How Nespresso turned coffee pods into a high-class business By Shelley DuBois, reporter

FORTUNE -- Imagine the Rolls Royce of coffee makers, one that can steam your milk, form the perfect foam-to-liquid ratio and deliver you a pH-balanced macchiato with the push of a button. A company called Nespresso, part of the Nestlé Business Group, makes them, and they've sold well in Europe for years.

The company is now touting that their luxe instant coffee is finally taking hold in America, too -- long known among coffee-loving countries for its willingness to drink from any pot of long-cooking Brand X coffee that the diner waitress brings around to our table.

Nespresso has grown an average of 30% annually since 2000, and reached almost $3 billion in turnover last year. Nespresso's North American Market has grown by 50%, year to date. They company has opened 201 stores in 50 countries where customers can buy Nespresso machines and drink Nespresso coffee.

They are seriously high-end: Machines cost up to $800, and you can't buy them at Wal-Mart (WMT, Fortune 500), you have to go to one of the five high-end consumer stores that have partnered with Nespresso. Nespresso makes the coffee too -- grounds that are exclusive to the brand, they say. Oh, and they're not flavors of coffee, they're "Grand Crus." Consumers buy Grand Crus in a rainbow of pearled pods, like little coffee space ships.

It's all about the experience, according to Frederic Levy, the president of Nespresso USA and Richard Giradot, the CEO of Nespresso. They told Fortune how true coffee aficionados can pick up the subtle notes in the different flavors, why Nespresso stores won't let you take your coffee to go, and how to create a high-end coffee experience around, essentially, pushing a button.

Q. Nespresso is well known in the European market, how did you bring it to America?

FREDERIC LEVY: In the last ten years, the coffee market totally changed in the US. What Nespresso is bringing to your home is some of the best coffee you can find, and it's very convenient. The demand for high-end coffee and high quality coffee is really booming in the US market.

But how do you push a high-end product in a recession?

RICHARD GIRADOT: During this crisis period, people wanted to stay home. But they wanted a good, quality product, that's clear. I don't want to say we had an opportunity but Nespresso was really at the right place at the right moment, especially in the US.

So it's a convenience product. So how do you brand Nespresso as a convenience product and a high-end product at the same time?

FL: It's about the testing and the distribution. For example, we are working mainly in the US with five companies: Williams-Sonoma, Bloomingdale's, Macy's, Sur La Table, and Crate & Barrel. The one point in common with these is that you can test Nespresso in the store.

For the customer, Williams-Sonoma is a trusted brand. If Williams-Sonoma is referring this kind of coffee machine, it's clearly the best of the best.

This is why we are not in mass market because if you just put the machine on the shelf, we'd be like everybody. And Nespresso is not like everybody. If you are a coffee lover, you can feel the experience immediately.

As a cheaper product, do you have to compete with America's addiction to Starbucks and Dunkin Donuts coffee?

FL: We are not putting ourselves in the same category because we are talking about drinking Nespresso at your home. What we are offering is a revolution compared to before. It's the first time that you can really have this kind of quality in your home.

Then if you come into the store, we won't offer coffee to go in our place. You have to drink our coffee in our cups. We want you to have a perfect Nespresso experience.

So other strictly-coffee companies haven't affected your business at all?

RG: I would actually like to say thank you to these people, especially Starbucks (SBUX, Fortune 500), who made the pedagogy of the coffee taste. But now people everywhere want quality, especially in the US.

Do you have competitors who are making similar coffee makers?

RG: We have some, especially in Europe. We define 31 competitors worldwide. Two main ones are Senseo and Kraft (KFT, Fortune 500) -- each one has a portion of the market. They're selling a good product, but when the consumer wants the best in class, in terms of taste, and in terms of choice, they choose Nespresso.

And people can really taste the difference between the different capsules?

RG: If I can speak personally, I drink only the Arpeggio. My wife hates it. She loves the Volluto, and she drinks only this one. You have a choice -- you are totally free to choose your coffee. You offer something that no competitor can offer.

FL: My wife and I, as well, we are totally different. Ninety-five percent of the time, we are totally sure that you will like two or three capsules. Then your partner can like different capsules.

How do you expand into markets where there isn't already a coffee culture?

RG: They will come to the coffee taste. If you go to Asia for example, there's a tea culture. But if you use the US as an example, when they come to coffee, they will very quickly come to the finest one. So they come to us.

You need time to come with Nespresso to love Nespresso. The most important thing to us is developing the culture. We are not going to the middle of nowhere China where it will take too long to learn the taste, but clearly you have to give it time. To top of page

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