A Tough Market Brews in Coffee Category

By Prophet

Nestlé's Nespresso brand dominates the fiercely competitive Swiss market for coffee capsules. But Migros is successfully challenging its powerful competitor with its own brand, Delizio –thanks to a new brand identity and a strong positioning. Success spawns imitators, and Nespresso’s success quickly led to the appearance of numerous competitors: Today nearly a dozen players compete in the portioned coffee market – a market that has seen double-digit growth for the past several years.

Competition has now progressed to the next stage. Patents are coming to an end, competitors are busy developing biodegradable capsules, and discount retailers are muscling in at the cheap end of the market. Three capsule clones have already popped up on the Swiss market and Nestlé seem to be spending more time in court than in trying to develop the perfect frothy coffee. No fewer than four of Nespresso's competitors contacted the European Patent Office in September alone last year. Calls for environmentally friendly and Fair Trade products from consumers and non-profit organizations are also doing their part to ensure that competition in the market for coffee capsules and systems remains fierce.

Retail giant Migros is also a factor in the hotly competitive Swiss market. With its Delizio brand, launched in 2004, Migros is currently the number two player in the market. Although the brand has enjoyed a high-quality image from the outset, it lacked a clear concept and its core message and style have changed several times.

Marketing initially focused on the fact that the system could also be used with tea capsules, its unique selling point. Later the emphasis shifted to the "Italianità" theme. Problems with an early generation of machines contributed to Delizio’s difficulty building a loyal customer base and keeping pace with growth.

It was clear to the management of Delizio that survival was only possible with a well-articulated brand identity and a clearly differentiated positioning. Also needed: A better understanding of their customers in order to develop this brand strategy.

This customer understanding had to include intelligence that made it possible to divide up consumers into different segments, identify the most profitable segments, and approach them in the right manner. That meant carrying out a comprehensive qualitative and quantitative analysis.

The first step was to understand not just the Swiss market for coffee capsules and systems but Swiss coffee culture in general. How do the Swiss drink their coffee? What is important to them when selecting a brand? Which brands are they familiar with and which do they prefer? How do they behave and what are their attitudes?

With the help of focus groups, the company gained an initial insight into the diversity of Swiss coffee culture with respect to consumer behavior and the perception of different brands. The findings provided a solid basis for a subsequent survey of more than 2,000 consumers. This quantitative study in turn provided data for a segmentation analysis focusing on consumer behavior and attitudes, which enabled a carefully targeted definition of the brand identity.

Profiling the consumer segments revealed key differences in terms of where and when coffee was consumed, what sort of system and brands were preferred, and demographic features.

The segments were then analyzed in detail. A purchase funnel analysis was carried out for each customer segment. Driver analyses provided a better understanding of bottlenecks in the decision-making process – i.e. which aspects are particularly important with regard to the conversion between critical steps in the decision-making process.

Research also looked at how different customer groups perceived competitors' brands. With the help of Prophet's Brand Equity Model, strategic drivers were identified for each segment depending on differentiation from the competition and the performance of Delizio on various brand attributes – the functional and emotional attributes with which Delizio is particularly strongly associated and which distinguish it from its competitors.

The segmentation also made it possible to identify the most profitable customer segments on the basis of financial parameters such as average spend and the level and frequency of consumption.

Based on the potential value of each segment and the strengths of Delizio's current positioning – along with the opportunities these factors create – it was then possible to derive both primary entry segments and future strategic target segments for the brand.

The overarching goal was to expand the customer base and target "valuable" customer segments. Having identified the most attractive target segments in terms of their potential, it was now necessary to bring the brand identity into line with these groups.

Entry segments were identified as the well informed and value-for-money oriented "smart shoppers," a group that includes an above-average share of Migros customers, and "traditionalists," a group focused strongly on the coffee itself and less so on the system used. Both segments are major consumers of coffee.

Future strategic target segments were identified as "functionalists," who are price-aware and include many non-capsule users, and "connoisseurs," who focus on quality and include many capsule users and current Nespresso customers.

The attitudes and perceptions of the four target segments ultimately dictated the brand identity and positioning. Detailed analysis indicated various overlaps with respect to the different attitude and perception attributes that formed decision factors for the segments. On the basis of these attributes, the company could derive the cornerstones of the new brand positioning and its core values, consolidating them into a new brand essence: "Simply good."

But reducing the brand to two short words – "simply good" – does not deny the complexity of the brand essence.

On one hand, it emphasizes the value and quality of the brand. At the same time, it gets rid of the hype by stripping the product down to its basics: good coffee. Simplicity is closely related to other desirable attributes such as accessibility and proximity, which are used to differentiate the Delizio brand from brands such as Nespresso. Rather than avoiding the premium concept altogether, the brand reinterprets it as simplicity and understatement.

First-class, affordable quality that is easy to procure and gives pleasure as a matter of course is the brand promise that Delizio must live up to in the future. The brand intentionally forgoes the type of exclusivity aimed for by Nespresso with its restricted distribution via boutiques and the Nespresso Club. Instead, it offers pleasure for everyone – a philosophy that fits Migros well.

The new positioning shaped the type of marketing and communication that the company engages in. It also helped define a broad set of specifications for the brand that has had an impact on product development.

The project led to almost immediate changes in marketing. The new positioning provided input that shaped various types of communication. The new website design, for instance, was intentionally very different from that of Nespresso. Delizio is now presented as a true alternative focused on simplicity, rather than a copy of Nespresso.

Also redesigned were the logo and the "non solo caffè" claim, which drew attention to the fact that tea capsules were also available. In line with the decision to concentrate on the essential and focus on the quality of the coffee, the claim was replaced with "pure pleasure" ("Genuss pur").

The market research and resulting positioning also provided valuable input for the development of new products and their design. Aspects of the newest generation of machines include a focus on key functions and simplicity of use. The brand's exclusivity is expressed through the machines' "smart design" with no fussiness or unnecessary features.

To ensure long-term implementation, further actions were systematically identified for different elements of the marketing mix. They included a simple pricing structure, a clearly defined role for special promotions and discounts, specific point-of-sale activities, customer support in shops and a reworked range of flavors.

According to initial figures, the new positioning is already having a positive effect. The re-positioned brand has been well received by customers. Delizio outdid Nespresso by a large margin in the key Christmas period in 2011, selling three times as many machines as Nespresso, compared to twice the number as it does on average during the year – an increase of more than 50 percent on the year before.

Although Nespresso remains clear market leader, its position is no longer uncontested. Winning new customers from target segments and binding them to a system that is relatively unattractive for discounters (due to the lower capsule price) will have a lasting positive impact on market share. Indeed, the company's market share already improved significantly in the key months of October and November compared to the previous year.

Joerg Niessing (jniessing@prophet.com) is an Associate Partner; and Philippe Knupp (pknupp@prophet.com) is a Senior Engagement Manager at Prophet, a strategic brand and marketing consultancy that helps its clients win by delivering inspired and actionable ideas. Aurel Kelleris Head of Marketing and Sales for Delizio at Delica AG, a company belonging to the Migros Group.

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