Please see the instructions and grading rubic attached.MKT 701 Marketing Strategy Summer 2021 AP1 Case Analysis 2 Keurig Please note that there are two case studies for this assignment. Read the two Cases: Keurig at Home & Keurig: From David to Goliath and complete this analysis. They were written by the same author, and the second case study was a follow-up to the first one. Questions to be addressed in your case analysis: (Note: these questions are not the “key issues”). • What is the market potential of the current single serve coffee market? • Where is it on the product life cycle curve – in the growth stage or maturity stage? • As the market leader, are there opportunities for growth in the future? What do you suggest Keurig do to maintain their market position and even grow? (Consider consumer preferences, competition, and the external environments – PEST) Please focus on the brand Keurig, instead of the company Keurig, since the company Keurig has become Keurig Dr Peppers and now it is the seventh largest food and beverage company in the US. Please make sure to review the grading guidelines and rubric prior to working on this case analysis. Please include the following in your case analysis. 1. Cover page 2. Summary of key marketing strategy issues. 3. Evaluation of key issues 4. Propose and justify your own solutions 5. Recommendations 6. References 7. Please apply marketing concepts or theories introduced in this course or you find from external sources. Case write-ups should be at least 5 pages not including cover page and reference page, double spaced, font size 12 in Times New Roman. Please submit it in MS Word format. 5-105-005 February 28, 2005 ERIC T. ANDERSON Keurig At Home: Managing a New Product Launch A Wednesday afternoon in February 2003 found Keurig Inc.’s president and CEO Nick Lazaris heading south on Interstate 89 back toward his Wakefield, Massachusetts, office and mulling over the day’s events in preparation for a briefing with his senior management team (see Exhibit 1). He realized that the next two weeks would be critical to the success of the company’s newest product initiative in the single-cup coffee market. Lazaris had just wrapped up a presentation to the Green Mountain Coffee Roasters Inc. (GMCR) management team, one of the company’s strategic partners and an investor in its business. While reviewing the company’s progress toward the launch of its innovative coffee-brewing system into the at-home consumer market, GMCR had asked Keurig to reconsider its decision to use a different version of the coffee portion pack, known as a K-Cup, in the consumer market. In making its request, GMCR had offered a number of compelling reasons for using the existing commercial portion pack in both channels. As he drove, Lazaris passed a new Starbucks and reflected on how gourmet coffeehouses had helped pave the way for Keurig’s single-serve brewing system. The proliferation of soft drinks since the 1960s had caused coffee to lose its place as a central component of social gatherings, spurring a precipitous drop in coffee consumption to an all-time low of 6.1 pounds per capita in the mid-1990s from a peak of 16.5 pounds per capita in the mid-1940s.1 The entrance of gourmet coffeehouses had reinvigorated the market, developing a distinct subculture of coffee drinkers and educating younger consumers about great traditional coffees as well as espresso and milk based specialty beverages. As a result, by 2003 an estimated twenty million Americans were drinking gourmet coffee on a daily basis. Keurig’s launch of a single-cup brewing system in the office coffee service market in the late 1990s had benefited from coffee drinkers’ increasing sophistication. Office employees could appreciate the greater variety, freshness, and convenience derived from the ability to brew a single cup of coffee on demand. Office managers recognized the advantages garnered from less coffee waste, increased employee productivity, and decreased hassle associated with tending the coffee machine. February 2003 found Keurig poised to launch its new model B100 system in the at-home segment with hopes of repeating its success in a much larger but more competitive market. With rumors of other single-cup competitors ready to enter the market, Lazaris knew Keurig needed to move quickly in order to obtain its desired positioning in the emerging single-cup consumer 1 Source: United States Department of Agriculture. ©2005 by the Kellogg School of Management, Northwestern University. This case was prepared by Elizabeth L. Anderson under the supervision of Professor Eric T. Anderson. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 847-491-5400 or e-mail firstname.lastname@example.org. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management.KEURIG AT HOME 5-105-005 market. Revisiting the decision to proceed with a two-K-Cup strategy had the potential to derail the company’s launch efforts and demanded rapid attention by Lazaris and the senior management team. Reevaluation of the K-Cup decision would also force them to rethink other elements of their product plans, including pricing and marketing. With less than six months until the September launch, time was of the essence. The Company and Its Products Keurig Inc. had been founded to develop an innovative technique that would allow coffee lovers to brew one perfect cup of coffee at a time. Beginning with the company’s inception in 1992, the word “Keurig,” from the Dutch word for excellence, had been the guiding principle behind the development of its products and services. The company leveraged investments from venture capital funds to transform its concept for a single-cup brewing system into a commercially viable business with the development and patenting of a single-portion pack and a revolutionary new coffee brewer. The first brewer targeting the office coffee service market, the B2000, was launched in 1998. A licensing agreement allowed GMCR to pack its specialty coffees in Keurig’s patented container, the K-Cup (see Exhibit 2). Eight varieties of coffee were originally available for sale to offices. Keurig continued to expand its relationships with roasters such as GMCR, using a selective but nonexclusive strategy. This ongoing effort had expanded the number of roaster partnerships to five, resulting in the largest variety of coffees available with a single-cup system in the market in 2003. In February 2002 the ownership structure of Keurig changed through agreements with two of its roaster partners. Keurig sold stock to Van Houtte Inc. to raise nearly $10 million to support the launch of the at-home business. This investment provided Van Houtte with nearly a 28 percent ownership stake in Keurig. At the same time, GMCR acquired and executed options to purchase a large number of Keurig shares from existing shareholders, enabling Keurig to consolidate to a smaller number of significant shareholders. GMCR obtained a 42 percent stake in Keurig. With these moves, Van Houtte and GMCR joined Memorial Drive Trust (MDT) as the three largest shareholders of Keurig. MDT, an investment advisory firm that managed a U.S.-based profit sharing plan, had served as the lead venture investor in Keurig since 1995 and led Keurig’s board of directors. As provided for in separate shareholder agreements with MDT, neither GMCR nor Van Houtte was allowed to have a seat on the board of directors. Lazaris reinforced the company’s position with respect to these roaster shareholders in a letter to its authorized distributors and other roaster partners: We do not plan to allow any roaster or other commercial business partner to sit on our board of directors. Our core strategy remains unchanged: we are committed to a multiroaster strategy that relies on strong relationships with selected gourmet coffee roasters who take a great deal of pride in the coffee consumption experience that supports the meaning of their brand to consumers.2 2 Internal memo dated February 5, 2002. 2 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Single-Cup Brewing Technology Keurig’s single-portion system hinged on three key elements: a coffee brewer that perfectly controlled the amount, temperature, and pressure of water to provide a consistently superior tasting cup of coffee; a unique portion-pack system containing ground coffee beans as well as filter paper; and a varied coffee selection to replicate the choices available in a gourmet coffeehouse. The Keurig commercial-market brewer included an “always-on” feature, enabling it to brew a cup of coffee in less than one minute at any time of day. Plumbed to a water line, the automatically refillable water reservoir maintained up to twelve cups of water at brewing temperature. After the customer inserted a K-Cup in a drawer, positioned the eight-ounce cup to receive the brewed coffee, and pressed the “brew” button, the brewer would pierce the K-Cup, inject pressurized hot water, and brew the coffee. The K-Cup, evolved from an initial mock-up design based on a modified yogurt cup, contained a built-in cone-shaped filter and the exact amount and grind of coffee to fresh-brew a single eight-ounce cup. K-Cups were impermeable to air, moisture, and light to ensure the contents stayed fresh for at least six months. A key differentiator for Keurig’s brewing system was the broad coffee selection available through licensing arrangements with a variety of gourmet coffee roasters. Coffee roasters controlled the quality of their coffee and the number of varieties available through K-Cup production lines. A production line might be owned by the coffee roaster or leased from Keurig. K-Cups were produced by five roasters with six brands and more than seventy-five coffee varieties.3 Roaster partners included Green Mountain Coffee Roasters, Diedrich Coffee, Van Houtte, Timothy’s World Coffee, and Ueshima Coffee Company. For each K-Cup sold, the roaster paid Keurig a royalty of approximately $.04. The Art of Cupping “Cupping” was a method of tasting the finished (or brewed) coffee product used by roasters and many large retailers to evaluate the flavor profile of a coffee. Similar to wine tasting, cupping involved swishing coffee around in the mouth to evaluate elements of the flavor profile. Expert “cuppers” could taste as many as ten to twenty varieties a day and perform an analysis that included taste, brightness (degree of acidity), fragrance and aroma, body, and finish. The process began with the roasting and grinding of a small batch of beans. Once the ground beans were placed in a cup, hot water was poured over them and the analysis process began. The cupping process could be supplemented by state-of-the-art machinery to ensure product consistency. In the world of gourmet coffees, roasters offered a variety of coffees tailored to the different tastes of gourmet coffee drinkers. For each variety of coffee offered, cuppers had established an expected flavor profile. The process by which that profile was achieved was closely controlled by the cupper during the cupping process. However, those same controls could not always be achieved in the traditional home brewing process. The desired flavor profile could be affected by a number of factors beyond the control of the roaster or cupper: the amount of coffee or water used by the consumer, variations in the temperature throughout brewing, or the amount of time the coffee sat in the coffee pot prior to being consumed. Through close control of critical 3 Currently there were three leased-production lines and an additional eight roaster-owned lines. Three additional lines were planned. KELLOGG SCHOOL OF MANAGEMENT 3 KEURIG AT HOME 5-105-005 elements in the coffee brewing process, the Keurig system enabled that flavor profile to be recreated on a consistent basis and ensured that the coffee drinker had the same taste experience time after time. Away-from-Home Market Keurig’s market included two broad