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Thinking Again… The Future of Coffee Pod Machines

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Last October I explored the striking differences between consumption of coffee pods and fresh coffee in Western Europe and the US, and what that meant for future sales of coffee machines. I came to the conclusion that “…perhaps by investing more in open coffee brewing systems, manufacturers could favour with consumers who might be willing to spend more for a coffee machine that offers them free choice rather than being tied to a brand for life’.

It might be time to think again...

The exclusive capsule system behind the fortunes of Nespresso could soon lose the means of defending its incredibly successful model.  The patent on its hard pod coffee machines has been infringed, legally, by the small British company, Dualit, which is now allowed to sell coffee pods compatible with Nespresso machines in the UK.

While this may be a blow for Nespresso’s sales of coffee pods, whose success was based on the exclusivity of the patented system, it could mean more business for coffee machine manufacturers, who combined sold over 3.5 million Nespresso machines in 2012.

Its too early to say for sure, but by losing its exclusivity, Nespresso could potentially become an open system, encouraging consumers who prefer more exclusive coffee brands to now consider the Nespresso machine as a viable option. Until now iconic coffee brands such as Illy and Lavazza have developed their own brewing systems, but with disappointing results. Nespresso machines are marketed as best in class coffee makers, and consumers may now be able to use best in class coffee in them.

My original thinking was that as consumers become more promiscuous with their coffee, as they are in Western Europe, premium open systems would benefit at the expense of restrictive closed systems like Nespresso. If that system is no longer closed, however, it once again becomes a strong contender for consumers weighing up the pros and cons of different coffee machines.

So early after the court ruling there are still many unknowns. Will this precedent be the catalyst for further challenges around the world? How will Nespresso react and how hard will it fight to protect the closed nature of its system?

While Nespresso could soon face the challenge of convincing consumers that its pods contain the best coffee, for the licensees who manufacture the actual machines, such as De’Longhi, Groupe SEB and Magimix, this development could be seen as a boon.

If You Think That the Future of Coffee Machines is All Pods, Think Again (Published October 2012)

There are many untapped opportunities in the global coffee machine market, and they are not just in pod formats. True, pods are driving sales in North America, the world’s biggest coffee machine market and also the most dynamic. Here overall volume sales of coffee machines are forecast to expand by an additional 6 million units annually by 2017. In context, this is six times bigger than the absolute growth expected in Western Europe.

Behind this phenomenal growth in North America lies the success of hard pod coffee machines which, according to new data from Euromonitor International, are set to become the preferred format by 2014, overtaking cheaper and traditionally more popular filter coffee models.

Western Europe: penchant for premium

Does this mean that Western Europe has run out of steam? Far from it. In fact while Western European consumers are expected to buy fewer coffee machines in the mid-term, when they do, they will spend far more per machine than anyone else.

The standard coffee machine market, which includes all standard brewing systems (espresso, filter, percolators and combination coffee machines) is worth over US$2 billion in Western Europe, almost double that of North America. In the old continent consumers spend an average of US$144 on a standard coffee machine, in North America it’s just US$42.

Standard Coffee Machine Sales, US and Western Europe, 2012-2017

Standard Coffee Machine Sales, US and Western Europe, 2012-2017

Source: Euromonitor International

That Western Europeans are prepared to invest in their coffee machines does not come as a surprise since they also spend the most on fresh ground coffee globally. We estimate that in Western Europe consumers will be spending an extra US$2.2 billion annually in fresh coffee in the next five years. Come 2017 the regional market will be worth US$19.6 billion, the size of North and Latin America combined. And they are willing to pay a premium to prepare it properly.

Fresh Coffee Sales, US and Western Europe, 2011-2016


Fresh Coffee Sales, US and Western Europe, 2011-2016
Source: Euromonitor International

Look for value growth beyond pod machines

We are already seeing that the thriving volume sales of pods machines are not delivering the boost in value that manufacturers had once hoped for. Quite the contrary, in fact, as increased competition in the segment combined with model diversification is driving the price of pod machines down, while standard coffee machines, such as espresso and filter, are instead undergoing premiumisation.

So while it is true that, in absolute terms, consumption of coffee pods in Western Europe is expected to post the largest growth in the mid term, it is also true that fresh ground coffee and coffee beans combined still account for 74% of the total fresh coffee market value, and this predominance won’t change in the near future.

Western Europeans do spend more than anyone else on their coffee, and are prepared to pay for a coffee machine that does it justice it. So how can manufacturers make the most of this counter-intuitive trend in a tough economic climate?

Perhaps by investing more in open coffee brewing systems, manufacturers could find favour with consumers who might be willing to spend more for a coffee machine that offers them free choice rather than being tied to a brand for life. The coffee machines market has already proved itself responsive to innovation, and Western European love of coffee is certainly resilient enough to suggest there is scope for premium options beyond the pod.

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