Nespresso's Brewing European Coffee War - Ethical Coffee Company and Sara Lee Enter A Monopolist's Market - Meet the Berkeley-Haas Faculty
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Nespresso’s Brewing European Coffee War Ethical Coffee Company and Sara Lee Enter A Monopolist’s Market Anup Anajpure, Erik Kiewiet de Jonge, Ignacio Larrain, Raimundo Silva
Anajpure, Kiewiet de Jonge, Larrain, Silva
Executive Summary
The case is a subset of the coffee war currently brewing in Western Europe between Nestlé,
Sara Lee and Ethical Coffee. Nestlé is the incumbent in the market with a monopoly over its home‐
coffee system with 1,700 patents. The coffee machine‐coffee podsmodel is almost identical to the
razor‐razor blade business model where Nestlé makes money primarily on the coffee pods. The
case outlines how two new companies one large (Sara Lee) and one small (Ethical Coffee) enter the
coffee pod market in France. The inflexibility of Nestlé to price competitively, flood the market or
potentially legally defend its patents presents an opportunity for new entrants. Sara Lee openly
declares commitment to entering this market. Ethical Coffee signals to Nestlé that it is not violating
any patents and thus also lends credibility to Sara Lee’s entry, which will most likely bear the cost
of a legal battle with Nestlé. Ethical Coffee will get free rider benefits of the legal fight between the
two large companies and minimizes its exposure to legal battles.
Nestlé and Nespresso
George Clooney famously asks, “What else?” in his role as the face of Nespresso’s brand.
Nespresso, a wholly owned subsidiary of the global food conglomerate Nestlé, has led the high‐end,
individual espresso coffee brewing business since bringing its first product to market in 1986.
Clooney’s association with this high‐end brand works: Nespresso has held a monopoly on this chic
personal espresso system cited by some as the “’most expensive coffee you can buy per cup’ for
home use.”1
The Nespresso SA company was founded in Vevey, Switzerland in 1986 under the ownership of
the Nestlé Group. Nespresso partnered with a Swiss manufacturer, Turmix, to produce and launch
the first Nespresso coffee system in the office coffee market in Switzerland and Italy. Nestlé
produced the first coffee capsules at its Swiss factory in Orbe. Nespresso. Nestlé traces the roots of
Nespresso back to the belief that consumers wanted to have café‐style espresso experiences in the
home and work place. Nespresso believed that the perfect combination of the highest quality
1Business Week (Bloomberg). Mulier, Tom. “Sara Lee Answers Clooney’s Nespresso Query with
Cheaper Coffee. April 7, 2010. Quote from James Amoroso, a food industry consultant based in
Walchwil, Switzerland.
1Anajpure, Kiewiet de Jonge, Larrain, Silva
coffee, water and air pressure was necessary to deliver a superior espresso. With this thinking the
Nespresso system was born.2
Since 1986 Nespresso has expanded beyond its initial partnership with Turmix for production
of its Nespresso machines. Today, Nespresso counts as partners such precision manufacturers as
DeLonghi, Jura, Koenig, Krups, Miele and Siemens, all of whom provide a global distribution
network of precision Nespresso machines. These machines, starting at €149 ($200), are sold at
over 12,000 points of sale globally, predominately in large department stores. Nespresso has also
cultivated a prestigious boutique presence in global cities like London, New York and Paris. To
complete the Nespresso system, Nespresso produces its aluminum, hermetically sealed coffee
capsules in Nestlé’s Swiss factories. These capsules are sold through Nespresso’s exclusive online
coffee club and specialty coffee retailers.3
Nespresso has enjoyed a monopoly status in the high‐end personal espresso system market
since 1986. A complex web of an estimated 1,700 patents protect its systems from competitive
infringement,4 meaning that once customers have purchased a Nespresso machine, they are locked
in to buying Nespresso‐only coffee capsules. This monopoly position has resulted in strong pricing
power: a 10‐pack sleeve of Nespresso capsules sells for as much as €3.70 ($4.95) in France, a
whopping €0.37 a capsule. To soften the high price, Nestlé claims that only 1% of the world’s coffee
supply meets its exacting standards.5 Nestlé does not disclose profits on capsules, though analysts
say Nespresso makes most of its money from pods6 – a classic razor and razor blade strategy.
Sara Lee
Sara Lee Corporation is a Downers Grove, IL – based global food conglomerate with brands like
Ambi Pur, Ball Park, Douwe Egberts, Hillshire Farm, Jimmy Dean, Kiwi, Sanex, Senseo, and Sara Lee
in its portfolio. Founded in 1939 by Nathan Cummings’ purchase of C.D. Kenny Company in
Baltimore, MD, the Sara Lee Corporation went by many names until officially consolidating under
2 Nespresso. “About Us – Our History.”
3 Ibid.
4 Business Week (Bloomberg). Mulier, Tom. “Nespresso Rival Says Order Book Full at 4 Billion
Capsules.” March 31, 2010.
5 Business Week (Bloomberg). April 7, 2010.
6 The Wall Street Journal. Passariello, Christina. “Nestle Stakes Its Grounds in a European Coffee
War.” April 28, 2010.
2Anajpure, Kiewiet de Jonge, Larrain, Silva
the Sara Lee Corporation banner in 1985. Sara Lee first dipped its toes in the coffee market with an
investment in the 257 year‐old Dutch coffee and grocery company Douwe Egberts in 1978.7
Not until 2002 did Sara Lee enter the personal coffee machine business with its Senseo system,
led by Douwe Egberts and partner Philips Electronics in the Netherlands. Sara Lee launched the
Senseo system in the United States, United Kingdom and the Denmark in 2004.8 The Senseo system
targets mid‐market customers and does not carry the same prestige as the Nespresso system.
Coffee capsules are sold globally through traditional supermarket and retail channels. Senseo
machines start at around $50 in the US, significantly less expensive than Nespresso machines.
