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Nespresso, a division of Nestle's SA, pioneered the development of the singleserving coffee machine in 1986. Nespresso had achieved sales of $2.6 billionwith double- digit growth projected over the next several years. The machineswhich have been imitated by more than twenty competitors use a capsule or"pod" to make a single serving of coffee pumping hot water through the podunder high pressure. From the outset, Nespresso's business model was basedon the sale of its exclusive coffee pods protected by many patents to generatemost of the sales and profits for the company rather than the sale of themachines.The pod to coffee machine relationship is similar to the cartridge and printer,whereby the printer manufacturers rely on the sale of the printer cartridge forthe bulk of their revenues and profits. Nespresso recognised the extremeimportance of maintaining the exclusivity and premium price of its coffee podsby stringently controlling their distribution channels. Consequently,Nespresso's coffee pods are only sold in its own stores, its online site, or byphone directly from Nespresso. Recent competitors Sara Lee Corp, EthicalCoffee Co announced plans to introduce their own coffee pods that will workin Nespresso machines. These capsules will be cheaper and more widelydistributed than the Nespresso pods. Nespresso says it will take legal action ifthe competitors products infringe on any of its patents.
Do you think Nespresso's distribution strategy based on tight control of the channels for its coffee pods cab provide an effective means for dealing withthe competition if the legal action fails to stop the competition from sellingtheir Nespresso compatible pods? Why or Why not?
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