target customers: office users and households.4 Keurig chose to focus first on the away-from-home commercial segment of office users in the hopes that a successful rollout would provide a springboard for launch into the at-home segment. The groundwork for launching into the away-from-home office coffee service (OCS) market was laid by Starbucks and other specialty coffee purveyors. They had successfully educated consumers about good-quality coffee and made it acceptable to pay $1.50 or more for a cup of coffee and even more for coffee-based specialty beverages. This behavior opened the door for Keurig and others to offer a single-cup system into offices, capitalizing on people’s desire to have the same great taste in the office as they got at a coffeehouse. In 2002 the OCS market reached $3.46 billion in total revenues.5 At the same time, acceptance of the single-cup brewing technology was evident in surveys of OCS distributors. In 2000 only 14.8 percent of distributors had offered a single-cup system, but that figure had increased to 44.8 percent in 2001.6 By 2003 total single-cup brewer placements had reached 143,200 (see Exhibit 3). Since the launch of its first commercial brewer in 1998, Keurig had quickly moved to a leading position in the sales of single-cup brewing systems. After five years in the market at the end of 2002, Keurig had shipped more than 33,000 brewers in North America, equal to 1 percent of all OCS brewers. In comparison to the competition, Lazaris was quick to point out the speed with which Keurig had penetrated the market: It took Filterfresh twenty years to ship 45,000 units in North America. And in its first five years, Flavia shipped only 8,000 units in North America. In addition, our expansion into Asia at the end of 2001 provided us an added opportunity for growth. In partnership with the top Asian roaster, UCC, our initial sales in Japan and Korea had been more than 2,700 brewers. A second measure of Keurig’s achievements in the OCS market was shipment of its patented K-Cups. In 2002 Keurig’s roaster partners shipped more than 125 million K-Cups, bringing total K-Cup shipments since launch to more than 340 million. Also in the works was the launch of an offering of teas in T-Cups, with the first being the “Celestial Seasonings” teas. 4 From early trial activities, Keurig had determined its single-serve brewing system was not well aligned with the needs of food service establishments serving a large volume of coffee. 5 Source: International Coffee Organization, London, UK. 6 Source: Automatic Merchandiser 2002 Coffee Service Market Report. 4 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Away-from-Home Channel of Distribution The office coffee market was served by a network of approximately 1,700 distributors that were responsible for placement and maintenance of office brewers and ongoing coffee supply. Keurig worked with a total of 180 Keurig authorized distributors (KADs) for sales throughout North America. A small number of KADs handled customers throughout the United States or North America, while the majority covered smaller regions. The purchasing decision was handled by office managers. “Office managers are all about eliminating headaches. The variety of coffees, convenience of brewing, and negligible clean-up of the Keurig system mean fewer employee complaints and greater productivity,” explained Chris Stevens, away-from-home vice president of sales, who was responsible for managing Keurig’s day-to-day relationship with its network of KADs. Customer relationships were managed by the KADs and feedback on problems or desired new features was funneled through the KADs to share with Keurig. The KADs purchased commercial brewers from Keurig at a wholesale price that ranged from $500 to $1,000. The brewer was placed in offices free of charge or with a low monthly rental in exchange for ongoing coffee sales. Typically there was no formal contract between the KAD and the office manager, although the KAD established expected volumes based on the number of employees in the office. If volumes fell below expected levels, the KAD could remove the brewer from the office or raise the price of the K-Cups. The KAD was also responsible for ongoing repairs of the brewer. The KAD provided a variety of coffees to offices, based on their individual consumption profiles. KADs entered into direct relationships with one or more licensed roasters for the purchase of K-Cups. Typically, KADs paid roasters $0.25 per K-Cup and sold K-Cups to office managers for $0.40–$0.50. Roasters then paid Keurig a royalty of $0.04 per K-Cup sold. Away-from-Home Single-Cup Competition There were two primary competitors in the away-from-home market. FILTERFRESH Hopper-based single-cup technology was pioneered by Westwood, Massachusetts-based Filterfresh Coffee Service Inc. in the late 1980s. Filterfresh was a U.S. subsidiary of Canadian based Van Houtte (a Keurig shareholder), a leading gourmet coffee roaster, marketer, and distributor in North America. The Filterfresh commercial single-cup system was based on the “French press” method of brewing. Ground coffee beans were loaded into a storage hopper in the machine. Once a button was pressed for a cup of coffee, an amount of ground beans would be measured from the hopper and mixed with hot water. The mixture would then be strained to remove the grounds and a single cup of coffee resulted. No brewed coffee was left to sit and become waste as was common in a traditional glass pot system, and a person enjoyed a freshly brewed cup of coffee each time. Regular tending of the coffee system was required to remove used coffee grounds and reload ground beans into the storage hopper. Filterfresh established its relationship with Keurig in October 2001 to market Keurig’s commercial brewer and offer a system that could provide a greater variety of single-cup coffees and teas. KELLOGG SCHOOL OF MANAGEMENT 5 KEURIG AT HOME 5-105-005 FLAVIA Flavia was owned by Mars Inc. It introduced its first single-cup brewer to offices in Britain in 1985 and expanded to Europe and Japan before introducing its “Brew-by-Pack” system in the United States and Canada in 1996. Similar to the Keurig brewer, the S350 commercial brewer utilized a single-serving pack. Each Filterpack contained its own filter and the appropriate measure of ingredients, which were foil-sealed, protecting them against air and moisture. A selection of twenty-four coffee varieties was available with the system. At-Home Market Building on its success in the OCS market, Keurig viewed the at-home consumer market as a logical extension to its business strategy. John Whoriskey joined Keurig as general manager and vice president of the at-home division in 2002. He brought with him more than twenty years of experience in consumer goods sales and marketing. “I fell in love with Keurig and its brewing system,” he commented. “I don’t consider myself a gourmet coffee drinker, but I do like a good cup of coffee. I would drive a mile out of my way to work to pick up a good cup of coffee. With a Keurig brewer, we can offer convenience benefit with taste assurance, in the comfort of your own home.” The at-home market represented an enormous opportunity for Keurig. Leading market research firms estimated the total size of the retail coffee market at approximately $18.5 billion in 2000. At-home retail consumption was a $6.9 billion market, with at-home gourmet coffee accounting for $3.1 billion (see Exhibit 4). Away-from-home gourmet coffee represented a $3.9 billion market and was typically sold by the cup at cafes such as Starbucks or in other food service venues such as restaurants. At the same time, estimates showed 157 million Americans drank coffee, with 60 percent predominantly drinking previously ground coffee and another 10 percent using freshly ground whole bean coffee.7 Profiles of coffee drinkers varied by product type, with consumers of whole-bean coffee exhibiting an upscale profile (see Exhibit 5). In addition, about eighteen million coffee makers were purchased annually in the United States, representing about $450 million in retail sales. Coffee makers represented one of the largest volume small appliances sold for home use.8 Previously the purview of upscale outlets—coffee/tea stores, gourmet/specialty stores, kitchenware stores, and coffeehouses—gourmet coffees had increasingly been sold in mass-retail outlets. At the same time, the growing popularity of whole-bean coffee had been driving the launch of a variety of roasts, blends, and flavors. Starbucks, for example, showed growth of whole-bean sales in excess of 100 percent in 2000.9 Coffee advertising centered on two major themes: good taste and positive stimulation. Taglines such as Maxwell House’s “Good to the last drop” reflected the emphasis on the taste experience. Positive stimulation focused on the benefits caused by drinking a particular cup of coffee. As an example, the well-known tagline “The best part of waking up is Folgers in your cup” suggested that the stress and challenges in your life could be overcome by taking that first sip. 7 Simmons Market Research Bureau (2000). 8 Source: Keurig company information. 9 The U.S. Market for Freshly Brewed Coffee Beverages, Packaged Facts, March 2004. 6 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME At-Home Single-Cup Market Research Keurig commissioned a variety of market research studies on the at-home product concept from 1999 to 2001 prior to moving ahead with any significant development efforts. “We wanted to get an understanding of the acceptability of the single-cup approach, gain some insight into pricing of the K-Cup and the brewer, and profile our prime consumer prospects,” explained Lazaris. This research was executed in a variety of formats, including intercept surveys, Internet based surveys, surveys of current OCS users, and surveys and focus groups of home use testers. Intercept interviews were conducted in three cities in the summer of 2000. Lazaris explained the study’s focus: “We were interested in speaking with regular gourmet coffee drinkers so respondents were selected based on coffee brewing habits and coffee consumption.” To qualify for the intercept survey, consumers had to drink gourmet coffee, which included coffee from freshly ground whole beans, from gourmet coffee roasters, and from premium coffee cafes such as Starbucks, Dunkin’ Donuts, Seattle’s Best, or Caribou Coffee. All participants had to drink at least one cup of coffee per day. While nearly 94 percent of respondents indicated that they were satisfied with the coffee they drank at home, 88 percent expressed an interest in the product concept. Interest focused primarily on convenience, particularly quick brewing, ease of use, and minimal clean-up, sources of the most dissatisfaction with current home brewing systems. Based on explanation of the product alone, more than three-quarters of respondents said they would be likely to purchase a system like the one proposed. The product demonstration had a huge impact on this figure. More than 90 percent of respondents indicated that the demonstration increased their likelihood of buying the product. Key factors rated highest in the demonstration included the time it took to prepare coffee and the time it took to clean up. Keurig had gained some initial insight into brewer pricing from previous market research (see Exhibit 6). It now wanted to explore product pricing with consumers who considered the system (brewer and K-Cups) and also experienced a product demonstration. Among intercept respondents, the self-reported daily consumption rate of coffee was an average of two to three cups. When asked about their willingness to pay for a cup of coffee like the one they tasted, 44 percent indicated they would pay $0.55 (see Exhibit 7). Later in the survey, respondents were asked about their willingness to pay for both K-Cups and the brewer. More