schlittler explains.
“People are used to buying through a channel. They are pretty loyal in that sense,” he says. Even if a capsule is less expensive, if it’s not convenient for a customer to purchase, he says they are much less likely to buy it.
Finally, Schlittler advises for companies to remember after-sales.
“Customers are not just buying coffee from you anymore,” he says. “They have a machine at home now that they are using every day.”

Schlittler says only when the coffee side of the business aligns with the technical side will a coffee capsule operation see success. With so many roasters focusing on increasing the quality of their whole bean and roast and ground coffee, Schlittler says it’s a shame that quality in the capsule business seems to be sliding downhill.
“Companies need the courage to be proud of their products,” he says. “A capsule can produce something really wonderful. It’s a shame that we’re seeing that sacrificed for the lowest price point.”

Source: Global Coffee Report: ‘Gold rush of compatible coffee capsules’ from the December 2013 issue.