In 2018, a staggering 59 billion coffee capsules were produced. In the same year, the global coffee pods market was valued at almost US $1.3 billion. It’s estimated that Nespresso alone manufactures around 14 billion pods a year, and that hundreds of their beverages are drunk every second.
It almost seems impossible to think back to a time where the capsule market didn’t exist. In today’s coffee sector, pods are a constant. They’re a permanent fixture, and we all just accept the astounding level of growth that they achieve with every passing year. But where did they come from? And how did it all start?
Read on to find out.
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A Slow Start For Pods
The coffee pod market started with Nespresso, which was launched in 1986 by Swiss multinational Nestlé. The idea was born when Eric Favre, a Nestlé engineer, visited a particularly popular Italian espresso bar in 1975. He observed that baristas continuously pulled the levers on their espresso machines to increase the pressure and change how the coffee extracted.
Over the next ten years, Favre developed this idea to create a simple brewer that mimicked the dynamics of an espresso machine. The machine added pressurised air into the water and ground coffee to create a drink that had a pronounced layer of crema. It wasn’t until 1986 that Nestlé registered the trademark and patented the machine.
Nespresso initially pitched their machines as an all-in-one, easy-to-use coffee machine for office buildings. But after they pitched four different capsule types to multiple offices in Switzerland and Japan, nobody seemed to be interested.
In 1988, Jean-Paul Gaillard joined Nespresso. He decided to change how the Nespresso machines were marketed. Rather than targeting the product to businesses, he looked to sell it to home consumers as a luxury item. He even increased the price of each capsule by around 50%.
Sales started to take off. Around the same time, Gaillard created “Club Nespresso”, or “Le Club”, which made customers feel like they were a part of an exclusive coffee “lifestyle”.
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Andre Chanco is the co-founder of Yardstick Coffee in Manila, Philippines. He recently co-founded Morning, an online specialty capsule marketplace. He tells me: “Initially, Nespresso made a huge impact by allowing coffee drinkers to enjoy an espresso at home, without all the technicalities of preparing that perfect espresso,” he says. “Convenience was the main draw, paired with the elegance of their solution.”
In the late 1980s and 1990s, Nespresso sales started to increase. But while coffee pods became increasingly popular in Europe, they struggled to take hold in the US. Some attributed this to the high popularity of filter coffee in the US in comparison to Europe, where espresso has historically been more prevalent.
But as Nespresso became more successful through the 1990s, competitors started to appear. In 1990, Green Mountain Coffee Roasters (now trading as Keurig Dr Pepper) founded Keurig, a US single-serve capsule brand.
However, while Nespresso had the immense profits of Nestlé behind them to support their expensive ad campaigns and aggressive expansion, Keurig did not. A waiting game began: competitor brands emerged and observed while Nespresso enjoyed their dominance.
The Market Explodes
By 2006, Nespresso’s revenue had passed £500 million, and a number of competitors had entered the market, including Keurig.
“Their patents started to lapse from around 2012, and that allowed other coffee players to explore this format,” Andre says. He explains that that because capsule machines were already so popular, competitors could enter the market and just offer pods. There was no need to invest in developing a costly machine of their own.
Nespresso had originally registered around 1,700 patents, and they attempted to sue companies who were manufacturing similar products, but it was too little too late. By 2010, American-owned Sara Lee introduced their own capsules in France. Within months, they had sold millions at a cheaper price than Nespresso pods.
Today, there are around 400 competitor capsule brands on the market. John Steel is the CEO of Cafédirect – a UK-based company that specialises in coffee, tea, and cocoa. He tells me: “Cafédirect launched its Nespresso-compatible coffee pods in 2014. At the time, there were only a few NC pods available in the market.”
John explains that capsule consumers generally want to create the café experience in their own home. He says that this was something that a number of chain coffee shops identified, and wanted to capitalise on. “Growth in the market is coming from existing Nespresso-compatible pods and a number of new entrants,” He says. “Most noticeable are brands like Starbucks and Costa.”
