Nespresso is a great business. If it were possible to invest directly into the business, this would be a top choice! It checks all the ‘great investment’ boxes:

• it created a market for itself (first player move)
• it controls the production, distribution and retail chains (consumer monopoly)
• consumers are price insensitive: you paid £100 for a coffee machine that you knew could only take coffee from Nespresso, do you really care if a pod costs £0.3 or £0.33? (BTW, see how I just increased your revenues by 10%?

Since Nespresso launched its coffee products, many customers have been trying to find ways to reduce the Nespresso tax. There are ‘reasonably successful’ attempts at refilling used Nespresso pods by using tin foil to replace the cap.

More recently however, two companies have produced “Nespresso refill systems”: NexPod and Ne-Cap. I purchased both systems to see whether they could really replace Nespresso’s own products. Let’s just say we’ll have a closer look at the Ne-Cap system

The Ne-Cap system is very cheap: paid £8 for 100 empty pods. The pods are empty because – and I speculate – that Nespresso might have some patents on the pods with coffee in them in such a manner that empty pods do not fall under the said patent (if anyone knows where to check this, let me know).

The Ne-Cap pods come in two parts: a plastic container and some round tin foil ‘bits’. The idea is that you put coffee in the container, remove the top tape and stick the round foil on it and you’re all set . I tested it, you get pretty good and consistent results and once you have done a few, it does not take a long time to create the pods.

Does it make a good investment?

Let’s start with the money. By searching around the web, you find that Ne-Cap is producing its pods in Spain. I believe the main reason for this is driven by low volumes. I contacted some manufacturers in China and all of them told me that they are not interested in producing anything below 10,000 units (this was the bear minimum i.e. they would do this amount as a favour). So anyway, the pods are produced in Spain, which means higher production costs. If we assume a 50% gross margin, this would give total costs of £4/100 units. Postage to/from Spain is about £3 leaving a unit cost of £0.01, which seems reasonable.

So for 10,000 units (or 100 sales), you would have a gross margin of £400. In the month I placed my order, the Ne-Cap eBay user was getting well over 100 orders a month and given how long it took to deliver, I believe Ne-Cap was well oversold. I believe their orders were about 500 per month giving £2,000/month or £24,000/year.

The initial investment for a business like that is likely to be in the order of £10-15,000 giving an excellent return.

Thinking longer term, there two scenarios: Ne-Cap becomes big and starts to annoy Nespresso, which proceeds to sue them for patent infringement (or something similar). The second scenario is that Nespresso doesn’t really have a patent and/or it is abusing a dominant position and lets other producers make pods. Both cases do not fare well for Ne-Cap in the long run, unless it starts filing its pods with coffee.

Let’s face it, convenience/money is a key driver for pod use. If producers start putting coffee in pods and sell them for a cheaper price: convenience goes up, price goes down, ratio of the two explodes

As a summary, I would say that Ne-Cap is a great investment but only for the short term… unless you bank on it being purchased by someone bigger but let’s face it: how hard is it to create a design for Nespresso coffee pods