Case study – Keurig (files attached).
Please see the instructions and allocation rubic attached.MKT 701 Business Strategy Summer 2021 AP1 Case Assay 2 Keurig Please agenda 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 accounting by the same author, and the added case abstraction was a aftereffect to the aboriginal one. Questions to be addressed in your case analysis: (Note: these questions are not the "key issues"). • What is the bazaar abeyant of the accepted audible serve coffee market? • Area is it on the artefact activity aeon ambit - in the beforehand date or adeptness stage? • As the bazaar leader, are there opportunities for beforehand in the future? What do you suggest Keurig do to beforehand their bazaar position and alike grow? (Consider chump preferences, competition, and the alien environments – PEST) Please focus on the cast Keurig, instead of the aggregation Keurig, aback the aggregation Keurig has become Keurig Dr Peppers and now it is the seventh bigger aliment and cooler aggregation in the US. Please accomplish abiding to assay the allocation guidelines and account above-mentioned to alive on this case analysis. Please accommodate the afterward in your case analysis. 1. Awning page 2. Arbitrary of key business activity issues. 3. Appraisal of key issues 4. Propose and absolve your own solutions 5. Recommendations 6. References 7. Please administer business concepts or theories alien in this beforehand or you accretion from alien sources. Case write-ups should be at atomic 5 pages not including awning folio and advertence page, bifold spaced, chantry admeasurement 12 in Times New Roman. Please abide it in MS Chat format. 5-105-005 February 28, 2005 ERIC T. ANDERSON Keurig At Home: Managing a New Artefact Launch A Wednesday afternoon in February 2003 activate Keurig Inc.’s admiral and CEO Nick Lazaris branch south on Interstate 89 aback adjoin his Wakefield, Massachusetts, appointment and answer over the day’s contest in alertness for a conference with his arch administration aggregation (see Exhibit 1). He accomplished that the abutting two weeks would be analytical to the success of the company’s newest artefact activity in the single-cup coffee market. Lazaris had aloof captivated up a presentation to the Green Mountain Coffee Roasters Inc. (GMCR) administration team, one of the company’s cardinal ally and an broker in its business. While reviewing the company’s beforehand adjoin the barrage of its avant-garde coffee-brewing adjustment into the calm chump market, GMCR had asked Keurig to amend its accommodation to use a altered adjustment of the coffee allocation pack, accepted as a K-Cup, in the chump market. In authoritative its request, GMCR had offered a cardinal of acute affidavit for application the absolute bartering allocation backpack in both channels. As he drove, Lazaris anesthetized a new Starbucks and reflected on how gourmet coffeehouses had helped pave the way for Keurig’s single-serve brewing system. The admeasurement of bendable drinks aback the 1960s had acquired coffee to lose its abode as a axial basic of amusing gatherings, dispatch a abrupt bead in coffee burning to an best low of 6.1 pounds per capita in the mid-1990s from a aiguille of 16.5 pounds per capita in the mid-1940s.1 The access of gourmet coffeehouses had reinvigorated the market, developing a audible subculture of coffee drinkers and educating adolescent consumers about abundant adequate coffees as able-bodied as espresso and milk based specialty beverages. As a result, by 2003 an estimated twenty actor Americans were bubbler gourmet coffee on a circadian basis. Keurig’s barrage of a single-cup brewing adjustment in the appointment coffee account bazaar in the late 1990s had benefited from coffee drinkers’ accretion sophistication. Appointment advisers could acknowledge the greater variety, freshness, and accessibility acquired from the adeptness to cooler a audible cup of coffee on demand. Appointment managers accustomed the advantages garnered from less coffee waste, added agent productivity, and decreased altercation associated with disposed the coffee machine. February 2003 activate Keurig assertive to barrage its new archetypal B100 adjustment in the at-home articulation with hopes of repeating its success in a abundant aloft but added aggressive market. With rumors of addition single-cup competitors accessible to access the market, Lazaris knew Keurig bare to move bound in adjustment to access its adapted accession in the arising single-cup consumer 1 Source: United States Administration of Agriculture. ©2005 by the Kellogg School of Management, Northwestern University. This case was able by Elizabeth L. Anderson beneath the administration of Professor Eric T. Anderson. Cases are developed abandoned as the abject for chic discussion. Cases are not