# Nespresso: how Nestlé kept a premium coffee business growing after its patents ran out

Source: https://sarang.pro/nespresso/
Author: Sarang | Published: 15 October 2026

## The situation

In February 2011 Nespresso was about to lose the legal protection on which it had been built. Sales had passed SFr3 billion (about US$3.1 billion) in 2010. Nestlé defended about 1,700 patents on the system of sealed aluminium capsules and matching machines, and the first of them were due to expire in 2012. Rivals were not waiting. Sara Lee was selling L'OR capsules that fitted Nespresso machines in France. The Ethical Coffee Company, founded by Jean-Paul Gaillard, who had run Nespresso for about ten years, planned to enter the Swiss market that September. In December 2010 the Swiss discounter Denner had put its own compatible capsules on its shelves at SFr0.25 each.

The courts were giving mixed answers. In January 2011 a court in St Gallen ordered Denner to take its capsules off sale. On 21 February 2011 a Zurich commercial court found that Denner's capsules did not infringe Nestlé's patents, and in March the St Gallen injunction was lifted. Nestlé said it would keep trying to stop the sales in court.

The price gap showed what was at stake. A box of ten Nespresso capsules cost €3.70 in early 2011. Ten L'OR capsules cost €2.99 and ten from the Ethical Coffee Company €2.60, according to Swissinfo. Eric Favre, the Nestlé engineer who had developed the system and later ran a competing business, put the problem plainly to Bloomberg: "After 20 years, you can't prevent the opening of the market." He added: "The Nespresso brand is more important than the patents."

The case asks what a company should do when a legal monopoly is about to end. Nespresso tried several answers at once, and the results of each, including the ones that drew regulators in, are now on the public record.

## Background

### A slow start

The idea behind Nespresso dates from the mid-1970s. Swissinfo reports that the original system was created in 1976 and that Nestlé first brought the capsule to market in 1986, ten years after filing its first patents. Nestlé's own history says Nespresso launched that year in Japan, Italy and Switzerland. Jean-Paul Gaillard ran the business for about ten years and later founded a rival capsule company, the Ethical Coffee Company, which became one of Nespresso's most persistent opponents.

### How the system made money

Nespresso's model rested on three choices. First, it was a closed system. Only Nespresso capsules were designed for Nespresso machines, and patents stopped others from making capsules that fitted. Second, Nestlé did not depend on selling machines for profit. It was willing to discount machines heavily (in 2018 a French customer who signed up for a year of capsules could get a Vertuo machine for one euro) because the margin came from the capsules each machine used for years afterwards. This is the pricing logic often called razor and blades. Third, Nespresso sold capsules directly to its customers, through a membership club, online and through its own boutiques, instead of through supermarkets. Swissinfo described the pods in 2011 as sold online and through boutique shops, with "an exclusive club for customers".

Selling direct gave Nespresso three things that a grocery brand lacks. It set its own retail prices without negotiating with supermarkets. It knew who its customers were and what they bought. And it controlled how the product was presented. The company's own history records revenue passing CHF 1 billion, then CHF 2 billion and CHF 3 billion, and the opening of its 200th boutique, in Shanghai. By 2021 it ran 802 boutiques, and in 2022 it said it operated in 81 countries with more than 13,000 employees.

### Brand building

Nespresso spent heavily on image. Its advertising built around the actor George Clooney, with the line "What else?", ran for many years. Swissinfo noted in 2011 that the Clooney campaign had lifted the brand's image and that Denner had imitated the slogan in its own marketing. The effect was to present a capsule of coffee costing about €0.37 as a small luxury rather than a grocery item.

### Inside Nestlé

Nespresso was run as a separate business within Nestlé, based in Lausanne. Nestlé reported its sales separately for some years but stopped doing so in 2012, the year the patents began to expire, according to Bloomberg. By its results for 2023 it was again reporting Nespresso as a separate segment. In 2023 the business earned an underlying trading operating profit margin of 20.3%, against 17.3% for the Nestlé group as a whole.

## The industry

### Portioned coffee

Single-serve coffee grew fast in the 2000s and early 2010s. In 2014 Nespresso cited a Mintel report finding that US single-serve coffee sales had tripled since 2011, and called portioned coffee "one of the fastest growing segments in consumer goods in North America". Different systems led in different places. In France, as shown below, Nespresso's small espresso capsules dominated. In North America, where drinkers preferred large cups of filter-style coffee, other systems were far bigger. In 2014 Nespresso said its US sales of portioned coffee were about US$300 million in 2013, up 40% on the year, in a US portioned coffee market that Nielsen put at US$4.9 billion. That implies a share of about 6%.

