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Nespresso France: Encapsulating Sustainability This case was developed by Professor Olivier Sibony from published sources and company interviews. Some of the data supplied is simplified or disguised for confidentiality reasons. This case is intended solely as a basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustration of effective or ineffective management. The views and opinions expressed in this case study only reflect the viewpoint of its author. The contributions of Arnaud Deschamps, Nathalie Gonzalez, Helene Coulbault and Katarzyna Renie are gratefully acknowledged. © Olivier Sibony 2017 1 Nespresso France: Encapsulating Sustainability Distributed by The Case Centre North America Rest of the world www.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903 All rights reserved f +1 781 239 5885 f +44 (0)1234 751125 e [email protected] e [email protected] case centre 317-0111-1 Usage permitted only within these parameters otherwise contact [email protected] Taught by Rachael Frear, from 25-May-2020 to 14-Sep-2020. Order ref F383617. Purchased for use on the BGA Future Leaders Case Competition, at Association of MBA. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F383617

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Page 1: Nespresso France: Encapsulating Sustainability › wp-content › ...Nespresso France: Encapsulating Sustainability 3 As an additional complication, alone among its single-serve competitors,

NespressoFrance:EncapsulatingSustainability

This casewasdevelopedbyProfessorOlivier Sibony frompublished sourcesand company interviews.Someofthedatasuppliedissimplifiedordisguisedforconfidentialityreasons. Thiscaseisintendedsolelyasabasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationofeffectiveorineffectivemanagement.Theviewsandopinionsexpressedinthiscasestudyonlyreflecttheviewpointofitsauthor. ThecontributionsofArnaudDeschamps,NathalieGonzalez,HeleneCoulbaultandKatarzynaReniearegratefullyacknowledged. ©OlivierSibony2017

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NespressoFrance:EncapsulatingSustainability

Distributed by The Case Centre North America Rest of the worldwww.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903All rights reserved f +1 781 239 5885 f +44 (0)1234 751125

e [email protected] e [email protected] centre

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NespressoFrance:EncapsulatingSustainability

This casewasdevelopedbyProfessorOlivier Sibony frompublished sourcesand company interviews.Someofthedatasuppliedissimplifiedordisguisedforconfidentialityreasons. Thiscaseisintendedsolelyasabasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationofeffectiveorineffectivemanagement.Theviewsandopinionsexpressedinthiscasestudyonlyreflecttheviewpointofitsauthor. ThecontributionsofArnaudDeschamps,NathalieGonzalez,HeleneCoulbaultandKatarzynaReniearegratefullyacknowledged. ©OlivierSibony2017

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NespressoFrance:EncapsulatingSustainability

NespressoandtheFrenchcoffeemarketin2008

Witha90%+penetrationofhouseholds,coffeeisoneofthelargestconsumergoodscategoryinFrance.Ofthedifferent coffee-making systems that coexisted in French households, filter (drip) coffee was the mostwidespreadin2008.

Individual,single-servecoffeecapsuleswerehoweverthefastest-growingsegment,andthatwasdueinlargeparttoNespresso.Launchedin1986,thebrandreliedonaproprietarysystem:onlyNespressomachinescoulduseNespresso capsules, andonlyNespresso capsules couldbeused inNespressomachines.Nespresso soldmachinesbothdirectlyandthroughelectricalretailers,andsoldcapsulesexclusivelythroughdirect-to-consumerchannels, including its own boutiques, phone orders, and online sales. (Exhibit 1). Although the company’sgrowthhadinitiallybeenslow,ithadacceleratedinrecentyearstoreachtheimpressivepaceof30%ayearfrom2000 to 2008. Nespresso, whichwasmanaged as a standalone unit within Nestlé, theworld’s largest foodcompany,reportedglobalsalesofSwissFr.2.3bnin2008,andproudlynotedthat8,000cupsofNespressocoffeewerebrewedeveryminuteintheworld1.

Nespresso was especially successful in France, where consumers were demanding and accustomed to thestrength of espresso coffee. France was the largest country within Nespresso worldwide. Outside sources2estimated that its salesaccounted forasmuchasone-thirdofNespresso’sglobal revenues,or roughly$450million.Itslocalmarketsharewithinthesingle-servesegmentwasestimatedtobeover70%inmachinesandover80%incapsules3.InDecember2007,NespressoFrancehadopenedaflagshipstoreontheChamps-Elysées,partly in order to enhance the brand’s visibility among international tourists. No longer a niche product forobsessivecoffeelovers,Nespressowasbecomingagloballuxurymegabrand.