Senseo is not a direct competitor of Nespresso, since the former favors the mid‐market and the
latter the high‐end market. Sara Lee’s Senseo machine outpaced Nespresso as the biggest selling
coffee system several years ago, with 26 million machines having been sold. Sara Lee is now
interested in Nespresso’s premium customers, who spend more than Senseo customers.9
Starting in 2005, the company announced its commitment to focusing on its global food,
beverage and household and body care businesses. Throughout 2005 and 2006, Sara Lee divested
its apparel, European packaged meats, US retail coffee and direct sales businesses, transforming it
into a company focused on its core food, beverage and household and body care business.10 Sara
Lee’s international beverage business accounted for half of its profits in Q4 2009 (operating income
of $172 million) when excluding the household and body care divisions. Beverage sales figures
increased 15% to $884 million in Q4, highlighting the importance of Sara Lee’s coffee business.11
Ethical Coffee Company
Ethical Coffee Company is a Swiss start‐up led by Jean‐Paul Gaillard, the former head of
Nespresso from 1988 to 1997.12 Many credit Gaillard with Nespresso’s success in positioning itself
as an elitist brand in the European market. When Gaillard became head of Nespresso, he had a
marketing budget of 800,000 CHF (~$1M) from Nestlé and he borrowed another 800,000 CHF from
UBS. Within a few years, Nespresso, under Gaillard’s leadership, became the up market leader,
where it remains today.13 His marketing skills honed at Nespresso no doubt inform his business
7 Sara Lee website. “About us – Our Timeline.”
8 Ibid.
9 The Wall Street Journal.
10 Ibid.
11 Chicago Business. Sterrett, David. “Sara Lee CEO Brenda Barnes fires a shot in a must‐win coffee
war.” April 5, 2010.
12 Business Week (Bloomberg). March 31, 2010.
13 Radio Télevision Suisse. “Les gouts de luxe de Nespresso.” October 8, 2004.
3Anajpure, Kiewiet de Jonge, Larrain, Silva
pursuits today, making him a potentially formidable rival to Nespresso, who he knows quite
intimately from his time there.
Today Gaillard leads Ethical Coffee’s 12 Swiss employees and 35 employees in Chambery,
France, where it will produce biodegradable coffee capsules for use in Nespresso coffee machines.
Ethical Coffee counts among its investors the Bennetton family and an agricultural investment
company Unigrains. Currently, Ethical Coffee is targeting the French market with its launch of
Nespresso‐compatible capsules, with the German market on deck for later this year. Gaillard
expressed interests in entering Spain, Austria and Switzerland in the future.14
Recent Market Conditions
Nespresso
Nespresso has operated as a monopolist in the Nespresso machine compatible coffee capsule
business since 1986. Life has been good: in 2009 Nespresso revenues rose by 22% to $2.6 billion,
following 2008 sales growth of 33%.15 Nespresso provided about one‐fifth of Nestlé’s sales growth
in 2009, excluding acquisitions and currencies.16 Around 80% of Nespresso’s 8 million customers
are concentrated in Western Europe, with France as the biggest Nespresso market. Nespresso’s
customers bought 5.5 billion capsules in 2009, with sales in France alone rising by 22%, according
to market data firm Euromonitor.17 Current prices for Nespresso capsules hover around €3.70
($4.95) in France, or €0.37 a capsule.18 Nestlé has a capsule production capacity estimated at 9
billion capsules per year in 15 varieties.19 Nespresso estimates portioned coffee (i.e. pods) to
expand to 25% of European and North American market by 2015, up from 19% in 2009.20 In other
words, Nespresso believes in strong growth for its capsule and system sales.
Sara Lee
Sara Lee currently plays in the mid‐market portioned coffee sector, though it has announced
entrance into the premium space with Nespresso‐compatible pods. Euromonitor estimates that
14 Business Week (Bloomberg). March 31, 2010.
15 Dow Jones Deutschland. “Nestle Coffee Growth Engine Challenged by Former Mgr.” March 8,
2010.
16 Business Week (Bloomberg). April 7, 2010.
17 The Wall Street Journal.
18 Business Week (Bloomberg). April 7, 2010.
19 Business Week (Bloomberg). March 31, 2010.
20 Business Week (Bloomberg). April 7, 2010.
4Anajpure, Kiewiet de Jonge, Larrain, Silva
Sara Lee, with its Senseo, Douwe Egberts and L’OR brands, holds 9.7% of the $16.8 billion Western
Europe coffee market. Nestlé leads with 19.1% marketshare, with Kraft trailing at 16.9%
marketshare.21 Sara Lee’s international beverage business contributes substantial profits to the
overall firm, making growth in the Western European market a top priority for Sara Lee
management.
Ethical Coffee Company
As a start‐up entrant into the portioned coffee sector, Ethical Coffee Company does not have any
current market share, though its upcoming presence in Nespresso’s market will change this.
Ethical Coffee and Sara Lee Separately Announce Entrance Into Nespresso’s Market
On March 5, 2010 Casino Guichard‐Perrachon SA, the parent of Casino and Monoprix
supermarkets, announced that it will begin selling Ethical Coffee’s biodegradable, Nespresso‐
compatible coffee capsules under private label in its French stores by mid‐May 2010. These
capsules will be priced at 20% less than Nespresso. Nestlé’s share price abruptly fell by 1.8% upon
the announcement.22 Other retailers, including Switzerland’s Coop and Migros supermarkets have
expressed interest in the Ethical Coffee’s products.23 Retailers have asked for 4 billion capsules
from Ethical Coffee, which has since stopped accepting orders. According to CEO Gaillard, Ethical
Coffee has “annual production capacity of 350 million capsules and aims to increase that to
between 800 million and 1.2 billion by the end of 2010. Next year, with further production capacity
increases, Ethical Coffee aims to produce 2 billion capsules.”24
Given Nespresso’s 24‐year successful run of being the sole provider of Nespresso capsules,
analysts have questioned whether Ethical Coffee is infringing on one or more of Nespresso’s 1,700
patents. Confident in his and his lawyers assessments, Gaillard claimed “’We know that there is no
problem … You can patent the way to get an effect, but you can’t patent the effect itself. You cannot
patent hot water. You can patent a way to heat water.”25 Gaillard said in an interview with the Wall
Street Journal, “’Nespresso was a real innovation, but it's still just coffee….The consumer wants the
