What’s brewing: Capsules serve up competition in Singapore’s coffee market

What’s brewing: Capsules serve up competition in Singapore’s coffee market

Banking on novelty, convenience and an array of flavours, coffee capsules and machines such as those from Nespresso, are fast winning over local consumers. Apart from Nestle's Nespresso and Dolce Gusto, a bevy of new players are vying for a slice of this burgeoning coffee segment.

SINGAPORE: These days, Ms Crystal Ling’s morning coffee comes in the form of a teal-coloured, bucket-shaped capsule.

By popping it into a Nespresso machine in her office’s pantry, black coffee covered by a light caramel-coloured froth fills her espresso cup in about 40 seconds.

“I like dark espresso that’s a bit bitter. There’s a café near my office that has what I want but at S$7 a cup, it’s not something that I should be having every day,” said the 27-year-old marketing executive, who is contemplating getting her own coffee machine.

“Because these capsules need to be used with the Nespresso machine, I’m thinking of having one at home. My parents say it’s an expensive toy but I think ultimately, it will be cheaper than what I have been spending at cafes previously… The capsules cost less than S$1 each and for that price, it’s not bad.”

Banking on novelty, convenience and an array of flavours, coffee capsules and machines, such as those from Nestle’s high-end brand Nespresso, are fast winning over local consumers like Ms Ling. According to research house Euromonitor, single-serve pods – including soft pods made from filter paper and hard pods that are often known as capsules – have been the fastest growing segment in Singapore’s coffee market since 2011, outpacing other segments with average year-on-year growth of nearly 5 per cent in terms of retail value. In comparison, the instant coffee segment grew an average of 2 per cent year-on-year during the same period.

Within this burgeoning segment, Nespresso, which first entered the local market in 2008, remains the dominant player. Nestle’s younger and cheaper range of single-serve coffee Dolce Gusto follows behind in terms of market share, helped by its lower pricing and wider variety of retail channels, noted Euromonitor’s research analyst Andrea Lianto.

Nescafe Dolce Gusto's latte macchiato series. (Photo: Tang See Kit)

And even amid an increasingly sluggish economy, industry observers remain upbeat that the coffee-in-a-capsule segment will continue to outperform the broader coffee market in the upcoming years.

“With higher disposable income, increased need for convenience and growing interest in high-quality coffee, coffee capsules still have room for growth in Singapore,” said Ms Lianto. “(Industry players) need to educate and convince consumers about the convenience and quality of capsules so that consumers are compelled to pay a premium for the product. The sustainability of capsules also depends on players’ efforts to maintain consumers’ excitement in the category, for example through new flavour launches.”

This optimism is also shared by the market players.

Nespresso Singapore, for instance, believes that its price adjustment in November means that its capsules have become an “affordable luxury experience” that consumers can have on a daily basis.

“Even with the slowdown, people will still want to enjoy life and have moments of indulgences… if you look at the new Nespresso capsule prices, you will realise that a cup of Nespresso coffee is now an affordable luxury that you can have every day,” country manager Matthieu Pougin told Channel NewsAsia. “This is what we see in our boutiques as well. Even with the economy slowing down over the past two years, people continued to shop at our boutiques.”

Over at Nescafe Dolce Gusto, expectations remain for the brand to see more than 5 per cent growth in the coming years. The Nestle range, which stands for “sweet flavour” in Italian, has logged double-digit growth year-on-year since its foray into Singapore six years ago.

“The Singapore economy is facing some of its toughest challenges now (but) for the coffee capsule segment, there should still be good growth,” said Mr Chow Phee Chat, the brand’s head of business in Singapore. “Currently, the capsule segment remains one of the smallest within the market so we do project that it will still be growing very fast.”

BREWING COMPETITION

But for these brands, a slowing economy that could tighten consumers’ purse strings is not just the only potential challenge looming ahead.

While Nestle’s dual-brand strategy has continued to ensure its dominance in the Singapore capsule market, it is a different picture globally.

Keen competitors such as US single-serve coffee company Keurig Green Mountain and other upstarts that have begun making less-expensive capsules compatible with Nespresso machines, have been eating into Nestle's global market share. According to Euromonitor, the Swiss food giant controlled 11.1 per cent of the global coffee capsule market in 2015, down from 13 per cent in 2011.

Nescafe Dolce Gusto follows behind Nespresso in terms of market share in the Singapore market. (Photo: Tang See Kit)

In Singapore, a handful of homegrown instant beverage makers like Owl International and Boncafé have rolled out their respective capsule ranges, and there are other brands of Nespresso-compatible pods that can be easily purchased online. While alternative options have emerged, Ms Lianto said the “minimal presence” of these selections means Nestle will likely be unrivalled for now.

But that does not mean that local capsule coffee lovers have not begun exploring other options.

Ms Lim Shiyun, who owns a coffee machine from Nespresso, has bought capsules from other brands such as local café chain The Providore. “I’m quite adventurous when it comes to coffee. Since these capsules work with my Nespresso machine, there’s no harm trying out new flavours,” the 29-year-old said.

Singapore-based Hook Coffee, for one, produces Nespresso-compatible capsules with sustainably-grown coffee beans sourced from around the world. Founded in early-2016, the online business also sells specialty coffee in other brewing methods such as French press and drip bags, and offers a coffee subscription service.

Founders Ernest Ting and Faye Sit told Channel NewsAsia that they introduced capsules to their product line-up last June and since then, sales have been in line with expectations. Given rapid growth in the local capsule market, Mr Ting said the new venture was a no-brainer even if there were significant challenges involved for the young firm.