Thealuminumcrisis

Anunexpectedconsequenceofthebrand’sgrowingstaturewastoexposeittogreaterscrutiny.Oneissuethatstoodoutinthequestionsthatitreceivedfromjournalistswastheenvironmentalimpactofitspackaging.

Bydefinition,consumersofsingle-servecoffeehadtothrowawayausedcapsuleforeachcuptheydrank.Thetangiblewastefulnessof thatgesture irkedmanyenvironmentally consciousconsumersandopinion leaders.Unsurprisingly,astheundisputedleaderofthesingle-servesegment,Nespressowasthe“face”oftheindustryandhadtoanswerconcernsrelatedtosingle-servecoffeeingeneral.

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Asanadditionalcomplication,aloneamongitssingle-servecompetitors,Nespressousedaluminumtomakeitscapsules.ThiswasessentialtodeliverthequalityNespressowasaimingfor,asaluminumwasmoreopaqueandairtightthananyothermaterial,andpreservedthefreshnessofthecoffeemoreeffectivelythanthealternatives.Butthrowingawaycolorfulaluminumcapsules,whichwereassociatedintheconsumer’smindwiththeluxuriousimageofNespresso’sstoresandadvertisingcampaigns,feltevenmorewasteful.

Astrikingillustrationofthisconcernwasprovidedbyalongstoryintheleft-leaningdailynewspaperLiberation.TheNov.2007storycriticizedNespressoforcarelesslyusingnon-renewableresources,andfeaturedtwovisuals:ahandgrenadeandaKalachnikovassault rifle,bothmadeofassembledNespressocapsules (Exhibit2).Thisservedasawake-upcallforthemanagementofNespressoFrance:somethinghadtobedone.

Thedominantviewatthetime,however,wasthatthiswasaPRproblemmorethanarealbusinessissue.Unlikejournalists,consumers–whohadadirectlinetoNespressoandusedittoordertheircapsules–seldomhadanyenvironmentalconcernsorinquiries.TherewasnosuggestionthatanyregulatorychangeorconstraintwouldbeimposedonNespressoanytimesoon.Saleswerestillgrowingata30%+annualrate,andthebrand’simage,which Nespresso tracked closely, showed no sign of weakness. On the contrary, the famous “What Else?”campaignfeaturingGeorgeClooney,launchedin2006,hadfurtherstrengthenedit.

Thefactsaboutaluminum

Therewasanadditionalreasonnottooverreact:thecriticismofNespresso’spackagingwaslargelymisinformed.

First,aluminum,anaturallyoccurringmetal,is100%recyclable,unlikemostotherpackagingmaterials.Whileitwastruethat--unlikeglass,plasticandpaper–aluminumwasverypoorlyrecycledaspartofthewastedisposalsysteminFrance,thatcouldhardlybeblamedonNespresso.

Second, if authorities hadnotmade aluminuma priority in their packaging recycling policy, itwas for goodreason: aluminum accounted for approx. 70,000 tons of waste annually, amere 2% of the total volume ofpackagingwaste(approx.3.3milliontons)4,whichitselfisonly18%ofallhouseholdwaste5.Peoplewhowereseriousabouttheenvironment,inotherwords,hadbiggerfishtofry.

Third,Nespressowasasmallfractionofthatsmallproblem.Althoughtheywereveryvisible,itscapsules,whichusedapproximately1gramofaluminum,accountedca.2%ofthevolumeofaluminumpackagingwaste.Softdrinkcans,aluminumwrap,takeawaytrays,etc.usedmuchmorealuminum–andnooneseemedtofocusonthem.WhatthejournalistswhowerewritingaboutNespressoprobablydidnotrealizewasthat,althoughtheyallhadaNespressomachineathomeandthrewawayafewNespressocapsuleseveryday,Nespressowasaluxuryproduct,presentinfewerthan10%ofFrenchhouseholds.

