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The Business Model of NESPRESSO

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Nespresso is a machine-and-pod coffee concept for making espresso, developed by the food multinational Nestlé. By fitting an aluminium coffee pod into the machine, perfect espresso can be made at the push of a button. The Nespresso case is a famous example of business model innovation, propagated often by business model protagonists, and with good reason. It is one of the liveliest arguments that the future of competition will not so much be driven by innovation in products or services themselves, but by the activities surrounding the products and services that bring them to market. Specifically, what makes the Nespresso case appealing is that the model:

  • lures clients through an upper segment marketing strategy, with George Clooney at the helm creating that “club” feeling
  • ties customers directly to Nespresso through direct sales systems for the cups that go into the machine, both online (10 million online subscribers) and through boutiques (over 200 worldwide). This keeps margins close and warm for the company
  • outsources production of the coffee machines to 3rd party manufacturers under “at cost” technology licensing. At the same time these manufacturers function as part of the distribution channel, as customers buying the machines are also tied to using the cups
  • safeguards the major revenue stream through the cups with patents, and through Nespresso’s own high-tech processing facilities, which put coffee in the cups and seal them

When the Nespresso business model is drawn out on the business model canvas, the overview looks more or less like this:

nespressomarket

Nespresso’s business model wasn’t built in a day. Since its first patent in 1976, Nespresso fiddled around with the technology for 10 years, before incorporating the company in 1986. The company decided to service the business-to-business market in the 1990’s, in joint venture with a machine manufacturer that also maintained a sales force. This model failed, and almost bankrupted the company. Around 2000 Nespresso innovated in its business model and worked it out to what it currently is: a model which shows a year-on-year growth rate of around 25% (the fastest growing division at Nestlé), and which noted revenues of over Euro 2.4 billion in 2010.

Upstream business innovation

The case is most noted for its downstream business model innovation. In last few years however, interesting things have started to happen upstream as well in the company’s sourcing practices. The company’s bullish growth rates have put pressure on sourcing specialty coffees. Nestlé claims that only 1-2% of coffee produced in the world fits to their quality requirements for Nespresso, and competition for sourcing in this segment is fierce. In order to provide the distinctive coffee quality and aromatic characteristics, farms need to fit to a rare combination of several specific production parameters of soil type, altitude, and vegetation. Scarcity is thus starting to work on the business model, and this has pushed Nespresso to refine its sourcing practice, where closer relations with farmers are key.

The sourcing model is called the Nespresso AAA Sustainable Quality™ Program. Nespresso targets the farmers, or rather clusters of farmers (farmer clubs), that fit to the quality specifications it needs in Brazil, Colombia, Nicaragua, Costa Rica, Guatemala, and India. The program focuses on quality, environmental and social sustainability, and productivity (further details of the program can be found here).

screen-shot-2011-12-28-at-15-18-34Source: Nespresso.com

The program is operationalized by a consortium of several distinct partners. The partnership constitutes a business model in itself. This business model (depicted below) involves the following key partners:

  • the commodity trader ECOM (marked purple).  Farmers are reached through three channels: extension, credit, and trade, all organized by the commodity trader ECOM. Relations with farmers are built through the farmer club, which maintains a progressive quality segmentation of Cherry, Parchment, and Gold. The quality level is determined through an assessment of production practices by ECOM’s local extension support staff. The quality of coffee from each cluster is verified by Nespresso in Avenches (Switzerland), allowing for full product traceability from origin to pod.
  • the environmental NGO Rainforest Alliance (RFA- marked in green). Sustainability performance of farmers involved is measured according to a watered down version of the RFA sustainbility standard, tailored to the Nespresso premium quality demands. In order to assess performance RFA has developed a tool called TASQ™, which can be used by producers for self-assessment and for verification by RFA as outside party at the same time.
  • the financier International Finance Corporation (IFC- marked in orange). The IFC provides the program with USD 750k of the 1.5 million required  for technical assistance (eg. developing the TASQ™ tool, and the extension system for farmers). Also IFC provides ECOM with USD 25 million of debt finance to support farmers in buying inputs for production and financing trade.
  • Nespresso (marked in yellow) provides a modest role in the model by selecting farmers and providing product quality feedback on the coffee it purchases from the farmers involved in the program.