advised to serve as endorsements, sources of primary data, or illustrations of able or abortive management. To adjustment copies or abode permission to carbon materials, alarm 847-491-5400 or e-mail firstname.lastname@example.org. No allotment of this advertisement may be reproduced, stored in a retrieval system, acclimated in a spreadsheet, or transmitted in any anatomy 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 accommodation to beforehand with a two-K-Cup activity had the abeyant to derail the company’s barrage efforts and accepted accelerated absorption by Lazaris and the senior administration team. Reevaluation of the K-Cup accommodation would additionally force them to amend addition elements of their artefact plans, including appraisement and marketing. With beneath than six months until the September launch, time was of the essence. The Aggregation and Its Products Keurig Inc. had been founded to beforehand an avant-garde abode that would acquiesce coffee lovers to cooler one absolute cup of coffee at a time. Alpha with the company’s birth in 1992, the chat “Keurig,” from the Dutch chat for excellence, had been the allegorical principle abaft the development of its articles and services. The aggregation leveraged investments from adventure basic funds to transform its abstraction for a single-cup brewing adjustment into a commercially applicative business with the development and patenting of a single-portion backpack and a advocate new coffee brewer. The aboriginal brewer targeting the appointment coffee account market, the B2000, was launched in 1998. A licensing acceding accustomed GMCR to backpack its specialty coffees in Keurig’s patented container, the K-Cup (see Exhibit 2). Eight varieties of coffee were originally accessible for auction to offices. Keurig connected to aggrandize its relationships with roasters such as GMCR, application a careful but all-encompassing strategy. This advancing accomplishment had broadcast the cardinal of broiler partnerships to five, constant in the bigger array of coffees accessible with a single-cup adjustment in the bazaar in 2003. In February 2002 the affairs anatomy of Keurig afflicted through agreements with two of its broiler partners. Keurig awash banal to Van Houtte Inc. to accession about $10 actor to abutment the barrage of the calm business. This beforehand provided Van Houtte with about a 28 percent affairs pale in Keurig. At the aforementioned time, GMCR acquired and accomplished options to acquirement a ample cardinal of Keurig shares from absolute shareholders, enabling Keurig to consolidate to a abate cardinal of cogent shareholders. GMCR acquired a 42 percent pale in Keurig. With these moves, Van Houtte and GMCR abutting Memorial Drive Trust (MDT) as the three bigger shareholders of Keurig. MDT, an beforehand advising abutting that managed a U.S.-based accumulation administration plan, had served as the beforehand adventure broker in Keurig aback 1995 and led Keurig’s lath of directors. As provided for in abstracted actor agreements with MDT, neither GMCR nor Van Houtte was accustomed to accept a bench on the lath of directors. Lazaris able the company’s position with account to these broiler shareholders in a letter to its accustomed distributors and addition broiler partners: We do not plan to acquiesce any broiler or addition bartering business accomplice to sit on our lath of directors. Our bulk activity charcoal unchanged: we are committed to a multiroaster activity that relies on able relationships with alleged gourmet coffee roasters who booty a abundant accord of pride in the coffee burning acquaintance that supports the acceptation of their cast to consumers.2 2 Internal announcement anachronous February 5, 2002. 2 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Single-Cup Brewing Technology Keurig’s single-portion adjustment hinged on three key elements: a coffee brewer that altogether controlled the amount, temperature, and burden of baptize to accommodate a consistently aloft tasting cup of coffee; a altered portion-pack adjustment absolute amphitheatre coffee beans as able-bodied as clarify paper; and a assorted coffee addition to carbon the choices accessible in a gourmet coffeehouse. The Keurig commercial-market brewer included an “always-on” feature, enabling it to cooler a cup of coffee in beneath than one minute at any time of day. Plumbed to a baptize line, the automatically refillable baptize backlog maintained up to twelve cups of baptize at brewing temperature. Afterwards the chump amid a K-Cup in a drawer, positioned the eight-ounce cup to accept the brewed coffee, and apprenticed the “brew” button, the brewer would bore the K-Cup, inject pressurized hot water, and cooler the coffee. The K-Cup, acquired from an antecedent mock-up architecture based on a adapted yogurt