Fourth,Nespresso’sleadersresentedbeingportrayedasevil–oratleastcareless–polluterswhentheywereinfactcommittedtoanumberofsocialandenvironmentalresponsibilityinitiatives.Amongmanyotherprograms,Nespresso Franceworkedwithpartnerswhoemployedaround140disabledpeople in itsorderpreparationcentersand in itsaftersalesservice.Globally,Nespressoalsotookgreatcare in itscoffeesourcingpractices:through itsAAAprogram forSustainableQuality, launched inpartnershipwithRainforestAlliance (anNGO),Nespressopaid30-40%morethanmarketpriceforitscoffee,builtwatertreatmentsitesnexttofarms,providedtechnicalassistancetofarmers,createdaretirementprogramforColombianfarmers,etc.

Lastbutnot least, therewasnoconvincingevidencethatanyofthealternativestoNespressowouldbe lessenvironmentallydamaging.Withintherealmofsingle-servecoffee,thealternativewasplastic,whichwasless

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easilyrecyclable.Ironically,plasticcapsulesgenerallyneeded,inordertopreservefreshness,tobeindividuallyover-packagedinanadditionalwrapper,oftenmadeofaluminum.

Moreover,andsomewhatcounter-intuitively,single-servecoffeewasnot,initself,awastefulwayofconsumingcoffee.Apeer-reviewedstudypublishedinthe“JournalofCleanerProduction”6compared“theenvironmentalburdensassociatedwithspraydriedsolublecoffee(…),dripfiltercoffeeandcapsuleespressocoffee(…)over(their)entirelifecycle”.Itfoundthefootprintofcapsuleespressocoffeetobelessthanthatoffiltercoffee,thedominanttechnology.Thiswasprimarilybecausethecapsuleisnotthemaindriverofcarbonfootprint(Exhibit3:CarbonfootprintofaNespressocupofcoffee).Thusthedisadvantagesofcapsuleespressocoffeeweremorethanoffsetbytheinefficienciesofdripcoffee,whichconsumesmorecoffeepercup(inoneexpert’swords,“thekitchensinkisthecoffeemarket’sbestconsumer”)andmoreenergytoproduceitandtokeepithotforsometime.OtherlifecycleanalysesperformedbyspecialistfirmsonNespresso’sbehalfconcurred:perhapscapsulesfeltwasteful,butobjectivelytheyweren’t.

ArnaudDeschamps’soptions

Forallthesereasons,addressingtheconcernsofjournalistsandotheropinionleaderswasseenasanecessarytask,butnotasatoppriority.WhenArnaudDeschamps,whohadspentmostofhiscareeratNespresso,waspromotedGeneralManageroftheFrenchunitinAugust2008,hismainmissionwastosustainagrowthofatleast 20% p.a. while maintaining profitability. Deschamps, who describes himself as “not especiallyenvironmentallyconscious”,simplywantedtoaddressthepackagingprobleminthemosteffectiveway.

Hisstaffwalkedhimthroughanumberofoptionstheyhadstudiedpriortohisarrival.

1.TreatingthePRproblemasaPRproblem

ThefirstoptionwassimplytobettercommunicatetherealityofNespresso’senvironmentalimpact,inordertodeflatetheunjustifiedperceptionthat itwascausingseriousdamagetotheenvironment.Proponentsofthisoptionarguedthattheburstofmediaattentiontoaluminumcapsuleswastemporary.Journalists,theybelieved,would soon find a fresher (and guiltier) scapegoat to blame for environmental problems. In order to divertattention, Nespresso could also use its considerable marketing skills and budgets to emphasize theenvironmentalactionsitwastakingaroundtheworld,particularlyincoffee-growingcountries.

Othercountriesaroundtheworld–wheretheperceptionproblemwasfelt lessacutelythaninFrance–hadessentiallyadoptedthisapproach.

2.PuttinginplaceaproprietaryrecyclingsystemThesecondoptionwastoprovideenvironmentallyconsciousconsumerswithawaytovoluntarilyrecycletheirusedcapsules.InSwitzerland,Nespresso’shomecountry,suchasystemwasinplaceandcollectedca.50%ofallcapsules.

Nespresso France had timidly started implementing a similar policy before Deschamps’ arrival, providingconsumerswith(relatively)stylishrecyclingbagsandencouragingtobringthemback,whenfull,toNespressoboutiques(Exhibit4).Nespresso,however,hadonly17boutiquesinFrance.Evidently,forthispolicytobemorethanmerelysymbolic,Nespressoneededadensernetworkofcollectionpoints.

