Keywords

FormalPara Case Synopsis

Research Problem

How can a product be introduced in a foreign market, where the underlying values seem to run counter to the product’s use and functionality? Is Monodor able to repeat the success of the Nespresso capsule system and is it likely to succeed in the Chinese market?

Case Summary

The case begins before the launch of TPresso in China in 2011. TPresso is an automated tea system produced by the Swiss company Monodor. It builds on the success story of Nespresso in the coffee capsule market and now introduces a high-end tea machine that uses capsules in order to make tea. Monodor was founded in 1991 by Eric Favre. Eric originally invented Nespresso coffee capsules for Nestlé in 1976, but then left the company to start his own business. Having successfully developed the idea of the tea capsule, Eric and his wife Anna-Maria decided to launch the Tpresso capsule first in China, i.e., before entering their Swiss home market. China is a country where drinking tea has been part of an old tradition, following specific rules, ingredients, and procedures. Apart from cultural challenges that affect consumer behavior, Monodor needs to develop its segmentation approach and marketing strategy to succeed in China. This implies enhancing the tea drinking experience for those who do not have the time to engage in traditional and lengthy procedures of preparing the beverage. It relates to setting the right price for a luxury product in a brand conscious community. Moreover, it is important to realize that China is a very heterogeneous market with different regions. Their future development may impact the way Monodor is able to attract an increasing middle class in China.

Learning Objectives

Illustrate the importance of China’s traditional values for successfully marketing new products, which may run counter to an increasing desire to be part of a segment of international luxury consumers. Introduce students to a discussion on cultural values and their changeability. Consider the heterogeneity and future development of the Chinese hot drink market with a special perspective on luxury goods and the Chinese economy in general. Show the need to reflect upon trading-down or trading-up strategies to attract sufficient market segments.

Themes and Tools Used

  • Luxury marketing

  • Country-of-origin effect

  • Trading-up versus trading-down

  • Consumer behavior in China

  • Different market segments: premium, luxury, good-enough market

  • Product policy

Target Audience

The case can be used for graduate students, who have already been exposed to the essentials of marketing. The case is equally suitable for courses in international marketing, luxury marketing, and consumer behavior, especially with an Asian focus. It is recommended that students have already been exposed to issues of intercultural differences in marketing, the management of the “4P’s” and some basic insights into international marketing.

Questions

  1. 1.

    What is your assessment of how well Monodor is handling the conflict between traditional tea drinking customers and modern technology?

  2. 2.

    What is the key positioning advantage of Monodor in China?

  3. 3.

    Can China be treated as a single market in terms of a variety of indicators, such as, culture, values, purchasing power, etc.?

  4. 4.

    How can the market for luxury products in China be segmented?

  5. 5.

    Are the Chinese economy and the hot drink market likely to change (some additional research required)?

  6. 6.

    Should Monodor engage in trading-down strategies to attract larger customer segments or should it rather increase the price positioning (trading up)?

1 Introduction

The Swiss company Monodor and its CEO Eric Favre, who invented the famous Nespresso coffee capsules for Nestlé, was facing a real challenge. In addition to marketing coffee capsules, Monodor had started to produce a high-end tea machine that uses capsules to make tea. The Swiss company had chosen to first launch its trademark “Tpresso” in Asia to “revolutionize tea consumption in China”.

Having been infatuated with the idea of tea drinking and tea capsules for almost 30 years, Eric and his wife Anna-Maria were about to present the tea capsule machine Tpresso in Bejing. But China is a country where drinking tea has been part of an old tradition, following specific rules, ingredients, and procedures. Eric knew that it would be difficult to introduce his second innovation to this challenging market and he wondered whether he could use the same marketing strategy he had already used to introduce Nespresso capsules elsewhere. Going to China, his objective was not to replace the hundreds of years old tea-drinking ceremony but to enhance the tea drinking experience for those who do not have the time to engage in traditional and lengthy procedures of preparing the beverage. He also knew that he would only succeed if he were able to better understand the desire for luxury products and the related positioning strategies at the top-end of the market. The road ahead would not be an easy one but Eric was convinced that the tea party in China could be a success.

