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Untapped Potential in the Coffee Machine Business: Italy

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Italy is still generally considered synonymous with proper espresso coffee, cappuccino and macchiato. After all, this is where these drinks were invented. Yet, the country ranks just sixth in Western Europe for sales of coffee machines. More interestingly, consumers in Spain and Portugal, and even in Greece, are showing a much higher propensity to buy expensive pod coffee machines than in Italy, and this is despite Italians drinking more fresh coffee than their Southern European counterparts on average.

Fresh Coffee Consumption vs Coffee Machine Sales: 2013

Source: Euromonitor International

Note: Bubble size shows the total value size of coffee machines in 2013. Range displayed 8 - 1,251 US$ million

Competition Within Foodservice Channel and Consumer Demand for Convenience

Indeed, the Spanish and Portuguese economies have taken a huge toll on the consumer foodservice industry, with consumers drastically limiting out-of-home expenditure on coffee. In Spain, out-of-home consumption of fresh coffee declined by 24% between 2008 and 2013. Here, nearly 11% of bars and cafés have closed since 2008. In Portugal, the number of bars and cafés has not declined as drastically, but out-of-home fresh coffee volume sales shrank by a staggering 33% over the same period.

Out-of-Home Fresh Coffee Consumption vs Pod Coffee Machine Retail Sales: 2008-2013

Source: Euromonitor International

In Italy, meanwhile, out-of-home volume sales of fresh coffee showed an overall contraction of just 9% over 2008-2013, with the number of cafés and bars  declining by just 3% overall over the same period. Furthermore, the effect of this contraction was further mitigated by the fact that the foodservice channel only accounts for 27% of total fresh coffee sold in Italy (against 40% in Spain and nearly 50% in Portugal).

In a nutshell, in Spain and Portugal, consumers have drastically cut their out-of-home expenditure on coffee and, in contrast, are investing in pod coffee machines to enjoy their espresso in the comfort of their own living rooms. Italians meanwhile are still finding drinking coffee outside the home quite convenient, especially considering that, in most outlets, a cup of espresso costs less than the equivalent of US$1.00.

Fresh Coffee Volume Sales by Retail/Foodservice Split: 2013

Source: Euromonitor International

Competition from Other Coffee Machine Formats

In Italy over 70% of fresh coffee is consumed at home, and competition from different coffee machine types represents another obstacle for the development of pod coffee machines, as opposed to Portugal and Spain. In Italy espresso coffee makers are very popular, accounting for around 44% of total electric coffee machines sold in the country. Additionally, many Italians still brew their morning coffee in a traditional stove percolator (“moka”), an old habit that is difficult to break, given the fact that these brewers are cheap and provide good coffee. Stove percolators are present in virtually every home in Italy, in different sizes and brands.

Behind the boom of pod coffee machines in most markets is the mess-free brewing experience. However, the sense of “mess” seems to be less of a concern in Italy, where consumers are used to choosing different coffee brands and quality and are used to measuring their coffee to give themselves their preferred-strength cup. Italians are therefore less sensitive to the idea of the “one-touch” coffee brewing experience that pod coffee machines offer, mainly because this experience comes at a price that is still perceived too high for many.

The Future Scenarios

It is true that, in Italy, sales of pod coffee machines are doing well. Still, despite the success of Nespresso, which is the unchallenged leader in the coffee pod category, many Italians prefer to spend that little bit more in local cafés. This means that coffee machine manufacturers and coffee producers have to work harder than in other markets to further expand their consumer base and avoid reaching early maturity. The question is: while Nespresso tries to gain a wider consumer base, can local players gain valuable share in the premium end of the coffee machine business?

There are two possible options for players willing to generate share in the premium coffee machine category. The first one is to join the crowd and challenge Nespresso in the pod category. In order for this to work, they will have to engage in a different idea of convenience and focus more on the exceptional taste and quality of their coffee, rather than on the brewing experience itself. The problem here remains gaining visible shelf space next to Nespresso and convincing consumers to pay a premium in a context where competition is already pushing prices down.

Another way to gain share of the premium market is to forget about coffee capsules all together and invest more in innovating the already popular standard espresso coffee makers with the aim of driving prices up and lead the premiumisation trend. Appliance manufacturers such as De’Longhi, Philips and SEB Groupe are already investing in automatic bean-to-cup models; still, these coffee machines are far from affordable and manufacturers will have to work harder on the price mix. Until this happens, Italian coffee lovers will stick with their old stove moka.

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