He created a separate affiliate wholly owned by Nestlé yet protected from the skeptical challenges and profit-now pressures of the button-down world of the corporation. Then he housed it in a building of its own across the street from company headquarters—a symbolic gesture that spoke volumes. Camillo Pagano, the executive then shepherding Nespresso, explained:
The business was physically moved out of Nestlé so that it could establish credibility and so that it didn’t have to fight against all the company’s rules.… Any innovation immediately hits resistance in an organization. Small satellites like this can help people gain insight into how a business could be developed differently. These offshoots provide an opportunity to train and test people. If they make a mistake there, it’s not so costly.
Ensconced in their new “skunkworks,” the eight-person Nespresso team led by Pagano and engineer Favre got to work on commercializing the coffee pod technology. We can imagine their feelings—a blend of exultation and anxiety over being pioneers in a new industry worlds away from Nestlé’s traditional market strongholds.
Unfortunately, results for their pilot programs weren’t encouraging. The team experimented with marketing Nespresso machines to cafés, restaurants, and offices, where most espresso is made and served. But the two chief advantages of the machines—their compact size and their ease of use—meant little in those markets. Most offices and restaurant kitchens were not particularly short on counter space, and most baristas regarded a quick-and-easy espresso maker as a threat to their livelihood. By 1987, only half the machines built had been sold.
In most big companies, the natural response would have been to shut down or sell the nascent business. Why should a successful packaged goods company be distracted by the unproven potential of a failed kitchen appliance? We can guess that many inside Nestlé must have been beginning to ask that question; some may have been growing irritated over the special treatment the Nespresso team enjoyed.
But Camillo Pagano insisted that the new technology deserved another chance. He convinced Maucher to make another unconventional move, recruiting Jean-Paul Gaillard to take over Nespresso in 1988.
Nestlé rarely hires executives from the outside. But Gaillard’s previous assignment had been to launch a clothing line, Marlboro Classics, within the Philip Morris tobacco empire. Pagano sensed that Nespresso fit the same mold—“a stab in the dark” for a big, traditional business.
Gaillard wasn’t merely an outsider; he also had an outsider’s mentality—in spades. Brash, talkative, even boastful, he was the opposite of the reserved, politically and socially conservative team players Nestlé would normally hire. He was also demanding, inflexible, willful, and impatient with structures and systems not of his own devising. Pagano recalls, “We needed to find somebody who wouldn’t react like a Nestlé manager.” Gaillard certainly fit the bill.
Soon after arriving, Gaillard decided that the future of Nespresso lay with the home market. Addressing Nestlé’s board, he declared that well-heeled, sophisticated homemakers with a taste for gourmet coffees could be won over by a great home brewing system. This called for a dramatic shift away from the middle price range implied by a restaurant-and-office strategy and toward the high-end luxury consumer market—another arena in which Nestlé had little experience.
Unfortunately for Gaillard, the evidence supporting his proposed strategy was scanty. Survey data and market trials suggested that the potential demand for home espresso machines was modest, and that a price higher than 25 Swiss centimes (about 16 cents) for a single coffee pod would kill demand. (Gaillard’s target price was 40 centimes.) A test in which five upscale appliance stores were provided with one hundred Nespresso machines and asked to promote them aggressively had been a complete failure: Fewer than thirty machines were sold.
But Gaillard had no intention of quitting. He spent days buttonholing his fellow Nestlé executives and plying them with bold (if not always supported) forecasts of the vast new demand stream Nespresso would soon uncork. Addressing the board, Gaillard put the best possible face on the test-market data, gliding quickly over the discouraging numbers and burnishing the few bright spots as best he could. Then he pointed out, perhaps with fingers crossed, that fax machines and mobile phones had received similar bad results in their early market testing.
It would have been understandable for Nestlé board members to regard Nespresso as an irrelevant distraction from the company’s packaged goods business. But CEO Maucher backed the maverick Gaillard. The board members swallowed whatever doubts they had and agreed to support Gaillard’s continued experimentation with Nespresso.
