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Keurig: From David to Goliath

Nicola Citera
10/14/14

A case analysis offered in partial fulfillment of the requirements


for the MB 107 course in management & business at Skidmore College
with Professor Tancredi
Fall 2014

Statement of Responsibility:
I, the undersigned, have abided by the Skidmore Honor Code in
completing this assignment.
________________________

EXECUTIVE SUMMARY
Keurigs high stakes challenge is to find a way to fix the K-Cup waste
product and prevent patent copycats. I recommend that Keurig
creates a new recyclable K-Cup and patents it to solve these issues.
The new cup would make the old system seem obsolete, making it less
attractive to consumers and copycats. Patenting this new system
would prevent any other company from having the same quality and
environmental impact simultaneously. These new cups would also have
less of a negative influence on the environment.

Keurig dominates the at home single portion coffee market due to its ease

of use, consistency, and variety.


By not aligning with one sole company that provides flavors, the brand

has been able to undertake some of the most recognizable coffee brands.
These include Green Mountain Coffee, Dunkin Donuts, Folgers, and
Starbucks. With these highly recognizable brands the company entices
users who have to travel for their caffeine fix by offering an at home

option.
With their patented K-Cup technology every cup is perfectly

regulated and consistent.


Each system works with minimal buttons to allow extreme

ease of use.
Nesspressos success in recycling pods shows a good
model for the future of an eco friendly K-Cup

Keurig was among the first to create a single-cup coffee machine designed for at

home use. The core technology of these devices was to produce a mess free perfectly
brewed cup of coffee between 60-90 seconds. Their patented K-Cup technology
allowed them to control the amount of coffee as well as the temperature & pressure of the
water. With this amount of control the Keurig system can effectively replicate the same
precisely brewed cup of coffee consistently. Their initial unit the B100 was released
around the same time as the launch of Saltons Melitta One and Flavias SB100 brewer.
The initial competition was miniscule in comparison to the myriad of new at home single
cup brewing machines that will be launched in years to come. This poses a challenge for
Keurig to differentiate itself and remain on top of the at home market.
ANALYSIS
Keurig did not rely on television or print advertisement to spread the word. The
company recognized their rivals had exposed consumers to the single serve concept
enough to make people visit a store. Since they were already in the stores Keurig
allocated funds to train employees to give in store demonstrations. The demonstrations
would emphasize ease of use, speed, and flavor in hopes the customer would fall in love.
The B100 was the most expensive of the early single cup brewing systems as seen in case
exhibit 8. The premium price was due to the unmatchable selection of beverages at
launch as seen in case exhibit 3. Having over 75 flavors and its runner up in variety the
Flavia SB100 with only 15 flavors to choose from. Exhibit 3 also shows the B100s
ability to produce a second beverage almost immediately. The supply of the K-Cups
themselves posed a problem at launch. 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. With so much coffee required it is clear as to why

Customers were complaining that the availability of the proprietary coffee packs was low
in retail stores. The variety of K-Cups is due to Keurigs multi-brand strategy. Green
Mountain Coffee Roasters (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. By separating themselves from
one specific roaster Keurig is able to acquire many flavors from different companies.
Companies such as Starbucks and Dunkin Donuts had their own line of K-Cups in
2011. These joint ventures allowed Keurig access to the frequent customers of these
popular coffee shops. It also invites people used to having to walk or drive somewhere
for coffee to instead have it ready in minutes in their own home. The Keurig B100 with
the precision and consistency of K-Cup technology was generally well received at
launch. The reviews of the product were in the extremes due to the wide spectrum of
pallets amongst Keurig users. The availability of Starbucks premium coffee aided to
subdue coffee snobs that left ill reviews in regards to Keurigs coffee quality. In 2004
the Seneso 7810 and Black & Decker Home Caf brewing systems arrived on the (AH)
market. Since different retailers have different profit margins as seen in case exhibit 5
there are many target audiences. The variety of audiences led Keurig to create a good,
better, best suite of brewers to attract a wide variety of consumers. They decided to
completely redesign the B100 from the ground up and created the B50. The B50 was the
perfect device for Keurig to enter the retail market and tackle the issues of retail product
placement. 10 retailers agreed to distribute the B50 brewer in about a hundred stores.
Choosing M. Block and Sons as the exclusive retail distribution partner for the brewer in

about a hundred stores, offering quantities of 18 at a minimum advertised price (MAP) of