### France as the test case

France shows how strong Nespresso's position was where it led. The French competition authority found that in 2012 Nespresso machines made up 73% of single-portion espresso machines sold in France, and Nespresso's own capsules made up 85% of sales of capsules that fitted those machines. About a quarter of Nespresso's global sales came from France, according to reporting by Quartz on the authority's findings.

### Rivals

The rivals came from several directions. Large coffee roasters such as Sara Lee, whose coffee business became DEMB (Douwe Egberts Master Blenders), wanted a share of the capsule market and launched compatible capsules under brands such as L'OR. Smaller specialists, such as the Ethical Coffee Company, sold biodegradable capsules. Retailers such as Denner sold their own labels at low prices. Later, investment money reshaped the industry: Bloomberg reported in 2018 that JAB Holding, backed by the Reimann family, had spent more than US$30 billion building a coffee group, and Coca-Cola bought the UK chain Costa that year.

### Forces at work

Seen through Michael Porter's five forces, the patents had kept the most dangerous force, new entry into compatible capsules, closed. Once they expired, the barriers to making a capsule were low: roasted coffee, a capsule body and some engineering. The threat of substitutes was always present, because a buyer could use a different system or go back to filter coffee, but switching was limited by the machine already on the kitchen counter. Buyer power was weak at the level of the individual customer, who bought direct, and the retail trade had no say, because Nespresso bypassed it. Supplier power was low for most inputs, since Nespresso bought green coffee from many thousands of farms, though the price of coffee itself was set by world markets. The key change in 2012 was that the installed base of Nespresso machines, built up over 25 years, would become a market that anyone could sell into.

### Regulation and environment

Two other forces shaped the industry. Competition authorities watched whether a dominant firm used technical changes to keep rivals out. And single-use capsules attracted criticism over waste. Aluminium capsules can be recycled, but they are small and most municipal recycling centres cannot sort them, so recycling depends on separate collection schemes run by the brand.

## The decision

As the patents neared expiry, Nespresso's managers faced four broad choices. They were not exclusive, and the company ended up using all of them, but each carried different costs and risks.

### Defend the patents in court

Nestlé could sue makers of compatible capsules for as long as any patent remained. The advantage was time: every month a rival was off the shelves was a month of full-price sales. The disadvantages were cost, uncertainty and the risk of looking like a bully. The Denner cases showed that courts could disagree. Gaillard said in 2011 that his company had "already filed a patent that pre-dates Nestlé's chip", a reference to reports that Nespresso might add a chip to reject rival capsules.

### Change the machines

Nespresso could change the design of new machines so that rival capsules no longer worked well in them. This would protect future sales without depending on patents. Swissinfo reported rumours in 2011 of a chip that would reject rival capsules, and cited the newspaper Blick as reporting that the Swiss competition commission had asked Nestlé for documents about a new machine. The risk was legal: a dominant firm that changes its product mainly to exclude competitors can be found to abuse its position.

### Compete on brand, service and quality

Nespresso could accept that compatible capsules would arrive and give customers reasons to keep paying its price: the boutiques, the club, the advertising, the range of blends and a sustainability story about where the coffee came from. Favre's view was that the brand mattered more than the patents. The risk was that price-conscious buyers would switch to capsules costing about 19% to 30% less once they could.

### Launch a new system

Nestlé could design a new system, with new patents, that rival capsules did not fit. This offered a fresh period of protection but required customers to buy a new machine, and it risked splitting the brand between two incompatible systems.

## What they did

### Lawsuits

Nestlé went to court against Sara Lee and the Ethical Coffee Company in France and against Denner in Switzerland, with mixed results as described above. The disputes with the Ethical Coffee Company ran for nearly a decade.

### Machine changes and the French case

Between 2007 and 2013 Nespresso made four successive technical changes to its machines that left some competitors' capsules unable to work in new models, according to the French competition authority. DEMB, owner of L'Or Espresso, and the Ethical Coffee Company complained. The authority found that the machine changes, together with warranty wording, instructions and packaging that discouraged the use of other capsules, and messages in Nespresso shops and to the press, could amount to an abuse of a dominant position.

Nespresso offered commitments in April 2014, tested them with the market and improved them. In September 2014 the authority made them binding and closed the case. Nespresso agreed to tell competitors about technical changes affecting capsule compatibility when production was ordered, with a safeguard period of at least four months before launch. Information would pass through a trusted third party so that the companies did not exchange confidential data directly. Nespresso would make at least 15 prototype machines available for testing, explain the reasons for each technical change to the authority, honour its warranty even when other capsules had been used, and stop commenting on rivals' capsules in the press and the club. The authority described the commitments as the first of their kind in the world.

