Case Summary
Nestlé’s Nespresso system sells affordable coffee makers and profitable single-serve capsules, with 5.5 billion capsules sold in 2009. To protect its design, Nestlé filed 1,700 patents. Sara Lee identified a gap in Nestlé’s patents and launched compatible capsules in France in 2010, leading Nestlé to sue them there. Another company, Ethical Coffee Co., also sells compatible capsules in France but hasn’t faced legal action.
Competition and Market Dynamics in the Coffee Industry
The fierce rivalry is one of the major distinctive features of the modern business world. The continuously growing and diversifying clients’ needs and the increasing buying power attract numerous companies. Firms must struggle with rivals to acquire loyal clients and generate stable benefits. For this reason, the importance of competitive advantage increases as it is a key to finding new customers and popularizing the brand. Thus, the coffee market is one of the attractive spheres today as there is a constantly growing demand for this product.
Nestlé, a giant multinational food and drink corporation, has entered the market with its unique product, Nespresso. However, its introduction resulted in the emergence of specific claims linked to using similar technologies by other companies. Nestlé emphasizes that it has numerous patents protecting its right to be the only product distributor; however, the given approach might negatively impact competition and promote the development of a monopoly.
Nestlé’s Nespresso: Innovation and Market Impact
Analyzing the situation, it is necessary to admit that the emergence of the Nespresso machine seriously impacted the coffee market. The business model, which implies selling small, convenient, and portable coffee machines and capsules, helped Nestlé generate significant income and become the leader in this segment. The company’s officials state that the development of the system required decades of research and significant investment costs (Mulier, 2010).
For this reason, the machine itself and its capsules are considered extremely valuable products protected by patents filed by the company (Mulier, 2010). Nestlé considers the system its intellectual property and the game changer with the potential to become more prevalent in other regions, such as the USA. That is why the emergence of analogs offered by other companies might threaten the corporation’s plans and position in the coffee market.
In such a way, the product developed by Nestlé and its protection helped to minimize the threat of new entrants. The patent policy employed by the company made competition non-existent because of the strong product protection (Ball, 2010). Moreover, the corporation monopolized its right to use systems such as Nespresso and capsules (Ball, 2010).
Emergence of Competitors: Sara Lee and Ethical Coffee Co.
For this reason, the emergence of similar products offered by Sara Lee and Ethical Coffee Co. became a new phase in developing the coffee market and competition within it. According to Nestlé’s position, companies try to generate income using their inventions and products, which contradicts the existing rules and is prohibited by patents (Mulier, 2010). However, following the competitors’ position, they act legally as they introduce their approaches to the product. For instance, Ethical Coffee Co. states it uses water seals on its capsules, meaning Nestlé’s rights are not infringed. The differences in companies’ positions create the basis for vigorous debates and discussions.
Case Analysis
Market Evolution and the Role of Imitation in Competition
Delving into the case, several important factors should be considered. The emergence of Nespresso capsules’ analogs can be viewed as the inevitable outcome of the market’s evolution. Successful products critically impact the industry and facilitate other firms’ attempts to create a similar offering.
For this reason, Nestlé’s approach to patenting can be considered a reasonable one, as the company wants to postpone the emergence of substitutions as long as possible. However, fair competition implies that rivals might struggle for clients by using the quality of their services and their costs. In such a way, Ethical Coffee or Sara Lee’s proposals are logical responses to the market situation. Realizing the high demand for specific products, the companies offer their own to generate income and impact Nestlé’s position.
Challenges of Monopoly: High Prices and Limited Competition
Moreover, Nestlé’s approach to patenting might threaten the market and its development. It established the brand’s worldwide monopoly (Alderman, 2010). As stated previously, the high number of patents made competition in the sphere impossible, which made the products offered by the company expensive. Nestlé acquired the opportunity to establish product prices and regulate the market. Moreover, it resulted in significant financial losses among competitors, as only Ethical Coffee lost around $225 million (Robb, 2015).
From this perspective, the emergence of new offerings introduced by Sara Lee and Ethical Coffee can be viewed as a positive tendency to revitalize the market and increase competition. Moreover, the brands offer cheaper capsules, which might be attractive for clients who now have the opportunity to choose between various manufacturers. The increased product availability might attract new potential clients and facilitate further development.
Balancing Intellectual Property Rights and Fair Competition
Nestlé’s position regarding Nespresso and capsules is clear and understandable as the brand tries to protect its dominant position in the market. From this perspective, its patents helped to acquire a first-mover advantage, gain time, and benefit from the absence of competitors. However, the further preservation of this situation might harm the market as it leads to the development of a monopoly and a lack of fair competition.
The emergence of cheaper analogs offered by Ethic Coffee and Sara Lee is a normal process of the market’s evolution and other brands’ desire to find loyal clients. It helps diversify products and allows clients to decide on their own what coffee to drink. For this reason, there is no need for extra measures to address the situation.
References
Alderman, L. (2010). Nespresso and rivals vie for dominance in coffee war. The New York Times. Web.
Ball, D. (2010). Nestle sues Sara Lee in coffee war. The Wall Street Journal. Web.
Mulier, T. (2010). Nestle takes legal action on Sara Lee coffee capsules. Bloomberg. Web.
Robb, C. (2015). Nespresso roasted over patents by smaller competitors. Web.