2 The History of Chinese Tea Drinking

Chinese people have been drinking tea for thousands of years (see Appendix, Exhibit 1). According to a legend, tea was first discovered by the Chinese Emperor Shennong in 2737 before Christ when a leaf from the tea plant (Camellia Sinensis) fell into a pot of boiling water. Deeply ingrained in Chinese culture, tea is considered as essential to life as six others elements: rice, oil, soy sauce, firewood, salt and vinegar. Drinking tea in China is part of the traditional way of life and the tea production affects the economic growth of the country.

Especially, the tea ceremony (see Appendix, Exhibit 2) is one of the country’s most sacrosanct traditions. The idea is to produce the finest and most aromatic brew from high quality tea (usually Oolong or Pu Erh), to taste the variations in flavor and to finish as the tea changes over many infusions. All of this is done with the skill, knowledge, and movement by the tea master that takes years of training and knowledge about tea. The art of preparing and making tea is called Cha Dao. The smells and taste are the most important parts of the ceremony, so the rules for making and pouring tea vary depending on the type of leaf used. Usually an unglazed purple or red clay pot and cups are used, with Yixing (a small area near Shanghai) clay being the most sought after due to the belief that it absorbs any toxins from the tea and water. The pot and cups are unglazed so as to allow the tea oils and resins to be absorbed into the material during the curing process which involves soaking the utensils in tea for a few hours a day for up to a week. After the pot and cups are cured they are ready to be used for the ceremony, however the more they are used the better. Because the clay is cured with one type of tea, it should not really be used to brew other types of tea as this would alter the purity of the flavor. Ever since, tea production has been a major business segment in China. In 2009, the total tea production in China amounted to 1340 thousand tons with domestic consumption rising to 77.3 %. International companies have discovered the challenges of the market and have become aware of this huge potential market. Currently, many competitors are working on products that comply to both the tradition of drinking tea in China and new technological advancements.

3 From Nespresso to Tpresso: A Brilliant Extension of a Successful Concept?

One of the leading players in the international capsule market is the Swiss-based company Monodor, founded in 1991 by Eric Favre. Eric originally invented Nespresso coffee capsules for Nestlé in 1976, but then left the company to start its own business. Nestlé Nespresso SA is nowadays an international well-know company. Nespresso was launched in 1986 in Switzerland and Italy with the C100 and C1100 machine models manufactured by Turmix. Capsule production began in Switzerland, and coffee varieties include Bolero, Capriccio, Cosi and Decaffeinato. In the 1990’, the company entered the USA, Germany, the Netherlands, the UK, Middle Eastern, and Asian countries like Singapore, Malaysia, and Taiwan. Present in more than 30 countries with 12 subsidiaries and 300 employees, Nestlé Nespresso has around 6500 points of sale. Nestlé-released 2009 sales figures for Nespresso were 2.77 billion Swiss Francs (nearly US $3 billion) with an average of 30 % annual growth since 2000.

With Monodor, Eric wanted to repeat the Nespresso capsule success story, now with tea. In fact, people are used to capsules with coffee and Nespresso achieved record sales of 3.2 billion Swiss Francs in 2010. Having successfully developed the idea of the tea capsule, Eric and his wife Anna-Maria decided to launch the Tpresso capsule system at a press conference in Beijing, and shortly afterwards introduce it to the Swiss market. Favre told the group that, if in the 1970s he’d aimed to make goof-proof, easy-to-make yet qualitatively top-flight Italian-style espresso available in the home and the office, the aim of his current Tpresso project was to fuse high tech-capsule technology, a futuristic-looking tea set and sophisticated tea maker that sets proper water temperature for each tea, with ancient Chinese tea traditions.

Favre had spent 18 years and 25 million Swiss Francs developing his latest product. He realized that it was impossible to keep other players out of the market. For instance, last September, Nestle had launched a tea-making system, called Special T in France and Switzerland, and the company had revealed in a news release that the first signs from the launch were promising, although no specific figures had been released yet.“We are now focused on building up the future of this product in these markets,” said Nestlé spokeswoman Nina Caren Backes at the time (Dow Jones News, 2011). However, Eric was not concerned about competition from other brands such as Special T as he believed in the better quality of his own product and he knew that bringing know-how to the product was more important. It was this knowledge the company had built over several years that now presented a real competitive advantage.

