---
title: "Why Traditional Companies Win the World but Lose Tomorrow: The Bitter Battle of Coffee"
description: "The long-running battle between Maxwell House and Nestlé has finally been decided. However, this fight had no clear victor—both former coffee oligarchs have tasted bitterness."
author: "王剑冰"
publisher: "New Distribution"
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published: "2016-11-29"
language: "en"
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---

# Why Traditional Companies Win the World but Lose Tomorrow: The Bitter Battle of Coffee

> The long-running battle between Maxwell House and Nestlé has finally been decided. However, this fight had no clear victor—both former coffee oligarchs have tasted bitterness.

The long-running battle between Maxwell House and Nestlé has finally been decided. However, this fight had no clear victor—both former coffee oligarchs have tasted bitterness.
By Wang Jianbing, reporter for Business Journal
Maxwell House, once a giant in instant coffee, seems to be in trouble.
After repeated failures in the coffee industry, Maxwell House finally closed its factory in Guangzhou in September 2016. Its decades-long business war with Nestlé in China may come to an end here.
How did Maxwell House, holding a good hand of cards, manage to play them poorly? How did its old rival Nestlé, locked in a love-hate relationship, manage to forge ahead against the current? Looking for internal causes from a corporate perspective may be more valuable than simply blaming consumption upgrades.
Moreover, it is too early to judge success or failure. The integration and growth of traditional enterprises and new forces in their confrontation is the most exciting part of this drama.
**No Man's Land**
The struggle between Maxwell and Nestlé is also a history of the growth of China's coffee industry.
As the world's second-largest food company, Kraft has a host of star products such as Oreo, Prince, and Chips Ahoy!. Among them, the coffee brand Maxwell House has a century-long history, and even U.S. President Roosevelt praised it as the best-tasting coffee in the world.
In 1985, Maxwell House ambitiously came to China, a coffee wasteland. Its market researchers found that China's emerging wealthy class might be potential coffee consumers. So Maxwell House adopted its American slogan, "Good to the last drop," positioned itself in the mid-to-high-end market, and gradually captured the Chinese coffee market through heavy advertising.
When Nestlé arrived, it was already six years behind Maxwell House. It was not easy to get a share under Maxwell's dominance, but Nestlé discovered a huge mistake in Maxwell's market research.
Nestlé's survey in Shanghai found that Chinese women's "most desired husband" was a taxi driver, because taxi drivers earned more than ten times the average salary at the time. The signal to Nestlé's research team was that people's admiration for the elite class was not as high as imagined. The potential consumers who could afford and were willing to drink coffee were still the general public.
So Nestlé coined the plain slogan "It's delicious" (味道好极了), intending to make coffee an indispensable part of consumers' lives.
In terms of product, Nestlé found that consumers would bring product bottles and boxes to the office to store things, while also satisfying their desire to show off. So Nestlé cleverly launched bottled and boxed products, which once made Nestlé coffee a topic of conversation among young people. Within a few years, Nestlé's popularity rose sharply.
Facing Nestlé's assault, Maxwell House innovatively developed 3-in-1 instant coffee to counter. The coffee, with its rich milky aroma, created a strong petit-bourgeois atmosphere.
Compared to Maxwell's elegance, Nestlé seemed more "worldly." Familiar with China's "gift-giving culture," Nestlé launched gift packs, making this imported product a popular choice for "giving to relatives and leaders."
Through mass-market brand marketing, the latecomer Nestlé quickly matched Maxwell, fighting to a standstill.
**Fierce Battle in Yunnan**
In 1997, Nestlé outflanked Maxwell House.
Maxwell House had always used imported coffee beans as raw materials, which was costly. Nestlé discovered that Yunnan, with its fertile volcanic soil, was very suitable for growing coffee beans. So it moved into Yunnan, built experimental fields, set up service stations, sold seeds to local farmers at low prices, and purchased according to New York coffee exchange rates. This move attracted more than 2,000 growers.
Upon hearing the news, Maxwell House immediately came to Yunnan and also set up a purchasing center. Nestlé offered 20 yuan per kilogram, Maxwell added 1 yuan, and also provided interest-free loans to farmers who couldn't afford agricultural supplies and tools. Seeing this, Nestlé chose to cooperate with a group of local agricultural organizations, using them to gather scattered coffee farmers for raw material purchases. Because there were not many growers and limited productivity, the two companies fought tooth and nail in Yunnan, determined to win.
As the giants clashed, the farmers also played their own "business games." Local farmers once hoarded goods, acting as arms dealers on the battlefield. If you don't buy, I'll sell to your competitor!
The decisive point came in 2002. Consecutive droughts led to poor coffee bean harvests, and Maxwell House turned to other sources. When the enemy retreats, we advance. Nestlé believed Yunnan had excellent growing conditions and wanted to cultivate it as a long-term source. So it "rooted" in Yunnan, established an agriculture department, offered free training, helped farmers with cost accounting and risk forecasting, and paid high prices for high-quality beans. Naturally, farmers were willing to sell their best beans to Nestlé first.