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Afterevaluatingseveralpotentialpartners,includingtheFrenchpostoffice,Nespressoannouncedanagreementwithanetworkof“PointsRelais”.Thesewereprimarilyindependenthighstreetshopswhowouldcollectusedcapsulesfromconsumers.Theagreementwasdifficulttoenforce,however:manyshopownershadsigneduptobe“PointsRelais”undertheassumptionthatconsumerswouldwalkintopickupe-commercedeliveries,nottodropoff theirgarbage.OneTVprogramtested thisNespressopromise,was turnedawaybyseveral shopowners,andsharplycriticizedNespressoforitsfalsepromisesand“greenwashing”.

Inordertoovercomethesedifficulties,Nespressoofferedanotheroption:intheParisregion,itgaveconsumersthe option to give used capsules to the courier service who delivered fresh capsules. This convenience, incombinationwith the network of Points Relais and theNespresso boutiques,was expected to drive 10%ofconsumerstorecycletheircapsuleswithinthenext2-3years. Inspiteofappearances,thiswasanambitioustarget:only40%ofplastics(bottlesandflasks)wererecycledinFrance,eventhoughallconsumershadtodowastodropthemintherightbin,andtheyhadhaddecadestogetintothehabit.

Ofcourse,Nespressoalsoneededtoorganizetherecyclingofthecapsulesitcollected.Itstruckadealwithaspecialistcompanythatdevelopedadedicatedprocessingcenter.Thisway,notonlythealuminum,butalsothecoffeegrounds,wouldbereusedandrecycled(eachusedcapsuleweighedabout10grams,incl.9gramsofwetcoffeegrounds).

Thetotalcostofthissystemwassignificant,anddirectlyproportionaltoitssuccess.Thetotalcostofcollectingandshippingusedcapsulestotherecyclingcenterwas€750pertonofcapsules.Inaddition,Nespressopaiditsrecyclingpartner€150foreachtonofcapsulesprocessed.Finally,themanufacturing,distributionandmarketingofrecyclingbagscostapprox.€50pertonofcapsules.

Therefore,manyofDeschamps’colleaguesadvocateda“soft”versionofthisoption,inwhichrecyclingwouldbeoffered,butnotaggressivelypromoted.Therealaim,theycontended,wastobeseenasofferinganeasyrecyclingsolution,nottoactuallydriveitsadoptionbyconsumers(andincurtheassociatedcosts).

3.ChangingthecapsuletechnologyDeschamps,whohadlongworkedatNespresso’sheadquarters,quicklycalledhisfriendsintheR&Ddepartmenttoaskwhethertherewasanyalternativetoaluminum.Theanswerwasclear:thereweremanyalternatives,buteach of them was worse – not only from a quality and cost standpoint, but also from an environmentalstandpoint.

However,Nespressoknewthat,asofApril2010,itssystemwouldhavetobeopentocompetitors,becauseoftheexpiryofitsmainpatents.NespressoanticipatedthatahostofnewcompetitorswouldfloodthemarketwithNespresso-compatible capsules, most of which would be made from non-metallic materials. (One of thesecompetitors, the “Ethical Coffee Company”, founded by a former Nespresso CEO, would indeed usebiodegradablecapsulesandmakeititsmainsellingpoint.)

Thismeantthat,inlessthan18months,consumerswouldbeexposedtoarangeofdifferentpackagingoptionsforNespresso-compatiblecapsules–andtoldabouttheadvantagesofnon-aluminumcapsules.

In this context, it seemedworth exploringwhetherNespresso should at least offer one line of non-metalliccapsulesalongsideitsmanyaluminum-wrappedlines.

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4.ChangingtheFrenchrecyclingsystemFinally,DeschampsinsistedonexploringwhetheranoverhauloftheentireFrenchrecyclingsystemwasfeasible.His reasoning was that, if aluminum was recyclable and there was a “yellow bin” in each household forrecyclables,theeasiestwaytorecyclealuminumshouldbeforconsumerstothrowitintheyellowbinalongwithotherrecyclablepackagingmaterials.(Exhibit5).