Gaillard would have one more opportunity to prove that demand for Nespresso was out there, waiting to be tapped. But the pressure for results was mounting.
HAVING FAILED with Nespresso in the café, restaurant, and office markets, Gaillard and his team had fallen back on the home market, more by default than by design. And they quickly learned the same lesson many others have learned—that an innovative product alone is not enough to generate large demand.
Sales of the new coffeemakers to the home market started slow, leading to a cascade of negative effects. Most appliance stores were reluctant to stock the unfamiliar machines, and those that did were unwilling to carry a large assortment of coffee pods. With the pods selling slowly, supplies eventually grew stale, leading to unhappy customers and even weaker demand for the Nespresso concept. The downward spiral threatened to destroy Nespresso in its cradle.
It was the kind of crisis many an ambitious manager in a large corporation has faced. To this point, Gaillard had handled very effectively the inherent tension between the need to experiment with brand-new demand creation approaches and Nestlé’s conservative culture. But if he couldn’t find a demand trigger to jump-start sales of Nespresso machines—and pull coffee pods through the sales pipeline before they turned stale—it would all add up to nothing.
Desperate, Gaillard proposed to his Nestlé colleagues an unorthodox solution: marketing directly to consumers.
“We’ll let customers order coffee pods over the phone for quick shipment by mail,” he declared hopefully. “How convenient—coffee on your doorstep within a couple of days! We’ll call our service the Nespresso Club, and we’ll automatically enroll everyone who buys a Nespresso maker.”
Direct selling would guarantee the freshness of Nespresso coffee pods. But it posed huge problems of its own. For one thing, the independent retailers who’d been selling Nespresso machines—or at least trying to sell them—hated the idea of having Nespresso do an end run around them. They also feared their customers would balk if they couldn’t get a supply of pods from the same store.
What’s worse, in its entire corporate history, Nestlé had never sold anything direct to consumers before. Proposing a wholly new business model to a large company with a long track record of remarkable success is virtually certain to provoke pushback. (Under similar circumstances, executives in most corporations might well have reacted to Gaillard’s proposal with consternation: “He can’t sell his coffee in stores like everybody else, so he wants to start a club?”)
But cajoled by Gaillard and prodded by CEO Maucher, Nestlé’s board approved direct selling. It was a high-wire moment for Nespresso and its champion. If they lost this bet, Nespresso would surely tumble to its doom.
Gaillard took a deep breath and declared the Nespresso Club open for business. On the first day, three people signed up.
On the second day, eleven more.
On the third day, not a single one.
Even the supremely self-confident Jean-Paul Gaillard must have had second thoughts.
But as the days turned into weeks and months, the numbers slowly began to swell—into the teens, then the hundreds. Each new member became a steady customer for Nespresso coffee pods, ordering between $300 and $400 worth every year. By 1990, two years after its founding, the Nespresso Club had 2,700 members in Switzerland, France, Japan, and the United States. By 1992
, outposts were established in Germany, Belgium, the Netherlands, and Luxembourg; in 1996, Spain, Austria, and the United Kingdom were added. By the end of that year, the Nespresso Club had more than 220,000 members worldwide. A year later, the number was 300,000, generating revenues for Nestlé in the range of $140 million.
It was enough to keep Nespresso alive. And it turned out to be a triple play: a move with three distinct sets of benefits—for Nespresso customers, for Nespresso’s management, and for Nespresso’s bottom line.
For the customers, direct selling guaranteed fresh supplies of coffee capsules and consistently high service standards. The Nespresso Club delivered coffee and accessories within forty-eight hours and offered information and advice around the clock via phone and later online. The superb service increased the odds that Nespresso drinkers would not only enjoy their machines and the coffee they made but also recommend them to their friends—helping to stimulate the next round of sales. (In a similar vein, remember how Netflix subscriptions soared every time a new distribution center cut delivery times, sparking enthusiastic word of mouth among local members.)