cup, independent a congenital cone-shaped clarify and the exact bulk and bullwork of coffee to fresh-brew a audible eight-ounce cup. K-Cups were closed to air, moisture, and ablaze to ensure the accommodation backward alpha for at atomic six months. A key differentiator for Keurig’s brewing adjustment was the ample coffee addition accessible through licensing arrange with a array of gourmet coffee roasters. Coffee roasters controlled the affection of their coffee and the cardinal of varieties accessible through K-Cup accumulation lines. A accumulation band adeptness be endemic by the coffee broiler or busy from Keurig. K-Cups were produced by bristles roasters with six brands and added than seventy-five coffee varieties.3 Broiler ally included Green Mountain Coffee Roasters, Diedrich Coffee, Van Houtte, Timothy’s Apple Coffee, and Ueshima Coffee Company. For anniversary K-Cup sold, the broiler paid Keurig a adeptness of about $.04. The Art of Cupping “Cupping” was a adjustment of tasting the accomplished (or brewed) coffee artefact acclimated by roasters and abounding ample retailers to appraise the acidity contour of a coffee. Agnate to wine tasting, cupping complex swishing coffee about in the aperture to appraise elements of the acidity profile. Expert “cuppers” could aftertaste as abounding as ten to twenty varieties a day and accomplish an assay that included taste, accuracy (degree of acidity), balm and aroma, body, and finish. The activity began with the baking and cutting of a baby accumulation of beans. Once the amphitheatre beans were placed in a cup, hot baptize was caked over them and the assay activity began. The cupping activity could be supplemented by advanced accouterment to ensure artefact consistency. In the apple of gourmet coffees, roasters offered a array of coffees tailored to the different tastes of gourmet coffee drinkers. For anniversary array of coffee offered, cuppers had accustomed an accepted acidity profile. The activity by which that contour was accomplished was carefully controlled by the cupper during the cupping process. However, those aforementioned controls could not consistently be accomplished in the adequate home brewing process. The adapted acidity contour could be afflicted by a cardinal of factors aloft the ascendancy of the broiler or cupper: the bulk of coffee or water acclimated by the consumer, variations in the temperature throughout brewing, or the bulk of time the coffee sat in the coffee pot above-mentioned to actuality consumed. Through abutting ascendancy of critical 3 Currently there were three leased-production curve and an added eight roaster-owned lines. Three added curve were planned. KELLOGG SCHOOL OF MANAGEMENT 3 KEURIG AT HOME 5-105-005 elements in the coffee brewing process, the Keurig adjustment enabled that acidity contour to be recreated on a constant abject and ensured that the coffee drinker had the aforementioned aftertaste acquaintance time afterwards time. Away-from-Home Market Keurig’s bazaar included two ample ambition customers: appointment users and households.4 Keurig chose to focus aboriginal on the away-from-home bartering articulation of appointment users in the hopes that a acknowledged rollout would accommodate a springboard for barrage into the calm segment. The background for ablution into the away-from-home appointment coffee account (OCS) bazaar was laid by Starbucks and addition specialty coffee purveyors. They had auspiciously accomplished consumers about good-quality coffee and fabricated it adequate to pay $1.50 or added for a cup of coffee and alike added for coffee-based specialty beverages. This behavior opened the aperture for Keurig and others to activity a single-cup adjustment into offices, capitalizing on people’s admiration to accept the aforementioned abundant aftertaste in the appointment as they got at a coffeehouse. In 2002 the OCS bazaar accomplished $3.46 billion in absolute revenues.5 At the aforementioned time, accepting of the single-cup brewing technology was axiomatic in surveys of OCS distributors. In 2000 abandoned 14.8 percent of distributors had offered a single-cup system, but that bulk had added to 44.8 percent in 2001.6 By 2003 absolute single-cup brewer placements had accomplished 143,200 (see Exhibit 3). Since the barrage of its aboriginal bartering brewer in 1998, Keurig had bound confused to a arch position in the sales of single-cup brewing systems. Afterwards bristles years in the bazaar at the end of 2002, Keurig had alien added than 33,000 brewers in North America, according to 1 percent of all OCS brewers. In allegory to the competition, Lazaris was quick to point out the acceleration with which Keurig had penetrated the market: It took Filterfresh twenty years to abode 45,000 units in North America. And in its aboriginal five years, Flavia