Yaakov Luzon, owner of Ilan’s House  of Coffee
Yaakov Luzon, owner of Ilan’s House of Coffee. Photo by Ofer Vaknin
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Ask Israeli coffee lovers what name comes to mind when they think of coffee machines that use pre-packaged capsules, and most will probably respond "Nespresso," the Nestle brand that dominates the market for capsule machines the way Apple dominates the tablet computer market.

Israelis who wanted to buy more capsules have until now been left with little choice but to purchase those produced by Nestle specifically for the Nespresso machines. But the barely existent Israeli market for Nespresso-compatible capsules that are not actually made by Nestle is about to get a badly needed shot of caffeine, according to Israeli importer Yoav Ramot.

Ramot is planning to launch a new brand of generic Nespresso-compatible capsules called Rialto in October.

"This is the first time that in this market in Israel, there is going to be a player who says 'I'm here and I'm not going anywhere,'" said Ramot, who is also the owner of Coffee Time, which imports coffee machines and related products. "Our goal is to snag 35 percent of the capsule market share held by Nespresso."

Nestle Nespresso, a Switzerland-based autonomous business of the Nestle Group, currently controls roughly half of the Israeli coffee machine market, constituting about 100,000 households, and has an annual turnover of an estimated NIS 100 million.

The company sells an estimated 35 million coffee capsules a year in Israel, claiming the largest slice of the local capsule market, which runs to 85 million capsules a year, for a total annual turnover of NIS 170 million.

Capsule sales are Nespresso's primary source of revenue, and are often sold at a low profit margin or even at a loss in a effort to win customers' loyalty to the brand-name capsules.

The market is opening up because Nestle is under attack, with the billions of dollars Nespresso produces annually for the world's largest food company lying in the balance. The problem for Nestle is that some of its approximately 1,700 patents for coffee machines and capsules are expiring this year, particularly the capsule-related ones. Once the patents expire, the floor will be opened up to other companies seeking to sell generic capsules.

A ruling by a German court earlier this month struck Nestle another blow when it decided that customers have the right to use capsules from other companies with their Nespresso machines, since the buyer acquires the right to use the machine and the capsules are not the primary component of the patented invention.

The coffee machine market is heating up in Israel, with a market penetration rate of 17 percent. Nespresso was the first to enter the field, and remains the largest company, far ahead of any competitors.

In an effort to win over new customers, Ramot plans to sell his rival coffee capsules for 20 percent to 25 percent less than Nespresso's prices of NIS 20 to NIS 25 for a pack of 10, at least in the beginning.

The capsules will come in four flavors and be manufactured in a plant in Kiryat Gat, which will begin operating in several weeks.

Ramot's Rialto Production, which he owns along with four other partners, put more than NIS 5 million into building the factory, he said. Ramot says his capsules will be of higher quality than competing generics.

But Rialto won't be the only brand of generic coffee capsules compatible with Nespresso machines.

The Ilan's House of Coffee cafe chain will also have a coffee mug in the game, and is expected to issue its own line of four flavored capsules in October.

"We conducted market research by studying our customers, and it turns out that they're interested in drinking our coffee, but in their Nespresso machines," said Ilan's owner Yaakov Luzon.