In fact, the birth of the Tpresso machine can be located somewhere else. Eric Favre and his wife Anna-Maria had been tied to one another by a non-corroding love. Their mutual support was witness of their merging affection like the mixture of water and tea. Mr. Favre knew that Mrs. Favre liked to taste a good cup of tea. Indeed, a trip to Japan made the Italian woman discover the joyfulness of drinking tea. After two weeks spent in Japan she was becoming so used to drinking tea that she bought several tea portions at the airport in order to bring them home. Eric decided to offer her a magical gift: a tea machine. Thus, the original Tpresso system was inspired by their seraphic love. The inspiration was further fuelled by previous research results of the coffee capsule system and 10 years later, the baby of their love was born: a tea capsule. Tpresso was closely tied to the life concept of the Favre couple: to be in perfect harmony with nature. This corresponds to Chinese Taoism—the metaphysical concept signifies that the primordial essence of life is part of the nature and universe. Especially older Chinese people believe that it is possible to enjoy natural and pure tea at home without any special effort, thus reaching a point where there is full harmony with nature.

4 The Tpresso Machine and Tea Capsules

Tpresso is a machine that uses capsules to make tea: it works in the same way as a Nespresso machine for coffee. Consumers have to buy the machine first: the machine is sold with two cups and a glass teapot, which are specifically designed to preserve and enhance the taste of tea. Capsules are not reusable but consumers need to buy new ones regularly. To obtain a cup of hot tea, the capsule has to be put into the machine. Then, the machine processes it using pressure and steam and the tea is ready after 50 s. Monodor manufactures the capsules using high-end teas coming from China. Eight tea sorts are available, and the machine can only be used with Monodor’s capsules. To preserve the taste of tea, the water used by the machine is filtered and all the components of the machine are made of materials that do not alter the taste of the beverage. In a traditional Chinese teashop, hundreds of different types of tea are available, with various grade of quality. Monodor decided to offer a range of different types of capsules, all made with traditional tea varieties.

5 Tpresso and the Chinese Market

Tea drinking in China is like wine tasting in France. Whereas Europeans think of tea as a hot beverage, in China it can come with different degrees of tepid, depending on the tea. As with wine in the West, there are different aromas and tastes. Favre knew quite a bit about the hot drink market having also worked as the Chief Executive of Nespresso between 1985 and 1990. Eric had explained his plans several times. He remembered the launch of Nespreso in 1989, when nobody believed in coffee capsules. Nowadays, millions of them were sold. Probably, it would be easier to sell a new system for tea just because people already knew about the coffee capsule. So he just wanted to reproduce the Nespresso story but with tea. And Favre was quite sure that TPresso could become the Nespresso of tea, probably in less time. He also knew that an estimated 1200 billion cups of tea were consumed every year, compared with 800 billion cups of coffee.

In 2009, the Chinese hot drinks market generated a total value of sales of $10.3 billion. Tea makes up for 96.7 % of the hot drinks value sales, which are $9.9 bilion.Footnote 1 Coffee, in comparison, only made up for 1.9 % of market value (Table 1).

Table 1 Hot drinks market value growth, 2005–2009
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In comparison, the Japanese tea market had only been growing by a CAGR of 1.1 % in value. In terms of volume, the Chinese hot drinks market had been growing at a CAGR of 1.8 % between 2005 and 2009. The overall market volume was expected to rise to 650,900 t by the end of 2014, which represented a CAGR of 1.6 % for the 2009–2014 period. In terms of value, the market was also forecast to grow further, but slowing down, with an anticipated CAGR of 6.7 % for the 5-year period from 2009 to 2014. This led the market to a value of $14.2 billion by the end of 2014. However, figures need to be interpreted carefully as there are several conflicting sources of data (Wooeb News, 2011) (Table 2).

Table 2 Hot drinks market volume growth, 2005–2009
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In spite of the promising market potential, entering the Chinese market for a product like tea is a real challenge. Drinking tea in China is part of the traditional way of life of the population. It is part of the Chinese culture and it affects the whole population, whatever the social classes. And there was also critical sentiment, as expressed by the following statement:

“One would have thought that tea has the convenience thing all figured out, with that teabag thing, but no, that isn’t convenient enough. Instead, the Tpresso, priced at a modest 5000 yuan (US$ 768!) is being marketed to ‘younger consumers who don’t have time to brew tea in the traditional way.’ So now they can buy overpriced tea in little plastic turds” (Alter, 2011 ).

