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 Keurig’s 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. Nesspresso’s 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 Salton’s Melitta One and Flavia’s 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 B100’s ability to produce a second beverage almost immediately. The supply of the K-Cup’s® 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-Cup’s® is due to Keurig’s 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-Cup’s® in 2011. These joint venture’s 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 Keurig’s coffee quality. In 2004 the Seneso 7810 and Black & Decker “Home Café” 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 2004’s holiday season. Although the B100 was initially only available online Keurig’s 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 Keurig’s 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 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. 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-Cup’s® alone Keurig Introduced the first third- party brewer designed using Keurig’s 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-Cup’s® 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-Cup’s® 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-Cup’s® to be recycled by the company. If possible these used cups can be utilized to make more K-Cup’s®, 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 mess—no scooping of coffee or dealing with filters—in 60–90 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 Café” 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 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 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 Tully’s 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 Keurig’s proprietary and patented brewing technology in 2007. Breville was the first third-party manufacturer. Additional relationships with Jarden and Conair were announced in 2009. Folgers’s 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 Keurig’s 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 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 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 Café” 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 Café joined the single serve segment, advertising a patented jet action spray head as a differentiator in the brewer’s 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 GMCR’s own coffee sales as well as royalties from other roaster coffee sales using the Keurig technology 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 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 Coffee’s 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 Tully’s in early 2009, followed by Timothy’s in late 2009, and Diedrich’s 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 Keurig’s 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 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. 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. Mimic
