Nespresso Rivals Vie for Dominance in Coffee War

PARIS — George Clooney and John Malkovich aren’t the only coffee lovers fighting over a Nespresso these days.

A coffee war has broken out in Europe pitting the Swiss food giant Nestlé against the struggling American food group Sara Lee as well as a former Nestlé executive. They are at odds over the worldwide monopoly Nespresso has long held on the lucrative espresso pods that fit its coffee-making machines.

Helping propel its popularity in Europe is a sleekly wry English-language ad campaign featuring Mr. Clooney and Mr. Malkovich.

With billions at stake, Nespresso has sued its rivals, accusing them of making cheaper copycat pods that violate the intellectual property it created in developing a system to make a convenient homemade cup of espresso that it claims can best a barista.

The first court test could begin next month here, where Nespresso’s competitors recently put their pods on grocery store shelves in hopes of establishing a beachhead to make inroads throughout Europe and into the United States.

“Nestlé has spent millions of dollars on innovation and research in Nespresso over many years,” said Richard Girardot, chief executive of Nestlé Nespresso. “So when someone comes along with a pure copy of the product, we have to protect ourselves.”

But Nespresso’s rivals say that Nestlé is trying to lock them out of one of the fastest-growing segments of the coffee market: pods now account for 20 to 40 percent of the value of ground coffee sales in the $17 billion European coffee market, according to Euromonitor International.

“What they’re doing is similar to Hewlett-Packard or Epson trying to forbid generic cartridges,” said Jean-Paul Gaillard, who ran Nespresso for a decade but who now is being sued by Nestlé for devising a biodegradable version of its capsule. “They are trying to stop copies — but our product is not a copy,” he said.

Competitors have emerged to other single-serve coffee products, but Nestlé is the first to take legal action to try to ward generics away from the gold mine of coffee by the pod.

“The real margins now are in capsulized coffee,” Mr. Gaillard said, “where you basically sell five grams of coffee for five times the price of what you’d get from regular roasted ground.”

Sales have leapt 30 percent a year, on average, over the last decade, ever since Nespresso underwent an aggressive makeover that transformed it from a humdrum office coffee product to a must-have item among chic urbanites. Through star-studded advertising in Europe and Asia and a growing network of clubby boutiques now numbering 200, it lures upscale customers, whether in New York, Paris or Shanghai.

Since 2000, when Nespresso started to break even, the company has sold more than 20 billion capsules through its boutiques and Web site at about 43 to 62 cents apiece. The price of its machines start around $190 and soar beyond $2,500.

Given similar projections for future growth, others started trying to angle in. Nestlé has not made that easy: it owns the patents — 1,700 of them — on its personal espresso system, which Mr. Malkovich, playing God in Nespresso’s most recent European ads, trades for Mr. Clooney’s soul.

Many of the patents are set to expire in 2012, and Nestlé has been working on other ways to prevent competitors from hacking a system that uses unique water dynamics to pump an espresso kissed with foam out of a hermetically sealed aluminum capsule.

Sara Lee, which has been trying since 2005 to engineer a recovery, recently broke through. In mid-July, it put its own plastic perforated version of the capsule, the L’Or, in French supermarkets, at a price of 37 cents. So far, it has sold 30 million capsules, a spokesman said.

“Coffee is Sara Lee’s No. 1 business; it accounts for well over 50 percent of their earnings,” said Tim Ramey, an analyst at D. A. Davidson & Company in Portland, Ore. “The single-serve coffee business is the piece that’s growing fast, so it’s important for them.”

Sara Lee has its own low-cost version of a personal espresso machine, the Senseo, whose pods alone had sales of $555 million in the fiscal year that ended June 30. Senseo is a top seller in the American market and a rival to other single-serve coffees in the United States, like Green Mountain.

About 27 million Senseo machines were sold in the last decade, compared to about eight million Nespresso machines. But the real gold mine is in pods.