Nescafe promising more "gusto" after 75 years

Tue Mar 26, 2013 10:59am EDT

* Brand has 72 percent of China market

* Huge potential as China's tea drinkers discover coffee

* Nescafe ranked no.35 global brand worth $11 bln

* Dolce Gusto brand seen breaking even soon

By Silke Koltrowitz and Emma Thomasson

ZURICH/ORBE, Switzerland, March 26 (Reuters) - Nescafe instant coffee might seem like an also-ran as Nestle celebrates the 75th anniversary of the flagship brand, but it is getting a pick-me-up from China and new Dolce Gusto machines that are tapping booming demand for coffee pods.

"Nescafe is a big brand with different faces," Nestle Chief Executive Paul Bulcke told journalists at the opening of a factory in western Switzerland that will produce beverage systems like Dolce Gusto and the firm's premium Nespresso machines.

Nescafe, whose appeal has been overshadowed in Europe in recent years by the explosive growth in demand for single-cup portioned coffee like Nespresso, sees huge potential in the traditionally tea-drinking countries of Asia.

"Nescafe is growing very well in China, but also in Japan, which is an important market," Bulcke said. "For example in Asia, Nescafe 3-in-1 sticks with milk and sugar that are ready to be used, are very strong."

Nescafe, which competes with offerings from Mondelez and DE Master Blenders 1753, dominates coffee markets worldwide except in the United States. The brand had sales of more than 10 billion Swiss francs ($10.64 billion) in 2012 or more than 12 percent of total Nestle group sales.

"Being a 75-year old brand, it is unsexy to talk about Nescafe instant/soluble in the new world of 'baristas' and single-serve coffee machines," said Jefferies analyst Alex Howson.

"However, these sexier trends are decidedly mature-market phenomenons and are unlikely to be material in emerging markets for some time."

POWER BRAND

Interbrand ranked Nescafe no.35 of the world's top brands last year, worth $11 billion, well ahead of the next most valuable coffee brand, Starbucks, on some $4 billion.

Nestle does not give figures for its individual brands, but Howson of Jefferies estimates that Nescafe instant represents 70 percent of the firm's coffee sales, compared with 26 percent for Nespresso and 4 percent for newcomer Dolce Gusto.

Nescafe is also expanding in the "out-of-home" professional market, where more coffee is drunk than at home, with brands like Alegria and Milano helping drive double-digit growth in 2012 for Nestle beverage systems for cafes and restaurants.

On Monday, Nescafe unveiled Milano Lounge, a self-service system for hot and cold beverages that will be sold to petrol stations and other "out-of-home" customers.

The Vevey-based group launched Nescafe on April 1, 1938 as the world's first soluble coffee, initially to help Brazil cut a coffee surplus by creating a product with a longer shelf life than fresh ground beans. That also helped its popularity spread among U.S. soldiers during World War II.

Nescafe launched in China about 20 years ago and has seen growth rates of around 20 percent per year over the last 15 years, giving it a 72 percent market share according to market research firm Euromonitor.

But Chinese per capita consumption is still only three cups per year versus 451 in the United States.

"The growth of instant coffee and coffee houses over the last few years would suggest a change in consumer beverage choices," said Dale Preston, senior vice president for Greater China at market research group Nielsen.

"We do anticipate the total coffee market to continue growing," he added. "Coffee mixes dominate the market as they are more convenient and the milky sweet taste is more appreciated in China."

About 55 percent of Nestle's coffee sales are now in developing markets, with margins approaching 30 percent, Credit Suisse analysts estimated in a recent report.

"Driven by the powder franchises' dominant market share, Nestle's developing market sales growth rate has been particularly strong in the last two years," they wrote.

DOLCE GUSTO: THE NEXT "BILLIONAIRE" BRAND

Meanwhile, Nescafe launched the Dolce Gusto brand in 2006 to profit from soaring western demand for single-cup coffee systems. A cheaper alternative to Nespresso, Dolce Gusto make drinks from milky coffees to hot chocolate and iced teas.

Bulcke said on Monday that Dolce Gusto was now at break-even and about to reach 1 billion francs of sales. Analysts expect the brand to continue to grow at 30 percent a year through to 2015.

Bulcke rejects suggestions that Nespresso - Nestle's fastest growing brand of recent years with high margins - is suffering from an increasing number of competing systems and coffee pods.

"Seventy-five to 80 pct of Nespresso is in Europe so you can imagine if you start growing in the rest of the world, there is huge upside," he said. "This market is getting a new dynamic."

Some analysts have suggested that Starbucks' launch of its Verismo coffee and espresso brewer could actually help Nestle by driving U.S. interest in single-cup machines.

Interbrand is more sceptical: "Attempting to elbow into an already crowded U.S. market has proven to be a costly venture, and it remains to be seen if Nescafe can become the category leader in the U.S. that it is in Europe."

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