In 2008, Nestlé's coffee bean purchases in Yunnan reached 8,000 tons, accounting for one-third of local production. Yunnan's coffee beans, with their first-class quality, became favorites of international buyers. At that point, Maxwell House reappeared on the Yunnan procurement market but lost the opportunity to grow with local farmers.
While the rear was fraught with secret battles, Maxwell and Nestlé also clashed on the sales front.
Having lost its cost advantage, Maxwell House also lost in channels due to "inherent deficiencies." Kraft's main business was biscuits, and coffee was in an awkward position in its portfolio. Nestlé, on the contrary, although it started with milk powder, made coffee its flagship product. After acquiring Yinlu in 2011, it even used Yinlu's extensive channel network to support its coffee products.
After the Yunnan campaign, Nestlé was even more powerful. As a "financial" company, Nestlé could offer distributors more profit while reducing costs. This allowed Nestlé to quickly establish a larger distribution system nationwide, triggering a chain reaction in sales. In 2009, Nestlé's market share soared to 60%.
Competing with Nestlé in channels was like a mantis trying to stop a chariot. By then, Maxwell House was backed into a corner.
To stop the declining market, Maxwell House had to fight back. In 2010, Maxwell changed its packaging and focused on more segmented groups. By sponsoring "Go Lala Go!," it built a brand image as a "good companion for young people." As the drama became a ratings dark horse that year, Maxwell House successfully won a following of white-collar women.
In China's coffee market, whoever wins the youth wins the world. Nestlé quickly launched the slogan "No matter how tired, we'll still have a cup of coffee with you," urging people to pay more attention to young people striving for their dreams. Even just having a cup of coffee with them and listening to their complaints is a form of warmth.
Another psychological tactic! Maxwell had to counter. Nestlé used "bitterness" as an entry point, so Maxwell did the opposite, launching a "daydream" themed campaign. Whenever the protagonist picked up a cup of Maxwell House, ridiculous and cute daydreams would come to mind. The ad emphasized that Maxwell House could bring a moment of peace to busy lives, which coincided with the sentiments of "escaping Beijing, Shanghai, Guangzhou" and "poetry and distant places." It was truly a masterstroke at the time.
At the same time, Maxwell also targeted "otaku villages," posting ads on major online games and gaming forums, launching products with double caffeine and dark roast, bluntly emphasizing their functionality for "all-night gaming" to the unromantic otaku.
After this combination of moves, Maxwell won over a large number of young consumers. But in hindsight, it was too late. Nestlé, with its massive distribution system, had already firmly grasped the market. In 2012, Nestlé's market share reached 68%, while Maxwell House had only 15%.
From then on, it could be said that in China's instant coffee market, there was only first place and no second.
**Assault on the Iron Throne**
The entanglement between Nestlé and Maxwell House was like two fortune tellers fighting to the death over the title of "half-immortal," but in the end, neither gained an advantage—people switched to believing in astrology.
With consumption upgrades, ready-to-drink coffee, filled with pure coffee concentrate, gradually replaced instant coffee on the throne due to better taste and convenience. From 2012 to 2015, the compound growth rate of ready-to-drink coffee reached 36.4%. The cake had been made bigger, and heroes flocked in.
Uni-President launched its ready-to-drink coffee product "Yaha" with great fanfare, launching a "dimensional upgrade attack" on Nestlé. Relying on its strong strength and complete channel network, Uni-President quickly completed new product distribution. At the same time, it implemented a "single product, single department" policy, setting up a dedicated business team for Yaha, running the market with distributors, and quickly boosting Yaha's sales.
The opponent was fierce, so Nestlé had to avoid its edge. In 2014, Nestlé handed over its entire ready-to-drink coffee business to Yinlu for production and sales, while it focused on product optimization. In pricing, Nestlé chose to avoid the most competitive 5-yuan market and launched several canned ready-to-drink products priced at only 3.5 yuan. With advantages in taste, bottle shape, and price, Nestlé further increased product exposure through heavy advertising. In the end, Nestlé barely maintained its dominance, still holding a 50% market share in the ready-to-drink coffee market.
Foreign giants had long coveted the mainland market and, seeing this, began to imitate Nestlé and Yinlu's approach. Starbucks partnered with Ting Hsin, Kirin married C'estbon, and Suntory joined forces with PepsiCo. The former provided marketing experience and coffee product lines, while the latter handled distribution channel construction. Thus, a host of new products emerged, ready to wrestle with Nestlé.
Maxwell House, unable to fight a price war, exported the coffee beans purchased from Yunnan and used imported raw materials for its ready-to-drink products, targeting the mid-to-high-end market at 6 yuan, differentiating itself from Nestlé.
While the front lines were tense, Nestlé had its own backyard fire.
In 2012, Nestlé was exposed for using hydrogenated vegetable oil, which is harmful to health, in its coffee mate. Subsequently, Nestlé was also pointed out that in Europe, America, the Middle East, Japan, and South Korea, it had long launched "zero trans fatty acid" coffee mate, and even kindly advised consumers to carefully check the ingredient list on the packaging.