21 Business Week (Bloomberg). March 31, 2010.
22 Ibid.
23 Dow Jones.
24 Business Week (Bloomberg). March 31, 2010.
25 Ibid.
5Anajpure, Kiewiet de Jonge, Larrain, Silva
right taste and a good price.” He went on to say, “’We have a model without bling‐bling advertising
… No Clooney, no glossy magazine, only coffee.’”26
On March 30, 2010 Sara Lee announced that it was launching its Nespresso‐compatible L’OR
Espresso capsules in French retail outlets on April 7.27 The head of Sara Lee’s international
beverage and bakery division, Frank van Oers, said 2 million L’OR capsules had been shipped by
mid‐April, with distribution planned in 2,000 French supermarkets. Sara Lee has recommended
that the L’OR capsules be priced at €2.99 per 10, around a 20% discount off Nespresso brand
capsules. L’OR capsules, at around €0.30 a piece, are considerably more than mid‐market Senseo
capsules at €0.13 a capsule. Like Ethical Coffee’s capsules, L’OR capsules are not aluminum, but
rather plastic.28
Sara Lee has placed resources behind ensuring the L’OR brand is a success. Industry analyst
Tim Ramey said, “Coffee is Sara Lee’s largest business and its most important growth franchise.” A
company spokesman indicated that Sara Lee “is planning television, print and in‐store advertising
as well as sampling promotions to introduce the product to customers.”29 Sara Lee spokesman
Ernesto Duran noted that L’OR has “the potential to be a global success.”30
Ethical Coffee and Sara Lee have both made bold claims on the potential success of their
products in stealing market share from the incumbent monopolist Nespresso. Nespresso is not
sitting idly by: Nespresso CEO Richard Girardot has patent experts poring over Sara Lee’s pods and
will do the same in May when Ethical Coffee’s pods enter the market. If either infringe on
Nespresso’s patents, Giradot says Nestlé will pursue its legal options. He also noted that he is not
concerned about Gaillard possessing Nespresso company secrets, since the machines have evolved
significantly since Gaillard left in 1997.31
Game Analysis
Sara Lee and Ethical Coffee announced their entry into Nestlé’s most profitable business
segment, the high‐end coffee consumers. Those who already have a Nespresso machine at home
26 The Wall Street Journal.
27 Sara Lee Corp. Press Release. “Sara Lee Launches New Espresso Capsule Compatible With
Nespresso Coffee Appliances.” March 30, 2010.
28 The Wall Street Journal.
29 Chicago Business.
30 Business Week (Bloomberg). April 7, 2010.
31 The Wall Street Journal.
6Anajpure, Kiewiet de Jonge, Larrain, Silva
will be able to buy alternative coffee capsules at a much lower price and through a broader range of
distribution channels.
What should Nestlé do? In order to estimate Nestlé’s best response, we studied the
relationships between the company and the new entrants and their intuitive perceptions about the
different options and respective consequences. For the purpose of this game, we will estimate the
different payoffs as the net present value of the profits for each of the companies involved.
The first decision of the game concerns Nestlé. A potential flaw on its Nespresso’s patents is
supposed to be the main reason why Sara Lee and Ethical Coffee decide to enter into the single‐cup
capsules market. The game starts with Nestlé deciding whether to signal legal and/or capacity
threats to deter the new entrants from entering, or to initiate a legal battle to prevent Sara Lee and
Ethical coffee from bringing their new product to market (See Figure 1: Game Analysis).
Figure No. 1: Game Analysis
The lower part of the decision tree shows the path of the preemptive legal battle. Nestlé sues
the new entrants for patent infringement under the argument of signing contracts with third
parties for producing and commercializing Nespresso compatible capsules. If Nestlé wins, it would
have managed to keep the new entrants out. If they lose, they would gain 2 extra years of monopoly
pricing and quantity before they have to take a long‐term strategic decision about it.
7Anajpure, Kiewiet de Jonge, Larrain, Silva
For the purpose of the analysis, in case Nestlé loses the legal battle and entrants successfully
enter into the market, we have narrowed down Nestlé’s potential strategic responses to four
options: i) Do nothing, ii) Initiate a price war, iii) Increase distribution, or iv) Combination of price
and distribution.
Strategic responses and their assumptions:32
i) Do nothing: This means Nestlé will try to accommodate and leave room for
competitors. It will try to focus on the image and the quality associated with the
Nespresso capsule, under the idea that a good enough product is not what you
want for your Nespresso coffee experience. We assumed that 50% of Nestlé’s
clients are loyal to the brand, and another 50% that are “shoppers”, and would
move to other alternatives if there is a price differential.
ii) Initiate a price war: For this option, we assumed Nestlé matches the new entrants’
prices, which would result in a profit margin decline for the segment and a slight
variation in the current market share distribution. Specifically, we have assumed
long‐term market shares of 60%, 20% and 20% for Nestlé, Sara Lee and Ethical
Coffee, respectively.
iii) Increase distribution: For this option, we assumed Nestlé matches the distribution
convenience of the new products by expanding its distribution capacities to
wholesalers, but keeps its price at the original level. As a result of this strategy, we
have assumed long‐term market shares to be 60%, 20% and 20% for Nestlé, Sara
Lee and Ethical Coffee respectively. Additionally, for the payoffs analysis, we have
assumed a 30% wholesaler mark‐up for the Nespresso capsules, so Nespresso’s
revenue per cup will be affected due to this new distribution channel.
iv) Combination of price and distribution: This is the pure fight scenario. We have
assumed long‐term market shares to be 85%, 7.5% and 7.5% for Nestlé, Sara Lee
and Ethical Coffee respectively.
Let’s take a look at the upper part of the tree now. In this case, instead of just launching a legal
battle before competitors manage to enter, Nestlé has the option of sending some signals to deter
enter without engaging in the legal battle beforehand. What are Nestlé signaling options? Nestlé can
mainly do two things: 1) signal through the use of the media that they are willing to fight back any
32 For details on each scenario please refer to Exhibits 1 to 4.
8Anajpure, Kiewiet de Jonge, Larrain, Silva
attempt of entry by engaging on price, distribution and legal wars, and 2) signal by preparing
openly for a possible response to entry; in this particular case, by building enough capacity to flood
the market as competitors try to enter. If these signals end up being effective, the new entrants will
stay out, meaning business as usual for all the players. The game would end with a no‐go decision
from the new entrants. However, if Sara Lee and Ethical Coffee decide to enter despite the signals,
Nestlé can either respond by following one of the four types of strategic responses described
before, or as an alternative, initiate in this stage a legal battle for infringement of its patents rights.