### Brand and sustainability

Alongside the legal and technical moves, Nespresso put money into its image and its supply chain. In 2003 it had launched the AAA Sustainable Quality Program, co-designed with the Rainforest Alliance, to work with coffee farmers on quality and farming practices. By 2021 the programme covered about 100,000 farmers in 13 countries, farming nearly 300,000 hectares, and supplied about 94% of Nespresso's coffee, according to a Rainforest Alliance report. A Nestlé statement in 2022 gave the programme's reach as more than 140,000 farmers in 18 countries; the two figures are from different dates and may count farmers differently.

The company also expanded capsule collection. Its own history records that the first recycling scheme began in Switzerland with 34 collection points, and that it reached recycling capacity for 76.4% of capsules sold, against a target of 75%, a year ahead of schedule. Its chief executive, Jean-Marc Duvoisin, said in 2017 that by the end of 2015 Nespresso could recycle 86% of the capsules it sold, and that "Aluminium is the best material for us, but it has to be recycled." These are figures for capacity, meaning the share of capsules that customers could return, not for the share actually returned.

### Vertuo

The largest move was a new system. In February 2014 Nespresso launched VertuoLine in the US and Canada. It used larger capsules that did not fit the original machines, worked only with capsules carrying a barcode on the rim, and made five cup sizes, including the large mugs that American buyers preferred. At the launch Nespresso said it had no plans to sell it beyond the US and Canada.

That changed. By October 2018 Vertuo was on sale in France and the UK, with eight more countries planned by the end of that year, and Bloomberg reported that it was covered by patents until at least 2030. In the US the Vertuo machine sold for US$199, against US$149 for an Essenza Mini, and a large Vertuo pod cost up to US$1.20, 67% more than an original capsule. In Europe the dearest Vertuo pod cost 70 euro cents. In France customers who signed up for at least a year of capsule deliveries could get a machine for one euro. Nespresso's chief executive, Jean-Marc Duvoisin, told Bloomberg: "In the long run, I'm convinced Vertuoline will make sense everywhere, or almost everywhere."

### Starbucks

In 2018 Nestlé paid about US$7.2 billion for the rights to market Starbucks capsules and beans. Nespresso began making Starbucks-branded capsules for the original format, which Bloomberg noted put it into the market for compatible capsules that it had once fought.

## What happened

### Share and growth

Compatible capsules took share in the original format. Euromonitor data reported by Bloomberg in 2018 showed that Nespresso had been unable to gain share in Western Europe since 2009. Gaillard's company did not survive the fight either. In July 2017 the Ethical Coffee Company said it would stop making capsules for the Nespresso format, calling it a market "where nobody makes money any more."

Nespresso itself kept growing, though more slowly than before. Bloomberg estimated its 2018 sales at about CHF 5 billion. Nestlé's finance chief said Vertuo contributed almost a third of Nespresso's organic growth in 2017, and North America grew at a strong double-digit rate. By 2023, when Nestlé reported the business separately again, sales were CHF 6.4 billion. Organic growth was 5.3%, of which 2.0% came from volume and mix and 3.3% from price rises. North America grew at a double-digit rate and gained share, while Europe grew at a low single-digit rate. Nestlé named Vertuo as the main driver.

Exhibit 1: Nespresso sales and profitability

YearSalesOrganic growthOf which volume and mix (RIG)Of which pricingUnderlying trading operating margin

2010more than SFr3bnn/an/an/an/a
2018 (estimate)about CHF 5bnn/an/an/an/a
2022CHF 6.4bnn/an/an/a21.5%
2023CHF 6.37bn5.3%2.0%3.3%20.3%
2024CHF 6.38bn2.2%1.6%0.6%20.0%
2025CHF 6.48bn6.0%1.6%4.4%17.9%

Sources: Swissinfo (2010); Bloomberg (2018 estimate, as Nestlé did not publish the figure); Nestlé full-year results for 2023, 2024 and 2025. Reported sales in Swiss francs were held back by a strong franc; in 2023 currency movements cut reported sales by 6.0%.

Exhibit 2: Prices of Nespresso and rival capsules

ProductMarket and datePricePrice per capsule

Nespresso original, box of 10Europe, early 2011€3.70€0.37
Sara Lee L'OR, box of 10Europe, early 2011€2.99€0.30
Ethical Coffee Company, box of 10Europe, early 2011€2.60€0.26
Denner compatible capsuleSwitzerland, early 2011SFr0.25 eachSFr0.25
Vertuo espresso podEurope, 2018n/a€0.45
Vertuo largest podEurope, 2018n/a€0.70
Vertuo large podUS, 2018n/aup to US$1.20

Sources: Swissinfo, 21 February 2011; Bloomberg, October 2018.