alien abandoned 8,000 units in North America. In addition, our amplification into Asia at the end of 2001 provided us an added befalling for growth. In affiliation with the top Asian roaster, UCC, our antecedent sales in Japan and Korea had been added than 2,700 brewers. A added admeasurement of Keurig’s achievements in the OCS bazaar was accession of its patented K-Cups. In 2002 Keurig’s broiler ally alien added than 125 actor K-Cups, bringing total K-Cup shipments aback barrage to added than 340 million. Additionally in the works was the barrage of an alms of teas in T-Cups, with the aboriginal actuality the “Celestial Seasonings” teas. 4 From aboriginal balloon activities, Keurig had bent its single-serve brewing adjustment was not able-bodied accumbent with the needs of aliment account establishments confined a ample aggregate of coffee. 5 Source: All-embracing Coffee Organization, London, UK. 6 Source: Automated Merchandiser 2002 Coffee Account Bazaar Report. 4 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Away-from-Home Access of Distribution The appointment coffee bazaar was served by a adjustment of about 1,700 distributors that were amenable for adjustment and aliment of appointment brewers and advancing coffee supply. Keurig formed with a absolute of 180 Keurig accustomed distributors (KADs) for sales throughout North America. A baby cardinal of KADs handled barter throughout the United States or North America, while the majority covered abate regions. The purchasing accommodation was handled by appointment managers. “Office managers are all about eliminating headaches. The array of coffees, accessibility of brewing, and negligible clean-up of the Keurig adjustment beggarly beneath agent complaints and greater productivity,” explained Chris Stevens, away-from-home carnality admiral of sales, who was amenable for managing Keurig’s circadian accord with its adjustment of KADs. Chump relationships were managed by the KADs and acknowledgment on problems or adapted new actualization was funneled through the KADs to allotment with Keurig. The KADs purchased bartering brewers from Keurig at a ample bulk that ranged from $500 to $1,000. The brewer was placed in offices chargeless of allegation or with a low account rental in barter for advancing coffee sales. About there was no academic adjustment amid the KAD and the appointment manager, although the KAD accustomed accepted volumes based on the cardinal of advisers in the office. If volumes fell beneath accepted levels, the KAD could abolish the brewer from the appointment or accession the bulk of the K-Cups. The KAD was additionally amenable for advancing aliment of the brewer. The KAD provided a array of coffees to offices, based on their abandoned burning profiles. KADs entered into absolute relationships with one or added accountant roasters for the acquirement of K-Cups. Typically, KADs paid roasters $0.25 per K-Cup and awash K-Cups to appointment managers for $0.40–$0.50. Roasters again paid Keurig a adeptness 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 Account Inc. in the backward 1980s. Filterfresh was a U.S. accessory of Canadian based Van Houtte (a Keurig shareholder), a arch gourmet coffee roaster, marketer, and benefactor in North America. The Filterfresh bartering single-cup adjustment was based on the “French press” adjustment of brewing. Amphitheatre coffee beans were loaded into a accumulator alembic in the machine. Once a button was apprenticed for a cup of coffee, an bulk of amphitheatre beans would be abstinent from the alembic and alloyed with hot water. The admixture would again be artificial to abolish the area and a audible cup of coffee resulted. No brewed coffee was larboard to sit and become decay as was accepted in a adequate bottle pot system, and a actuality enjoyed a afresh brewed cup of coffee anniversary time. Approved disposed of the coffee adjustment was adapted to abolish acclimated coffee area and reload amphitheatre beans into the accumulator hopper. Filterfresh accustomed its accord with Keurig in October 2001 to bazaar Keurig’s bartering brewer and activity a adjustment that could accommodate a greater array of single-cup coffees and teas. KELLOGG SCHOOL OF MANAGEMENT 5 KEURIG AT HOME 5-105-005 FLAVIA Flavia was endemic by Mars Inc. It alien its aboriginal single-cup brewer to offices in Britain in 1985 and broadcast to Europe and Japan afore introducing its “Brew-by-Pack” adjustment in the United States and Canada in 1996. Agnate to the Keurig brewer, the S350 bartering brewer activated a single-serving pack. Anniversary Filterpack independent its own clarify and the appropriate admeasurement of ingredients, which were foil-sealed, absorption them adjoin air and moisture. A addition of twenty-four coffee varieties was accessible with the system. At-Home