If they win the legal battle, the new entrants will have to exit the market, but if they lose, they will
have to follow one of the four long‐term strategic responses.
Solving the game
In order to start solving this game, we first approached the payoffs of scenarios that do not
involve legal issues (upper part of the tree), and assumed that for all these players are driven only
by profit maximizing objectives. The results are summarized in the following table in billions of $:
Decisions Payoffs
Nestle SL&EC Nestle Nestle SL EC
Signal Stay out $ 45.40 $ - $ -
Signal Enter Do Nothing $ 23.44 $ 6.13 $ 6.02
Signal Enter Only Distribution $ 21.31 $ 4.92 $ 4.86
Signal Enter Only Price $ 21.38 $ 4.89 $ 4.83
Signal Enter Price & Distribution $ 18.79 $ 1.82 $ 1.82
Using this data, we can see that from Nestlé’s point of view, they have a dominant strategy
within the four long‐term strategic responses: Do Nothing. By understanding this, we simplified our
decision tree by eliminating the branches associated with dominated strategies. Figure No. 2 shows
the simplified decision tree.
9Anajpure, Kiewiet de Jonge, Larrain, Silva
Figure No. 2: Simplified Decision Tree
SL, EC
stay out
Do
nothing
Signaling
to deter entry
Sara Lee (SL) SL, EC
& enter
Ethical Coffee Nestle (N) Initiate legal
(EC) battle
announce entry
N wins
Initiate
legal battle
(Before Do nothing
Entry) N loses
N Wins
N Loses Do
(Only nothing
postpones EC
& SL entry)
As a second step, we approached the nodes that refer to legal battles, by acknowledging that
now, the two possible scenarios after the legal battle are: 1) a win for Nestlé or 2) an entry from the
others with a Do Nothing response from Nestlé. In addition, we based our assumptions on the fact
that Ethical Coffee is a startup with limited resources and has openly declared that they will not
fight Nestlé in the courts. We also assumed that Ethical Coffee will free ride at Sara Lee’s expense in
case a legal battle is realized, since Sara Lee has deep pockets and has stated that it will do anything
to enter this key segment for its future growth.
We calculated lobbying expenses (using a McCain‐Schummer approach) and expected payoffs
for each player for the following cases (figures in B$):
1) Legal battle after entry
Nestle SL EC
Payoffs if Nestle wins (no legal fees) $44.47 $0.31 $0.20
Payoffs if Nestle losses (no legal fees) $23.44 $6.13 $6.02 Probabilities
Net Difference (Max - Min) $21.03 $5.82 $5.82
Legal expenditures $3.57 $0.99 $0.00
Nestle Wins 78.3%
Expected payoffs $36.34 $0.59 $1.46 Nestle Loses 21.7%
10Anajpure, Kiewiet de Jonge, Larrain, Silva
2) Legal battle before entry (includes two years of extra monopoly for Nestlé)
Nestle SL EC
Payoffs if Nestle wins (no legal fees) $45.40 $0.00 $0.00
Payoffs if Nestle losses (no legal fees) $25.26 $5.61 $5.53 Probabilities
Net Difference (Max - Min) $20.14 $5.61 $5.53
Legal expenditures $3.43 $0.96 $0.00
Nestle Wins 78.2%
Expected payoffs $37.58 $0.27 $1.21 Nestle Loses 21.8%
Using all the available information we solved the tree by looking forward – reasoning back. The
results are shown in Figure No. 3:
Figure No. 3: Look forward – reason back
SL, EC (45,0,0)
stay out
Do (23,6,6)
nothing
Signaling
to deter entry
Sara Lee (SL) SL, EC
& enter
Ethical Coffee Nestle (N) Initiate legal
(EC) battle
announce entry
N wins
Initiate
legal battle (36,1,1)
(Before Do nothing
Entry) N loses
N Wins
(38,1,1)
N Loses Do
(Only nothing
postpones EC
& SL entry)
From the results we can see that Nestlé’s best response is to actually initiate a legal battle as
soon as possible, trying to stop entry at least for a while. This looks like a very reasonable response
after 24 years of monopoly and 1,700 patents protecting the product. But when analyzing what
happened in reality, we started facing a new dilemma: why did Nestlé go for the signaling strategy
and left the legal actions just as a threat in case of entry?
11Anajpure, Kiewiet de Jonge, Larrain, Silva
A good place to start searching for an answer to this situation is in Jean‐Paul Gaillard’s – CEO of
Ethical Coffee and former head of Nespresso – words: “None of Nestlé’s patents are being violated”.
As a former head of Nespresso, we believe Jean‐Paul Gaillard knows exactly what he is doing, and
would not start a new company without being sure that he can get around Nestlé’s patents. This, in
addition to Nestlé’s chosen path of signaling, leads us to think that Nestlé’s chances of winning the
legal battle are very much on the low side, and the results we got using the McCain‐Shummer
approach have to be revisited.
As a first approach, using the same lobbying expenses calculated before, we found out that if the
chances of winning the legal battle are 8% for Nestlé, then the company would be indifferent on
whether to start the legal battle or just allow entry and accommodate. So our intuition tells us that
Nestlé actually expected a very low probability of winning the legal battle, if any at all, and this is
why they went for the signaling path. Adjusting the probabilities to 0% winning and 100% losing
for Nestlé the tree now looks as follows (even though this seems extreme, it is a good way to show
how the game changes for Nestlé having a chance of winning lower than 8%):
With these adjustments, the actions Nestlé has taken so far make much more sense from a game
theory perspective. We also know that Nestlé has indeed sent signals to deter entry from its
potential competitors: They have publicly stated that they will fight in court any attempt to enter,
and they have also built additional capacity (up to 9 billion cups a year, in the order of 40% more
12Anajpure, Kiewiet de Jonge, Larrain, Silva
capacity than needed), with the intent to show that they have the tools to respond aggressively if
needed. So there is only one last question to be answered: Why do these signals seem not to have
stopped Sara Lee and Ethical Coffee’s entry so far? Let’s analyze them and draw some conclusions:
1) “If you enter our market segment we will either take a legal path or respond using price
and/or distribution wars”.