Ashisteamdiscovered,therealitywasmorecomplex.Recyclableswerecollectedfromhouseholds(usuallyonaweeklybasis)anddispatchedtoover250processingcenters(Table6).Thesecentersweremanagedbylocalauthorities(usuallyadhocgroupingsofmunicipalities),whoeitheroperatedthembythemselvesoroutsourcedthemtowastedisposalcompanies(e.g.,Veolia,Sita,etc.)Eachcenterhaddifferentequipmentandeachlocalauthorityhaditsownpolicies.Asaresult,therulesonwhatcouldandcouldnotbethrownintheyellowbinvariedsignificantlyfromonetowntothenext.Anychangetothissystemwouldhavetoberetail,notwholesale.

Onethingalltheseprocessingcentershadincommon,however,wasacompletedisregardforsmallmetalitems.Thefirststepineveryprocessingcenterwastothrowalltherecyclablesina“Trommel”whichwouldseparatelarge items from small ones. Smallmetallic items (below 7 centimeters in diameter) would be ejected anddisposedofinlandfills(or,insomecases,incinerated),whilelargeritemswentontobesortedandrecycled.

Deschampssooncommissionedastudyaskingwhatitwouldtakeforprocessingcenterstobeabletosortandrecyclesmallermetalitems.Ashelearned,thiswouldrequire,ineachcenter,theacquisitionoftwomachines:oneeddycurrentmachinetoremovenon-ferricmetals,andonesolenoidtoremoveferricmetalssuchassteel.(Ifnotremovedfirst,steelwoulddamagetheeddycurrentmachine;andpackagingwastetypicallyincluded50%moreferricmetalthanaluminum).

Conveyorbeltswouldalsohavetobeadjusted.Allinall,thesetupcostwouldbeca.150k€foreachcenter.Ontopofthat,acenterwouldincurroughly€8,000inadditionalcostsannuallytooperatetheadditionalmachines.

NoneofthecentersDeschampsvisitedseemedtohavemuchinterestinmakingtheseinvestments.Theyhadotherpriorities;andNespressowasseenasalittlemorethananuisance.Themarketvalueofsmallmetalwassignificant(Table7),butnotsufficientintheireyestojustifyinvestments,giventheuncertaintiessurroundingthevolumestobecollected.

Deschampsaskedwhatcouldbedonetoencouragetheinstallationofeddycurrentmachinesandsolenoidsin“pilot” centers, onanexperimentalbasis. This couldbeachievedeitherbypaying for the installationof theequipment, or bypaying a subsidy to the recycling centers for each tonofmetal collected.However, tohissurprise, localauthorities, far fromseizingtheopportunity toshift thetaxpayers’burden,declinedtoacceptmoney from a private company. To subsidize recycling centers, Nespresso would have to go through Eco-Emballages,theorganizationinchargeofcoordinatingrecyclinginFrance(whichalreadypaidrecyclingcentersaper-tonsubsidywhentheycollectedmetals);or, ifEco-Emballageswasnot interested,throughsomeothernot-for-profitcoalitionofmanufacturers.

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Appendices

Exhibit1:ExamplesofNespressomachines,capsules,andboutiques

Exhibit2:FromLibération , Nov.2,2007

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Exhibit3:CarbonFootprintofaNespressocupofcoffee

Exhibit4:RecyclingCapsulesinNespressoboutiques

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Exhibit5:Exampleof“yellowbin”guidelinesinonemunicipality

Source:ADEME,March2013

Table6:NumberofprocessingcentersandtonsprocessedbyFrenchregion

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EuropertonSteel

Marketvalue 150Eco-Emballagesubsidy 172Total 322

Aluminum

Marketvalue 100Eco-Emballagesubsidy 388Total 488

Forallmetals

Avoideddisposalcosts* 100*Costofdisposingofunprocessedwasteinlandfills.

Table7:Expectedrevenuesfrommetalrecycling,ca.2008

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Notes

1Nespressopressrelease,April23,2009.2Capital,26/5/20153LSA,17/4/20144 http://www.ecoemballages.fr/actualite/objectif-100-tri-decouvrez-le-rapport-annuel-2015-deco-emballages(p57)5http://www.ademe.fr/gisement-emballages-menagers-france-evolution-1994-2009(p3)6Humbert,S,Loerincik,Y,Rossi,V,Margni,M,&Jolliet,O2009,'Lifecycleassessmentofspraydriedsolublecoffeeandcomparisonwithalternatives(dripfilterandcapsuleespresso)',JournalOfCleanerProduction,17,15,pp.1351-1358,BusinessSourceComplete,EBSCOhost,viewed27July2016.

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