In the years to come, the customer benefits offered by the Nespresso Club steadily multiplied. Members began receiving special Limited Edition coffee offerings, the biannual Nespresso magazine—a glossy “coffee pleasure guide” distributed in eight languages across fifteen countries—and access to a beautiful array of coffee-drinking accessories: china and silverware cups, plates, and bowls, milk frothers and heaters, cleaning and descaling kits, ice crushers, and much more. Free machine pickups and loans were provided in case a coffeemaker broke down, and the company even mailed out a cleaning kit when its records indicated that a customer’s filter was due for a scrub.
Almost by accident, Nespresso had created its first great demand trigger. Thanks to the Nespresso Club, word of mouth became a powerful demand creation tool for Nespresso. In a survey of French Nespresso customers, 71 percent agreed with the statement “I love this product!”—double the percentage among users of rival coffeemakers—and 60 percent reported praising Nespresso in conversations at least once a month.
At the same time, the club provided Nespresso’s management with direct access to customers for marketing messages as well as a valuable stream of customer data that their marketers could use to enhance their demand creation efforts. Which customers buy the most coffees, accessories, confectionery goods, and other products? How do their patterns of consumption change over time? What seasonal buying habits do they develop? What kinds of special offers will excite them? Nestlé’s marketers could answer such questions by sifting through the flows of data the Nespresso Club provided. And the club produced a huge boost for Nespresso’s profit margins by enabling it to sell directly, without additional markups by retailers. The higher margins fell right to Nespresso’s bottom line.
Perhaps most remarkably, with its direct-selling model, Nespresso had even begun to revolutionize the half-a-millennium-old coffee business. Just as Apple’s iPod is a portal to the “music world” of the iTunes Store, and Amazon’s Kindle is a portal to the “reading world” of the Amazon bookstore, a Nespresso machine had become a portal to the “coffee world” that club members are privileged to enjoy. As John Gapper, a columnist for the Financial Times, wrote: “It did not occur to me before Nespresso came along that I ever needed such a thing. Now that I have it, however, I am attached to it.”
BY THE MID-NINETIES, more than twenty years after the invention of the new brewing technology, demand was finally beginning to flow. And then Nespresso discovered its second, even more powerful demand trigger.
In 1994, seeking new markets, Nespresso introduced a coffeemaker designed for first-class aircraft galleys. This proved to be a catalytic move, and not so much because of the value of direct sales to airlines, which are a relatively small market, but because it helped the Nespresso team to recognize the extraordinary impact that tasting their coffee could have on potential customers.
Swissair was the first airline to serve Nespresso. Others followed, and sales of Nespresso machines began a modest climb. The connection was apparent. First-class airline passengers—wealthy, well-traveled, sophisticated—turned out to be the perfect customer set for sales of Nespresso machines. Soon first-class aircraft cabins weren’t the only venue where Nespresso tastings were being offered. High-end restaurants in France, Belgium, and other European countries were sold the machines. Selected opinion leaders, including politicians and journalists, were given free machines with which to serve VIP guests in their offices. The growth of Nespresso sales began to improve.
Gaillard and the Nespresso team had stumbled upon what would prove to be their product’s single most powerful demand trigger—the chance for consumers to try Nespresso for themselves. Over the next several years, in various forms and venues, trial would gradually convert thousands, then millions of coffee lovers into Nespresso customers.
In August 1997, the feisty Jean-Paul Gaillard left Nespresso, first moving to another assignment within Nestlé, then leaving the corporation altogether. His place at Nespresso was taken by the Dutch-born Henk Kwakman, a lifelong Nestlé executive. Though a “very structured manager” in the classic Nestlé mold rather than a headstrong cowboy like Gaillard, Kwakman scaled back none of the innovations Gaillard had pioneered. Instead he pushed them further.
Unlike Gaillard, however, Kwakman emphasized the value of intensive customer research as a basis for shaping demand creation strategy. Within the first few months of starting his new assignment, he commissioned a study to investigate more fully the meaning of espresso for consumers. The goal: to identify the steps needed to make Nespresso the natural choice for coffee lovers, so that its steady but slow growth could be dramatically accelerated.