Clearly, after analyzing the payoffs of each strategic response, we saw that doing nothing is a
dominant strategy for Nestlé over price and distribution wars, so this threat is not credible. Also,
using our previous analysis on Nestlé’s low chance of winning a legal battle, the threat of a legal
battle has no credibility either. In addition, the fact that Nestlé did not begin a legal battle in the
beginning makes the threat even less credible.
2) 40% extra capacity already in place
Again, we can see directly from Nestlé’s payoffs that flooding the market would not be a wise
decision as a strategic response, since accommodating is a dominant strategy.
Finally, even though if the signals where credible and Nestlé had profitable deviations if they
undertook any of the threats, if Nestlé does not start a legal battle before entry, the expected payoffs
for the entrants are always larger than zero, meaning that entering is a dominant strategy for Sara
Lee and Ethical Coffee from that point going forward.
Additional issues of the game to take into account
1) The smaller game being played: Sara Lee versus Ethical Coffee
From our analysis we concluded that Sara Lee and Ethical Coffee should enter the market and
that Nestlé’s best response is to accommodate. But, there is a sub‐game being played that, even
though it does not affect Nestlé’s response, it might change the way the entrants approach their
pricing strategies. Both companies have already announced a 20% discount over Nestlé’s price. To
see if this is a possible equilibrium let’s analyze possible strategies from these companies.
This is a game that will be played constantly for a long time. If one company lowers its price,
then the other can do so in a relatively fast manner. Also, they are entering the premium segment of
13Anajpure, Kiewiet de Jonge, Larrain, Silva
the market, with current prices of around $0.40 per cup. The segment that follows is the mid‐
market segment, with prices in the order of $0.22 per cup. Thus, a first approach is to think that
Sara Lee and Ethical Coffee will at least maintain a pricing strategy that keeps them in the premium
segment. We assumed a lower cap of $0.3 for the analysis. Using this information, plus the fact that
Nestlé will accommodate and the two entrants will fight for just a 50% of the market, we can build a
game in its normal form for a single year. If only one player defaults, he gets a 50% total market
share, and the other one gets 0%. In case they cooperate or default, their share is 25% each. The
game is as follows (payoffs in $B)33:
Cooperate Default
Cooperate 0.35 , 0.35 0.44 , 0.00
Default 0.00 , 0.44 0.22 , 0.22
We can see that the players are facing a prisoners’ dilemma when analyzing a single year. But in
order to see if equilibrium could be reach in the beginning, we have to analyze what happens going
forward if one of the players defaults. From a single year, if one player defaults and the other
cooperates, the one that defaults gets an extra $0.09 for that year. But since the other player will
default in the next period, the expected payoffs going forward (talking into account the value of
money with a 10% discount rate), will be B$2.8 less than if they had cooperated indefinitely. Since
the game will be played for a very long time, we believe that there is a high chance that both
entrants will cooperate at a high price point, at least in the beginning. We have seen that both
companies have indeed signaled that they are entering the market at a same price point, which goes
in line with our analysis.
2) Is Nespresso a better coffee? How loyal are Nespresso’s customers?
While we do not have any information on whether the coffee sold by Nestlé is significantly
different/better than the coffee sold by Sara Lee and Ethical Coffee, we assume here that the quality
of coffee would be ‘very similar’. Sara Lee is known for bringing quality products in the market and
so it will be difficult for them to sell something that lowers their brand image. Ethical Coffee’s
The number $0.35B comes from year 2012 of Exhibit 1, where both players have reached a 25%
33
market share. The rest of the payoffs of this smaller game where calculated by adjusting prices and
market shares on this same scenario.
14Anajpure, Kiewiet de Jonge, Larrain, Silva
declaration that we sell “Coffee and not Clooney” seems to indicate that its coffee is similar to
Nestlé’s but that Nestlé has claimed premium margins because of the premium image it has built.
This is why for this particular analysis we assumed that willingness to pay was similar for any of
the brands.
However, in order to give some additional insight, we played with some of our numbers and
realized that if those non‐loyal customers have a willingness to pay that is 10.75 percentage points
higher for Nespresso than for the alternative coffee, then Nestlé is indifferent between
accommodating and starting an “only price” response (the percentage was calculated on the
original price, so it would be around $0.05). But, in case the difference in willingness to pay is
higher than 10.75 percentage points, then Nestlé’s best response would be to initiate an “only price”
response, in which they would keep more than 50% of the market with a price cut that has higher
benefits through increased market share.
On another issue, for our analysis we assumed that 50% of Nestlé’s clients are loyal to the
brand, and will not change on the basis of a lower price. For this percentage of loyalty, Nestlé’s best
response is to accommodate. But what if it was lower? We calculated that if the loyals were only
45%, Nestlé would be indifferent between accommodating and initiating a pure price war. For any
percentage above 45% Nespresso would accommodate, and below that, their best response would
be to start playing with price.
Conclusions
After analyzing this very entertaining case, we can see how both Sara Lee and Ethical Coffee are
using a judo strategy by exploiting Nespresso’s inflexibilities: premium brand image, selective
distribution channels and higher costs. Nestlé faces the potential of losing its premium image and
high margins by engaging in new distribution channels and/or price cuts, and the costs of reacting
through these tactics are higher than its benefits.
In addition, this case was filled with signaling. We discovered how the different signals changed
the outcome of the game depending on signal credibility. Nestlé’s signals over legal battles and
price/distribution threats turned out to be very ineffective, and thus Sara Lee and Ethical Coffee
were not scared of going forward with their respective entry strategies. On the opposite side,
Ethical Coffee’s signals about not stepping on Nespresso’s 1,700 patents is very credible as Ethical
15Anajpure, Kiewiet de Jonge, Larrain, Silva
Coffee’s CEO ran Nespresso for several years, and clearly understands the legal issues behind the
business, and Nestlé’s policies on these matters.
