Marketing 2

Nestle Nescafe Instant Coffee: Farmers Blendi

The Instant Coffee Market

Instant coffee is water soluble coffee powder from

roasted or ground coffee beans. Although it has

been around for decades, it has seen a dramatic

uptick in demand over the past 15 years and the

trend is expected to continue (see chart). Experts

attribute this growth to the following factors:

 Convenience – easier and quicker to make than ground coffee

 Can be prepared by anyone – just add hot water and stir

 Globalization nudging people towards coffee, especially in tea-drinking markets

 Innovation has led to better quality, aroma, and flavor

 Social trend to start drinking coffee at a younger age

The US is the world’s largest coffee consumer. While ground coffee dominates, consumed by

80 million people, there are 32 million instant coffee drinkers in the US (13% of population). The

instant coffee consumer tends to be less educated (50% have no college education) and have a

lower household income (<$50,000) than brewed coffee drinkers (source: MRI).

The US instant coffee market has long been dominated by 3 brands – Folger’s, Maxwell House,

and Nescafe. In 2009, Starbucks introduced VIA, a premium instant coffee (see table). While

all 4 brands can be found wherever ground coffee is sold, VIA is also found in Starbucks cafes.

Retail prices and consumer purchase behavior can be found in the Exhibit.

Ethical Coffee and the Fairtrade Labeling Organization (FLO)

The 2001 crash in the extremely volatile coffee bean market forced farmers out of business and

left coffee-producing countries economically devastated. Campaigns from Oxfam and the

Fairtrade Labeling Organization (FLO) resulted in public demand for ethically and sustainably

sourced coffee, especially in Europe. As a result, coffee producers started marketing

sustainable coffee and the issue dropped out of the media for a while. However, ethical

shopping is now a trend again, especially among younger consumers.

Products labeled “ethical” or “sustainable” are either linked to a supply chain where farmers

receive a fair price or other ethical or sustainable practices occur. To use the FLO Fairtrade

mark (see image), which verifies that fair trade standards have been met, coffee manufacturers

must:

1. Purchase beans from farmer-run co-ops (i.e. do not use middlemen)

2. Pay farmers a 4% premium over the market rate for beans.

3. Pay FLO a licensing fee of 2% of revenue on all products sold with the

Fairtrade mark.

FLO has identified 3 consumer segments based on interactions with ethical practices. 2% of

the population are Global Watchdogs who actively scrutinize product details, boycott products

from unethical companies, and consume only independent brands that are certified fair trade.

23% are Conscientious Consumers who are informed and engaged, intentionally purchasing

fair-trade, sustainable, and organic products in addition to mainstream products. 75% fall into

the Do What I Can segment who take responsible action when they can, but are often unwilling

to pay a noticeable premium or sacrifice quality.

Coffee is the most popular fair trade commodity in the world. However, it represents only a small

portion of the total coffee market. In the US, fair trade makes up less than 5% of all coffee

sales. Starbucks is notable for committing to 100% ethically sourced coffee. In contrast, neither

Folgers nor Maxwell House participates in fair trade, choosing to emphasize price instead.

Nestle’s Nescafe

Nestle is the largest coffee producer in the world. In the US, their sales revenues for instant

coffee are split 2/3 to Nescafe Taster’s Choice (TC) and 1/3 to Nescafe Classic, their premium

coffee. US sales across both labels have declined 1.5% a year for the past 5 years due to

competition from Starbucks VIA as well as single-serve coffee systems (e.g. Keurig).

Nestle executives in Switzerland are demanding action. They think the time has come for the

global leader in instant coffee to grow their US market share. Not only is the demand for

convenience greater than ever, but VIA improved perceptions for instant coffee and attracted

customers from outside the traditional instant market. Further, Nestle has yet to leverage their

multiple sustainability efforts in the US coffee market. One executive stated, “We want

consumers to know Nestle is serious about helping coffee farmers.” In addition to purchasing

15% of their beans directly from farmers and processing 30% of their beans in the regions

where they’re grown, Nestle spends $1 million annually on technical assistance to farmers and

various community improvement projects (e.g. building schools, water treatment plants, etc.).

The option under consideration is a US launch of Farmers Blend (FB), an instant coffee made

from beans purchased directly from farmers that can be marketed as ethical and sustainable.

Nestle has similar products that they sell through grocery and food service in the United

Kingdom, where organic and fair trade are more prevalent concerns. Farmers Blend could

therefore launch in the US without any new R&D or operational costs.

Your tasks will be as follows: 1) decide whether Farmers Blend should launch as a regular

instant coffee under Nescafe’s TC label with its tagline “The simple solution to a fast-paced life”

or as a premium instant coffee under Nescafe’s Classic label with its tagline “The world’s

premium coffee brand;” 2) decide whether or not Farmers Blend should launch with the FLO

Fairtrade mark; 3) recommend launch implementation tactics. Corporate will allocate $5 million

to the launch with the expectation that the new product breakeven in the first year.

Your team has gathered the following information to assist with your decision.

 Farmers Blend would launch in 100-cup jars (standard size)

 Regardless of branding choices, $5 million for advertising and promotions should

produce 40% awareness among instant coffee drinkers and 60% ACV distribution

 Nestle surveyed 200 instant coffee drinkers in the US. Results indicate that they are

sympathetic to the plight of coffee farmers, with 50% willing to try a fair trade coffee

 Data from FLO states that half of all coffee drinkers globally (regular or instant) who

heard of Fairtrade have bought it at least once

 Retail margins for instant coffee are 20% (averaged across channels and brands). Due

to Nestle’s size, they sell direct to retailers without using a wholesaler

 Nescafe’s contribution margin is 40% for Classic and 30% for TC

 Raw beans represent 50% of the variable cost for both Classic and TC. You can

assume the cost of beans will be the same for Farmers Blend with the exception of the

FLO premium should you decide to go that route.

 Although Nescafe consumers resemble other instant coffee drinkers in the US, the TC

consumer tends to be older (age 55+) than the Classic consumer (age 18-54).

Exhibit

i iThis case was written by Professor Lisa Abendroth for MKTG 625. The content is a mixture of fact and fiction and should not be used outside the context of this course. Sources are available upon request.

Folger's

Crystals

Maxwell

House

Nescafe

Classic

Nescafe

Taster's

Choice

Starbucks

VIA*

Store

brands Other

Percent of instant coffee drinkers

who report consuming each brand

in the last 6 months (Source: MRI)

37% 26% 21% 14% 8% 10% 7%

Retail price per 1 cup $0.06 $0.05 $0.10 $0.08 $1.00 $0.04 N/A

Retail price per 100-cup Jar $6.00 $5.00 $10.00 $8.00 N/A $4.00 N/A

*Sold as 8 single-serve packs in a box