Nespresso Cafes Planned for Vienna, London

(This article was originally published on Tuesday.)

John Revill

ZURICH-- Nestlé SA's Nespresso single-serve coffee brand will apply for a joint venture with Austrian catering company Do & Co AG to set its first-ever cafes, Nespresso officials said late Tuesday.

The first coffee shop in Vienna is a pilot that could see further cafes rolled out in London and other prime locations across Europe and will put Nestlé, the world's biggest food company by revenue, head-to-head with Starbucks Corp. in the battle for high street coffee supremacy.

Nespresso has been one of Nestlé's big growth engines, with estimated sales of more than 4.5 billion francs ($4.86 billion) in 2014. The brand is also one of Vevey-based Nestlé's most profitable with margins of around 30%, much higher than instant coffee brands such as Nescafe.

But Nespresso, which is promoted outside the U.S. by actor George Clooney, has come under pressure in recent years as more companies launch their own capsule coffees that are compatible with its machines.

Annual sales growth has slowed from 29% in 2009 to 14% in 2013, according to estimates by Bank Vontobel in Zurich. Analyst Jean-Philippe Bertschy expects Nespresso growth to slow to around 8% to 12% in the next five years.

The move to set up cafes could reignite growth for the brand, which faces competition from more than 130 competitors world-wide including companies such as Mondelez International Inc., which is merging its coffee business with D.E Master Blenders 1753 B.V. Nespresso, which until now has only been on sale through the Internet, phone call centers and boutiques, has also lost legal battles to protect its designs in many markets.

Nespresso and Do & Co will file an application Wednesday to create a 50-50 joint venture to operate one pilot Nespresso Café in Vienna, which will be opened in the second half of March 2015, and one in London later in the year.

"The Nespresso Café will provide a new premium coffee shop experience to consumers combined with an innovative retail solution to purchase the brand's coffee capsules," said Diane Duperret, spokeswoman for Nespresso.

"The rationale for the JV is to combine the Nespresso brand and high quality coffee expertise with Do & Co's expertise in super premium food offering and operational know-how of fresh food service businesses to create a distinctive 'cafe boutique' experience," added Ms. Duperret.

Nespresso declined to reveal how much was being invested in the coffee shops, and said future cafes would depend on the results of the pilots.

Do & Co wasn't immediately available for comment.

Write to John Revill at john.revill@wsj.com

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