An interesting point to acknowledge is how both Sara Lee and Ethical Coffee have clearly stated
that they will not step on Nestlé’s distribution channels, as a signal to further convince Nestlé that it
is in their best interest to accommodate and keep that distribution channel for itself, while
maintaining a more premium image over its new competitors, and thus being able to keep charging
a higher price. Both entrants have somehow committed to staying out of that exclusive channel by
securing contracts with retailers at a lower price point (Sara Lee shipped directly to retailers while
Ethical Coffee closed deals to be sold as private label). It is also costly for them to develop this
exclusive channel from scratch, making their signals more credible.
We also saw some possible free riding from Ethical Coffee in terms of lobbying expenses. This
free riding problem ends up pushing the new entrants’ overall lobbying expenses to a lower than
optimal level, diminishing their chances of winning the legal battle. However, in this particular
case, we have some hints that lead us to think that the legal battle seems lost for Nestlé despite its
lobbying expenditures. This idea is supported on the signals that Ethical Coffee has sent through his
CEO, a person that clearly knows the rules of the games that they are starting to play, and in
addition, by the fact that Nestlé did not undertake this strategy before the new players entered the
market.
We also acknowledge that there is a smaller game being played between the new entrants, and
how a cooperative equilibrium – with signals on distribution channels and price points – is a very
plausible outcome for them. We think both new entrants have understood the benefits of
cooperating as they enter simultaneously, and not only cooperating on price and distribution
channels, but also acting accordingly in order to successfully apply a judo strategy against Nestlé, a
situation that benefits both of them.
As a final comment, we believe that Nestlé will indeed take an accommodating strategy in
response to these new competitors in the market, since fighting on price and distribution do not
yield attractive payoffs relative to the “do nothing” approach. Time will tell if our predictions are
correct.
16Anajpure, Kiewiet de Jonge, Larrain, Silva
Sources
1. Business Week (Bloomberg). Mulier, Tom. “Nespresso Rival Says Order Book Full at 4
Billion Capsules.” March 31, 2010. http://www.businessweek.com/news/2010‐03‐
31/nespresso‐rival‐says‐order‐book‐full‐at‐4‐billion‐capsules.html
2. Business Week (Bloomberg). Mulier, Tom. “Sara Lee Answers Clooney’s Nespresso Query
with Cheaper Coffee. April 7, 2010. http://www.businessweek.com/news/2010‐04‐
07/sara‐lee‐answers‐clooney‐s‐nespresso‐query‐with‐cheaper‐coffee.html
3. Chicago Business. Sterrett, David. “Sara Lee CEO Brenda Barnes fires a shot in a must‐win
coffee war.” April 5, 2010. http://www.chicagobusiness.com/cgi‐
bin/mag/article.pl?articleId=33226
4. Dow Jones Deutschland. “NestleNestlé Coffee Growth Engine Challenged by Former Mgr.”
March 8, 2010. http://www.dowjones.de/site/2010/03/nestleNestlé‐coffee‐growth‐
engine‐challenged‐by‐former‐mgr.html
5. Nespresso website. “About us – Our History”
http://www1.nespresso.com/precom/aboutus/aboutus2.php
6. Radio Télevision Suisse. “Les gouts de luxe de Nespresso.” October 8, 2004.
http://www.nouvo.ch/52‐1
7. The Wall Street Journal. Passariello, Christina. “Nestle Stakes Its Grounds in a European
Coffee War.” April 28, 2010.
http://online.wsj.com/article/SB10001424052748704388304575202402216730116.html
?mod=WSJ_business_MediaMktNewsBucket
8. Sara Lee Corp. Press Release. “Sara Lee Launches New Espresso Capsule Compatible With
Nespresso Coffee Appliances.” March 30, 2010.
http://www.saralee.com/~/media/C360C6E28E4549008444323FD5ED2BF4.ashx
9. Sara Lee website. “About us – Our Timeline.”
http://www.saralee.com/AboutSaraLee/OurTimeline.aspx
17Anajpure, Kiewiet de Jonge, Larrain, Silva
Exhibit No. 1 – Nestlé responds by accommodating
Growth Rate of market first 5 years 20%
Growth Rate of market after 5 years 3%
Discount Rate 10%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Estimated Total Market (Billion capsules) 5.5 6.6 7.9 9.5 11.4 13.7 14.1 14.5 15.0 15.4 15.9
Nestle's Price per capsule ($) 0.500 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Sara Lee's Price per capsule ($) 0.400 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Ethical Coffee's Price per capsule ($) 0.400 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Nestle's Revenues per capsule ($) * 0.470 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47
Sara Lee's Revenues per capsule ($) ** 0.277 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Ethical Coffee's Revenue per capsule ($) 0.277 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Nestle's Cost per capsule($) 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15
Sara Lee's Cost per capsule ($) *** 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Ethical Coffee's Cost per capsule ($) 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Nestle's Capacity (Billion capsules) 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00
