We all know that the Pandemic will leave a lasting impact on consumption habits, coffee being is one clear example of domestic adaptation to compensate for the loss of a previous pre-lockdown pass time. How this new army of home-coffee consumers will make their brew, is the battleground that is now being fought over. I believe capsule coffee will be one of the big winners, and in this article, I’ll explain why.
In January 2021, I received a large box of capsule coffee and pre-ground flavoured coffee from Coffee Roots, an ‘Integrated Beverage’ company based out of Belgium. What is an Integrated Beverage Company you may wonder? By moving away from any specific designation, such as ‘coffee or tea’, Coffee Roots is acknowledging that the growing popularity of single-serve drinks will provide an opportunity to build a wider range of beverages that can be delivered through the same mechanism.
An example is the Immunity range of drinks that Coffee Roots packages, which serves hot vitamin drinks that are light and fruity using the same Nespresso capsule format that you use for coffee. Below is a Beetroot & Turmeric Latte I made using Rejuvenation pods from Rejuvenation Water – another company that uses compostable capsules from Coffee Roots. The pods have received mostly very positive reviews. Personally, I found the taste to be a little light – I would prefer a stronger flavour, but my Chinese wife thought they would be a hit in China, where quality vitamins are hard to buy.
Before I tried any of the capsules that Coffee Roots sent, however, I had to purchase another Nespresso machine, since the one I was using previously used Nespresso’s proprietary Vertuo system. Third-party capsules are only available with the original Nespresso capsule format where the design patent has expired. A few weeks later and I finally purchased a compatible machine. I admit that part of the reason for being slow in getting the equipment was that I expected the results to be disappointing.
Instead, I was surprised – the difference between the coffee from these capsules and what I had been able to extract from the original Nespresso system was night and day – see my brief video ‘Speciality Coffee in a Capsule’ video below. Some of the coffee I tried was from award-winning speciality roasters like the ones below.
Coffee Roots shared some numbers with me and complimented by my own research and the revelation of the quality from capsule coffee that can be attained if done correctly led to the production of this article where I share my findings.
The Global coffee market as a whole is set to continue its growth over the next 5 years. From 2020-2025, the value of that growth is expected to be 4.22% overall, but segment analysis shows that the growth is not evenly distributed among the sector.
While the west obsesses with third-wave and speciality coffee, many other parts of the world have different tastes. Instant coffee still dominates in large markets like Japan, Brazil, and China.
The growth in value is expected due to higher sales of value-added products, including single-serve solutions which attract a higher price per kg than selling beans or ground coffee. The market value of capsule coffee is estimated to be circa $4.3bn and set to grow in the coming years at 6.77% Compound Annual Growth Rate CAGR until 2023.
The (CAGR) of the single-serve market is expected to be between 7-7.72% during this time, although again, the picture should take into account different national tastes. Asia is still dominated by instant coffee above all other segments.
Nespresso – Dominant in Europe
Any discussion on single-serve coffee has to include Nespresso. But how did they come to be so successful? It’s worth having a brief history lesson to see how we got here.
Nestle is a leader with their Nespresso brand (the name coming from a combination of Nestle and Espresso). An employee, Eric Favre, in the 1970s had the idea for a pressurised system after watching baristas at a popular cafe in Italy pumping the levers to increase pressure before initiating the extraction.
The first Nespresso machine was not produced until 1986, and it was targeted at businesses. 2 years later, sales were flat and it was clear the strategy wasn’t going to work. By good fortune, the company had recently appointed Jean-Paul Gaillard as Commercial Director, and through his leadership and a change in the product positioning and market strategy, the company saw a turnaround that now puts the Swiss company at the front of the huge global market.
Gaillard didn’t believe the product should be sold to businesses, but that it should be a consumer device. In fact, it should be a consumer device that the homeowner could aspire to. When you purchased a Nespresso machine, you bought into an exclusive club. In 2006, the company contracted with George Clooney for a highly successful advertising campaign that made Nespresso synonymous with capsule coffee.
Later, Gaillard fell out with Nestle and founded his own capsule business focused on the production of biodegradable coffee capsules in competition with Nestle. The Ethical Coffee Company closed it’s doors in 2017 with Gaillard saying:
We’re leaving the Nespresso format market, which is totally outdated, where nobody makes money any more
Alas, like many visionaries before him, Gaillard was just a bit too early with this business model.
Nespresso’s Cousin – Dolce Gusto
The market for Nespresso had been clearly defined by Nestle as an upmarket espresso machine, but in 2006 the company introduced a new capsule system with more mass-market appeal – the Dolce Gusto. This system was designed to produce common coffee shop favourites like a Cappuccino using only capsules. Making a layered cappuccino, for example, is possible with the Dolce Gusto pod system, by switching between milk and coffee pods.
As with the Nespresso brand, Nestle preferred to partner with manufacturers to make the machines, while they concentrated on their core competencies in coffee.
Capsules’ Increasing Popularity
There are advantages of capsules as a delivery medium over alternatives, and with higher profit margins, companies have an incentive to invest and promoting these systems to the domestic coffee audience that wants to up their coffee game.
In the west, instant coffee is not the solution most people are looking for, and neither is investing in expensive equipment to achieve the coffee-shop experience. Capsules can fill a gap of both convenience and quality, and as I found out the quality can be higher than some might believe.
The global coffee pods and capsules market is projected to grow at a CAGR of 7.72% during the forecast period.
