Competition hots up for coffee capsule market smooth operators Hollywood actor George Clooney promotes the Nespresso machine-and-capsule systems Consumers have been waking up and smelling the coffee during the recession - and realising that it can be cheaper to get their espresso fixes at home, using the latest coffee capsule technology. It is a trend that has proved lucrative for companies such as Nestlé - the KitKat maker that also dominates the coffee capsule market in Europe, through its Nespresso brand. Sales of coffee capsules, or pods, in western Europe almost doubled over the past four years, to €4bn, according to Euromonitor. Worldwide, the market is estimated at $10bn. Nespresso - which, as a pioneer of the technology, can lay claim to driving the popularity of capsules - now has one-third of the market in western Europe, according to Euromonitor. Analysts estimate that total annual Nespresso sales are between SFr4bn-SFr4.5bn and now account for 8 per cent of Nestle's operating profits, suggesting operating profits of 30 per cent - double Nestle's group margins. But selling coffee pods will no longer be as smooth as George Clooney in the adverts. A simmering brew of rival capsules, made by companies chasing this highly-profitable market, now threatens to spill over. Last month, US-based Mondelez, the world's second-largest coffee producer after Nestlé, launched a range of capsules that can fit into Nespresso machines. It is by no means the first to do so - there are dozens of generic rivals. However, by launching its Nespresso-compatible capsules in six European countries, the maker of Cadbury chocolate and Oreo biscuits has decided to go head-to-head with the Swiss food company. Among the six territories targeted by Mondelez are France, Germany and Switzerland - which are three of Nespresso's top four markets, and therefore those in which consumers are most likely to own a Nespresso machine. "Since many consumers already have the hardware, the release of new, compatible pods is likely to impact Nespresso's dominance significantly," argues Euromonitor. In addition, Mondelez's October launch came in the same month that the European Patent Office revoked a Nespresso patent - a blow that Nestlé called "disappointing." Nestlé has tried to maintain its grip on the Nespresso capsule market through the use of patents and legal action against some copycat rivals. It has also added small hooks inside its machines, which make some of the generic pods stick, rendering them incompatible. Robert Dickinson, analyst at Citigroup, points out that, despite the proliferation, Nespresso has grown strongly in Europe. But he adds: "Mondelez is a significant threat because they've got deep pockets and a big marketing budget." Mondelez is selling its pods under its Jacobs and Carte Noire brands, whereas most other pods are new names. "Since Jacobs and Carte Noire maintain a strong presence in western Europe's standard fresh ground coffee market, it is likely that their pod offering will also appeal to consumers in these markets," notes Euromonitor. Since many consumers already have the hardware, the release of new, compatible pods is likely to impact Nespresso's dominance Euromonitor Like the other copycats rivals, the Mondelez capsules are sold at a lower price and in supermarkets, where Nespresso is absent. Nestlé rewrote the marketing textbook when it launched its Nespresso products by selling its capsules online, over the phone or in its own stores - rather than making them easily available on supermarket shelves. It maintains that success in this market will depend on quality, innovation and service. "Thanks to our direct-to-consumer model, we have our own distribution channels," says Yvonne Iwaniuk, Nespresso's head of public affairs. This is a clear distinction to the crowded supermarket environment, where our competitors are increasingly forced to compete against one another for shelf space. Nespresso has recently launched new machines and new coffees, such as the stronger espressos Dharkan and Kazaar. It has also accelerated the opening of its designer-look boutiques, including an automated shop called Nespresso Cube. Nestlé says there is plenty of room for international growth and is targeting expansion in the US - where the capsule market is dominated by Green Mountain - Latin America and Asia. Some, including Mr Dickinson, question how fast it can go. "Nespresso's growth has slowed partly because of the rival capsules but also because of its size . . . that makes it hard to keep growing at the same rate," Mr Dickinson said. But Jeremy Fialko, analyst at Redburn, believes Nestlé"s competitive advantage in sourcing high-quality beans should not be underestimated. Nor should consumer appetite, suggests Todd Hall, senior vice-president of consumer insight at Nielsen, the consumer research company. He argues that it will be some time before the froth comes off the coffee capsule market, despite their price.