Sara Lee's Capacity (Billion capsules) 2.00 4.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Ethical Coffee's Capacity (Billion capsules)**** 0.35 1.00 2.00 4.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Nestle's Unit Market Share 80% 65% 50% 50% 50% 50% 50% 50% 50% 50% 50%
Sara Lee's Unit Market Share 14% 20% 25% 25% 25% 25% 25% 25% 25% 25% 25%
Ethical Coffee's Unit Market Share 6% 15% 25% 25% 25% 25% 25% 25% 25% 25% 25%
Nestle's Sales (Billion capsules) 4.40 4.29 3.96 4.75 5.70 6.84 7.05 7.26 7.48 7.70 7.93
Sara Lee's Sales (Billion capsules) 0.75 1.31 1.98 2.38 2.85 3.42 3.52 3.63 3.74 3.85 3.97
Ethical Coffee's Sales (Billion capsules) 0.35 1.00 1.98 2.38 2.85 3.42 3.52 3.63 3.74 3.85 3.97
Nestle's Sales (B$) 2.07 2.02 1.86 2.23 2.68 3.22 3.31 3.41 3.52 3.62 3.73
Sara Lee's Sales (B$) 0.21 0.36 0.55 0.66 0.79 0.95 0.98 1.01 1.04 1.07 1.10
Ethical Coffee's Sales (B$) 0.10 0.28 0.55 0.66 0.79 0.95 0.98 1.01 1.04 1.07 1.10
Nestle's Cost of Sales (B$) 0.66 0.64 0.59 0.71 0.86 1.03 1.06 1.09 1.12 1.16 1.19
Sara Lee's Cost of Sales (B$) 0.08 0.13 0.20 0.24 0.29 0.34 0.35 0.36 0.37 0.39 0.40
Ethical Coffee's Cost of Sales (B$) 0.04 0.10 0.20 0.24 0.29 0.34 0.35 0.36 0.37 0.39 0.40
Residual Value *****
Nestle's Net Contribution Margin (B$) 1.41 1.37 1.27 1.52 1.83 2.19 2.26 2.32 2.39 2.47 2.54 36.29
Sara Lee's Net Contribution Margin (B$) 0.13 0.23 0.35 0.42 0.51 0.61 0.62 0.64 0.66 0.68 0.70 10.04
Ethical Coffee's Net Contribution Margin (B$) 0.06 0.18 0.35 0.42 0.51 0.61 0.62 0.64 0.66 0.68 0.70 10.04
Nestle's NPV (B$) $23.44
Sara Lee's NPV (B$) $6.13
Ethical Coffee's NPV (B$) $6.02
* Net revenues for Nestle include a 5% cost of distribution
** Net revenues for Sara Lee and Ethical Coffee include a 30% markup taken by retailers
*** Sara Lee and Ethical Coffee's cost assumed lower because they use cheaper package
**** Ethical Coffee has small initial capacity but has announced a rapid increase
***** Residual value calculated with a yearly growth rate of 3%
18Anajpure, Kiewiet de Jonge, Larrain, Silva
Exhibit No. 2 – Nestlé responds by only increasing distribution
Growth Rate of market first 5 years 20%
Growth Rate of market after 5 years 3%
Discount Rate 10%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Estimated Total Market (Billion capsules) 5.5 6.6 7.9 9.5 11.4 13.7 14.1 14.5 15.0 15.4 15.9
Nestle's Price per capsule ($) 0.500 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Sara Lee's Price per capsule ($) 0.400 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Ethical Coffee's Price per capsule ($) 0.400 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Nestle's Revenues per capsule ($) * 0.396 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Sara Lee's Revenues per capsule ($) 0.277 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Ethical Coffee's Revenue per capsule ($) 0.277 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Nestle's Cost ($) 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15
Sara Lee's Cost ($) 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Ethical Coffee's Cost ($) 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Nestle's Capacity 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00
Sara Lee's Capacity 2.00 4.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Ethical Coffee's Capacity 0.35 1.00 2.00 3.00 4.00 5.00 5.00 5.00 5.00 5.00 5.00
Nestle's Unit Market Share 80% 70% 60% 60% 60% 60% 60% 60% 60% 60% 60%
Sara Lee's Unit Market Share 14% 15% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Ethical Coffee's Unit Market Share 6% 15% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Nestle's Sales (Billion capsules) 4.40 4.62 4.75 5.70 6.84 8.21 8.46 8.71 8.97 9.24 9.52
Sara Lee's Sales (Billion capsules) 0.75 0.99 1.58 1.90 2.28 2.74 2.82 2.90 2.99 3.08 3.17
Ethical Coffee's Sales (Billion capsules) 0.35 0.99 1.58 1.90 2.28 2.74 2.82 2.90 2.99 3.08 3.17
Nestle's Sales (B$) 1.74 1.83 1.88 2.26 2.71 3.25 3.35 3.45 3.55 3.66 3.77
Sara Lee's Sales (B$) 0.21 0.27 0.44 0.53 0.63 0.76 0.78 0.80 0.83 0.85 0.88
Ethical Coffee's Sales (B$) 0.10 0.27 0.44 0.53 0.63 0.76 0.78 0.80 0.83 0.85 0.88
Nestle's Cost of Sales (B$) 0.66 0.69 0.71 0.86 1.03 1.23 1.27 1.31 1.35 1.39 1.43
Sara Lee's Cost of Sales (B$) 0.08 0.10 0.16 0.19 0.23 0.27 0.28 0.29 0.30 0.31 0.32
Ethical Coffee's Cost of Sales (B$) 0.04 0.10 0.16 0.19 0.23 0.27 0.28 0.29 0.30 0.31 0.32
Residual Value
Nestle's Net Contribution Margin (B$) 1.08 1.14 1.17 1.40 1.68 2.02 2.08 2.14 2.21 2.27 2.34 33.45
Sara Lee's Net Contribution Margin (B$) 0.13 0.18 0.28 0.34 0.40 0.49 0.50 0.51 0.53 0.55 0.56 8.03
Ethical Coffee's Net Contribution Margin (B$) 0.06 0.18 0.28 0.34 0.40 0.49 0.50 0.51 0.53 0.55 0.56 8.03
Nestle's NPV (B$) $21.31
Sara Lee's NPV (B$) $4.92
Ethical Coffee's NPV (B$) $4.86
* Revenues for Nestle include a 20% cost of distribution (5% on original channel and 30% through retailers)
19Anajpure, Kiewiet de Jonge, Larrain, Silva
Exhibit No. 3 – Nestlé responds by only lowering price
Growth Rate of market first 5 years 20%
Growth Rate of market after 5 years 3%
Discount Rate 10%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Estimated Total Market (Billion capsules) 5.5 6.6 7.9 9.5 11.4 13.7 14.1 14.5 15.0 15.4 15.9