than 30 percent of respondents who were interested in the system were willing to pay $0.50 or more for a K-Cup. Before obtaining input on brewer pricing, respondents were told that high-quality coffee makers sold in the range of $69 to $149. Approximately one-fourth of the respondents were willing to pay more than $130 for the brewer. Consumers who drank more coffee were more willing to pay for both the K-Cup and the brewer. An Internet-based survey used as its basis a Keurig system summary (see Exhibit 8) that was shown to people who drank coffee on a daily basis. It found that the concept had strong appeal, with 67 percent of respondents expressing interest. The main differentiating factor revolved around the speed of brewing a cup of coffee. Of second highest importance was the convenience of no preparation or clean-up. As part of the study, a price point of $149.99 was tested. The 9 percent of respondents who indicated that they “definitely would buy” or “probably would buy” the coffee system at this price were classified as “core customers.” These respondents tended to be younger and most were male. Follow-up survey questions revealed that the average price core customers were willing to pay for the coffee system was $125. KELLOGG SCHOOL OF MANAGEMENT 7 KEURIG AT HOME 5-105-005 For the home use test, a commercial model brewer was placed in the homes of gourmet coffee drinkers. The testers were then required to purchase K-Cups at a retail price of $0.50 via fax, e-mail, or phone for their own individual coffee consumption. Subsequent interviews and focus groups found that users consistently referenced great-tasting coffee with a system that was fast and convenient. Additional attributes of the product highlighted included taste consistency, coffee variety, and cleanliness of preparation. Of particular note was the fact that coffee consumption at home increased with the presence of the Keurig brewer. On average, 2.25 cups of coffee were consumed per day at home. Not only were participants drinking more coffee in the morning, but they were purchasing less coffee outside the home. An acceptable price range for the brewer was determined to be in the $129–$199 range, with a price exceeding $200 triggering a reaction that the item would become a luxury purchase for which more consideration would be required. K-Cup pricing, however, did not appear to be an issue. At-Home Single-Cup Competition A key element of Keurig’s strategy in the at-home market was being one of the first entrants in the product category. In establishing itself as a pioneer in the upscale single-cup brewing category, Keurig envisioned that subsequent press coverage would naturally include a reference to the Keurig system as a single-cup pioneer and enhance its visibility in the upscale market. In the traditional consumer coffee market, Procter & Gamble (P&G) and Kraft were the market share leaders with distribution largely through grocery stores (see Exhibit 9). In advertising expenditures, the two companies represented 84 percent of total expenditures of $163 million.10 In the coffee maker appliance market, appliance brands targeted either upscale or mass market retailers. In the upscale segment, Cuisinart, Krups, Braun, DeLonghi, and Bunn had strong distribution. In the mass channel, through which about 70 percent of all coffee makers were sold, Mr. Coffee, Black & Decker, Sunbeam, and Hamilton Beach had strong positions. Market indicators had led Keurig to believe that a number of these large established consumer products companies were preparing to enter the emerging single-cup market. In addition to the growth of the single-cup system in the away-from-home market, recent trends in Europe were showing the adaptation of traditional espresso pod systems for American-style coffee brewing. In each case, including Keurig, the systems were proprietary, with individual brewers working only with compatible coffee pod systems. Salton, with 2002 sales of $922 million, was a leading domestic designer, marketer, and distributor of a broad range of branded, small appliances. Under its licensed brand name, Melitta, it had formally announced plans for a May 2003 launch of a new brewing system: One:One. The One:One brewer would brew coffee utilizing Javapods, small round packets of filter paper in which the grounds were sealed. Salton’s expected retail brewer pricing was $49 with pod pricing of about $0.25 per pod. Sara Lee, a U.S.-based consumer packaged products company with sales of $17.6 billion in 2002, had been active primarily in the European coffee market, but, through a series of acquisitions completed in 2000, had become a stronger force in the U.S. market. Its two best known brands were Chock Full o’ Nuts and Hills Brothers. Sara Lee had stated that the Senseo- 10 Packaged Facts Market Profile: The U.S. Coffee and Tea Market, September 2001. 8 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Crema pod system might be in the U.S. market in the second half of 2003. Previously introduced in Europe, the Senseo Coffee Pod System used coffee pods of a different size than the Salton Javapods. The Sara Lee pods were bulk-packed in a bag made with a very thin layer of aluminum to preserve freshness. Sara Lee had placed almost two million Senseo pod systems in Europe since the product’s introduction. The company’s experience in the consumer market gave it the potential to be a formidable competitor. Senseo’s European pricing suggested a U.S. retail price of about $70 and a pod price of about $0.20 (with two pods required to deliver an eight-ounce serving). There were also rumors that P&G had partnered with an appliance marketer to launch its own proprietary pod system. It was expected that P&G would focus on mass channel distribution of both its pod brewers and pods, given P&G’s strength in the grocery channel. P&G’s pricing and distribution were expected to be similar to Salton’s and Sara Lee’s. Nespresso, developed by Nestlé, was a European capsule-based single-cup espresso brewing system. It offered similar benefits to the Keurig system including taste, variety, and convenience. Since its introduction in 1987, more than 500,000 units had been sold, largely in Europe, using direct fulfillment via phone, fax, and Internet. Keurig wondered whether Nestlé would decide to enter the American-style single-cup coffee market, based on its experience with single-cup espresso. Is the Cup Half-Full or Half-Empty? Keurig did not have the resources to launch its B100 brewing system through the retail channel. However, it felt it could develop a direct marketing approach using an e-commerce enabled Web site to sell both the brewer and K-Cups in conjunction with leveraging the distribution capabilities of roasters and KADs. In pursuing this strategy, Keurig had encountered a number of channel issues that could jeopardize its established business in the away-from-home OCS market. Chris Stevens explained the challenge of balancing the needs of the OCS channel with the development of the new at-home business: Feedback from our KADs indicated that they would interpret our entry into the at-home market with a direct sales approach as a first step towards a direct approach in the OCS market in the long term. Concern about this would diminish the KADs’ marketing efforts in both the OCS and at-home markets, resulting in erosion of our installed base and revenue stream from our core OCS segment and a less effective launch in the at-home market. At the same time, we were worried about loss of pricing control with KADs underpricing Keurig and the roasters because they had no brewer investment to recover. In addition, there was concern that the office managers would not support our at-home marketing efforts for fear of theft of K-Cups for use in the home brewer. Given these issues, Keurig’s goal had been to introduce a controlled distribution of brewers and portion packs that would maximize the launch of the at-home business while protecting the away-from-home OCS channel. Key in this strategy had been the introduction of a second portion pack as the basis for production differentiation—a new Keurig-Cup for the at-home market—and that decision had driven its development efforts to date. The K-Cup would work only in the commercial brewer, while the Keurig-Cup worked only in the at-home brewer (see Exhibit 10). Further distinction was made with the color of the two portion packs: the K-Cups were white while the Keurig-Cups were tan. These two portion packs would be manufactured on the same KELLOGG SCHOOL OF MANAGEMENT 9 KEURIG AT HOME 5-105-005 packaging lines. Design of the necessary tooling to thermoform the new cup bases had been completed at a cost of about $400,000. In addition, new parts for the packaging lines at licensed roasters had been manufactured by Keurig at a cost of just under $60,000 per packaging line to enable the lines to manufacture both the Keurig-Cups and the K-Cups. While the new B100 brewer was targeted for both lower-volume OCS customers and for at-home use, different cup holder inserts and different color drawers would differentiate the brewer products in the two markets. Building off this product differentiation, Keurig’s controlled distribution strategy allowed roasters to sell Keurig-Cups in direct and indirect markets and KADs to sell them in direct markets, assuming certain volume commitments were met on sales of the associated brewer. KAD brewer volume commitments ensured that parties selling Keurig-Cups would be equally vested in brewer sales and focused on marketing an entire system. Roasters would manufacture Keurig-Cups for Keurig to resell directly to at-home users over the Internet. In addition to providing necessary assurances to KADs about Keurig’s future plans, the two-portion-pack strategy eliminated office manager concerns over the potential theft of portion packs for use in home brewers, increasing the likelihood of their participation in in-office promotions of the Keurig system. Unfortunately, the plan had reached a roadblock at that afternoon’s meeting with GMCR. Lazaris later summed up GMCR’s concerns to the senior management team in an e-mail, “We reviewed the controlled distribution structure with GMCR’s management team. GMCR responded that it was complicated and resulted in doubling the number of portion pack products they would have to manufacture and warehouse. There could also be the potential for customer dissatisfaction resulting from using a portion pack in the wrong brewer. GMCR preferred the one cup model based on long-term simplicity and the desire to move quickly because of the competitive systems coming to market. Clearly, GMCR has the same interests we do—it has the largest share of the OCS K-Cup business and can’t afford to alienate the channel. It has an ownership interest in Keurig and wants to see long-term value creation. But going back to the board to discuss a major change at this point will not be easy.” At-Home Product Pricing Another issue being wrestled with by the senior management team in early 2003 was determination of the pricing strategy for the Keurig-Cup and B100 brewer for the at-home market. A decision on the one-cup vs. two-cup approach challenged by GMCR would have a direct impact on Keurig’s portion pack pricing strategy. One benefit of the controlled distribution strategy utilizing two distinct portion packs was increased control of the pricing, specifically for the Keurig-Cup. “We were interested in using a direct sales model for the at-home market,” explained John Whoriskey. “With the Keurig-Cup, we could set pricing for the consumer market without having to worry about erosion of our established revenue base in the OCS market.” Without the product distinction, office managers would have the opportunity to purchase portion packs from their current KAD or directly from the Keurig Web site, potentially drawing away sales from the KADs and jeopardizing