Market Building on its success in the OCS market, Keurig beheld the calm chump bazaar as a analytic addendum to its business strategy. John Whoriskey abutting Keurig as accepted administrator and carnality admiral of the calm assay in 2002. He brought with him added than twenty years of acquaintance in chump appurtenances sales and marketing. “I fell in adulation with Keurig and its brewing system,” he commented. “I don’t accede myself a gourmet coffee drinker, but I do like a adequate cup of coffee. I would drive a mile out of my way to assignment to aces up a adequate cup of coffee. With a Keurig brewer, we can activity accessibility account with aftertaste assurance, in the abundance of your own home.” The calm bazaar represented an astronomic befalling for Keurig. Arch bazaar assay firms estimated the absolute admeasurement of the retail coffee bazaar at about $18.5 billion in 2000. Calm retail burning was a $6.9 billion market, with calm gourmet coffee accounting for $3.1 billion (see Exhibit 4). Away-from-home gourmet coffee represented a $3.9 billion bazaar and was about awash by the cup at cafes such as Starbucks or in addition aliment account venues such as restaurants. At the aforementioned time, estimates showed 157 actor Americans drank coffee, with 60 percent predominantly bubbler advanced amphitheatre coffee and accession 10 percent application afresh amphitheatre accomplished bean coffee.7 Profiles of coffee drinkers assorted by artefact type, with consumers of whole-bean coffee announcement an flush contour (see Exhibit 5). In addition, about eighteen actor coffee makers were purchased annually in the United States, apery about $450 actor in retail sales. Coffee makers represented one of the bigger aggregate baby accessories awash for home use.8 Previously the ambit of flush outlets—coffee/tea stores, gourmet/specialty stores, accouterments stores, and coffeehouses—gourmet coffees had added been awash in mass-retail outlets. At the aforementioned time, the growing acceptance of whole-bean coffee had been alive the barrage of a array of roasts, blends, and flavors. Starbucks, for example, showed beforehand of whole-bean sales in balance of 100 percent in 2000.9 Coffee announcement centered on two aloft themes: adequate aftertaste and absolute stimulation. Taglines such as Maxwell House’s “Good to the aftermost drop” reflected the accent on the taste experience. Absolute dispatch focused on the allowances acquired by bubbler a accurate cup of coffee. As an example, the acclaimed tagline “The best allotment of alive up is Folgers in your cup” adapted that the accent and challenges in your activity could be affected by demography that aboriginal sip. 7 Simmons Bazaar Assay Bureau (2000). 8 Source: Keurig aggregation information. 9 The U.S. Bazaar for Afresh Brewed Coffee Beverages, Packaged Facts, March 2004. 6 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME At-Home Single-Cup Bazaar Research Keurig commissioned a array of bazaar assay studies on the calm artefact concept from 1999 to 2001 above-mentioned to affective advanced with any cogent development efforts. “We wanted to get an compassionate of the acceptability of the single-cup approach, accretion some acumen into appraisement of the K-Cup and the brewer, and contour our prime chump prospects,” explained Lazaris. This assay was accomplished in a array of formats, including ambush surveys, Internet based surveys, surveys of accepted 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 absorbed in speaking with approved gourmet coffee drinkers so respondents were alleged based on coffee brewing habits and coffee consumption.” To qualify for the ambush survey, consumers had to alcohol gourmet coffee, which included coffee from afresh amphitheatre accomplished beans, from gourmet coffee roasters, and from exceptional coffee cafes such as Starbucks, Dunkin’ Donuts, Seattle’s Best, or Caribou Coffee. All participants had to alcohol at atomic one cup of coffee per day. While about 94 percent of respondents adumbrated that they were annoyed with the coffee they drank at home, 88 percent bidding an absorption in the artefact concept. Absorption focused primarily on convenience, decidedly quick brewing, affluence of use, and basal clean-up, sources of the best annoyance with accepted home brewing systems. Based on account of the artefact alone, added than three-quarters of respondents said they would be adequate to acquirement a adjustment like the one proposed. The artefact affirmation had a huge appulse on this figure. Added than 90 percent of respondents adumbrated that the affirmation added their likelihood of affairs the product. Key factors rated accomplished in the affirmation included the time it took to adapt coffee and the time it took to apple-pie up. Keurig had acquired some antecedent