But Eric hoped that his experiences with Nespresso may help him and he was quite confident about the success of his company’s product in China. André Übersax, president of the Swiss-Chinese chamber of commerce further said that far away from being self-sufficient like India, the Chinese society was opening itself to the world and that it was aspiring to possess Western brands.

6 Tpresso’s Positioning and Chinese Luxury Consumers

Tpresso’s positioning was focused on several elements: Tpresso was a high-end machine that perfectly allied Swiss technology and Chinese tradition by making tea while preserving its flavor and its healthy properties.

A long-term investment gave birth to a real sophisticated machine. The company emphasized the elements that would be purchase incentives for its target customers: modernity, ability of the machine to preserve the flavor and healthy properties. Tpresso’s positioning particularly emphasized the fact that modernity can sublimate tradition. It also stressed the national origin of Monodor to make use of positive perceptions of the country. Indeed, Switzerland had, among others, been well known for its high-end and reliable watches, chocolates, and prospering banking sector. For instance, half of Switzerland’s US$ 8 billion annual watch export goes to China (KPMG, 2007). With the positive country of origin effects, Monodor hoped that the perception of its tea machine would be influenced by the good reputation of high-end and reliable Swiss products. However, Monodor, as a Swiss company, could also be seen as lacking credibility as far tea is concerned. Switzerland is not known to be a country of tea specialists, or a country where drinking tea is a tradition. There is a risk that a Swiss company might be perceived as not having enough knowledge of tea to have pretensions to revolutionize the way of making it. Thus, being Swiss-based can be a disadvantage or an advantage.

Eric Favre defined TPresso’s target customers as rich Chinese people, who like cool stuff. With a price-tag of 5000 ¥ (EUR 635) for the tea making machine, special teapot and tea cups, and 1.5–3 Swiss Francs for a capsule, Favre stressed that it was a luxury product and he was hoping to sell up to six million capsules in the first year of entering China. On the one hand, the consumers targeted by Monodor cared more about the healthy properties of tea than about its traditional and symbolic value (Askensai, 2011). They considered tea as a healthy drink, and drink it for its properties rather than because it is a symbol of Chinese millenary culture. Thus, it is usually said in China that tea produces anti-oxidants and allows the body to resist against weaknesses. It also lessen cholesterol; it strengthens body natural immune system; it has of course a pleasant and fragrant smell and taste; it reduces stomach bloodedness due to over eating; it freshens breath especially if you smoke or drink coffee regularly and finally tea is the perfect drink for anyone during illness recovery, dieting or stress. Women were Favre’s main target. This aspect was highlighted by the fact that women were starting to gain economic independence and could now spend their own money in order to buy luxury products. The modern female luxury shopper included the business woman, the celebrity and the newly independent rich wife.

On the other hand, some figures could enable a better understanding of the scale of the potential market for this product. The following differences between income levels can be identified for 2000, 2010, and 2020 (forecast) (McKinsey, 2011):

  • Affluent: consumers with household income that exceeds $ 34,000. This accounts for only 2% of the urban population in 2010, or 4.26 million households.

  • Mainstream: consumers with relatively well-to-do households with an annual disposable income of between $16,000 and 34,000. This group is still comparatively small with fewer than 14 million households in 2010.

  • Value: this segment represents the large majority of consumers living in households with annual disposable incomes between $ 6000 and $16,000, just enough to cover basic needs.

  • Poor: this segment represents consumers with less than $ 6000 and has been mainly ignored by Western firms.

According to the census conducted in 2010 Nov. 11th (which is the latest source of data available), the total Chinese population was 1.34 billion people. Urban people represent 46.68 % of this population, that is to say 665.57 million people. The average annual revenue of the urban population is 19,109 ¥ ($2866): the annual revenue of the rural population is about three times as low as the urban population’s revenue (5919¥, $887). Table 3 depicts the per capita GDP per region in 2010 (or later).