$9.95. These MAP prices helped reassure retailers that the investment of store space,
employee demonstration training, and inventory cost was well worth it.
This new device was at a lower price point of around $149 and was launched just in time
for 2004s holiday season. Although the B100 was initially only available online
Keurigs retail presence significantly increased. By the holiday season of 2005 Keurig
systems were available in 3500 locations. With this growing retail presence Keurig
follows up their good, better, best suite with the Elite B40 and the Keurig Special
Edition B60. Each brewer provided the same user experience in terms of ease of use and
brewing of a great cup of coffee, consistent with Keurigs overall product commitment.
Kraft partnered with Braun to introduce the Tassimo Hot Beverage System in the United
States in September 2005. This device used the Tassimo 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). The T-Disc technology was
remarkably similar to the K-Cup so in January 2007 Keurig filed a patent infringement
lawsuit against Kraft Foods Inc. Asserting that Krafts 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. Finishing the suite
with the best brewer Keurig launched the Platinum B70 with the most robust set of
features and functionality to date. Including four-cup sizes, a programmable LCD display,
and a larger water reservoir. In the fourth quarter of 2008 Keurig had captured close to 20
percent of total coffee maker sales in dollars, rendering systematic space in between

launches a success. Keurig and its full range of products are at this point widely
available, the total number of retail outlets, including grocery stores, exceeded 16,000
locations by the end of 2008. Since consumers could pick up the machines they were
hearing about it was time for Keurig to invest in broadcast advertising. They spent almost
$20 million, including a $6 million national advertising campaign, for the holiday 2008
season. With the extreme success of the K-Cups alone Keurig Introduced the first
third- party brewer designed using Keurigs proprietary and patented brewing technology
in 2007. Breville was the first third-party manufacturer. Additional relationships with
Jarden and Conair were announced in 2009. Keurigs excellent strategic movements
brought them to the top of the AH market. By March 2011, Keurig models were the four
best-selling brewers.
DIAGNOSIS
All these K-Cups were being used and creating a hard to recycle plastic waste
product. Negative environmental impact drives away eco friendly customers. To avoid
losing a green audience some waste research was conducted and it was found productpackaging disposal contributed only a fraction of its total environmental impact as
compared to the production of the packaging itself. 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. To curb concern Keurig invented the
My K-Cup reusable filter could also provide a solution to environmentally conscious
users who were concerned with disposal. The K-Cup being the main source of revenue
they also cause the most problems. Once the patent expires other companies can mimic
the patented flavor locking technology.

RECCOMENDATION
As Keurig moves forward they need to address the problems facing their KCup technology. One option they have is to sell branded ground
coffee with Reusable My K-Cups in a bundle. The bundle would
appeal to those who are looking to be environmentally friendly or just
buying a Keurig. Another option is to create a collection service for
used K-Cups to be recycled by the company. If possible these used
cups can be utilized to make more K-Cups, this saves raw material
cost. To solve the environmental impact issue as well as the patent
issue only one solution is necessary. This can happen if Keurig
allocated funds to design and patent a new cup that uses recyclable
matierials. This new patent would render the environment damaging KCup unimportant. It would still place Keurig in the arena of AH coffee
leaving those sales alone. The sooner this is implemented the better,
as to never have the same technology as other brewers. This plan
makes sense economically because if its recyclable quality, savings
would occur in raw material cost. It would differentiate from all other
coffee makers and appeal to eco friendly caffeine addicts. With a go
green advertising campaign for the new K-Cup, Keurig users will be
notified and would desire to own the eco friendly option. This is better
than the other alternatives because its much less messy than the
refillable filter and would still allow a collection service.

SWOT
STRENGTHS
Accurate control of coffee amount, water temperature & pressure
result in consistent quality cup
Dunkin Donuts Agreement in Q4 2010
Starbucks Agreement in Q4 2010
One of the first to enter the (AH) At Home market
75+ flavors of K-cups to choose from
Ability to brew a single cup of coffee with no messno scooping of
coffee or dealing with filtersin 6090 seconds
In the fourth quarter of 2008 Keurig had captured close to 20 percent
of total coffee maker sales in dollars
By March 2011, Keurig models were the four best-selling brewers
WEAKNESSES
Waste product created from used K-Cups
Lack of television and print advertising for Keurig systems
Product packaging disposal contributed only a fraction of its total environmental impact
as compared to the production of the packaging itself.
OPPORTUNITIES
Appeal to customers of Starbucks & Dunkin Donuts to provide an (AH) alternative
(MAP) program to address potential retailer concerns
Releasing B50 before the 2004 holiday season
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.
THREATS
Inability to supply proprietary coffee packs in retail stores
Impending expiration of K-Cup patent
Environmental impact of K-Cup waste
Introduction of Seneso 7810 to the US (AH) coffee market in 2004
Black & Decker Home Caf brewing systems introduction in 2004
Inability to create portioned K-Cups that are convenient and easily recyclable
Expensive launch price of original B100
Concerns from retailer involving investments of inventory cost, shelf space, advertising,
and training of in-store staff about the product
Patents associated with the current generation of K-Cup portion packs were set to