Nestle's Price ($) 0.417 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42
Sara Lee's Price ($) 0.400 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Ethical Coffee's Price ($) 0.400 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Nestle's Revenues ($) 0.396 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Sara Lee's Revenues ($) 0.277 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Ethical Coffee's Revenues ($) 0.277 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Nestle's Cost ($) 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15
Sara Lee's Cost ($) 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Ethical Coffee's Cost ($) 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Nestle's Capacity 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00
Sara Lee's Capacity 2.00 4.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Ethical Coffee's Capacity 0.35 1.00 2.00 3.00 4.00 5.00 5.00 5.00 5.00 5.00 5.00
Nestle's Unit Market Share 80% 70% 65% 60% 60% 60% 60% 60% 60% 60% 60%
Sara Lee's Unit Market Share 14% 15% 18% 20% 20% 20% 20% 20% 20% 20% 20%
Ethical Coffee's Unit Market Share 6% 15% 18% 20% 20% 20% 20% 20% 20% 20% 20%
Nestle's Sales (Billion capsules) 4.40 4.62 5.15 5.70 6.84 8.21 8.46 8.71 8.97 9.24 9.52
Sara Lee's Sales (Billion capsules) 0.75 0.99 1.39 1.90 2.28 2.74 2.82 2.90 2.99 3.08 3.17
Ethical Coffee's Sales (Billion capsules) 0.35 0.99 1.39 1.90 2.28 2.74 2.82 2.90 2.99 3.08 3.17
Nestle's Sales (B$) 1.74 1.83 2.04 2.26 2.71 3.25 3.35 3.45 3.55 3.66 3.77
Sara Lee's Sales (B$) 0.21 0.27 0.38 0.53 0.63 0.76 0.78 0.80 0.83 0.85 0.88
Ethical Coffee's Sales (B$) 0.10 0.27 0.38 0.53 0.63 0.76 0.78 0.80 0.83 0.85 0.88
Nestle's Cost of Sales (B$) 0.66 0.69 0.77 0.86 1.03 1.23 1.27 1.31 1.35 1.39 1.43
Sara Lee's Cost of Sales (B$) 0.08 0.10 0.14 0.19 0.23 0.27 0.28 0.29 0.30 0.31 0.32
Ethical Coffee's Cost of Sales (B$) 0.04 0.10 0.14 0.19 0.23 0.27 0.28 0.29 0.30 0.31 0.32
Residual Value
Nestle's Net Contribution Margin (B$) 1.08 1.14 1.27 1.40 1.68 2.02 2.08 2.14 2.21 2.27 2.34 33.45
Sara Lee's Net Contribution Margin (B$) 0.13 0.18 0.25 0.34 0.40 0.49 0.50 0.51 0.53 0.55 0.56 8.03
Ethical Coffee's Net Contribution Margin (B$) 0.06 0.18 0.25 0.34 0.40 0.49 0.50 0.51 0.53 0.55 0.56 8.03
Nestle's NPV (B$) $21.38
Sara Lee's NPV (B$) $4.89
Ethical Coffee's NPV (B$) $4.83
20Anajpure, Kiewiet de Jonge, Larrain, Silva
Exhibit No. 4 – Nestlé responds with both price and distribution
Growth Rate of market first 5 years 20%
Growth Rate of market after 5 years 3%
Discount Rate 10%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Estimated Total Market (Billion capsules) 5.5 6.6 7.9 9.5 11.4 13.7 14.1 14.5 15.0 15.4 15.9
Nestle's Price ($) 0.417 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42
Sara Lee's Price ($) 0.400 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Ethical Coffee's Price ($) 0.400 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Nestle's Revenues ($) 0.305 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30
Sara Lee's Revenues ($) 0.277 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Ethical Coffee's Revenues ($) 0.277 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Nestle's Cost ($) 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15
Sara Lee's Cost ($) 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Ethical Coffee's Cost ($) 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Nestle's Capacity 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00
Sara Lee's Capacity 2.00 4.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Ethical Coffee's Capacity 0.35 1.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
Nestle's Unit Market Share 95% 90% 85% 85% 85% 85% 85% 85% 85% 85% 85%
Sara Lee's Unit Market Share 3% 5% 8% 8% 8% 8% 8% 8% 8% 8% 8%
Ethical Coffee's Unit Market Share 3% 5% 8% 8% 8% 8% 8% 8% 8% 8% 8%
Nestle's Sales (Billion capsules) 5.23 5.94 6.73 8.08 9.69 11.63 11.98 12.34 12.71 13.09 13.49
Sara Lee's Sales (Billion capsules) 0.14 0.33 0.59 0.71 0.86 1.03 1.06 1.09 1.12 1.16 1.19
Ethical Coffee's Sales (Billion capsules) 0.14 0.33 0.59 0.71 0.86 1.03 1.06 1.09 1.12 1.16 1.19
Nestle's Sales (B$) 1.59 1.81 2.05 2.46 2.96 3.55 3.65 3.76 3.88 3.99 4.11
Sara Lee's Sales (B$) 0.04 0.09 0.16 0.20 0.24 0.28 0.29 0.30 0.31 0.32 0.33
Ethical Coffee's Sales (B$) 0.04 0.09 0.16 0.20 0.24 0.28 0.29 0.30 0.31 0.32 0.33
Nestle's Cost of Sales (B$) 0.78 0.89 1.01 1.21 1.45 1.74 1.80 1.85 1.91 1.96 2.02
Sara Lee's Cost of Sales (B$) 0.01 0.03 0.06 0.07 0.09 0.10 0.11 0.11 0.11 0.12 0.12
Ethical Coffee's Cost of Sales (B$) 0.01 0.03 0.06 0.07 0.09 0.10 0.11 0.11 0.11 0.12 0.12
Residual Value
Nestle's Net Contribution Margin (B$) 0.81 0.92 1.04 1.25 1.50 1.80 1.86 1.91 1.97 2.03 2.09 29.85
Sara Lee's Net Contribution Margin (B$) 0.02 0.06 0.11 0.13 0.15 0.18 0.19 0.19 0.20 0.20 0.21 3.01
Ethical Coffee's Net Contribution Margin (B$) 0.02 0.06 0.11 0.13 0.15 0.18 0.19 0.19 0.20 0.20 0.21 3.01
Nestle's NPV (B$) $18.79
Sara Lee's NPV (B$) $1.82
Ethical Coffee's NPV (B$) $1.82
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