Table 3 GDP per region
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Eric felt that figures reinforced his desire to enter the Chinese market as they clearly illustrated its huge potential. But he also realized that only looking at average revenues blurred the fact that significant revenue inequalities existed among the Chinese population. For example, considering only the urban people with high revenues, their average annual revenue per capita was 139,000 ¥ ($20,850). Only 5 % of the Chinese population earned more than 300,000 ¥ ($45,000) per month but this small share of very rich people within the population still represented 50 million people! Another figure showed that even a minority of well-off people could represent a significant number of people. And more than 960,000 people on the Chinese mainland had a personal wealth exceeding 10 million ¥.

The target consumers were high revenues people, who were ready to spend money on sophisticated products: the high price of the product would not be a disincentive to purchase for them. This reflects a general trend in Chinese consumer behavior as Eric know from talking to his market analyst in China, Tom LiPing.Footnote 2 Tom regularly monitors the luxury market segment in China and he knows a lot about the development of the sector and the behavior of high revenue people. Asia is the largest target market for luxury brands, accounting for more sales than any others regions. Consumption of luxury goods in China reached USD six billion in 2006, making up 12% of the global consumption of goods, and predictions that this will increase to 29% in 2015 (Goldman Sachs, 2007). However, just a tiny fraction of China’s huge population can afford buying luxury goods. Demand for luxury and fashion products has traditionally been regarded as highly susceptible to swing in line with the economic sentiment. Luxury brand have however now enjoyed many successive years of growth. The worldwide sales of luxury goods are expected to grow at an average of about 6% up to the end of the decade, with the sector growing by as much as 9% in Asia.

With the elevation of living standard in China, the public awareness and the demand for a safer tea has risen significantly. The consumption concept seems to shift from a price-based to a safety-based strategy, and consumption of organic tea is increasing. Drinking tea for its functional and healthy values becomes a new trend. Those modernized consumers will not mind seeing a Swiss firm launching a machine that supposedly makes a tea that is better than “traditional” tea, since it preserves and enhances the taste and the natural properties of tea.

7 Tea Consumption Habits of Chinese People

Chinese people have drunk tea for thousands of years and this tradition is maintained in a lot of events of Chinese daily life. In fact, this national drink has been designated as the currency of the country during some periods through history. At the beginning, tea was valued more for its medicinal characteristics, but today it is an art to make it and drink it. Tea is still used in Chinese medicine and cuisine. Drinking tea is regarded as a culture involving the methods of preparation, the equipment used and the occasions in which it is consumed. Chinese people use to drink tea very often; for example, when showing respect to older generations, in family gatherings, when children apologize to their parents, in large family meetings, ceremonies and common meals. Chinese people choose the ingredients and the people preparing it, regarding to the occasions mentioned before. Even though this culture is deeply rooted in rural areas, nowadays instant tea is the largest brand. This means consumer behavior is changing, because people in urban areas have less and less time to prepare tea and because of companies’ efforts to sell more diverse products at higher prices.

Consumption habits also differ across regions: Western provinces prefer teas with stronger aroma and taste, in Sichuan province people prefer green flavored teas and in some others regions such as the South and East the local production is the most consumed. People in Tibet and the North West of China usually consume larger quantity of tea, followed by those in big or middle cities. People in the North of China prefer scented tea, while Southern consumers prefer green tea. People in big cities such as Beijing, Tianjin, Shanghai, Hangzhou etc. like to drink high grade green tea like Longjing tea and Biluochun tea. People in Guangdong, Fujian and Taiwan provinces like Oolong tea best.

Each Chinese consumes approximately 20–25 g of dry tealeaf each day. Tea is also an important element in social life: it is for example drunk during business meetings or with friends. The development of the new wealthy Chinese middle-class enhances the development of conspicuous tea consumption: those consumers drink expensive and refined teas as a symbol of their status and wealth.

8 Product and Pricing Strategies in China

When Eric wanted to launch the TPresso machine in China, he was well aware that the market was specific, especially with the drive towards upper segments of the market. He remembered an old chart, he was looking at a while ago and contemplated: Would the luxury segment at the top of the pyramid be large enough in terms of volume? Or maybe, he could lower the positioning to target the “good-enough market”, a segment that requires high quality but can be targeted at lower prices (Gadiesh, Leung, & Vestring, 2007) (Fig. 1).