acumen into brewer appraisement from antecedent bazaar assay (see Exhibit 6). It now basic to analyze artefact appraisement with consumers who advised the system (brewer and K-Cups) and additionally accomplished a artefact demonstration. Amid intercept respondents, the self-reported circadian burning bulk of coffee was an boilerplate of two to three cups. Back asked about their alertness to pay for a cup of coffee like the one they tasted, 44 percent adumbrated they would pay $0.55 (see Exhibit 7). Afterwards in the survey, respondents were asked about their alertness to pay for both K-Cups and the brewer. Added than 30 percent of respondents who were absorbed in the adjustment were accommodating to pay $0.50 or added for a K-Cup. Afore accepting ascribe on brewer pricing, respondents were told that high-quality coffee makers awash in the ambit of $69 to $149. About assay of the respondents were accommodating to pay added than $130 for the brewer. Consumers who drank added coffee were added accommodating to pay for both the K-Cup and the brewer. An Internet-based assay acclimated as its abject a Keurig adjustment arbitrary (see Exhibit 8) that was apparent to bodies who drank coffee on a circadian basis. It activate that the abstraction had able appeal, with 67 percent of respondents cogent interest. The basic adapted agency revolved about the acceleration of brewing a cup of coffee. Of added accomplished accent was the convenience of no alertness or clean-up. As allotment of the study, a bulk point of $149.99 was tested. The 9 percent of respondents who adumbrated that they “definitely would buy” or “probably would buy” the coffee adjustment at this bulk were classified as “core customers.” These respondents tended to be adolescent and best were male. Aftereffect assay questions arise that the boilerplate bulk core barter were accommodating to pay for the coffee adjustment was $125. KELLOGG SCHOOL OF MANAGEMENT 7 KEURIG AT HOME 5-105-005 For the home use test, a bartering archetypal brewer was placed in the homes of gourmet coffee drinkers. The testers were again adapted to acquirement K-Cups at a retail bulk of $0.50 via fax, e-mail, or buzz for their own abandoned coffee consumption. Consecutive interviews and focus groups activate that users consistently referenced great-tasting coffee with a adjustment that was fast and convenient. Added attributes of the artefact accent included aftertaste consistency, coffee variety, and cleanliness of preparation. Of accurate agenda was the actuality that coffee burning at home added with the attendance of the Keurig brewer. On average, 2.25 cups of coffee were captivated per day at home. Not abandoned were participants bubbler added coffee in the morning, but they were purchasing beneath coffee alfresco the home. An adequate bulk ambit for the brewer was bent to be in the $129–$199 range, with a bulk beyond $200 triggering a acknowledgment that the account would become a affluence acquirement for which added application would be required. K-Cup pricing, however, did not arise to be an issue. At-Home Single-Cup Competition A key aspect of Keurig’s activity in the calm bazaar was actuality one of the aboriginal entrants in the artefact category. In establishing itself as a avant-garde in the flush single-cup brewing category, Keurig envisioned that consecutive columnist advantage would artlessly accommodate a advertence to the Keurig adjustment as a single-cup avant-garde and enhance its afterimage in the flush market. In the adequate chump coffee market, Procter & Gamble (P&G) and Kraft were the bazaar allotment leaders with administration abundantly through grocery aliment (see Exhibit 9). In announcement expenditures, the two companies represented 84 percent of absolute expenditures of $163 million.10 In the coffee maker apparatus market, apparatus brands targeted either flush or accumulation bazaar retailers. In the flush segment, Cuisinart, Krups, Braun, DeLonghi, and Bunn had able distribution. In the accumulation channel, through which about 70 percent of all coffee makers were sold, Mr. Coffee, Black & Decker, Sunbeam, and Hamilton Beach had able positions. Market indicators had led Keurig to accept that a cardinal of these ample accustomed chump articles companies were advancing to access the arising single-cup market. In accession to the beforehand of the single-cup adjustment in the away-from-home market, contempo trends in Europe were bold the adjustment of adequate espresso pod systems for American-style coffee brewing. In anniversary case, including Keurig, the systems were proprietary, with individual brewers alive abandoned with accordant coffee pod systems. Salton, with 2002 sales of $922 million, was a arch calm designer, marketer, and benefactor of a ample ambit of branded, baby appliances. Beneath its accountant cast name, Melitta, it had formally appear affairs for a May 2003 barrage of a new brewing system: One:One. The One:One brewer would cooler coffee utilizing Javapods, baby annular packets of clarify cardboard in which the area were sealed. Salton’s accepted retail brewer appraisement was $49 with pod pricing of about $0.25 per pod. Sara Lee, a U.S.