Situation Analysis: Keurig Single Cup Brewer
Team 6: Nicole Edelman Marissa Nagy Brian Plaum Laurel Upton
Comm 422, Section 2 February 26, 2009
Introduction Green Mountain Coffee Roasters, Inc. (GMCR) first began in 1981 and has been publicly traded since 1993. Green Mountain Coffee offers about 180 varieties of cocoa, coffee and tea. The company sells its products to wholesale customers including supermarkets, convenience stores, resorts, and office-delivery services. Other types of customers are Exxon Mobil (convenience stores) nationwide and McDonalds in New England and the Albany, New York area. The company also sells, for brand extension, the Keurig single-cup brewing systems for home and office use. GMCR manages its operations through two wholly owned business segments: Green Mountain Coffee and Keurig. We will be focusing on Keurig, Inc., which is a leading manufacturer of gourmet single cup coffee brewers. A. Company Analysis Green Mountain Coffee can definitely be labeled as successful in the fiscal year of 2008. According to their annual report, in the fiscal year ending in September 2007, GMCR had sales exceeding $341 million, which is an increase of 52% over the previous year. In 2008, the company’s net sales were $500,277,000, which is more than double their sales from 2006. The net profit of the company for 2008 was $22,299,000. For the Keurig brand alone, net sales reached $254 million in 2008, an increase of 88% from the previous year. And in fiscal 2007, the growth rate of Keurig Brewer sales increased 105%. The GMCR company mission is “to create the ultimate coffee experience in every life we touch from tree to cup – transforming the way the world understands business.” The company’s guarantee reads: “Green Mountain Coffee Roasters is about more than making coffee, we are about commitment. A commitment that every sip will reflect our passion for the art of roasting coffee. We will always strive to protect the ecosystems where our coffees are harvested, and that you will always be completely satisfied with our products.” Green Mountain Coffee is recognized as a leader in the specialty coffee industry for its award-winning coffees, innovative brewing technology, and socially and environmentally responsible business practices. Even in a challenging economic environment, Keurig still continues to gain market share and expand its leadership position in the single-cup brewing segment. According to their annual report and the NPD Group, Keurig gained further momentum as the market leader by obtaining over half of the share in both unit and dollar sales in the retail single-serve category in 2008. Specialty coffee is becoming more popular in the United States and Green Mountain Coffee is a premier brand in this market that continues to grow. GMCR is dedicated to doing business in a manner that balances economic goals with social and environmental impacts on local and global communities. As stated on their website, the company has been 100% greenhouse-gas-neutral since 2004 and claims that they are the industry’s largest purveyor of fair-trade coffee. The company likes to distinguish itself as a workforce that is protecting and sustaining the environment, while also supporting the communities where it does business. According to their annual report, Green Mountain prides itself in “brewing a better world,” and at least 5% of the company’s pre-tax profits help support social and environmental projects each year. A major trend in the marketplace today is “Going Green,” and GMCR is proudly following this trend by using sustainable packaging along with promoting sustainable coffee. 2
Due to the current economic recession, the company is realizing that people are unwilling to spend large amounts of money on unnecessary products. GMCR has to struggle with promoting their gourmet coffee and brewing systems to consumers that do not necessarily have a large disposable income. However, an advantage the company has is that the return on purchasing a personal coffee maker can be greater than buying a cup of coffee daily at a coffee shop. Also, gourmet coffees and coffees in general have become more popular recently due to cultural trends in the U.S. B. Brand Analysis The Keurig brand’s slogan is “brewing excellence one cup at a time.” In the coffee and tea industry, under non-alcoholic beverages, the Keurig brand is the leading single-cup brewing system in North America for both at home sales and away from home sales. Keurig’s innovative single-cup brewing system allows coffee drinkers to brew perfect coffee, one cup at a time, in less than a minute. In a recent consumer survey of Keurig users, over 90% of the respondents said that they would highly recommend the Keurig system to their friends. Keurig’s surveys show that 98% of Keurig users love their brewer. The brand believes that the strong loyalty and high consumer satisfaction from the brewing systems are critical to their success in the single-serve market. Keurig is a leader in single-cup brewing technology due, in part, to the convenience and ease of a k-cup versus other pods, the variety against normal coffee capsules, and a revolutionary brewing system. The Keurig single cup brewing system enables consumers to make a fresh tasting cup of coffee at their convenience. The machines come standard with a 48 ounce water reservoir that can make up to eight drinks. The K-cups are