Fig. 1
figure 1

Market segments. Source: Author

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8.1 Product Launch and Positioning

The first tea machines, which have been assembled in China, with technological parts made in Switzerland, Germany, France and Italy, will go on sale in China in April. Later this year Tpresso will be launched in Korea, Japan and Hong Kong, before coming to Europe (Mawani, 2011).

Because of similarities tea tasting has with wine tasting, the Favres asked wine glass designer Jacques Pascot to design the Tpresso Tpot and Tcups (in Bayel crystal) so that the refined, subtle tastes and fragrances of each brew are optimally channeled. To encapsulate the essences of teas, Favre developed a machine called a “tea crumbler” that crumbles leaves as gently as human fingers do, thus making the leaves “bleed”. Because the machine is hermetically sealed in an inert atmosphere, no freshness is lost as crumbled leaves are quickly transferred to the capsules that protect them from light, oxygen and humidity.

While the product targets the high-price market segment and thus wealthy consumers with Western brand preferences, the product’s launch may still be hampered by several potential disincentives to purchase. In fact, a Western manager needs to learn a lot before settling a business in China which also includes the specificities of the luxury industry in China that follows different rules. The pricing strategy for the new product launch also has to be very well defined as consumers may be more sensitive to price changes with products challenging their traditional way of living. Thus, a whole array of negative feelings may occur with the product, some of which may be related to Western country perceptions, thus as country-of-origin effects or personal animosity that Chinese consumers may develop about foreign brands. Moreover, the reputation of the company has an important role to play here. How will Chinese consumers perceive this Swiss company willing to change their traditional tea consumptions habits? May Chinese inherent pride in their own culture lead to a potential boycott of the product? Are Chinese so open minded that they will allow a European company to revolutionize what is and has always been a tradition? Indeed, from a European point of view, the market in China is not easy to pierce.

8.2 Pricing Strategy

A first potential disincentive to purchase might be the price of the product. The capsules will be sold at a relatively low price, but the consumer will have to spend around 5000 ¥ to buy the machine. This represents a very high price and a significant initial investment, especially for a country like China. China is a two-tier society where habits are different from the rural to the urban areas but the consumption of tea is quite homogeneous and is following the same traditional basic rules in the whole country. Thus, even if a part of the society is adopting a modern way of life, somehow living like European do, a large majority of consumers might consider that this is too expensive for a machine that only makes tea, given that you can make tea with water and a less expensive teapot.

Chinese are quite sensitive as far as the prices of products are concerned (Berger, 2010). Companies in China mainly realize a low margin and a high volume sales strategy. Nevertheless, international brands are often seen like quality brands, that justify higher prices. Thus, even if the “low cost” strategy is preferred by a large majority, a Chinese famous sentence says: “pian wu yi hao huo”, meaning that the cheapest is never the good one. Further empirical data are favorable of the Tpresso concept. There is also an increasing tendency of trading up, especially when it comes to housing, utilities, and food, but this goes along with searching for the ‘best price’ (McKinsey, 2011). Another point to be highlighted here is that the pricing of a Tpresso machine and capsules will remain the same, wherever it is sold in China. However, when buying tea from producers, the tea price may change from one producer to another, depending on the quality of the tea, whether it is made from leaves that are whole, cut or broken—knowing that the higher grade of tea is the one made from whole leaves and that the dust that is left over as a result of the grading process at the factory, is then used for low quality teas in teabags.

9 The Future

Even though he realizes that it will not be easy, Eric feels very positive about the Chinese market. But he knows that launching the tea machine directly in China is a bold bet for Monodor, and this strategy seemed riskier than simply launching its product in France or Switzerland. But Monodor is well aware of the challenges it is facing in China. The company has clearly identified all the disincentives to purchase that could negatively impact its sales development, and has tried to overcome them. Its targeting and positioning is clearly matching Chinese consumer segments. The main goal of Monodor now is to appear as an innovative firm while avoiding to deter Chinese customers by entering the field of traditional tea ceremony. At present, it seems that Monodor has found the perfect balance between innovation and tradition, partly thanks to its strategic partnerships with key Chinese players in the tea sector. Monodor is also looking for new partnerships in order to expand its supply and distribution network in China. The company’s long-term goal in the country is to reach a 20–30 % market share of all tea sold in China within 20 or 30 years, and to further develop the product in Western European countries. Can Monodor successfully manage this challenge?