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Nespresso: Porter's 5 Forces Analysis for the coffee market

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  1. Introduction
  2. Threat of substitutes
  3. Bargaining power of buyers
  4. Bargaining power of coffee suppliers
  5. Threat of entry of new competitors
  6. Rivalry
  7. General environment
  8. Conclusion

Portion-coffee is defined as single cup coffee systems, offering individual portions of freshly ground coffee. Portion-coffee systems come in several coffee machines systems like, filter, automatic, pads or capsules . In this segment, Nespresso offers hermetically sealed and colored capsules containing a wide range of tastes. The portion-coffee market could be of great interest for investors, as this market grew by 44% between 2006 and 2007 (see Appendix XX) and has been growing constantly since then. In 2009, Nespresso held 20% of the espresso & filter portioned coffee machines market, and its sales grew 30% annually over the past 8 years . The portion coffee market is one of the fastest-growing segments of the coffee market. Pods represented, 20 to 40% of the value of ground coffee sales in the $17 billion European coffee market in 2010. Moreover, the portion-coffee market is expected to triple to $15 billion by 2012 .

The following sections will analyze the competitive environment of portion-coffee through the five-force analysis. Conclusions are made on the global investment interest of the portion coffee market.

[...] Patents play a key role in the portion coffee industry as they determine the ability of a capsule retailer to assess 100% of the capsules sales for its specific machine system (captive customer). As patents prevented competition on Nespresso's system for now 20 years, the threat to Nespresso patents is today rising due to new comers developing systems compatible with the Nespresso machines and due to the impending expiration of several patents (next expirations expected in 2012)[xx] [xxi]. The brand equity of Nespresso is high. [...]

[...] Nevertheless, it could lead to a significant loss in market share and an increased rivalry on the long term as these competitors have registered orders for billions of capsules[xxxvi]. To address this issue, Nestlé is actually suing these companies for patent infringement in order to lock rivals out of the segment[xxxvii]. This describes well the intensity of rivalry. The portioned-coffee market has shown a high concentration ratio and a high growth rate during the past ten years. New competitors and incumbents have increased their production and their diversification through new products and the development of a high-density sales network. [...]

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