sealed airtight to preserve freshness. After the K-cup is placed in the holder the consumer places their desired cup in the machine and they select a beverage size from an easy to use electronic interface. The machine will then automatically puncture the k-cup, heat a precise amount of water that will perfectly brew a fresh cup of coffee within 60 seconds. The technology utilized by Keurig is simple and creates a premium beverage. With the increasing popularity of coffee in society today, Keurig offers a unique brewing system that can help save money and a trip to the coffee shop. The Keurig system can brew a fresh cup of coffee in the comfort of the consumer’s own home for less than what they would pay at a coffee shop, and sometimes with even more variety. Also, there have been recent trends in the country to go organic and to protect the environment. Responding to this trend, Keurig offers many organic varieties in their K-cup Portion packs. In addition, the K-cup’s packaging is an area of major environmental concern for all consumer product companies. The components of the packaging are hard to recycle but key to maintaining the freshness of the coffee. Therefore, Keurig is working hard to find a more environmentally-friendly approach to improve its packaging. C. Consumer Analysis On average, people pour about 1.4 billion cups of coffee per day worldwide and about 45 percent of it is consumed in the United States. In fact, coffee is so popular, that 56 percent of the population over age 18 consumed coffee yesterday. (Source: NCA National Coffee Drinking Trends 2006). The United States is the single largest consumer of coffee in the world, and home 3
brewing is on the incline. The primary consumer of Keurig coffee brewers are busy 35 to 49 year olds in the U.S. These consumers are typically on-the-go and always trying to find a beverage that is quick and convenient for their busy lifestyles. These consumers have found that picking up a cup of coffee at a Starbucks or Dunkin’ Donuts is not very convenient or time efficient during their commutes to work. It is easier for them to not stop en route in order to get their daily cup of coffee. The buying motivations of these target consumers are that they do not want to spend extra money or time to purchase coffee on their way to work. They like the freedom of being able to make coffee in their own homes at their convenience. Additionally, these consumers value the option of only making one cup at a time, as it cuts down on waste and clean-up time. The Keurig machines pre-measure the water and the ground coffee beans so that users do not have to spend extra time measuring or grinding. Consumers use the Keurig product both at home and at work. Many originally started using the machine in their offices, but loved it so much that they purchased one for their homes. These consumers enjoy fresh gourmet coffee, and they refuse to wait in line, go out of their way, or pay extra for expensive coffeehouse brews. According to Keurig’s Website, “Keurig brewers can be found in over 200,000 offices in North America with over 50 million cups consumed monthly. Nationally, about 6% of coffee brewed in offices is Keurig.” The machine is also used frequently in hotels and other business areas such as gyms and salons. The most important factors to the 35-49 year-old target when consuming coffee are convenience and ease. The Keurig brewing system addresses these issues with simple user friendly technology. In addition, consumers are much more aware of the effects of products they use, and they want a product that does not harm the environment. Keurig has addressed this issue by selling and continually developing environmentally friendly options for the consumer to feel good about using. They have taken on the challenge of creating an optimal product that exceeds expectations and takes care of the environment. These consumers are also spending less because of the economic recession our country is facing; however, they still are not willing to give up their coffee drinking habits. Many consumers have found that it is more economical for them to brew their favorite brand of coffee from their homes rather than buying from a vendor each day. D. Market/Industry Analysis The Keurig Single Cup Brewer is sold and distributed on many different levels from supermarkets, retail stores, consumer direct and office coffee services. The product is now available in more than 13,800 retail outlets nationwide. The consumer direct segment includes catalogs and websites, and according to the GMC Annual Report, this channel represents 21% of overall annual sales. An article from Chicago Business states that “more than 100,000 customers buy single-serve coffee cups directly from Green Mountain through a membership program,” compared to 40,000 customers of competitor Tassimo. Keurig is clearly the market leader for single cup brewer systems. According to the Green Mountain Fiscal 2008 Annual Report, “Net sales for Keurig were 254 million in the fiscal 2008, up to 88% from previous year. The growth rate of Keurig Brewer sales are up 105% over the fiscal 2007 year. K-Cup portion packs shipped by all licensed roasters increased 59% over the previous year. Green Mountain Coffee expects net sales to grow 40%-50% in fiscal 2009. They also anticipate that system-wide sales of the K cups portion packs will grow 50%-60%.” 4