Founders of Hook Coffee, Ernest Ting and Faye Sit. (Photo: Tang See Kit)

For one, the production of capsules involved much more extensive research and development (R&D), compared to other brewing methods.

“Each pod contains 5.5 grams of coffee and to get the same body and flavour in 30 seconds of extraction time, is very challenging. The roasting technique and the blends have to be precise; even the grinders are different so it’s a very complicated process and a huge amount of R&D investment that goes into making just one pod,” Mr Ting explained.

That is why the introduction of new capsule flavours have been slower than other brewing options, which usually sees new additions once a month, he added.

Meanwhile, to prevent wastage, an average of 10,000 capsules are filled during each production cycle. With such a large-sized production, it is crucial for the start-up to get things right before the release of every new flavour, Ms Sit told Channel NewsAsia. “Especially for a small market like Singapore, a large production batch is also tricky so we have to be really careful and do a lot of market research.”

Despite the difficulties, the two young entrepreneurs still think their five-figure investment into capsules has been worthwhile and remain optimistic on sales, even as competition seems to have been turned up a notch after the market’s biggest player, Nespresso, lowered the prices of its coffee range.

“Twenty per cent of our total sales right now are capsules. That’s the same as our drip bags and achieved within six months… As more people want convenient options, we think there will be an increase,” said Mr Ting.

The 25-year-old added: “Interestingly, when Nespresso lowered their prices, we maintained ours but we didn’t see a drop in subscribers. In fact, it increased slowly so we think consumers are coming to us because we offer a more artisanal option.”

Hook Coffee invested a "five-figure sum" to add Nespresso-compatible capsules to its product line-up. (Photo: Tang See Kit)

PRICE CUTS, NEW PRODUCTS TO GET A SHOT IN THE ARM

Still, industry observers said the nearly 30 per cent price reduction follows Nespresso’s recent adjustments in other markets, and will give the high-end brand a shot in the arm when it comes to competing with lower-priced rivals. For instance, Ristretto and Espresso capsules that were S$0.91 each are now S$0.68, cheaper than Dolce Gusto’s Espresso Intenso that retails at S$11.90 for a box of 16.

Describing Singapore as a “unique market” where “coffee is part of the people’s DNA”, an increasingly discerning taste for coffee among local consumers has spurred Nespresso’s growth over the past eight years, said Mr Pougin. However, he denied that increasing competition was a catalyst for the recent price adjustment, adding that “Nespresso continues to grow in (Singapore) regardless of competition”.

“We didn't make the decision to decrease the price because of competition,” Mr Pougin told Channel NewsAsia. “The reason we did that is because we have been here for more than eight years and we now have the ability and want to offer the Nespresso experience to a bigger group of consumers.”

Meanwhile, Nescafe Dolce Gusto said it has “no plans to relook (at) its pricing”, primarily because the brand’s competitive edge remains in its capsule beverages that go beyond coffee and its diverse retail locations such as supermarkets.

“We have a place in the market. We offer a variety of beverages not just for coffee enthusiasts… (but) also tea and hot chocolate. We are a coffee system that not only offers good quality coffee, but beverages for the whole family,” said Mr Chow, who added that the brand’s new varieties including healthier options such as its unsweetened Latte Macchiato will continue to “surprise consumers”.

In the meantime, Dolce Gusto is also betting on new coffee systems to help it keep up with competition. The brand’s latest “Eclipse” machine comes with an unconventional circular design and a touch screen interface.

Nescafe Dolce Gusto follows behind Nespresso in terms of market share in the Singapore market. (Photo: Tang See Kit)

DIVERSIFY INTO CAPSULES? MAYBE NOT YET

Nonetheless, there is at least one beverage maker who is opting to sit out of the hype for now.

Mr Desmond Ng, managing director of local instant coffee brand Gold Kili, told Channel NewsAsia that the rising popularity of coffee capsules has had little impact on sales. The 32-year-old household brand also has no plans to follow in the footsteps of other homegrown beverage makers, given that coffee capsules remain “a non-mainstream option” for now and there are consumers who are not willing to splurge on a coffee machine. “As such, a packet of instant coffee, which is usually four times cheaper than a capsule costing around S$1, remains more attractive to price-sensitive consumers,” Mr Ng added.

Gold Kili also prides itself on its traditional brew that is achieved by roasting a mixture of Arabica and high-caffeine Robusta coffee beans with sugar or caramel. Even amid the rise of Western-style coffee that uses just Arabica beans, Mr Ng believes that the traditional brew will continue to have its loyal following.

Eurmonitor’s Ms Lianto agrees: "Instant coffee targets a different segment of consumers through a much lower price point than capsule coffee. On average, one serving of instant coffee costs less than one-third of one serving of capsule coffee.

"As such, many instant coffee consumers, especially those who are price-sensitive, find themselves reluctant to shift completely to capsule coffee for their regular caffeine fix."

However, Gold Kili’s Mr Ng is not ruling out expansion plans to tap on new emerging trends in the local coffee market, such as coming up with specialty coffee bags to attract younger consumers.

“Capsule machines remain expensive and with capsules far from being the mainstream option for consumers, we won’t be heading in that direction for now," he told Channel NewsAsia. "But we are considering Western-style coffee bags to cater to the tastes of younger consumers. We think there’s still a gap in this market and there’s a business opportunity for us."

Follow See Kit on Twitter @SeeKitCNA

Source: CNA/sk