their relationships with their accounts. Regardless of the one-cup vs. two-cup approach, Keurig needed to set a price for its direct sales of coffee. Equally challenging was the pricing of the B100 brewer. Early market research suggested that consumers paid greater attention to the pricing of the brewer and it would have a direct impact on their decision to invest in the Keurig system. In price testing, upscale consumers appeared to react 10 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME favorably to pricing in the $149 to $170 range, providing Keurig with the target price for its product development and business plan forecasts. With an estimated launch of September 2003, Keurig had forecasted at-home brewer shipments of about 20,000 through year-end. Just under two-thirds of those sales were expected to be through direct Keurig sales activities, with the remainder being driven by roasters and KADs either selling B100s to at-home consumers or driving leads to Keurig by referring potential customers to the Keurig Web site. Additionally, Keurig expected KADs to buy about 3,000 B100 brewers for placement in small offices in the OCS channel. Keurig-Cup and K-Cup sales were expected to follow the same at-home/away from-home distribution split as the brewers. Yet another issue was the manufacturing costs of the new brewer. Development efforts on the at-home brewer were put on hold in 2002 to speed development of a smaller commercial brewer called the B1000 that was launched in December 2002. Under the leadership of engineering development vice president Dick Sweeney, development of the new B100 at-home brewer was restarted after the B1000 brewer was launched. While the B100 could also be used in offices, it was targeted at the at-home consumer market. The B1000 brewer had costs greater than $300 and some significant design issues. Sweeney explained, “Product development always has the dark cloud of unexpected consequences. What distinguishes a company is how it resolves issues and moves on. In this case, our experiences with the B1000 brewer provided valuable insight into the development of the B100 at-home brewer.” Even so, the latest reports from the manufacturing partner had projected costs at $220. Additional engineering efforts were focused on reducing those costs to $200. As a result, Keurig’s senior management team and board of directors were struggling with the pricing of the B100. The three key price points being reviewed were $199, $249, and $299. The company could simply not afford to sell at the desired $149 price point and it was too late to redesign the brewer for lower costs. At $299, there would be a small profit margin to apply toward marketing and infrastructure costs. At $199, there would be a large immediate loss on brewer sales, but marketing research had shown the $199 price to be more attractive than $200 or more. While Keurig’s business model allowed the recovery of losses on the brewer through the royalties on K-Cups, the degree of losses impacted cash. Lazaris wondered, “If we price high, we can always lower the price, but we may not have the time to correct the pricing, given competitive pressures.” Marketing Plan for At-Home Launch Unlike the OCS market, the at-home market did not include a single source for both brewer and coffee sales. Traditionally, consumers made separate purchases. Brewer distribution was through small appliance retailers like department stores, mass merchants, and kitchen specialty stores, while coffee distribution was through grocery stores, gourmet food retailers, and coffee shops. Each product was promoted independently and essentially all brewers worked with all coffees. The Keurig brewer and its patented single-portion pack presented unique distribution challenges. To accomplish a Keurig system sale would require either direct distribution or a great deal of investment to develop traditional channels and to place enough brewers to pull portion packs through retail shelves. To complicate matters, market research had made it clear that the Keurig system was a “demonstration-driven product.” The question was how best to demonstrate the system to the target market of gourmet coffee drinkers. “Based on the market research and the unique challenges of the Keurig system, leveraging our current OCS penetration was a primary focus of our at-home launch strategy. We planned to KELLOGG SCHOOL OF MANAGEMENT 11 KEURIG AT HOME 5-105-005 target Keurig office users, people already familiar with the benefits of the Keurig system, and convert them to at-home buyers in order to build critical mass to support channel expansion,” explained VP of away-from-home marketing Dave Manly. With more than 30,000 commercial brewers in place, Keurig had about one million people to focus on in its direct marketing efforts. Critical to the success of direct marketing efforts to “Keurig-aware” coffee drinkers was the support and involvement of the Keurig authorized distributors. The KADs maintained relationships with office managers where commercial brewers were placed and had knowledge of each office’s size. Keurig would not be able to market to coffee drinkers in the offices without the KADs’ assistance. As a result, Keurig had designed a KAD referral program that gave them attractive incentives to support the marketing of the new brewer. The KAD referral program was to be driven by point-of-sale (POS) advertising that had been developed for display on or near the office brewer (see Exhibit 11). In exchange for placement of the POS materials, the KAD would be compensated $15 for each home brewer sale attributed to that KAD’s OCS accounts and would be paid a two-cent-per-K-Cup (or Keurig-Cup) annuity on subsequent coffee sales that Keurig made to that customer for three years. Chris Stevens outlined the company’s expectations: “We anticipated that about 60 percent of our KADs would participate in our joint marketing program with sales of two brewers for each office where advertising was placed. We estimated that the remaining 40 percent would already be planning their own marketing program and would want to maintain more control of their customers.” A second avenue for marketing to “Keurig-awares” would be via an Internet direct marketing campaign. Since the launch of the commercial brewer in the OCS market, Keurig had received unsolicited e-mails from more than 12,000 users of its office system who wanted to know when a similar system would be available for home use. Keurig planned to market to these people directly and expected 20 percent of them to purchase a home brewer in the first three months of the launch. Finally, a public relations campaign coupled with additional marketing activities by roasters such as placement in their retail stores, catalogs, and Web sites would provide additional avenues for sales to gourmet coffee drinkers. Lazaris’s Dilemmas As Lazaris reflected on Keurig’s strategy for the launch of its at-home brewer in preparation for the senior management meeting, he wondered: 1. How should we respond to GMCR’s request to switch to the single K-Cup approach? What do we really need to know to make this decision? How will our other roasters and the KADs respond? Can our team really implement a new game plan at this late date and still launch in six months? Can we afford the write-off on the new Keurig-Cup and packaging line tooling? 2. What is the right price for the brewer? Is there a way to afford a $149 price point on the brewer that we have not thought of? 3. How should we price the at-home portion pack? If we have one cup in all markets, what pricing is optimal? If we have both the K-Cup and the Keurig-Cup, what pricing makes sense and optimizes our market opportunity? 4. Have we taken the necessary steps for our marketing plan to succeed? Is there another avenue that we are overlooking? 12 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Exhibit 1: Keurig Senior Management Team NICK LAZARIS: PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR Lazaris joined Keurig in 1997. His more-than-twenty years of business experience includes president/CEO- and VP-level experience in marketing, sales, finance, and business development in the home furnishings and office products industries. Prior to Keurig he was president/CEO of MW Carr, a photo frame manufacturer/marketer, and VP and divisional GM for Tech Specialists, a contract professional staffing firm. Earlier in his career, Lazaris served as chief of staff for West Virginia Governor Jay Rockefeller. In 2001 and 2003 he was a regional finalist for Ernst & Young’s Entrepreneur of the Year. He received his BS from MIT and his MBA from Harvard Business School, and is a licensed CPA. DICK SWEENEY: CO-FOUNDER AND VICE PRESIDENT, ENGINEERING AND OPERATIONS Sweeney co-founded Keurig in 1993 and joined the company full time as VP of engineering in 1996. He brought to Keurig more than twenty-five years of experience in manufacturing, product development, and consulting for industrial and consumer appliances, including espresso machines. Prior to Keurig he was VP of manufacturing for Canrad-Hanovia, a manufacturer of scientific and UV lighting. Before that he was VP of operations for V-M Industries, a consumer appliances manufacturer and importer. Sweeney received his BS from New Jersey Institute of Technology and his MBA from Fairleigh Dickinson University. CHRIS STEVENS: VICE PRESIDENT OF SALES Stevens joined Keurig in 1996. He brought to Keurig more than twenty years of experience in consumer goods sales and marketing, as well as general management. After beginning his sales career with seven years at Proctor & Gamble, he became president of the August A. Busch Co., a subsidiary of Anheuser-Busch. After also serving as a divisional manager with A-B, he was executive VP and general manager for United Liquors before becoming executive director of the Sports Museum of New England. Stevens received his BS from Notre Dame and completed the Executive Education program at Columbia Business School. DAVE MANLY: VICE PRESIDENT OF MARKETING Manly joined Keurig in 2002. He brought to Keurig more than twenty years of experience in consumer goods sales and marketing. His experience included VP and GM positions building well-known consumer brands in the food products and consumer goods industries via innovative marketing approaches. Manly has held marketing positions at Nexus EnergyGuide, EnergyUSA, LoJack Corporation, Boston Whaler Boat Company, and Procter & Gamble (food products division). Manly received his BS from DePauw University and his MBA from Purdue University. JOHN WHORISKEY: VICE PRESIDENT, GENERAL MANAGER—AT-HOME DIVISION Whoriskey joined Keurig in 2002. He brought to Keurig more than twenty years of experience that included president- and VP-level experience in marketing and sales in the home furnishings, gift, and consumer products industries. Prior to Keurig he was president of Fetco Home Décor and president of Optelec Inc. Prior to that, he worked in VP-level positions for Honeywell Consumer Products, Tucker Housewares, The First Years, and Polaroid. Whoriskey received his BS and an MBA from Boston College. KELLOGG SCHOOL OF MANAGEMENT 13 KEURIG AT HOME 5-105-005 Exhibit 2: B2003 Commercial Brewer and Keurig K-Cups Exhibit 3: U.S. Single-Cup Brewer Placements by OCS Distributors Manufacturer Product(s) 1999/2000 2000/2001 2001/2002 2002/2003 Cafection Avalon 7,500 11,000 13,000 16,000 Crane Cafe System 22,500 23,000 11,000 12,000 Filterfresh Filterfresh/Keurig 23,000 24,000 26,500a 30,000b Flavia Flavia 8,000 19,000 32,000 40,000 Keurig Keurig 13,000 23,000 30,000 33,000 Newco Gevalia 0 1,000 1,200 1,300 Progema Venus 0 0 1,000 2,400 Unibrew Unibrew 3,200c 3,200 3,200 3,200 Zanussi Brio/Colibri 5,000 6,400 8,000 10,000 Other 1,100 1,600 516 4,600 Total 83,300 112,200 126,416 143,200 a Includes 1,484 Keurig units. b Includes 2,300 Keurig units. c Available to Filterfresh franchisees only. Note: Table has been modified to exclude espresso machine sales. Source: Automatic Merchandiser, February 2002, July 2004. 