The Keurig Company is a subsidiary of Green Mountain Roasters which is a very environmentally responsible company. In terms of social, legal and environmental trends this is a very good thing. They know that consumers are becoming increasingly more concerned about the environment. For their efforts, the company has been ranked number one on the Business Ethics list of “100 Best Corporate Citizens.” Green Mountain has also been recognized by prominent business magazines as an ethical, cutting edge and socially responsible company. Unfortunately, in the past year, Keurig has had legal issues. The company entered into a patent litigation against competitor Kraft over licensing disputes. Kraft illegally used technology that Keurig had patented. The case was eventually settled when Kraft gave Keurig a $17 million dollar settlement. However, Keurig is still number one in the market and they continue to develop technologies that leave competitors trailing behind. Keurig will likely benefit from the recent economic crisis because Keurig offers consumers a more economical way to have their favorite coffee house brews at less expensive prices. With many people trying to save their money, Keurig and other home brewers are expected to become more popular, while name brand coffee shops such as Starbucks and Dunkin Donuts will likely lose business. There is a predicted shift in coffee sales from the foodservice level to the retail level. As George Ellis of Supermarket news observes, “As consumers dig deeper into their pockets for food and fuel, Starbucks seems to be especially hard hit. In July it announced plans to close some 600 locations nationwide by mid-2009. The upscale coffeehouse has lost sales to consumers who've "traded down" to brewing coffee at home” (Ellis). Overall, it is likely that the home brewing coffee market will significantly increase over the next few months and years. E. Competitive Analysis Keurig’s Single Cup Brewing Systems face three major primary competitors, Tassimo, Senseo and Flavia. Each of these companies make a similar brewing systems to Keurig’s models however, they do have unique aspects, which could be seen as threatening to the brand. As far as secondary competition, Keurig competes against higher scale espresso machines from the brands Nespresso and Delonghi. Although Keurig’s Single Cup Brewing Systems have secured a great deal of market prominence, its important that they keep updating their technology as to not fall behind what their primary and secondary competitors are developing. Tassimo is a subsidiary of Kraft Foods Inc. and is a brand of single cup serving hot beverage systems manufactured by Bosch. The machine operates similarly to the Keurig machine as it uses an individualized T-disc pods that comes with a barcode. The barcode is read by the Tassimo machine and will appropriately apply the correct amount of water, brewing time and temperature for the selected beverage. An advantage to the Tassimo Hot Beverage System is that the t-discs can prepare one-cup servings of coffee, tea, espresso, hot chocolate and other espresso drinks such as cappuccinos or lattes. Starbucks, Seattle’s Best and Tazo Tea all produce t-disc pods that work with the Tassimo Hot Beverage System. The system makes every drink between 30 to 60 seconds. According to Kraft Foods Inc. 2007 Financial Annual Report, the Tassimo brand has seen a 4.8% growth compared to their sales in 2006. In 2008 the Tassimo brand worked with Ogilvy & Mather to launch an advertising campaign consisting of various webisodes that were set in a workplace environment and featured an employee who obsessed over his Tassimo. This advertising campaign is definitely aimed at a young professional
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audience who is familiar with the cubicle lifestyle. Tassimo’s unique barcode recognition technology combined with their webisode campaign could potentially be threatening to Keurig. Senseo is a subsidiary of Sara Lee Corporation and is another brand of single serving brewing systems that is manufactured by Philips and Douwe Egberts. This machine is comparable to the Keurig Single Cup machine; however, their premier market positions are across Europe and in Brazil. According to the Sara Lee 2008 Annual Report, Senseo had the highest growth of all Sara Lee brands at an increase of 23% and an annual sales reporting of $547 million. Senseo recently tested a new campaign for Russian Coffee after they received very positive test market results. As they are seeing a lot of success in their European market Senseo’s advertising campaigns are focusing on targeting their European Customers. The Sara Lee Corporation also just partnered with Dunkin Donuts and will exclusively selling and marketing Dunkin” Donuts Coffee to office buildings, cafeterias and other businesses which give them more market prominence. As Dunkin Donuts has a growing popularity in the United States, this effort can be interpreted as their attempt to expand into the American market. The third primary competitor for Keurig is the brand Flavia, which is a subsidiary of the Mars Company. The Mars Company is a private company so their financial earnings are unavailable however their machine has a distinctive brewing method that is threatening to the Keurig product. The Flavia hot beverage machine uses a Filterpack that gets directly placed in the brewing chamber. Next