The Guardian, which published this news, was sponsored by Maxwell House's parent company. Undoubtedly, Nestlé's brand image was tarnished, and the entire instant coffee category was labeled unhealthy. Maxwell House, being in the same instant camp, inevitably suffered "losing 800 to wound 1,000."
Competitors represented by Blue Mountain and G7 took advantage of the situation, targeting the "unhealthy" weakness of instant coffee and launching "premium" instant coffee with a health concept. Freshly ground coffee shops led by Starbucks also became a new choice for consumers. The competitive landscape of the entire coffee market was upgraded again. The "new generation iron triangle" of premium instant coffee, freshly ground coffee, and ready-to-drink coffee began to jointly attack instant coffee.
In early 2015, due to poor sales, Nestlé destroyed nearly 400 tons of accumulated inventory at its Dongguan factory, the largest destruction since the factory was built in 1992.
**Defeat in Guangzhou**
In May 2015, Maxwell House received a market consultation email from its parent company, with the subtext being "Is the old horse still capable?" A few months later, Maxwell House was dismantled and restructured by its parent company and handed over to D.E Master Blenders 1753, a Chinese company specializing in coffee and tea. This was a huge blow to Maxwell House, which had fought repeatedly.
In China's coffee industry, there is a theory called the "Three Waves."
The first wave was the popularization of instant coffee. The second wave saw the rise of freshly ground coffee shops represented by Starbucks. Due to its unique cultural symbols, coffee shops derived many functions and became a marketing tool. Many sold books, clothes, and entrepreneurial services in coffee shops. China's coffee market is currently at the end of the second wave.
In the third wave, all business models that do not aim to sell coffee will be broken. Consumers are tired of various coffee shops, and their demands return to a cup of high-quality specialty coffee.
The giants have already sensed the upcoming third wave. In Starbucks' overall sales in recent years, the proportion of light coffee drinks represented by "Frappuccino" has begun to decline, and pure coffee without creamer is increasingly sought after by consumers. Additionally, the strong sales of Starbucks coffee beans prove that more and more consumers are starting to make coffee themselves.
To cater to this trend, Starbucks began adding handcrafted bars in its first-tier city stores this year, offering specialty pour-over coffee. At the same time, it produces capsule coffee powder ground from whole beans, selling to consumers who brew their own coffee.
Nestlé also decisively changed its leadership in 2016, appointing Wan Min Gong, who has extensive experience in the FMCG industry, as CFO for the Asian market.
Gong's other identity is an independent director of Alibaba Group. After taking office, the first thing she did was cooperate with Alibaba. On the one hand, she upgraded Nestlé's e-commerce channels; on the other hand, she used Alibaba as a brand operation platform, conducting a six-month marketing campaign on its platform, with Alibaba providing consumer data analysis.
In addition, Nestlé has deeper strategic intentions for this cooperation.
In recent years, Alibaba has vigorously promoted the Rural Taobao project, which now covers more than 20,000 rural outlets. Amid market contraction and overcapacity, Nestlé has set its sights on third- and fourth-tier cities and rural markets. It hopes to achieve a curve breakthrough with a "rural surrounding the city" strategy, and Alibaba can help Nestlé complete the sinking of sales channels.
In the ready-to-drink market, Nestlé launched "Coffee Mousse" with the slogan "Shake 8 times before drinking, coffee turns into mousse" for differentiated competition. On the other hand, to welcome the upcoming specialty coffee wave, Nestlé is laying out high-end coffee shops in major cities across the country, with high-quality specialty coffee as its core product.
In July 2016, Nestlé, which had been absent from the screen for a long time, upgraded its brand image to be younger by sponsoring the online variety show "College Students Are Here." At the same time, it announced a strong alliance with the freshly ground coffee giant: Starbucks will produce espresso suitable for Nestlé's capsule coffee machines. This means consumers can make Starbucks coffee at home with Nestlé machines.
In October, Nestlé's modern coffee center was officially completed in Yunnan. Nestlé can control product quality from the source, reduce supply chain risks, and stockpile more "ammunition" for the upcoming battle.
While Nestlé continues to increase its investment in China's coffee business, showing determination to fight to the end, Maxwell House seems powerless. After being spun off by its parent company, Maxwell House has done nothing in the Chinese market except update its product packaging once. In October this year, Maxwell House's factory in Guangzhou was empty, and products for the Greater China region will be imported via Thailand. Maxwell House stated that it will reappoint a general manager for Greater China and form a strategic partnership with Hillhouse Capital Group to achieve greater development in China.
Is it a curtain call or halftime? We don't know. But what can be seen is that the inflection point for instant coffee has arrived, and the battle for the throne in the new era is about to begin. The old guards fought for the country all their lives, but now it's like a beauty growing old and a hero mourning in autumn.
Editor: Tang Liang, tangliangcq@126.com
Source: Business Journal
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