expire in 2012 and 2017


STRATEGY DIAMOND
Arenas
Online
Retail Stores
(AH) Single serve brewing
Airtight freshness locking K-Cups
Daily coffee drinkers
Staging
Launch of the B100 single-cup brewer in September 2003
Keurig envisioned producing a suite of brewersgood, better, best
that would allow it to offer different products in each retail segment to
meet the needs of those retailers target customers
Introduction of completely redesigned B50 Keurig model at $149 in Q4
2004 before the holiday season began
Releasing lower-count-size packages of K-Cup portion packs in 2004
Retail presence of 3500 stores by the holiday season of 2005
In fall 2005 Keurig introduced two new AH brewers to its product line:
the Keurig Elite B40 and the Keurig Special Edition B60.
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.
Close to $20 million, including a $6 million national advertising
campaign, for the holiday 2008 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
Vehicles
10 retailers agreeing to distribute the B50 brewer in about a hundred
stores
Choosing M. Block and Sons as the exclusive retail distribution partner
for the brewer in about a hundred stores, offering quantities of 18 at
(MAP) price of $9.95
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.

Roaster partners were subsequently added, such as Tullys in 2006.


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.
Introducing the first third- party brewer designed using Keurigs
proprietary and patented brewing technology in 2007.
Breville was the first third-party manufacturer. Additional relationships
with Jarden and Conair were announced in 2009.
Folgerss Gourmet Selections in 2010, followed by Dunkin Donuts and
Starbucks in 2011.
Differentiators
Most options of coffee & tea (75+) as seen in case exhibit 3
Being one of the first to enter the (AH) At Home market created brand
recognition
In-store demonstrations of Keurig devices
Keurigs multi-brand strategy
In exhibit case exhibit 3 it is shown that of the initial single cup
machines in the AH market Keurig had the shortest time (immediately)
to making a second cup
Economic Logic
In fall 2003, Keurig embarked on an ambitious three-pronged approach
to address the brewers 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
Addictive qualities of caffeine translates to a consistent cash flow from
K-Cups after the initial unit is purchased
Creation of a (MAP) program to have a minimum advertised price
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.
Sales of K-Cups generate more returns than the Keurig units
themselves as seen in case exhibit 8
FIVE FORCES OF MICRO ENVIRONMENT
Threat of new competition
Introduction of Seneso 7810 to the US (AH) coffee market in 2004
Black & Decker Home Caf brewing systems introduction in 2004

Kraft partnered with Braun to introduce the Tassimo Hot Beverage


System in the United States in September 2005
Bunn My Caf joined the single serve segment, advertising a patented
jet action spray head as a differentiator in the brewers ability to
release flavor and aroma.
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.
Threat of substitute products or services
Nespresso achieved organic growth of more than 20 percent in 2010
and estimated global market share of around 20 percent in the
segment of espresso and filter portioned coffee machines.
Kraft subsequently announced a partnership with Starbucks in
December 2007, introducing four Starbucks varieties in time for the
holiday season.
Tassimo 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).
Starbucks will continue to explore the many single serve and on-thego 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.-Jeff Hansberry
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 GMCRs own coffee sales
as well as royalties from other roaster coffee sales using the Keurig
technology
In December 2010 Bunn My Caf 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
Bargaining power of suppliers
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 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

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 Coffees
specifications.
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 Tullys in early 2009, followed
by Timothys in late 2009, and Diedrichs Coffee and Van Houtte in
2010
Bargaining power of customers (buyers)
Range of reviews from more or less experienced coffee drinkers
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.
COMPONENS OF THE MACRO ENVIRONMENT
Population Demographics
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.
About 71% of the 115 million households in America owned a coffee
maker in 2008
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.
General Economic Conditions
Throughout Keurigs cycle only more people have spent money on at home coffee units
Societal Values and Lifestyles
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.
Single serve coffee makers, however, had grown to represent about 19
percent of the total sales volume in that same time.
The My K-Cup reusable filter 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
non-recyclable materials.

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.
Technology
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.
Tassimo 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).
Keurig had introduced the My K-Cup reusable filter assembly in 2006
Legislation and Regulations
In January 2007 Keurig filed a patent infringement lawsuit against Kraft
Foods Inc., Kraft Foods Global, Inc., and Tassimo Corporation asserting
that Krafts 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.
Keurig had filed a lawsuit against Sturm Foods: The Sturm portion
packs that weve 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 Sturms portion packs
infringe two patents, which cover certain technologies relating to the
use of brewers and portion packs.
Mimic

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