the drink is brewed within the Filterpack and poured directly into the cup instead of going through a common channel. This prevents any residue from one type of drink mixing with another drink. The Flavia hot beverage machine is made in both commercial and residential sizes that are a threat to Keurig’s marketing strategy to place their machines in hospitality industries such as hotels and cruises. Keurig also has secondary competitors which could be seen as threatening to the brand. Nespresso is a subsidiary of the Nestle Company and specializes in single serving automatic espresso machines. The Nespresso machines are a higher end product and can only use the Nespresso brand pods. These pods however come in a variety of premium espresso roast flavors. The brand has seen a significant increase in success in the past year, as the Nestle Company 2008 Annual financial report stated the Nespresso brand experienced a 40% growth compared to the previous year. The annual report also showed that the Nespresso market is split evenly between Switzerland and the United States. The brand says that their target market is a busy consumer who seeks indulgence in a premium beverage. DeLonghi is an Italian company that makes small kitchen appliances out of Treviso, Italy. Their espresso machines are considered to be very high end as they come equipped with sophisticated technology. Instead of using a pod system the machine stores the espresso beans, grinds the exact amount needed per drink, applies a specific amount of pressure and water, and when the drink is complete it ejects the used grinds so that it is ready to make its next drink. The company target market is very international as they reported 75% of their sales in 2008 were outside Italy. F. Analysis of Current Advertising and Media Expenditures Appendices with the following information are attached at the end of the report. Over the past three, years, from 2006 to 2008, Keurig has spent $4,653,800 dollars on advertising. They did not spend any funds to advertise in 2006 or 2007, and they did not utilize magazine or internet media outlets. In 2008, Keurig spent the second-highest amount in 6
advertising expenditures compared to its primary competitors, and the brand spent the most that year compared to its secondary competitors. The brand used $4,653,800 dollars to advertise, and of that total, $3,512,300 was used for network television and $1,141,500 for cable outlets. One of the brands major competitors, Tassimo, spent the most in 2008, with a total of $5,625,400 on magazine advertising. The company also took a viral approach to its advertising and implemented a successful webisodes campaign. Another competitor, Senseo, funded only $73,000 in Internet ads, and a third primary competitor of Keurig, Flavia, spent nothing on advertising that year. Although Tassimo had the highest advertising expenditures last year, the brand spent nothing in 2006 or 2007. On the other hand, Senseo advertised all three years, using the Internet consistently, but dropping network and cable television ads in 2007 and then dropping magazine ads in 2008. Over the past three years, Flavia only advertised in 2006, using magazine media vehicles. Compared to secondary competitors Nespresso and Delonghi, Keurig spent the most overall on advertising in 2008. Nespresso spent $523,300 that year, with the bulk, $519,100, coming from magazine ads and only $4,200 used for Internet. Delonghi spent nothing last year on advertising. However, in 2006 and 2007 Delonghi did spend funds on advertising through magazines, $903,700 in 2006 and $1,432,800 in 2007. Nespresso only used Internet advertising in 2006 and 2007, spending $18,600 in 2006 and $11,200 during 2007. Overall, over the past three years, Keurig has spent $4,653,800 on advertising expenditures. Flavia has funded $409,700 for ads, Senseo used $10,608,200, and Tassimo spent $5,625,400. And secondary competitors Nespresso and Delonghi spent $553,200 and $2,336,600, respectively. G. SWOT Analysis Summary Strengths In general, Keurig has many strengths as a brand. Its sales have been increasing in the past few years and are likely to keep increasing in the future. In addition, the brand is the market leader in the single cup brewing market segment. And it is the only single-cup brand with several different brewing models. Other advantages include the machine’s ability to brew one cup of coffee at a time, its quick brewing time of less than one minute, and the reduction of waste. Keurig is also an environmentally responsible company, as it is greenhouse-gas-neutral and offers environmentally friendly options for its products. The brand supports the communities where it does business and gives back five percent of profits each year to support social and environmental projects. Keurig was even ranked number one on the Business Ethics list of “100 Best Corporate Citizens.” Weaknesses The expense of Keurig systems is a weakness of the brand. Especially with the declining economy, many people are becoming reluctant to spend excess money on products. And although Keurig prides itself as being an environmentally friendly brand, the packaging of its products are hard to recycle. Another negative aspect of the brand is its advertising budget. Keurig has not spent a great amount of money for advertising in the past; therefore the brand name is not as recognized as it could be.
