Nespresso agrees to break down barriers to coffee rivals

ZURICH, Sept 4 (Reuters) - Nestle’s Nespresso capsule coffee business has bowed to pressure from French competition authorities and agreed to make it easier for competitors, even outside of France, to produce coffee pods compatible with its machines.

Nespresso, which reported underlying sales growth of more than 20 percent in 2010 and 2011 but has not published full results in the past two years, is now facing increasing competition from rivals offering cheaper capsules for Nespresso machines and has sued several it considered to have infringed its patents.

The company made specific commitments in April to lift technical, legal and commercial barriers to competitors, but Thursday’s agreement with the French competition authority (AdlC) includes even stricter terms, the watchdog said.

Nespresso has undertaken to provide competitors with information on any future technical changes to its machines and abstain from discouraging consumers against using other brands.

Notably, the warranty of its machines will still be valid even if consumers use non-Nespresso pods, the regulator said.

Nespresso will work with an independent third party to provide information to current or potential manufacturers of capsules that claim compatibility, even if they are doing business outside France, company spokeswoman Diane Duperret said in an emailed statement.

The AdlC initiated proceedings after complaints lodged by DE Master Blenders and the Ethical Coffee Company, which both make Nespresso-compatible capsules.

Kepler Cheuvreux analyst Jon Cox said the watchdog’s success with Nespresso is part of the dismantling of the legal barrier to entry to what had been a fast-growing and attractive market for Nestle over the past decade.

“It is still a fast-growing market but Nestle is growing at a slower rate because competitors are coming in and taking share,” he said, adding that he estimated Nespresso’s operating margin at 25 percent this year.

Nespresso Chief Executive Jean-Marc Duvoisin said in a media interview last week that the company would meet its target to increase sales by 500 million Swiss francs this year. He said it had reached annual turnover of more than 4.25 billion Swiss francs ($4.59 billion). (1 US dollar = 0.9262 Swiss franc) (Reporting by Silke Koltrowitz; Editing by David Goodman)