- The combination of quality, convenience and amount of choice capsules offer, can explain why capsules and other single-serve solutions are gaining in popularity
- Low cost entry point of capsule machines give them a wide appeal
- A generation used to disposable items, accepts single use coffee, perhaps on the condition of being environmentally friendly (more on this below)
- Before Europe dominated market share of capsule coffee, but after 2009 the US market – driven by Keurig’s K-Cup system has made this a more global phenomenon
Capsules Environmental Credentials
In a conversation I had just this weekend with a consultant for ESG (Environmental, Sustainability, Governance) matters, I learned that new regulation in Europe requires any Fund Manager wanting to sell funds into the EU, regardless of where they are located to include new elements of ESG into their reporting requiring disclosure of any matters that might have a substantive or material impact on the business. Typically, a negative impact will come from bad PR following an environmental event or disclosure.
As people look at capsule drinks as a potential solution to their new caffeine restricted, homebound existence, the environmental question must be answered decisively. A challenge to the environmental claims of a company might run foul of the EU regulations, directly impacting a companies ability to attract funds from fund managers who manage money on behalf of Pension companies and Sovereign Wealth funds.
All this means that catchy environmental soundbites that don’t have the work or evidence behind them, are probably going to be harder to get away with.
Nestle has moved away from plastic capsules to aluminium, which can be recycled, but only when sent to plants that have specialist facilities. In the UK, all aluminium pods are sent to a single plant, which Nestle partnered with specifically for this purpose. The recycling plant keeps the recycled material as payment for the service, but getting the pods to the plants is a bill that I’m guessing Nestle is hoping the councils will pick up.
Considering that not all the councils have got involved, leads me to wonder if there is a commercial negotiation taking place between Nestle and the councils, whereby the company compensates the council as their collection agent. This would be reasonable given that Nestle would have savings from not doing it themselves through their own stores.
How Nespresso Recycling Currently Works
When you purchase a new Nespresso machine in the UK, you receive a green recycle bag where to put your wasted pods, which you, however, research indicates that only about 30% of households use this service, which is inconvenient to organise. When I looked at my options for recycling the bag that came with my machine during the lockdown, their page was unhelpful. The option of arranging a complimentary collection service looked promising, but the asterisk had no related reference and it was unclear how to proceed.
Nestles New Recycling Plan
The company is clearly aware they need to do more and has recently announced a new service called ‘Podback’, which is going to be launched this year in partnership with JDE Peets, who has recently invested themselves in facilities to manufacture aluminium pods at scale. Instead of having to drop your bag at a Nespresso outlet, you’ll be able to leave it kerbside during rubbish collection days, in a number of regions where the local council has agreed to collect the waste on behalf of the companies.
This is desperately needed – to put it in context if 70% of pods are not being recycled, that is the equivalent of 54,000 tons annually going into landfill. That would be enough material to build 5 Eiffel Towers or 240 Statues of Liberty. Every year! In fact, British Programmer Sky made a documentary on this problem.
In the US, the popular Keurig K-Cup has gone through a similar painful migration to sustainability. In earlier iterations, the product required the user to disassemble and separate the elements so they could be recycled separately. At the end of 2020, the company had moved toward a plastic material that was 100% recyclable.
Compostable is Better than Recyclable
Recycling is not an ideal answer, not least of which because there will always be a substantial percent of material that never makes it to the recycling plant, and even then, it takes energy to recycle materials.
Compostable materials however can easily and cheaply managed. I discovered, while in discussion with a paper cup designer, that to be considered a truly compostable material in Europe, you must meet stringent requirements. A capsule made from a material that quickly degrades in the soil will not only not have negative effects, but coffee grounds are generally considered beneficial to the soil.
I knew that the capsules sent to me by Coffee Roots were compostable, but I wanted to dig in to get the details. Fortunately, there is quite a lot of information on their website. For example, their Nespresso compatible capsules are made from lignine, a by-product of the wood and paper industry, which means they can be produced in a climate-neutral manner. The material themselves are certified compostable to the strict European EN13432 regulation.
Having used these compostable products for the last 2 months, I can also say that it feels good in the hand. That may sound strange, but although the shiny aluminium capsules from Nespresso look pretty at first, you subconsciously acknowledge that despite putting them in the recycle bag, you’ll never get around to driving to the nearest Nespresso outlet to drop it off.
With the natural fibrous capsules, however, there was no guilt attached to having a coffee, and it felt good to just throw them in the compost bin afterwards.
Final Thoughts on Capsules and the Environment
The same argument about the profit margins on capsule coffee also impacts the environmental question. High margins exist in part because so little coffee is used in a capsule vs grinding and brewing coffee manually. Since there is an environmental cost to every Kilogram of coffee produced, there is an environmental saving from using less of it.
Where will the Capsule Market Go from Here?
The analysis shows the market to be reasonably strong for capsule coffee over the next 3-5 years. However, while this is going to be contained in the traditional markets, in particular Europe and North America, I feel there may be opportunities to piggyback off the system outside the regular approach.
With sustainable packaging, convenience, and a low cost for consumers to buy into the system, I can see novel uses for both Nespresso and Dolce Gusto type devices. The Rejuvenation concept is one idea, but when researching the materials Coffee Roots used, I noted on their website flavoured hot chocolate in Dolce Gusto capsules!
Perhaps a significant indicator could be that the company themselves, while still named Coffee Roots, now describes themselves as an ‘Integrated Beverage Company’. They certainly seem to be confident the market will have a lot of opportunities beyond our traditional concept of coffee.
I’d like to thank Coffee Roots for their assistance in supplying some of the data used in this article, and for sending me packs of capsules from different companies I could try. They have not seen any version of this article prior to publishing and haven’t paid or influenced its direction. The thoughts and opinions contained herein are my own.