14 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Exhibit 4: U.S. Retail At-Home Coffee Market Year Mass Market Coffee Sales ($ in millions) Pound Volume (in millions) Gourmet Coffee Sales ($ in millions) Pound Volume (in millions) 2000 3,815 840 3,100 320 1999 3,800 850 3,000 310 1998 3,975 830 2,800 290 1997 4,205 845 2,500 270 1996 3,905 850 2,200 255 Source: Packaged Facts Market Profile: The U.S. Coffee and Tea Market, September 2001. Exhibit 5: Demographic Characteristics by Product Form Factor Ground Instant Whole Bean Age 55–64 NS 45–54 Race NS Black; Hispanic Asian; Other Marital status NS Widowed Married Household income (in thousands) NS $10–$15 $75+ Education NS Not high school graduate College graduate Employment status Retired Homemaker Full-time Occupation NS NS Professional/ managerial Household size NS NS NS Region Midwest NS West Notes: U.S. adults. NS is no statistically significant differences. Source: Packaged Facts Market Profile: The U.S. Coffee and Tea Market, September, 2001. Exhibit 6: Initial Market Research Brewer Pricing Awares % (N=170) Nonawares % (N=601) $199 6 1 $149 9 7 $99 31 18 Note: Results from early street intercept testing were segmented between “Keurig-awares,” people familiar with the Keurig system, and “Keurig-nonawares.” Source: Company-sponsored market research. KELLOGG SCHOOL OF MANAGEMENT 15 KEURIG AT HOME 5-105-005 Exhibit 7: Intercept Testing Market Research Table 7A: Willingness to Pay for Coffee Survey respondents were asked how much they would be willing to pay for a cup of coffee like the one they tasted. Interviewers guided the respondents and started the price point inquiry at $0.55. The percentages of respondents represent the cumulative percentages of people willing to pay each price. Percentage of Respondents Initial Pricing (Cumulative) $0.55 43.8 0.50 53.5 0.45 60.0 0.40 69.5 0.35 79.3 0.30 87.3 0.25 97.8 Source: Company-sponsored market research. Table 7B: K-Cup Pricing Based on Coffee Consumption Survey respondents were asked how much they would be willing to pay for a K-cup. The percentages of respondents represent the cumulative percentages of people willing to pay each price. Responses include only customers who were very or somewhat likely to purchase system. K-Cup Pricing 1 Cup/Day a (N=78) % 2+ Cup/Day a (N=446) % $0.55+ 5.1 14.6 0.50–0.54 16.7 30.7 0.45–0.49 20.5 33.6 0.40–0.44 22.0 41.5 0.35–0.39 28.2 48.2 0.30–0.34 41.0 58.5 0.25–0.29 60.3 75.6 a Coffee consumption per weekday. Source: Company-sponsored market research. Table 7C: Brewer and K-Cup Pricing Based on Coffee Consumption This table reflects the percentages of respondents willing to pay certain prices for the brewer. Information is segmented based on their previously stated K-cup pricing and coffee consumption. Responses include only customers who were very or somewhat likely to purchase system. 1 Cup/Day a (N=78) % 2+ Cups/Day a (N=446) % K-Cup Pricing < $100 $100–$129 $130+ < $100 $100–$129 $130+ < $0.30 34.1 9.4 5.9 22.2 8.9 6.3 0.30–0.39 7.1 8.2 2.4 6.2 5.3 5.2 0.40–0.49 2.4 2.4 4.7 5.7 2.5 1.9 0.50+ 10.6 5.9 1.2 9.9 9.5 10.1 Don’t Know 5.9 6.3 a Coffee consumption per weekday. Source: Company-sponsored market research. 16 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Exhibit 8: Internet Survey Concept Description Introducing a Revolutionary New Home Coffee-Making System Coffee House Taste by the Cup™ Fresh Fast Convenient Delicious • The System—A revolutionary coffee-making system that uses individual portion packs of freshly roasted and ground coffee with a unique coffeemaker designed to brew GREAT cups of coffee, one cup at a time. Each user picks the brand and variety of coffee they want and makes a fresh, piping hot cup in just 30 seconds. • Delicious and Fresh—Individual portion packs come in over 36 varieties of branded coffees from Green Mountain Coffee Roasters, Diedrich Coffee, and Gloria Jean’s Coffees. The coffee is roasted, ground, and packed at the roasters’ facilities into an individual portion pack where freshness is sealed in. The pack provides an oxygen, light, and moisture barrier to ensure fresh ground quality that is guaranteed for six months. Whether you prefer light roasts, dark roasts, blends, decafs, or flavored coffees, this system serves you the coffee you prefer, brewed to perfection every time. • Convenient—The entire brewing process takes place in the portion pack. There is no waste, no pot or filters to clean, and no hassle. Just discard the used portion pack after brewing. • Fast—Just press a button and in 30 seconds you’ll have a fresh cup of hot coffee. The machine is always plugged in and powered on with hot water ready to brew your cup of coffee. KELLOGG SCHOOL OF MANAGEMENT 17 KEURIG AT HOME 5-105-005 Exhibit 9: Coffee Market Share Company Market Share (%) Procter & Gamble a 36.9 Philip Morris/Kraft 31.8 Nestlé b 5.0 Starbucks 3.7 Chock Full o’ Nuts c 3.1 Tetley d 2.1 Community Coffee 1.8 Private Label 7.5 Other 8.1 Total 100.0 a Includes sales of Folgers and Millstone ground regular. b Nestlé sold its ground brands to Sara Lee in late 2000. c Chock Full o’ Nuts sold to Sara Lee in 2000. d Tetley sold off its coffee brands in 2000. Source: Packaged Facts Market Profile: The U.S. Coffee and Tea Market, September 2001. Exhibit 10: K-Cup (left) and Proposed Home Keurig-Cup (right) Note: Cups are shown upside down to illustrate difference in design. 18 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Exhibit 11: Point-of-Sale Display KELLOGG SCHOOL OF MANAGEMENT 19 5-411-751 ERIC T. ANDERSON Keurig: From David to Goliath The Challenge of Gaining and Maintaining Marketplace Leadership On March 17, 2011, the vice president and general manager of Keurig Incorporated’s At Home division, John Whoriskey, sat in his office in Reading, Massachusetts, reminiscing about the changes he had been a part of since joining the company in 2002. At that time Keurig was a privately held company with just over $20 million in revenues and a plan to enter the single serve coffee arena for home consumers, which Whoriskey himself had been hired to head up (see Exhibit 1). Nine years later Keurig was a wholly owned subsidiary of Green Mountain Coffee Roasters, Inc. (GMCR), a publicly traded company with 2010 net revenues of $1.36 billion (see Exhibit 2) and a market capitalization of between $8 and $9 billion. In 2003 Whoriskey oversaw the introduction of Keurig’s first At Home brewer, at the same time convincing the company’s board of directors to take the risky approach of launching design and development of a next-generation brewer before the first brewer had reached the marketplace. That decision turned out to be critical to Keurig, providing the basis for a suite of products that secured Keurig the four best-selling coffee makers, in dollars, in Q4 2010.1 Its strategy had been to offer a wide variety of coffees compatible with its single serve brewing system. Now, the company had just concluded an agreement with Dunkin’ Donuts that would make five flavors of its coffee available in K-Cup® portion packs compatible with Keurig brewers. Starbucks, a company synonymous with super-premium gourmet coffee, had also agreed to offer its coffee and Tazo tea for the Keurig® single-cup brewing system. In the fourth quarter of 2010, approximately 25 percent of all coffee makers sold in the United States were Keurig-branded machines,2 and Keurig was recognized as among the leaders in the marketplace. Keurig now faced different challenges than in 2003 when it was a small, unknown marketplace entrant. Among them, Whoriskey considered what impact the impending expiration of key technology patents and the perceived environmental impact of the K-Cup® portion packs could have on the company’s growth. Whoriskey wondered what Keurig’s growth potential was, and how the new arrangements with Starbucks and Dunkin’ Donuts could be leveraged to achieve it. 1 From company reports, based on NPD data, which does not include all retailers and is estimated to represent 35 to 45 percent of the total marketplace. 2 Ibid. ©2012 by the Kellogg School of Management at Northwestern University. This case was developed with support from the December 2009 graduates of the Executive MBA Program (EMP-76). 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KEURIG: FROM DAVID TO GOLIATH 5-411-751 The Company and Its Products Keurig had been founded to commercialize an innovative technology that allowed coffee lovers to brew one perfect cup of coffee at a time.3 Beginning with the company’s inception in 1992, the word “keurig,” derived from the Dutch word for excellence, had been the guiding principle behind the company’s products and services. With its patented single serve brewing system, Keurig first entered the office coffee service, or Away From Home (AFH), marketplace in 1998. In 2003 Keurig became one of the first to enter the At Home (AH) marketplace with a single-cup brewer designed for use in the home. Keurig’s single-portion brewer strategy was built on three key product features: a coffee brewer that perfectly controlled the amount, temperature, and pressure of water to provide a consistently superior-tasting cup of coffee; a unique, patented portion-pack system (marketed under the K-Cup® brand) containing ground coffee beans as well as filter paper; and a varied coffee selection to replicate the choices available in a gourmet coffeehouse. This varied coffee selection was a key differentiator for Keurig and was achieved through licensing arrangements with a variety of gourmet coffee roasters. A selective but nonexclusive relationship with a coffee roaster enabled the roaster to pack its specialty coffees in the K-Cup® portion pack. Coffee roasters controlled the quality of their coffee and the number of varieties available through portion-pack production lines. A production line was owned or leased and operated by the coffee roaster. K-Cup® portion packs were produced by four North American roasters with more than seventy-five coffee varieties. Roaster partners included GMCR, Diedrich Coffee, Inc., Van Houtte, Inc., and Timothy’s Coffee of the World, Inc. The roaster paid Keurig a royalty for each K-Cup sold.4 Other roaster partners were subsequently added, such as Tully’s in 2006. At the time of Keurig’s entrance into the AH marketplace in 2003, the company was privately held, with three significant shareholders. MDT, an investment advisory firm that managed a U.S.- based profit-sharing plan, had served as Keurig’s lead venture capital investor since 1995 and led the company’s board of directors. GMCR held a 42 percent stake in Keurig, and Van Houtte owned 28 percent. As provided for in separate shareholder agreements with MDT, neither GMCR nor Van Houtte was allowed to have a seat on the board of directors, enabling Keurig to maintain a roaster-neutral company strategy. At Home Product Introduction Keurig felt that being one of the first entrants in the product category was critical to its performance. The company’s launch of the B100 single-cup brewer in September 2003 coincided with Salton’s U.S. launch of the Melitta One:One brewer and Flavia’s SB100 brewer. Each brewer differentiated itself by its features, underlying brewing technology, and packaging of the coffee. Both the Keurig and Flavia brewers used a proprietary portion pack, while the Melitta 3 Portions of this overview are excerpted from “Keurig At Home: Managing a New Product Launch,” Case #5-105-005 (Kellogg School of Management, 2004). 4 See “Keurig At Home” case. The royalty was estimated to be approximately $0.04 per K-Cup. The royalty was increased by about $0.01 in 2008 to support advertising and market development. 