Nespresso’s survey of coffee drinkers in five European countries yielded several crucial insights. The first was that espresso has an intensely emotional meaning for consumers. The emotion begins with the taste, which ideally should be a short, powerful burst of flavor—“a tango for the tongue,” in Kwakman’s colorful phrase. But it doesn’t stop there. Those who love espresso also associate it with a host of less tangible qualities: the good life, as represented by a delightful meal in a sophisticated restaurant, as well as high style, trendiness, connoisseurship, and “Italian-ness.” Fundamentally, espresso is a sexy drink—worlds away from the utilitarian pick-me-up represented by the standard morning cup of joe.
Kwakman and his team began to realize that, for all the brilliant technical work that had been done to perfect the Nespresso machine, they might have stopped just short of the final, crucial development step—emotionalizing the product to capture and express the unspoken expectations and longings of espresso aficionados.
The research team delved still deeper. Some 15 percent of respondents said they’d bought espresso machines, but most were disappointed with them. Most had purchased conventional, pre-Nespresso devices whose output fell short because of insufficient water pressure, no frothy crema atop the coffee, lack of body, and too few flavor options. Half of those with espresso machines at home had stopped using them.
Finally, the researchers found that only 1 percent of espresso lovers had even heard of Nespresso. Those who’d bought a Nespresso brewer were mostly pleased with the product—though their comments were fairly lukewarm, reflecting a feeling that the coffeemaker, while well made, had no real magnetism. Its relatively high cost was a further enthusiasm damper. And many mentioned a small but irritating hassle: the drop of coffee invariably left on the kitchen counter or floor when removing the used capsule after brewing.
All in all, the research painted a discouraging picture of how far Nespresso still had to go to achieve a major demand breakthrough. But Henk Kwakman was delighted—even with the complaint about the spilled drop of coffee. “When you discover a problem, you discover a business,” he declared, deftly summarizing the philosophy that drives all of the world’s great hassle-fixers.
Kwakman and hi
s team set about redesigning Nespresso based on their new insights into the mind and heart of the coffee lover. It started with a redesign of the Nespresso machine itself—a process that ended up taking nearly two years.
Fixing the problem of the spilled drop was the least of the challenges. (Adding a compartment into which empty coffee capsules were automatically ejected after brewing solved that one.) More challenging was working closely with appliance manufacturers to transform the brewer from a conventional squarish black box into a stylish, sexy-looking device—“the Armani of coffee,” as Kwakman put it. After months of experiments, they came up with a series of designs ranging from a streamlined Art Deco look to an ultramodernist style accented with brushed stainless steel and vivid color panels—in the words of New York magazine, “race-car-sleek machines designed to seduce the gadget-happy and modernize the fustiest Park Avenue kitchen.”
To further enhance the product’s magnetic appeal, Kwakman and his team worked with designers to create a new, more elegant logo for the budding brand. “I was a crazy fan of Nike,” Kwakman recalls. “I loved the way they put their symbol on a cap, a T-shirt, a trouser, a shoe—constantly reinforcing the Nike image without having to say ‘Nike’ over and over.” The new stylized N logo, subtly suggestive of a pair of high-heeled shoes one atop the other, quickly found its way onto the machines, the coffee packaging, even the cups and spoons, capturing a bit of the premium sheen imparted by the Chanel monogram on a handbag or the Mercedes-Benz symbol on the hood of a sedan.
These design innovations were a huge step toward intensifying the appeal of the product. Nespresso had found its missing emotional energy.
At the same time, Kwakman wanted to make his machines accessible to a wider market, which meant significantly reducing their price. He negotiated deals with Nespresso’s manufacturing partners, assuming a portion of the financial risk from reduced retail prices. In effect, Kwakman was betting a bit of Nestlé’s money that the stylish new machines would sell well, leading to a rapid increase in volume and a sharp consequent drop in manufacturing costs. In the end, the new lineup of machines ranged in price from a modest $199 to more than $2,000 for a multifeatured machine connected to an in-home water supply.
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