In late 1988, the newly appointed CEO of the Nestlé subsidiary, Nespresso, was trying to decide how to rejuvenate his subsidiary’s financial fortunes. Jean-Paul Gaillard had just taken over a subsidiary that, despite selling one of Nestlé’s most innovative new products, was facing serious financial problems.
The Nespresso product was a system that allowed the consumer to produce a fresh cup of espresso coffee at home. Though simple in appearance and use, it took Nestlé more than ten years to develop it. The system consisted of two parts: a coffee capsule and a machine. The coffee capsule was hermetically sealed in aluminum and contained five grams of ground roast coffee. The machine consisted of a handle, a water container, a pump, and an electrical heating system. These four parts were cast into a body to form the machine.
The use of the Nespresso system was straightforward. The coffee capsule was placed in the handle, which was then inserted into the machine. The act of inserting the handle into the machine pierced the coffee capsule at the top. At the press of a button, pressurized hot water passed through the capsule. The result was a creamy, foamy, high-quality cup of espresso.
The new product was introduced in 1986. Nestlé’s original strategy was to set up a joint venture with a Swiss-based distributor, called Sobal, to sell the new product. This joint venture (named Sobal-Nespresso) would purchase the machines from another Swiss company (called Turmix) and the coffee capsules from Nestlé, after which it would distribute and sell everything as a system — one product, one price. Offices and restaurants were targeted as the customers and a separate unit called Nespresso S.A. was set up within Nestlé to support the joint venture and to service and maintain the machines.
By 1988, it was clear that the new product was not living up to its promise. Sales were well below budget, and costs were escalating due to quality problems. Nestlé executives were considering halting the operation when Jean-Paul Gaillard was chosen to decide whether and how to strategically reposition the subsidiary.