2 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH brewer used a 44mm pod. All three provided the ability to brew a single cup of coffee at a time (see Exhibit 3). The Keurig and Flavia systems (both brewer and coffee) were only available online, whereas the Melitta system was available online and in limited retail outlets. A New Business Is Brewing The AH single serve concept was well received by coffee lovers. Early press and user reviews showed that customers were happy with the ability to brew a single cup of coffee with no mess—no scooping of coffee or dealing with filters—in 60–90 seconds. Feedback among the users of the three initial entrants varied, however, with the selection of coffee varieties a common thread for discussion. Melitta One:One offered only five options and the Flavia system was only slightly better, with a choice of eleven flavors. In addition, both systems’ offerings were restricted to a proprietary roaster. Meanwhile Keurig offered a total of more than seventy-five options encompassing a variety of flavors from four different coffee roasters. It quickly became apparent that feedback on a brewing system was often driven by the user’s individual coffee preferences, so greater quality and variety of coffee positioned Keurig well in the marketplace. Users complained, however, that all three competitors lacked availability of the proprietary coffee packs in retail stores. Online ordering was the only option and required some advance planning to have a continuous supply of coffee. Some new, larger players entered the single serve marketplace in 2004. In March of that year, Phillips and Sara Lee International launched the Senseo 7810 in the United States. The pod-based system brewed Sara Lee’s Douwe Egberts coffee brand and produced a distinct frothy layer on top of the brewed coffee. The U.S. introduction of the Senseo followed launches in the Netherlands, France, Germany, and Denmark between 2001 and 2003. More than 5 million machines and 2.5 billion pods had already been sold in those countries.5 The brewer’s primarily plastic construction was still viewed as sturdy and overall it received positive reviews for its simplicity and ease of use. In February 2004 Procter & Gamble announced that it had joined forces with four appliance marketers6 to launch the Home Café single-cup brewing system in conjunction with a $50 million-plus marketing campaign. The Home Café pod system would brew Folgers and Millstone coffees. Black & Decker produced the first Home Café brewing system in May 2004, but users frequently complained about the machine leaking, the difficulty of properly placing the pod in its holder, and the volume of plastic used in the brewer construction. In late 2004 the Mr. Coffee Home Café brewer was added to the line and received more positive reviews. Both the Senseo and Black & Decker Home Café systems were available online and in limited retail outlets, an improvement upon the limited distribution of early products. Across all products, however, reviews of the coffee varied from one extreme to the other, highlighting the challenge of being able to meet the taste requirements of a range of coffee drinkers, from the casual one-cup-a-day drinker to the gourmet coffee snob. 5 Phillips/Sara Lee press release, February 2004. 6 Black & Decker, Krups, Hamilton Beach, and Sunbeam. KELLOGG SCHOOL OF MANAGEMENT 3 KEURIG: FROM DAVID TO GOLIATH 5-411-751 Even so, the entrance of P&G marked a turning point for single serve brewing. Extensive ad campaigns, including infomercials and an appearance on the show Survivor in September 2004, created awareness of the Home Café product line. In turn, this created spillover recognition for all single serve brewing systems, and the category grew. Managing Brewer Manufacturing Costs At the time of Keurig’s B100 launch, management knew that its brewer price was very high. Even so, Keurig management felt that it was important to gain experience and consumer exposure in this emerging business. Mark Wood, VP of new business development, explained, “Launching new products stimulates interest in the company and in the category.” When the B100 was introduced in fall 2003, Keurig embarked on an ambitious three-pronged approach to address the brewer’s cost structure. The approach consisted of reengineering the existing brewer to reduce cost, evaluating overseas options for brewer manufacturing, and launching a new brewer project in time for the holiday 2004 season, including retail distribution. Kevin Sullivan, VP of engineering, joined Keurig just after the initial launch of the B100 brewer and, after overseeing modest cost reductions on the current design, focused the engineering team’s attention on the next-generation brewer, the B50 (see Exhibit 4). The B50 design effort replicated existing Keurig benefits: time, temperature, and volume (TTV) control, use of the existing K-Cup® portion pack, at least two brew volumes (e.g., 6 oz., 8 oz.), and support of a retail price point of $149. Limiting the variance in the TTV components was key to meeting the taste profile requirements of both the “Cuppers”7 and Keurig’s roaster partners. Engineering evaluated three alternatives in its design process: redesign of the B100 brewer, evaluation of the pod systems in the marketplace to see how they could be modified to achieve the Keurig benefits, and a bottoms-up new design of the brewer. Ultimately Keurig chose to start from scratch when designing the new brewer, balancing the product features with budget and schedule requirements to meet the fourth quarter 2004 deliverable. In parallel with the B50 design efforts, Dick Sweeney, VP of contract manufacturing and quality assurance, oversaw efforts to select a manufacturer for both the B100 and the new B50 brewers. After narrowing the field down to three companies, Keurig selected a single vendor in late December 2003. Production of the B50 began in September 2004, and in November 2004 the company received the first shipment of brewers via airfreight to meet the goal of holiday distribution. Keurig’s Retail Launch Strategy Keurig’s retail launch strategy included two features central to its success. Whoriskey explained it as follows: We recognized that retailers were different and competed in different market segments. Selling a single brewer could create conflict among retailers that could limit distribution. 7 “Cuppers” were responsible for tasting the finished coffee product to evaluate the flavor profile of a coffee. 4 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH A high-end retailer such as Williams-Sonoma did not typically carry the same product assortment as a mass merchant like Target. We also needed to offer assurance to retailers that their support of a premium brewer would be worth their investment. As a result, Keurig envisioned producing a suite of brewers—“good, better, best”—that would allow it to offer different products in each retail segment to meet the needs of those retailers’ target customers. The products would match varying retail price points and offer a range of product features. The “better” category of product would provide broader appeal for multiple segments. Initially the B50, with its improved cost structure, fit the better category and was designed to meet a price point of around $149. In some cases, a “good, better, best” suite of products also allowed Keurig to meet varying retailer margin requirements. As shown in Exhibit 5, average profit margins varied between mass merchants such as Target and premium retailers such as Williams-Sonoma. In launching the B50 brewer, Keurig also needed to address retailer concerns that investments in support of Keurig would not be eroded away. That investment included inventory costs to carry the brewer, shelf space, advertising, and training of in-store staff about the product. To address potential retailer concerns, Keurig created a minimum advertised price (MAP) program. Premium manufacturers in numerous industries, including Bose, Viking, Sub-Zero, HP, and Nintendo, often used MAP programs. These programs minimized intrabrand price competition by providing incentives to retailers who only advertised prices at or above the MAP price; a common incentive was cooperative advertising dollars that could be used to subsidize retailers’ advertising expenses. A retailer that chose to advertise in a manner inconsistent with the MAP program could lose out on these financial incentives. A retailer that repeatedly violated these terms could eventually lose the right to distribute a manufacturer’s product. From the retailers’ perspective, the MAP price provided some comfort that competing retailers would not undercut them on advertised prices. In the months leading up to the B50 launch, Whoriskey focused on a number of issues associated with moving into the retail environment, including gaining product placements with retailers, identifying a logistics partner that would manage the fulfillment to retail stores, and introducing new, lower-count-size packages of K-Cup® portion packs. By the holiday 2004 season, ten retailers had agreed to distribute the B50 brewer in about a hundred stores. Keurig selected M. Block and Sons as the exclusive retail distribution partner for the brewer and completed repackaging of K-Cup® portion packs to offer quantities of eighteen at a MAP price of $9.95. Whereas Sara Lee and P&G focused their marketing dollars on television and print advertising, Keurig devoted its more limited advertising dollars to in-store demonstrations of the product. The television and print coverage by Keurig’s rivals increased consumers’ exposure to the single serve concept and sent them to stores with curiosity about the products. Once in the stores, Keurig hoped its demos would get people hooked on the taste, ease, and simplicity of the Keurig system. The At Home Marketplace Heats Up With the entry of competitors and heavy advertising spending, interest and awareness of single serve brewing increased and sales of Keurig brewers took off. By the holiday 2005 season, Keurig had grown its retail presence to 3,500 stores. Existing competitors were also adding products, with new entrants joining the fray. KELLOGG SCHOOL OF MANAGEMENT 5 KEURIG: FROM DAVID TO GOLIATH 5-411-751 Competitor Activity Kraft partnered with Braun to introduce the Tassimo Hot Beverage System in the United States in September 2005. Designed by Kraft, the product had been introduced in France, Switzerland, and the United Kingdom in 2004 and was touted as the leading competitor to the Senseo system there. The Tassimo system used a proprietary portion pack, the T-Disc, which included a bar code that provided information to the machine about the appropriate brewing settings (amount of water, brewing time, and temperature). In addition to coffee, the Tassimo offered cappuccino, espresso, café crema, tea, and hot chocolate—a total of about fifteen varieties, featuring Kraft brands such as Gevalia and Maxwell House as well as Kraft-distributed Twinings Tea. The brewer’s suggested retail price was $169.99, with a cost of about $0.50 per T Disc. Like P&G, Kraft used its marketing muscle to push the Tassimo system and the entire single serve segment of coffee brewing. The system was featured in an episode of The Apprentice: Martha Stewart, in which contestants were tasked with creating a retail space for selling the new system. Kraft reportedly invested $75 million in marketing the system’s introduction. Kraft subsequently announced a partnership with Starbucks in December 2007, introducing four Starbucks varieties in time for the holiday season. Starbucks positioned it as a natural fit for the company, a “way to provide an authentic Starbucks coffee experience to our customers, and to do so anywhere and anytime they prefer.”8 This expanded relationship between Kraft and Starbucks (building off a 1998 supply and distribution agreement) came on the heels of a revamped business plan to “spur stronger and more profitable growth”9 in the Tassimo system. It also expanded Tassimo’s beverage offerings to more than sixty worldwide.10 At the same time, Kraft announced a new brewer alliance with Bosch to replace Braun, which had been acquired by a coffee competitor, P&G. Additionally, another competitor had appeared on the scene in 2005. Bunn was a manufacturer of drip coffee makers for commercial and AH applications. With the Bunn My Café, the company joined the single serve segment, advertising a patented jet action sprayhead as a differentiator in the brewer’s ability to release flavor and aroma. The pod-based brewer used a pour-over method that required the consumer to pour in the desired amount of water, from 4 to 14 ounces, each time a new cup was brewed. The pod drawer was designed to receive a range of pod sizes, enabling the brewer to be used with a variety of different roasters’ pods and increasing the variety of coffees available for use with the brewer. The brewer was introduced with a suggested retail price of $199.95. Not all product introductions were successful, however. P&G experienced slow sales and a smaller adoption of its Home Café line after its initial splash. In June 2006 the company announced it would cut marketing funds for the product, after having spent an estimated $41 million since the launch of the first brewer in 2004. Similarly, after significant success in Europe, Senseo’s sales and product innovation in the United States seemed to trail off. 8 Kraft press release, September 4, 2007. 