Today’s Coffee pod Market
The capsule market shows no signs of slowing down. Nespresso have even recently announced that they are planning a CHF 160 million investment into one of their factories in Switzerland.
John explains that a focus on both quality and sustainability has only driven the market further. “The quality of coffee has improved, but more noticeably, so has the quality of packaging and the technology involved with it. In the early days, the failure rates of pods in machines were high, as was the presence of oxygen in the pods, which caused the coffee to go stale.”
Andre tells me that today, there is a renewed focus on freshness and innovation in the capsules themselves. “There are continuous improvements in the aluminium capsule format, making them brew better with existing machines.
“They also sometimes allow roasters to dose more coffee inside. Recently, the compostable capsules have improved, as has the seal on the capsule itself, which keeps coffee fresher for longer.”
Today, a single Nespresso capsule retails for somewhere between US $0.70 and $1.20. That’s still cheaper than the average coffee shop espresso. This low price is mainly due to the fact that each capsule contains between 5 and 6 grams of coffee. That’s around a quarter of the 18 to 21 grams that a barista would typically use to pull an espresso shot.
However, in recent years, more and more capsules containing specialty-grade coffee have emerged. This shows that some consumers are willing to pay more for quality. “Just like the wider coffee industry, the coffee capsule market is going through ‘waves’ or phases,” Andre says.
“When Maxwell Colonna-Dashwood placed high-quality coffee inside a Nespresso capsule in 2016, it proved to be a viable way to balance quality and convenience,” he explains. “He was able to preserve the inherent qualities of the coffee, while allowing the end-user to enjoy the coffee in the way he intended.”
What’s Next For Coffee Pods?
There has been some growth for specialty coffee pods in recent years. Andre explains that this was the concept behind Morning. “We started the Morning marketplace in late 2019 with a strong hunch that more and more specialty coffee roasters would be putting their coffees into capsules.
“We observed top roasters from around the world like ST. ALi from Melbourne, Papa Palheta in Singapore, and Maxwell Colonna-Dashwood, who were all adapting the Nespresso-compatible capsule format.”
However, with a demand for higher quality coffee, consumers also look for improved sustainability and transparency. “When you consume more, you become more aware of the environmental impact and the search for quality,” Andre says.
“These two, plus convenience, are what customers look for in capsule coffees today. It’s just that different consumers put a different amount of emphasis on each factor.”
Sustainability is not a new topic of discussion for the capsule market. In 2018 alone, some 56 billion capsules went to landfill, with fewer than 5% of all capsules being recycled. In 2016, the local government in Hamburg, Germany banned capsule use in all government-owned organisations and offices.
The pressure is on for capsule companies to become more proactive in reducing their environmental impact. “Packaging recyclability has been high on the agenda. Many manufacturers are using aluminium coffee pods to mirror the Nespresso product but also to encourage recycling,” John says.
Nespresso was aiming to increase its recycling rate up to 100% by 2020, with 14,000 global capsule recycling points across 31 countries. However, according to a 2018 report by British compostable capsule manufacturer Halo, 42% of UK consumers just throw them away.
The same report states that more than 50% of consumers don’t know the difference between the words “recyclable”, “biodegradable”, and “compostable”. It’s clear that capsule manufacturers don’t need to just provide recycling solutions; they need to educate and empower their customers to dispose of their waste responsibly.
Andre believes that as the pod market develops, an option that balances quality, sustainability, and convenience will become accessible. “I think all three can be achieved today, but probably couldn’t have been a few years ago. I expect more environmentally friendly formats to emerge in the future, as well as better local systems for recycling capsules.”
Despite the obvious environmental issues, the coffee pod market continues to thrive. Consumers still want the ultimate convenience of coffee shop style drinks in the comfort of their own homes. Furthermore, sustainability and quality are rising up the agenda for capsule consumers across the world. However, the question remains: how will major capsule manufacturers respond?
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