Drawn out on another business model canvas, the sourcing model looks like this:

nespressofarmer

Upstream Impact

According to Nespresso’s own statements, the program is working out very well. It claims to be able to reach its target of buying 1.3 million bags of coffee (60 kg. per bag) under the AAA program in 2013, corresponding to 80% of Nespresso’s requirement. Also Nespresso states that farmers are paid a price which is 30-40% above prices which are paid for regular quality coffee at the New York Stock Exchange, and 10-15% above prices paid for top quality. Furthermore the company claims to pay over 75% of the export value directly to farmers. As a result 40.000 producers supplied 60% of Nespresso’s coffee in 2010, and in 2013 this number is expected to reach 80.000. An impact assessment report by the IFC has shown that farmers’ club incomes are 27% higher than those from clusters of farmers which are outside of the program in Mexico and Guatemala. A small work-around of the figures shows that procurement of coffee is around 10-20% of the business model’s cost structure. This is very low by food industry standards and a very small price to pay for so much alleged positive impact.

In perspective

These types of partnership models are increasingly appearing in food and agriculture value chains of late. They are generally a response to pressures on resources and global commodity prices, where downstream companies build closer relations with suppliers in order to secure their production base. Regarding the Nespresso partnership the following observations can be made in SWOT form:

Strengths: The model provides a low risk venture into the value chain for securing supply. Most of the funding and activities are conducted by Nespresso’s partners Weaknesses: The sustainability performance is not likely to be high. The model is deliberately progressive, but the standards chosen for AAA quality are a selection amongst the Rainforest Alliance certification standards
Opportunities: The partnership is very flexible. It is already being expanded with other traders which can fullfill the role of ECOM (as shown by Cranfield’s study into the partnership here and here). As long as the trading company is substantial in size, and has local presence with farmers, it can be fit in with the program. For the sourcing model this means that Nespresso can start up new specialty coffee product ranges with new partners, sourced from remote areas in the world with distinct characteristics Threats: It is as yet unclear what percentage of total production of the AAA farmers is actually bought by Nespresso, but it is likely not to be everything. Farmers are required to sell their remaining produce to other buyers, who are likely to have lower quality demands and therefore prices. If volumes bought by Nespresso are too small, then farmers could loose the incentive to produce against Nespresso’s high quality standards.

As a whole, the Nespresso case is a very compelling case of business model innovation for both downstream and upstream segments, and holds potential for improving sustainability of the whole value chain. The most important observations for value chain innovation are that:

  • the branding firm’s business model design matters for sustainable development in value chains. The Nespresso case has shown that value chain development entails designing compatible business models at the level of the lead firm, and at the level of suppliers. Nespresso’s continuing changes in its models both down and upstream have meant that is has been able to refine a fitting match. This design process is paying off well for the company and it is known to pay off for other companies using such principles as well.
  • business models are in constant development. Some leading brand firms are ready to engage in business model innovation in their upstream segments, some are not. Nespresso has taken roughly 25 years before it started engaging with its producers. Business model innovation should only be started with firms that are ready to commit themselves to experimentation, learning, and change.
  • despite taking leadership in value chain development, Nespresso is not active itself in execution of its sourcing model. There are an estimated 7 people working on the sourcing program from Nespresso’s side, in a company with currently over 5.000 employees, of which 70% belong to the sales force. This is a very small extra cost to operations of the company
  • certification is not the driver for sustainability, but the lead firm business model is. The premium price was installed as an incentive for producers to deliver AAA quality coffee, and this could only be offered by Nespresso’s business model which has created a leadership position for the company in a premium quality market. The question remains what the overall impact will be on environmental sustainability, but the company has taken its value chain a step in the right direction.

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About the Author

This article was written by Bart Doorneweert of Value Chain Generation. Value Chain Generation was launched in 2011 with the idea of supporting a movement for much needed business transformation in food and agriculture. Through the blog, Bart started sharing insights from his work as a researcher on entrepreneurship and innovation in the sector. Bart Doorneweert is partner at Source Institute; an organisation dedicated to entrepreneurship education. He is also a guest lecturer at Wageningen University on entrepreneurship, and former food and agriculture entrepreneur/scholar.

Callum Connects

Malcolm Tan, Founder of Gravitas Holdings

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Malcolm Tan is an ICO/ITO and Cryptocurrency advisor. He sees this new era as similar to when the internet launched.