9 Ibid. 10 The Kraft-Starbucks relationship was terminated by Starbucks on March 1, 2011. 6 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH The stumbles and uncertainty of some of its competitors did not slow Keurig down. In fall 2005 Keurig introduced two new AH brewers to its product line: the Keurig Elite B40 and the Keurig Special Edition B60. With variations in the programmability and features, these products helped the company target the “good” and “best” segments of its distribution strategy, respectively. The B40 was generally offered at a retail price of $99.95, while the B60 was generally offered at $199.95. In fall 2006 the Keurig Platinum B70 was introduced with the most robust set of features and functionality to date, including four cup sizes, a programmable LCD display, and a larger water reservoir. Each brewer provided the same user experience in terms of ease of use and brewing of a great cup of coffee, consistent with Keurig’s overall product commitment. By the first quarter of 2007, Keurig had secured a position as one of the market leaders in the small but growing single-cup segment of the broader coffee maker category (see Exhibit 6). Changes at Keurig In June 2006 GMCR completed the acquisition of the remaining shares of Keurig, transitioning Keurig from a small, privately held company to a wholly owned subsidiary of a publicly traded company. In doing so, GMCR not only signaled its commitment to single serve brewing but also reaffirmed its support of Keurig’s multibrand strategy, one of the company’s key differentiating features and an important element of its success. This move enabled Keurig to leverage the resources of GMCR to further its growth in the single serve segment. The added financial backing of GMCR was critical to Keurig’s ongoing product innovation and also allowed the company to aggressively protect its design and technology investments. Ownership by GMCR allowed Keurig to pursue a new avenue for expansion of its robust offering of coffee varieties with its single serve brewers. As an example, Keurig and Caribou Coffee announced an agreement in early 2007 that would make eight flavors of Caribou Coffee available in K-Cup® portion packs. This arrangement represented a new model for production and sales of K-Cup® portion packs. Under the terms of the arrangement, Caribou Coffee will blend and sell its gourmet coffee beans to Keurig. Keurig will be responsible for packaging the coffee into K-Cups in accordance with Caribou Coffee’s specifications. Under the license from Caribou Coffee, Keurig will also serve as the wholesale distributor and a direct retailer for all Caribou Coffee K-Cups.11 Rather than requiring a roaster partner to operate its own production line, Keurig could benefit from the manufacturing capabilities of its parent to pursue relationships without upfront capital or leasing costs. At the same time, tension existed between GMCR and the other roasters over the longevity of GMCR’s commitment to a multibrand strategy. This tension eased as GMCR embarked on a strategy of acquiring the wholesale businesses, including the K-Cup® portion-pack production lines, of each of the original roaster partners, beginning with Tully’s in early 2009, followed by Timothy’s in late 2009, and Diedrich’s Coffee and Van Houtte in 2010. Driving these 11 Caribou Coffee, press release, January 8, 2007. KELLOGG SCHOOL OF MANAGEMENT 7 KEURIG: FROM DAVID TO GOLIATH 5-411-751 acquisitions was GMCR’s desire to become a leader in the highly fragmented coffee industry. GMCR added complementary brands to its portfolio while expanding its geographic presence and manufacturing and distribution capabilities. With GMCR’s backing, Keurig’s ongoing success enabled it to expand its marketing and distribution presence. In the holiday 2007 season, Keurig launched a $3 million television advertising campaign in sixteen cities, coupling it with in-store demonstrations and cooperative advertising support in retail stores. That investment grew close to $20 million, including a $6 million national advertising campaign, for the holiday 2008 season. In conjunction with that same holiday season, Keurig and GMCR also launched brewer and twelve-count K-Cup® portion-pack offerings in the grocery channel, adding to the purchase options available to consumers. The total number of retail outlets, including grocery stores, exceeded 16,000 locations by the end of 2008 (see Exhibit 7). Keurig brewer sales continued to grow, and in the fourth quarter of 2008 Keurig had captured close to 20 percent of total coffee maker sales in dollars (see Exhibits 8 and 9). Keurig further expanded the brewer options available to the consumer, introducing the first third party brewer designed using Keurig’s proprietary and patented brewing technology in 2007.12 Marketplace Evolution A question facing Keurig and all manufacturers of single serve brewing systems was the state of the coffee marketplace and the ongoing role of single serve applications. The marketplace for drip coffee makers in the United States was stagnant, with a decline of approximately 3 percent from 2004 to 2010 (see Exhibit 10). Single serve coffee makers, however, had grown to represent about 19 percent of the total sales volume in that same time. Importantly, about 71 percent of the 115 million households in America owned a coffee maker in 2008. In terms of coffee consumption, research showed that 44 percent of all U.S. consumers had a daily cup of coffee and 75 percent of that consumption was done in the home.13 Industry analyst Harry Balzer of the NPD Group commented: Coffee consumption per capita is fairly stable in the U.S. So for a coffee company to gain share in the marketplace, it needs to shift share or get consumers to pay more for a cup of coffee. Manufacturers of coffee makers have to address one or more of three key components: novelty, time, or money—is it new, does it save time, or does it save money? Analysis of the foreign marketplace could also provide some insight into the U.S. marketplace’s potential. Industry analyst Scott Van Winkle pointed to the success of Nespresso S.A., a business of Nestle Group, in Europe as an indicator of the potential for Keurig in the United States: “I could see Keurig’s market share for coffee makers grow close to 50 percent based on the precedent set by Nespresso in Europe, where they have reached the 40 percent range.” Initially introduced in Switzerland in 1986, Nespresso’s single serve espresso machine experienced a slow start until the mid-1990s, when it entered a period of rapid growth. According to the company, Nespresso achieved organic growth of more than 20 percent in 2010 and 12 Breville was the first third-party manufacturer. Additional relationships with Jarden and Conair were announced in 2009. 13 Harry Balzer, NPD Group, in interview with the author. 8 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH estimated “global market share of around 20 percent in the segment of espresso and filter portioned coffee machines.”14 Choose. Brew. Enjoy.® Choose From its initial entry into single serve brewing, Keurig recognized the importance of choice to allow each person to find a coffee that met his individual taste preferences. Keurig continued on this path by entering into relationships with three key coffee brands, each with its own loyal following: Folger’s Gourmet Selections in 2010, followed by Dunkin’ Donuts and Starbucks in 2011. In February 2011 GMCR entered into a promotion, manufacturing, and distribution agreement with Dunkin’ Donuts that would make five flavors available in K-Cup® portion packs, sold exclusively in its restaurants by the second half of 2011. In addition, Keurig brewers occasionally would be sold in the restaurants. GMCR would be responsible for packaging the K Cup® portion packs using coffee that was sourced and roasted to Dunkin’ Donuts specifications. In March 2011 GMCR entered into a manufacturing, marketing, distribution, and sales relationship with Starbucks that would make Starbucks and Tazo tea K-Cup® portion packs available by fall 2011. Starbucks had previously introduced its own portion pack of instant coffee targeted at single serve consumers, Starbucks VIA Ready Brew, which had achieved $100 million in worldwide sales in under a year.15 The relationship would enable Keurig to potentially reach the approximately 50 million customers served in Starbucks stores every week, an estimated 80 percent of whom did not have a single serve brewer at home.16 The Starbucks relationship presented an exciting opportunity for Keurig to add a super premium coffee brand to its robust offering of flavors. However, there was some uncertainty concerning the long-term benefit. Starbucks had already announced a strategy to pursue multiple options in single serve brewing. “The single serve coffee category in the U.S., and much of the world for that matter, is in its beginning stages of development,” said Jeff Hansberry, president, Starbucks Consumer Products Group. “At this very early stage, there are numerous contenders and no demonstrated long-term winners related to either format or machines. Following our very successful introduction of Starbucks VIA Ready Brew in the U.S. and into a growing number of international markets, Starbucks will continue to explore the many single serve and on-the-go solutions and options available to us, and to participate in those where we can better and more conveniently serve our customers wherever they may be.”17 14 Nespresso Corporate Backgrounder and Corporate Factsheets, March 2011, http://www.nespresso.com/mediacenter/xml/int/ resources/pdf/CorporateBackgrounder_CorporateFactsheets_EN.pdf. 15 Starbucks press release, August 3, 2010. 16 Starbucks press release, March 10, 2011. 