### Margins under pressure

Profitability has slipped since 2022. The underlying trading operating margin fell from 21.5% in 2022 to 20.3% in 2023, which Nestlé put down to cost inflation and the strong franc, and to 17.9% in 2025, when underlying trading operating profit fell from CHF 1,278 million to CHF 1,160 million. At group level, Nestlé's 2025 results pointed to higher coffee and cocoa prices in its cost of goods. Nespresso raised prices by 4.4% that year, while volume and mix grew by 1.6%, the same rate as in 2024. The business could pass on part of the higher cost of coffee, but not all of it.

### Sustainability results

The supply chain programme grew, and in 2022 Nespresso was certified as a B Corporation. From August 2020 its capsules were made from 80% recycled aluminium, in a partnership with the aluminium company Novelis, and used 9.2% less metal. In 2022 the company said it had more than 100,000 collection points in 70 countries, giving almost 90% of customers convenient access, and announced paper-based capsules that could be composted at home, to be piloted in France and Switzerland from spring 2023.

Collection, though, did not translate into recycling. In 2023 Nespresso estimated that only about 30% of its capsules were recycled worldwide, according to an IMD article based on interviews with the company. The gap between access (almost 90%) and actual returns (about 30%) remained the weakest point in its environmental case.

## Other views

### Competitors

Rivals saw the machine changes and the legal campaign as attempts to keep a monopoly after the patents had run out. The French authority agreed that the practices raised competition concerns, though it closed the case by accepting commitments rather than ruling on whether the law had been broken. Gaillard's company, which had argued for years that the market should be open, left it in 2017 saying no one in it was making money. That remark fits the view that compatible capsules competed mainly on price and squeezed margins for everyone except the brand owner.

### Analysts

Analysts were clear about what Vertuo was for. Pierre Tegner of Oddo BHF told Bloomberg in 2018 that "Vertuoline will better secure the resilience of the business, as it's not compatible with other capsules." The same article quoted Swiss and German consumers who were reluctant to buy a second machine for their counters. That is the commercial risk of a new closed system: it protects margins but asks loyal customers to pay again.

### Environmental critics

Environmental groups have long objected to the volume of single-use capsule waste. Nespresso's response, as set out by its chief executive Guillaume Le Cunff in an IMD interview in 2023, is that a capsule cup has a lower life-cycle carbon footprint than many alternatives. The company estimates about 100 grams of CO2 per cup, of which the capsule accounts for about 14 grams, falling to 9 grams if the grounds are recycled, with most of the rest coming from growing the beans and heating the water. It cites a University of Quebec study finding capsule coffee greener over its life cycle than filter coffee, though IMD noted that instant coffee looks better when the recommended amount is used. Le Cunff's view was that the capsule is "not perfect, but it's much better than putting your coffee down the sink." Critics point to the 30% recycling rate as evidence that the system's real-world footprint is worse than the best case.

### Farm conditions

Questions have also been raised about the supply chain the AAA programme was meant to improve. IMD reported that a television investigation in 2020 found children under 13 working on Guatemalan farms that supplied Nespresso. The company's response, as IMD describes it, included an audit of 400 farms, three of which were flagged, and the opening of schools. The Rainforest Alliance's own 2021 study of AAA farms found that many farmers' net income from coffee remained below the living income benchmark, even where farming practices had improved. These findings do not show that the programme failed, but they show that a premium paid by consumers does not by itself raise farmers out of poverty.

### Consumers

Consumers have had mixed incentives. Compatible capsules cost about 19% to 30% less in 2011, which gave price-sensitive buyers a reason to switch while keeping their machines. The French commitments made that easier by stopping warranty wording that discouraged other capsules. Vertuo customers, by contrast, have no compatible alternative until the patents expire.

## Reading it through a framework

### VRIO

The VRIO framework asks whether a resource is valuable, rare, hard to imitate and supported by the organisation. If all four hold, it can give a lasting advantage.

Nespresso's patents were valuable and rare, and until 2012 they could not legally be copied. They were therefore a source of advantage, but a temporary one. As soon as they expired, the capsule itself became easy to imitate: by early 2011 rivals were already selling compatible capsules at €0.26 to €0.30, against Nespresso's €0.37. The legal resource failed the imitability test as soon as the law stopped protecting it.