What’s your story?
I’m a lawyer entrepreneur who owns multiple businesses, and who is now stepping into the Initial Coin Offering/Initial Token Offering/Cryptocurrency space to be a thought leader, writer (How to ICO/ITO in Singapore – A Regulatory and Compliance Viewpoint on Initial Coin Offering and Initial Token Offering in Singapore), and advisor through Gravitas Holdings – an ICO Advisory company. We are also running our own ICO campaign called AEXON, and advising 2 other ICO’s on their projects.

What excites you most about your industry?
It is the start of a whole new paradigm, and it is like being at the start of the internet era all over again. We have a chance to influence and shape the industry over the next decade and beyond and lead the paradigm shift.

What’s your connection to Asia?
I’m Singaporean and most of my business revolves around the ASEAN region. Our new ICO advisory company specialises in Singaporean ICO’s and we are now building partnerships around the region as well. One of the core business offerings of our AEXON ICO/ITO is to open up co-working spaces around the region, with a target to open 25 outlets, and perhaps more thereafter.

Favourite city in Asia for business and why?
Singapore, since it is my hometown and most of my business contacts originate from or are located in Singapore. It is also a very open and easy place to do business.

What’s the best piece of advice you ever received?
Be careful of your clients – sometimes they can be your worst enemies. This is very true and you have to always be careful about whom you deal with. The closest people are the ones that you trust and sometimes they have other agendas or simply don’t tell you the truth or whole story and that can easily put one in a very disadvantageous position.

Who inspires you?
Leonardo Da Vinci as a polymath and genius and leader in many fields, and in today’s world, Elon Musk for being a polymath and risk taker and energetic business leader.

What have you just learnt recently that blew you away?
Early stage bitcoin investors would have made 1,000,000 times profit if they had held onto their bitcoins from the start to today – in the short space of 7 years.

If you had your time again, what would you do differently?
Seek out good partnerships and networks from day one, and use the power of the group to grow and do things together, instead of being bogged down by operations and going it alone from start.

How do you unwind?
I hardly have any time for relaxation right now. I used to have very intense hobbies, chess when I was younger, bridge, bowling, some online real time strategy games and poker. All mentally stimulating games and requiring focus – I did all these at competitive levels and participated in national and international tournaments, winning multiple trophies, medals and awards in most of these fields.

Favourite Asian destination for relaxation? Why?
Phuket – nature, resort life, beaches, good food and a vibrant crowd.

Everyone in business should read this book:
Rich Dad Poor Dad by Richard Kiyosaki

Shameless plug for your business:
Gravitas Holdings (Pte) Limited is the premier ICO Advisory company and we can do a full service for entrepreneurs, including legal and compliance, smart contracts and token creation, marketing and PR, and business advisory and white paper writing/planning.

How can people connect with you?
Write emails to [email protected], or [email protected]

Twitter handle?
@malcolmABM

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Entrepreneurship

Women on Top in Tech – Pam Weber, Chief Marketing Officer at 99Designs

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(Women on Top in Tech is a series about Women Founders, CEOs, and Leaders in technology. It aims to amplify and bring to the fore diversity in leadership in technology.)

Pam Webber is Chief Marketing Officer at 99designs, where she heads up the global marketing team responsible for acquisition, through growth marketing and traditional marketing levers, and increasing lifetime value of customers. She is passionate about using data to derive customer insights and finding “aha moments” that impact strategic direction. Pam brings a host of first-hand startup marketing experiences as an e-commerce entrepreneur herself and as the first marketing leader for many fast-growing startups. Prior to joining 99designs, she founded weeDECOR, an e-commerce company selling custom wall decals for kids’ rooms. She also worked as an executive marketing consultant at notable startups including True&Co, an e-commerce startup specializing in women’s lingerie. Earlier in her career, Pam served in various business and marketing positions with eBay and its subsidiary, PayPal, Inc. A resident of San Francisco, Pam received her BA from the University of Pennsylvania and MBA from Harvard Business School. Pam is a notable guest speaker for Venture Beat, The Next Web, Lean Startup, and Growth Hacking Forum, as well as an industry expert regularly quoted in Inc., CIO, Business News Daily, CMSwire, Smart Hustle, DIY Marketer, and various podcast and radio shows. You can follow her on Twitter at @pamwebber_sf.