17 Starbucks press release, February 15, 2011. KELLOGG SCHOOL OF MANAGEMENT 9 KEURIG: FROM DAVID TO GOLIATH 5-411-751 The question remained whether Starbucks’s relationship with GMCR and Keurig represented an interim solution or whether it would fulfill a key component in Starbucks’s overall single serve offering. In conjunction with expanding their coffee offerings, Keurig and GMCR also continued to grow the grocery presence to enable consumers to easily obtain K-Cup® portion packs. By the end of 2010, K-Cup® portion packs could be purchased in 98 percent of grocery stores in the Northeast and 61 percent of all grocery stores in the United States.18 Brew Its commitment to technological innovation continued to be a key component of Keurig’s success. Where appropriate, Keurig obtained patents covering its innovations and vigorously defended them. In January 2007 Keurig filed a patent infringement lawsuit against Kraft Foods Inc., Kraft Foods Global, Inc., and Tassimo Corporation asserting that Kraft’s T-Discs infringed upon a Keurig technology patent filed in August 2003. In October 2008 Kraft agreed to settle out of court with a lump sum of $17 million for a limited, nonexclusive license for applicable Keurig patents related to beverage machines and beverage cartridges. More recently, Keurig had filed a lawsuit against Sturm Foods: The Sturm portion packs that we’ve seen appearing on several retailer shelves contain instant coffee and state they are intended for use in Keurig brewers. As our complaint notes, our lawsuit asserts that Sturm’s portion packs infringe two patents, which cover certain technologies relating to the use of brewers and portion packs.19 Keurig was looking for similar success in this suit. However, the longevity of some of the existing patents still could pose a problem. Certain patents associated with the current generation of K-Cup® portion packs were set to expire in 2012 and 2017, while brewer patents had expiration dates out to 2023. Pending patent applications associated with the current generation of K-Cup® portion packs, if issued, could extend those expiration dates to 2023 as well. Without patent protection, the door could be opened to competitors such as Sturm Foods, which would look to market a product to compete with the K-Cup® portion pack, thus eroding GMCR’s own coffee sales as well as royalties from other roaster coffee sales using the Keurig technology. Another issue facing Keurig lay in the patented K-Cup® portion pack itself. Key to the quality and freshness of its coffee, the K-Cup® design included materials and a heat-sealing process that made recycling difficult. Keurig had introduced the My K-Cup® reusable filter assembly in 2006, a reusable filter designed to work with the Keurig single-cup brewing system. Although it was initially targeted for use by consumers wanting to use their own gourmet coffee instead of a prepackaged portion pack, it could also provide a solution to environmentally conscious users who were concerned with the disposal of the used K-Cup® portion packs, which contained plastic and other nonrecyclable materials. That solution did not address those consumers interested in the convenience of the traditional K-Cup portion pack, however. 18 From GMCR first quarter 2011 earnings release based on IRI data for the latest twelve weeks ended December 26, 2010. 19 GMCR, “Prepared Remarks for Fourth Quarter and Year-End Fiscal 2010 Results,” December 9, 2010, p. 2. 10 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH Keurig’s competitors were facing the same challenge. In December 2010 Bunn My Café had introduced a new brewer that used pods that could be composted. In Europe, Nespresso had introduced dedicated portion-pack collection points to facilitate capsule recycling, and in 2009 it committed to tripling its recycling capacity by 2013. A similar issue had arisen in the bottled water industry. The convenience of bottled water, together with consumers’ desire for a healthier alternative to soda, had resulted in rapid growth in sales of bottled water. But concerns about the volume of empty plastic containers in landfills threatened the industry and caused sales to slow, leaving bottled water manufacturers scrambling to find solutions to their environmental challenge. Concerns about the environmental impact of the K-Cup portion pack had started to surface in user comments on websites and in newspapers such as the New York Times.20 Estimates of the amount of nonrecyclable material from the K-Cups appearing in landfills had some users contemplating use of another, more environmentally friendly single-cup brewing system. Keurig’s own life cycle analysis compared a number of environmental factors of the Keurig single-cup brewing system to traditional drip brewing. The analysis had shown that product packaging disposal contributed only a fraction of its total environmental impact as compared to the production of the packaging itself.21 As a result, the company was working with its packaging suppliers to improve the environmental dimensions of the packaging production process. The introduction of nested packaging to reduce the size of a box of K-Cup® portion packs and experimentation with a tea-based K-Cup® portion pack made with paper were additional environmental initiatives undertaken by the company. With the increasing popularity of the Keurig single-cup brewing system, the K-Cup® portion-pack packaging was one of the company’s most significant environmental challenges and needed to be addressed to prevent erosion of its position in the marketplace. Enjoy? By March 2011, Keurig was in an enviable position. In the fourth quarter of 2010 it had shipped a record number of products, and Keurig models were the four best-selling brewers, in dollar sales, in the United States. The company had also just announced the agreements with Dunkin’ Donuts and Starbucks, which would strengthen its multibrand approach and penetrate a new retail outlet. But Whoriskey and the rest of the senior leadership team at Keurig and GMCR couldn’t help but turn their attention to the future. Whoriskey was eager to begin writing the next chapter in Keurig’s success story, but questioned the potential size of the single serve opportunity, the impact of expiring technology patents and environmental concerns, and how to maximize the effectiveness of Keurig’s relationships with its coffee-roasting partners. 20 See “A Coffee Conundrum,” New York Times, August 3, 2010, and “Keurig K-Cups: How Green Is Green Mountain?” Coffee Amp, January 27, 2010, http://www.coffeeamp.com/single-cup-coffee/keurig-k-cups/keurig-k-cups-how-green-is-green-mountain. 21 “Reducing Our Environmental Impact: The Keurig® Brewing System,” http://www.gmcr.com/csr/ProtectingTheEnvironment/ TheKeurigSingleCupBrewingSystem.aspx. KELLOGG SCHOOL OF MANAGEMENT 11 KEURIG: FROM DAVID TO GOLIATH 5-411-751 Exhibit 1: Members of Keurig and GMCR Senior Management Teams KEURIG SENIOR MANAGEMENT TEAM ∙ Michelle Stacy, President ∙ John Whoriskey, Vice President, General Manager At Home Division ∙ Dave Manly, Vice President, General Manager Away From Home and Consumer Direct Divisions ∙ Kevin Sullivan, Vice President, Engineering ∙ Ian Tinkler, Vice President, Brewer Engineering ∙ Bob McCall, Vice President, Packaging, Equipment, and R&D ∙ Dick Sweeney, Co-Founder, Vice President, Contract Manufacturing and Quality Assurance ∙ Basil Karanikos, Vice President, Packaging Special Products ∙ Chris Stevens, Vice President, Corporate Relations and Customer Development ∙ Mark Wood, Vice President, New Business Development ∙ Mike Degnan, Vice President, General Counsel ∙ John Heller, Vice President, Finance GMCR SENIOR MANAGEMENT TEAM ∙ Larry Blanford, President and CEO ∙ Howard Malovany, Vice President, Corporate General Counsel and Secretary ∙ R. Scott McCreary, President, Specialty Coffee Business Unit ∙ Frances Rathke, Chief Financial Officer ∙ Stephen J. Sabol, Vice President, Development ∙ Michelle Stacy, President, Keurig 12 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH Exhibit 2: Green Mountain Coffee Roasters Financial Performance ($ in thousands) Fiscal Year Net Sales Gross Profit Net Income 2005 161,536 56,975 8,956 2006 225,323 82,034 8,443 2007 341,651 131,121 12,843 2008 492,517 174,040 21,669 2009 786,135 245,391 54,439 2010 1,356,775 425,758 79,506 Note: Net income for 2005 and 2006 is after equity in losses of Keurig, Inc., net of tax benefit. GMCR acquired Keurig in June 2006. Source: GMCR Annual Reports. Exhibit 3: Comparison of Early Single-Cup Brewing Systems Features Keurig B100 Melitta One:One Flavia SB100 Senseo Home Café HCC100 Manufacturer Keurig Salton Filterfresh Phillips Black & Decker Coffee packaging Proprietary K-Cup 44mm pod Proprietary Filterpack 62 mm pod 62 mm pod Brewing sizes 8 oz. 5 oz., 8 oz. 5 oz., 8 oz. 4 oz., 8 oz. 7 oz., 9 oz., 14 oz. Water reservoir 64 oz. 28 oz. 96 oz. 50 oz. 34 oz. Shortest time to first cup < 1 min 1 min < 1 min 2+ min 1 min Shortest time to second cup Immediate 45 sec 40–45 sec 30 sec 10 sec Number of flavors 75+ 6 15 4 9 Suggested retail price $249.99 $49.99 $99.99 $69.99 $59.95 Source: Singleservecoffee.com, company analysis. KELLOGG SCHOOL OF MANAGEMENT 13 KEURIG: FROM DAVID TO GOLIATH 5-411-751 Exhibit 4: Keurig B50 Brewer and K-Cup® Portion Pack Exhibit 5: Retailer Annual Gross Margins (%) Retailer 2006 2007 2008 2009 2010 Amazon.com 22.9 22.6 22.3 22.6 22.3 Bed Bath & Beyond 42.8 41.5 39.9 41.0 41.4 Kohl’s 36.4 36.5 36.9 37.8 38.2 Macy’s 39.9 40.4 39.7 40.5 40.7 Target 30.3 30.2 29.8 30.5 30.5 Williams-Sonoma 39.9 38.9 33.8 35.6 39.2 Source: RetailSails data. 14 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH Exhibit 6: Single Serve Coffee Maker Sales by Brand By Dollar Volume ($) Brand Jan.–Mar. 2005 Jan.–Mar. 2006 Jan.–Mar. 2007 Keurig 152,730 1,154,135 2,293,802 Braun 0 1,622,884 2,166,536 Phillips 1,379,242 1,120,567 1,172,441 Flavia 0 0 170,719 Mr. Coffee 60,017 249,363 168,508 Krups 0 222,310 152,419 Melitta 1,040,165 525,173 35,214 Bunn 41,408 62,593 24,424 Black & Decker 608,635 645,033 24,168 By Unit Volume Brand Jan.–Mar. 2005 Jan.–Mar. 2006 Jan.–Mar. 2007 Keurig 1,022 8,813 17,995 Braun 0 9,925 15,029 Phillips 22,730 18,905 18,881 Flavia 0 0 1,648 Mr. Coffee 1,173 3,471 3,456 Krups 0 1,771 4,109 Melitta 27,252 11,279 634 Bunn 212 337 115 Black & Decker 11,535 11,376 969 Note: Total coffee maker category includes all coffee makers and espresso makers. NPD data does not include all retailers and is estimated to represent 35 to 40 percent of the total marketplace. Source: NPD data. Exhibit 7: Keurig Retail Presence Year Ending No. of Retail Stores No. of Supermarkets Total Retail Locations December 2004 200 0 200 December 2005 3,500 0 3,500 December 2006 7,000 200 7,200 December 2007 10,000 1,300 11,300 December 2008 13,800 2,600 16,400 December 2009 17,900 10,000 27,900 December 2010 19,000 14,400 33,400 Source: GMCR earnings releases. KELLOGG SCHOOL OF MANAGEMENT 15 KEURIG: FROM DAVID TO GOLIATH 5-411-751 Exhibit 8: Cumulative Keurig Single-Cup System Sales (in thousands) Year Ending Keurig-Branded Brewers K-Cup Portion Packs September 2004 124 September 2005 226 312,405 September 2006 474 448,880 September 2007 953 638,298 September 2008 1.936 1,650,654 September 2009 2,342 3,300,532 September 2010 4,543 6,185,532 Source: GMCR earnings releases. Exhibit 9: Keurig Coffee Maker Sales Share Dollar Sales by Quarter 2007 2008 2009 2010 Q1 (Jan.–March) 2.8 6.7 14.1 24.5 Q2 (Apr.–June) 3.5 7.3 16.9 24.8 Q3 (July–Sept.) 4.1 7.9 17.3 26.5 Q4 (Oct.–Dec.) 8.4 17.8 36.4 45.3 Unit Sales by Quarter 2007 2008 2009 2010 Q1 (Jan.–March) 0.9 2.3 5.7 10.8 Q2 (Apr.– June) 1.1 2.6 7.4 11.1 Q3 (July–Sept.) 1.3 2.7 6.8 11.3 Q4 (Oct.– Dec.) 3.1 8.1 18.6 25.1 Note: Total coffee maker category includes all coffee makers and espresso makers. Derived from NPD data. NPD data does not include all retailers and is estimated to represent 35 to 40 percent of the total marketplace. Source: GMCR’s NPD data from its earnings releases. Exhibit 10: Automatic Drip Coffee Maker Sales Unit Volume Single Serve Share (%) Dollar Sales ($) Single Serve Share (%) 2004 26,705,000 5.5 804,878,390 8.4 2005 27,250,000 5.7 870,138,800 9.5 2006 27,148,060 5.2 918,040,600 11.2 2007 26,101,870 5.0 903,635,800 11.9 2008 23,281,190 7.0 825,397,700 17.1 2009 25,482,840 12.6 976,260,400 29.6 2010 25,870,160 19.4 1,099,732,000 42.9 Note: Drip coffee makers include automatic drip coffee and pod machines. Restatement of data post-2004. Volumetrics derived from presumed trend 2005 vs. 2004.
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