-based chump packaged articles aggregation with sales of $17.6 billion in 2002, had been alive primarily in the European coffee market, but, through a alternation of acquisitions completed in 2000, had become a stronger force in the U.S. market. Its two best accepted brands were Chock Abounding o’ Nuts and Hills Brothers. Sara Lee had declared that the Senseo- 10 Packaged Facts Bazaar Profile: The U.S. Coffee and Tea Market, September 2001. 8 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Crema pod adjustment adeptness be in the U.S. bazaar in the added bisected of 2003. Advanced introduced in Europe, the Senseo Coffee Pod Adjustment acclimated coffee pods of a altered admeasurement than the Salton Javapods. The Sara Lee pods were bulk-packed in a bag fabricated with a actual attenuate band of aluminum to bottle freshness. Sara Lee had placed about two actor Senseo pod systems in Europe aback the product’s introduction. The company’s acquaintance in the chump bazaar gave it the abeyant to be a appalling competitor. Senseo’s European appraisement adapted a U.S. retail price of about $70 and a pod bulk of about $0.20 (with two pods adapted to bear an eight-ounce serving). There were additionally rumors that P&G had partnered with an apparatus banker to barrage its own proprietary pod system. It was accepted that P&G would focus on accumulation access administration of both its pod brewers and pods, accustomed P&G’s backbone in the grocery channel. P&G’s appraisement and administration were accepted to be agnate to Salton’s and Sara Lee’s. Nespresso, developed by Nestlé, was a European capsule-based single-cup espresso brewing system. It offered agnate allowances to the Keurig adjustment including taste, variety, and convenience. Aback its accession in 1987, added than 500,000 units had been sold, abundantly in Europe, using absolute accomplishment via phone, fax, and Internet. Keurig wondered whether Nestlé would adjudge to access the American-style single-cup coffee market, based on its acquaintance with single-cup espresso. Is the Cup Half-Full or Half-Empty? Keurig did not accept the assets to barrage its B100 brewing adjustment through the retail channel. However, it acquainted it could beforehand a absolute business access application an e-commerce enabled Web armpit to acquaint both the brewer and K-Cups in affiliation with leveraging the administration capabilities of roasters and KADs. In advancing this strategy, Keurig had encountered a cardinal of access issues that could attempt its accustomed business in the away-from-home OCS market. Chris Stevens explained the claiming of acclimation the needs of the OCS channel with the development of the new calm business: Feedback from our KADs adumbrated that they would adapt our access into the at-home bazaar with a absolute sales access as a aboriginal footfall appear a absolute access in the OCS bazaar in the connected term. Affair about this would abate the KADs’ business efforts in both the OCS and calm markets, constant in abrasion of our installed abject and acquirement beck from our bulk OCS articulation and a beneath able barrage in the at-home market. At the aforementioned time, we were afraid about accident of appraisement ascendancy with KADs underpricing Keurig and the roasters because they had no brewer beforehand to recover. In addition, there was affair that the appointment managers would not abutment our at-home business efforts for abhorrence of annexation of K-Cups for use in the home brewer. Given these issues, Keurig’s ambition had been to acquaint a controlled administration of brewers and allocation packs that would aerate the barrage of the calm business while absorption the away-from-home OCS channel. Key in this activity had been the accession of a added portion backpack as the abject for accumulation differentiation—a new Keurig-Cup for the calm market—and that accommodation had apprenticed its development efforts to date. The K-Cup would assignment abandoned in the bartering brewer, while the Keurig-Cup formed abandoned in the calm brewer (see Exhibit 10). Added acumen was fabricated with the blush of the two allocation packs: the K-Cups were white while the Keurig-Cups were tan. These two allocation packs would be bogus on the same KELLOGG SCHOOL OF MANAGEMENT 9 KEURIG AT HOME 5-105-005 packaging lines. Architecture of the all-important applique to thermoform the new cup bases had been completed at a bulk of about $400,000. In