What makes you do what you do?
My dad always told me make sure you choose a job you like because you’ll be doing it for a long time. I took that advice to heart and as I explored various roles over my career, I always stopped to check whether I was happy going to work every day – or at least most days :). That has guided me to the career I have in marketing today. I’m genuinely excited to go to work every day. I get to create, to analyze, to see the impact of my work. It’s very fulfilling.

How did you rise in the industry you are in?
I had a penchant for numbers and it helped me stand out in my field. This penchant became even more powerful when the Internet and digital marketing started to explode. There was a great need for marketers whose skills could span both the creative and the analytic aspects of marketing. I capitalized on that growth by bringing unique insight to the companies I worked with, well-supported with thoughtful analysis.

Why did you take on this role/start this startup?
I’m not sure this is relevant to my situation as I had been a marketing leader in various start-ups and companies. I took on the role at 99designs because I was excited by the global reach of the brand and the opportunity the company had to own the online design space. I especially liked the team as I felt they were good at heart.

The challenge I’ve faced in my time at 99designs is how do I evolve the team quickly and nimbly to address new challenges. The work we do now, is very different than the work we did a year ago and even the year before that. There is a fine line between staying focused on the goal ahead and being able to move quickly should that goal shift.

Do you have a mentor that you look up to in your industry or did you look for one or how did that work?
There is no one I’ve sought out or worked with over my entire career as my “mentee” needs have changed so much over the years. There are many people who have helped me along the way. For example, one of my peers at eBay, who was quite experienced and skilled in marketing strategy and creative execution, taught me what was in a marketing plan and how to evaluate marketing assets. As I have risen to leadership positions over the years, I often reach out to similarly experienced colleagues for advice on how they handle situations.

How did you make a match if you and how did you end up being mentored by him?
I learned early in my career that it rarely hurts to ask for advice. So that is what I have done. Additionally, there are people that are known to be quite helpful and build a reputation for giving back to others in advisory work. Michael Dearing, of Harrison Metal and ex-eBay, is one of those people. I, as well as countless others, have asked him for advice and guidance through the years and he does his best to oblige. Finding mentorship is about intuiting who in your universe might be willing and whether you are up for asking for help.

That being said, generally, I have found, if you are eager to learn and be guided, people will respond to the outreach.

Now as a leader how do you spot, develop, keep, grow and support your talent?
I generally look for a good attitude and inherent “smarts”. A good attitude can encompass anything from being willing to take on many different types of challenges to working well amongst differing personalities and perspectives. Smarts can be seen through how well someone’s done in their “passion areas” (i.e. areas where they have a keen interest in pursuing).

I try to hire those types of people because in smaller, fast-growing companies like many of the ones I’ve worked in, it’s more often than not about hiring flexible people as things move and change fast.

Once those people are on my team, I try to keep them challenged and engaged by making sure they have varying responsibilities. If I can’t give them growth in their current job or in the current company, I encourage them to seek growth opportunities elsewhere. I’d rather have one of my stars leave for a better growth opportunity than keep them in a role where they might grow stale.

Do you consciously or unconsciously support diversity and why?
I consciously support diversity. When I am hiring, I am constantly thinking about how to balance the team with as broad a range as possible of skill sets, perspectives, etc. to ensure we can take on whatever is thrown at us, or whatever we want to go after.

What is your take on what it takes to be a great leader in your industry and as a general rule of thumb?
I’m going to assume a great leader in my industry to mean a marketing leader in a technology company. I think a great leader in this industry is not afraid to learn new tricks no matter their age – it’s the growth mindset you may have heard about. I have a friend who inspires me to do this – she purchased the Apple Watch as soon as it was available, and was one of the first people I knew to use the Nest heating/cooling system. She’s not an early adopter by most definitions, but she adopts the growth mindset. This is the mindset I, too, have sought to adopt. In my field of marketing, it most recently has meant learning about Growth Marketing and how to apply this methodology to enhance growth. Independent of your industry, I think a growth mindset serves you well.

Advice for others?
I have been at 99designs for 3.5 years. During that time we’ve invested in elevating the skills and quality of our designer community, we’ve rebranded to reflect this higher level of quality, and have improved the satisfaction of our customers. Our next phase of growth will come from better matching clients to the right designer and expanding the ability to work with a designer one-on-one. We have the best platform to find, collaborate, and pay professional designers who deliver high quality design at an affordable price, and it’s only going to get better. I’m excited to deliver on that vision.

Pam Webber
Chief Marketing Officer of 99designs
Twitter: @pamwebber_sf

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