Other resources passed the test better. The installed base of machines and the customer club were built over two decades and could not be copied quickly. The boutique network, which reached 802 shops by 2021, was expensive to replicate. The brand, built on the Clooney campaigns, gave Nespresso a position that a supermarket capsule could not match on price alone. These resources were organised to be used together: the club and shops sold the capsules, and the brand justified the price. In VRIO terms, Nespresso's response to the patent expiry was a shift from a legal advantage to an organisational one.

The machine changes are the exception. They tried to keep the legal advantage alive by technical means, and the French authority stepped in. Vertuo was a second, more durable attempt to restore rarity and inimitability, with patents reported to run to at least 2030.

### Razor and blades, and switching costs

The razor and blades model makes money from repeat purchases of a consumable after the customer has bought the durable product. It works only while the seller controls the consumable. Once rivals can sell compatible blades, the seller either has to win on quality and brand or find a new way to lock in the customer.

The numbers show how this played out. In Europe in 2011, a Nespresso capsule cost about 24% more than a L'OR capsule and about 42% more than one from the Ethical Coffee Company. A household drinking two cups a day uses about 730 capsules a year, so switching to the cheapest rival would have saved about €80 a year at those prices, enough to explain why compatible capsules gained ground with buyers who already owned a machine. Vertuo restored the lock-in: a large US pod cost up to US$1.20, 67% more than an original capsule, and in France a machine could be had for one euro with a year's subscription. Giving away the razor makes sense only when the blades cannot be copied, and Vertuo's patents provided that condition again.

## Since then

Nespresso's growth has slowed while costs have risen. Organic growth was 2.2% in 2024, with almost no price increase, and 6.0% in 2025, driven mainly by price. The margin fell to 17.9% in 2025 as higher coffee prices fed through to costs. Nestlé said in its 2025 results that price elasticity in coffee had been limited, meaning consumers kept buying despite the increases, but the margin data show the company absorbed part of the cost.

In its results for 2025, published in early 2026, its chief executive Philipp Navratil set out a plan to focus the group on four businesses: coffee, pet care, nutrition, and food and snacks. Coffee, which includes Nespresso, was named as one of the core areas, while Nestlé said it was in advanced talks to sell its remaining ice cream business and would seek partners for its waters business.

The original Nespresso format is now an open market, with Nespresso, Starbucks-branded capsules made by Nespresso, roasters' brands and retailers' own labels all competing in it. Vertuo remains closed, and Nestlé continues to name it as the main source of Nespresso's growth. The question for the next decade is what happens when Vertuo's own patents begin to expire, a date Bloomberg put at no earlier than 2030.

## What to take from it

- A patent buys time, and Nespresso used that time to build a customer club, a shop network and a brand that kept its prices above rivals after the patents ran out.

- Selling direct to customers gave Nespresso control of price and customer data, which is why it could charge €0.37 a capsule when compatible rivals charged €0.26 to €0.30.

- A dominant firm that changes its product to shut out rivals invites regulators, as the binding French commitments of 2014 showed.

- A new closed system can restore the economics of razor and blades, but it asks loyal customers to buy again and only resets the clock until the new patents expire.

- Environmental claims are judged on outcomes, and a gap between almost 90% access to recycling and about 30% actual recycling leaves room for critics.

## Questions to think about

- In 2011 a Nespresso capsule cost €0.37 and a compatible Ethical Coffee Company capsule €0.26. If a household uses two capsules a day, how much would it save in a year by switching? What would Nespresso need to offer to keep that household?

- Was Vertuo a fair response to competition, a way to rebuild the lock-in that patents had provided, or both? Does the answer matter to customers, to competitors or to regulators?

- The French authority accepted commitments instead of fining Nespresso. What are the advantages and drawbacks of that approach for consumers and for rival capsule makers?

- Nespresso's operating margin fell from 21.5% in 2022 to 17.9% in 2025 while sales rose. Using Exhibit 1, how much of its growth in 2025 came from price and how much from volume, and what does that suggest about its pricing power?

- What would it take to raise the capsule recycling rate from about 30% when almost 90% of customers already have access to a collection scheme? Who should bear the cost?

- Nestlé paid about US$7.2 billion for the right to sell Starbucks products, and Nespresso now makes Starbucks capsules for the original format. Is that a sensible use of a format the company can no longer protect?

## Concepts at work

VRIO, razor and blades pricing, switching costs, Porter's five forces. Explore them in [Insights](/insights/).

## Further reading

Oxford University Press covers this story as a teaching case in *Cases in Strategic Marketing* on Oxford Business Trove. The sources below are the public record this page was written from.

*Written from the public sources listed below. Figures are as those sources report them.*