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How George Clooney is impacting coffee market

GENEVA (Bloomberg) — In Europe, Nestle SA has made Nespresso its fastest-growing brand by promoting it as sexier than George Clooney, who endorses the espresso in ads. America, where the heart-throb refuses to advertise the product, will be a harder sell.

The world's largest coffee maker is stepping up expansion of its Nespresso single-serve espresso system in the US as part of a plan to double sales of the product to 2 billion Swiss francs ($1.8 billion) by 2009. Nespresso machines only function with pods of coffee made and sold by Nestle.

As demonstrated by Clooney, who doesn't want his image used for any US product endorsements, according to his spokesman, Stan Rosenfeld, what works on one side of the ocean may not succeed on the other. Latte-loving Americans shell out 70 percent of their coffee spending outside the home at chains including Starbucks Corp. Senseo, a similar espresso maker from Royal Philips Electronics NV and Sara Lee Corp. that was a hit in Europe, failed to meet forecasts in its first year in the US Kraft Foods Inc. wrote down the value of its competing Tassimo system this year.

The Nespresso "concept is very strong, but Starbucks is extremely convenient," said Nicholas Parry Jones, who helps manage $50 million at Altanes Investments LLC in New York. "It will be an uphill road for Nestle." He has no plans to buy a Nespresso machine and doesn't own Nestle stock.

Nestle shares rose 4.5 Swiss francs, or 0.8 percent, to 540 francs in Zurich yesterday.

Nestle, with sales more than double its closest rival Kraft, needs new products to boost revenue as sales of brands such as Hot Pockets frozen sandwiches and Buitoni pasta decline. Nespresso sales have grown more than 30 percent a year worldwide since 2001. If the company is successful in the US, operating profit from Nespresso will triple to 3 percent of Nestle's total in 2010, Zuercher Kantonalbank analyst Patrik Schwendimann forecasts.

Europeans spend more than three times as much on making coffee at home than Americans do, according to ACNielsen research. Single-serve brew accounts for six percent of coffee sold in Europe by value, where Nespresso is the most expensive kind. Capsules, which cost 49 cents each in the US, comprise 3.8 percent of the US coffee market. Nespresso says it sells 23 percent of the world's espresso machines.

Many Americans also like their coffee to be an experience, not just a quick pick-me-up. "I don't like to just take a shot of coffee. I like it to be a drink," said Melissa Dixon, 28, while drinking a latte in a Manhattan Starbucks. "Something that I sip over the course of an hour and then throw away when it gets too cold."

Nespresso coffee is only sold on the Internet, over the phone or through Nespresso boutiques in luxury shopping areas. The machines are sold in 700 US stores, including Bloomingdale's, Macy's and Williams Sonoma. The company is expanding in the US as the worst housing market in 16 years and rising fuel prices begin to hit spending. Starbucks this month cut its profit target following its first decline in US customer visits.

Nestle has opened its second US Nespresso boutique — complete with an espresso bar and walls decorated with its multicoloured coffee capsules — in a New York City Bloomingdale's store on lower Broadway and plans to open as many as 40 in the next four years. Their first is on the city's Madison Avenue.

Even for a conglomerate like Nestle, which makes everything from Purina dog chow to Haagen Dazs ice cream, Nespresso is a key brand as it becomes more difficult to pass on higher commodity costs for other products. Coffee is the third-fastest-growing non-alcoholic beverage market, behind water and milk, according to Jonathan Banks of ACNielsen. He said those markets are expanding mostly due to consumption growth, while coffee is growing because of price increases.

To maintain Nespresso's growth rate of more than 30 percent annually for the last six years, Nestle needs new markets like the US Nespresso could reach sales of 50 million Swiss francs to 100 million francs in the US next year, Schwendimann estimates.

Kraft took a $245 million charge this year to write off the value of its Tassimo machine after sales grew less than forecast. Still, they got to the market first, and forecast sales of $200 million next year.