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Opportunities There are many opportunities that Keurig can take advantage of. One is the growing popularity of specialty coffees and coffee drinking in general. More and more people are becoming avid coffee drinkers and purchasing coffee products. In addition, the consumer trend of organic living can be seen as an opportunity for the brand. Since Keurig already offers organic products, it can capitalize on this trend. Also, home brewing is on the incline, in part because it is cheaper than buying coffee from a coffee shop each day. The economic recession can be considered an opportunity for Keurig to promote its systems as the inexpensive alternative to coffee drinking. It is more economical for consumers to brew coffee at home. Threats At the forefront of threats to Keurig is the economic recession. Although the recession can give some opportunities, for the most part it is a negative obstacle for the brand. Because of the economy’s decline, people have a smaller disposable income and are spending less as a result. And although Keurig is an environmentally friendly company, its packaging can be seen as a threat because it is not recyclable. With consumers’ growing environmental concerns, selling a product that can harm the environment could damage perceptions of the brand. Legal issues surrounding the company, such as the conflict with Kraft can also lead to negative publicity for Keurig. Other threats include Keurig’s competition. For example, Tassimo has a unique barcode recognition technology that Keurig lacks. It also has an innovative webisode ad campaign. Senseo is also a threatening brand, as it is rapidly expanding into the American market that Keurig currently dominates. Flavia is a brand that has a unique Filterpack that Keurig does not have. It also comes in commercial and residential sizes which threaten Keurig’s marketing strategy of placing machines in hotels. H. Summary Overall, Keurig is a brand that is doing very well in its market. Profits have been steadily increasing over the past few years and the company continues to gain market share and expand its leadership position in the single-cup brewing segment. Keurig will likely continue to expand as a market leader even further in the future, as net sales are expected to grow 40%-50% over the next year. There is also a predicted shift in coffee sales from the foodservice level to the retail level, and establishments such as Starbucks will begin to lose business. The home brewing coffee market is likely to significantly increase in upcoming months and years. There are also many factors that are beneficial to Keurig. The fact that coffee drinking is becoming more popular is advantageous to the brand, as it guarantees more potential customers. Also, the environmentally friendly attitude and business practices of Keurig attracts consumers as well. The company was one of the first affordable single cup brewing systems created, and this is an advantage for brand recognition. Corporate offices are drawn to the brand because by purchasing the system they are transitively helping the environment, as portions of the profits are donated annually. Keurig machines’ presence in corporate settings is like free advertising, as many employees purchase a Keurig after they have used it in the office. This in turn expands brand loyalty among the 35-49 consumers and many recommend the system to others. Strong brand loyalty and high consumer satisfaction is critical to Keurig’s success. The real issue surrounding the brand right now is maintaining its front position in the market. Several competitors spend more money on advertising and will likely impede on Keurig’s share in the 8
near future. Also, the economic recession is something to take into consideration. Many consumers are trying to save their money and as a result purchase less. Since owning a personal coffee maker is a more economical choice as opposed to buying coffee out every day, the recession could actually work in Keurig’s favor if consumers realize the value in owning a machine. An offensive marketing strategy including updating technologies to stay on track with its competitors would be beneficial to the brand. Right now, Keurig needs to focus on continued growth and increasing sales in order to remain the leader in the single-cup brewing market segment.
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