addition, new genitalia for the packaging curve at licensed roasters had been bogus by Keurig at a bulk of aloof beneath $60,000 per packaging band to accredit the curve to accomplish both the Keurig-Cups and the K-Cups. While the new B100 brewer was targeted for both lower-volume OCS barter and for calm use, altered cup holder inserts and altered blush drawers would differentiate the brewer articles in the two markets. Building off this artefact differentiation, Keurig’s controlled administration activity allowed roasters to acquaint Keurig-Cups in absolute and aberrant markets and KADs to acquaint them in absolute markets, bold assertive aggregate commitments were met on sales of the associated brewer. KAD brewer aggregate commitments ensured that parties affairs Keurig-Cups would be appropriately vested in brewer sales and focused on business an absolute system. Roasters would accomplish Keurig-Cups for Keurig to resell anon to calm users over the Internet. In accession to accouterment all-important assurances to KADs about Keurig’s approaching plans, the two-portion-pack activity alone appointment administrator apropos over the abeyant annexation of allocation packs for use in home brewers, accretion the likelihood of their accord in in-office promotions of the Keurig system. Unfortunately, the plan had accomplished a roadblock at that afternoon’s affair with GMCR. Lazaris afterwards summed up GMCR’s apropos to the arch administration aggregation in an e-mail, “We advised the controlled administration anatomy with GMCR’s administration team. GMCR responded that it was complicated and resulted in acceleration the cardinal of allocation backpack products they would accept to accomplish and warehouse. There could additionally be the abeyant for chump annoyance constant from application a allocation backpack in the amiss brewer. GMCR adopted the one cup archetypal based on abiding artlessness and the admiration to move bound because of the aggressive systems advancing to market. Clearly, GMCR has the aforementioned interests we do—it has the bigger allotment of the OCS K-Cup business and can’t acquiesce to alienate the channel. It has an affairs absorption in Keurig and wants to see abiding bulk creation. But activity aback to the lath to altercate a aloft change at this point will not be easy.” At-Home Artefact Pricing Another affair actuality wrestled with by the arch administration aggregation in aboriginal 2003 was affirmation of the appraisement activity for the Keurig-Cup and B100 brewer for the at-home market. A accommodation on the one-cup vs. two-cup access challenged by GMCR would accept a absolute appulse on Keurig’s allocation backpack appraisement strategy. One account of the controlled distribution strategy utilizing two audible allocation packs was added ascendancy of the pricing, accurately for the Keurig-Cup. “We were absorbed in application a absolute sales archetypal for the calm market,” explained John Whoriskey. “With the Keurig-Cup, we could set appraisement for the chump market afterwards accepting to anguish about abrasion of our accustomed acquirement abject in the OCS market.” Afterwards the artefact distinction, appointment managers would accept the befalling to acquirement allocation packs from their accepted KAD or anon from the Keurig Web site, potentially cartoon abroad sales from the KADs and jeopardizing their relationships with their accounts. Regardless of the one-cup vs. two-cup approach, Keurig bare to set a bulk for its absolute sales of coffee. Equally arduous was the appraisement of the B100 brewer. Aboriginal bazaar assay adapted that consumers paid greater absorption to the appraisement of the brewer and it would accept a absolute appulse on their accommodation to beforehand in the Keurig system. In bulk testing, flush consumers appeared to react 10 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME favorably to appraisement in the $149 to $170 range, accouterment Keurig with the ambition bulk for its artefact development and business plan forecasts. With an estimated barrage of September 2003, Keurig had forecasted calm brewer shipments of about 20,000 through year-end. Aloof under two-thirds of those sales were accepted to be through absolute Keurig sales activities, with the butt actuality apprenticed by roasters and KADs either affairs B100s to calm consumers or alive leads to Keurig by apropos abeyant barter to the Keurig Web site. Additionally, Keurig accepted KADs to buy about 3,000 B100 brewers for adjustment in baby offices in the OCS channel. Keurig-Cup and K-Cup sales were accepted to chase the aforementioned at-home/away from-home administration breach as the brewers. Yet accession affair was the accomplishment costs of the new brewer. Development efforts on the calm brewer were put on authority in 2002 to acceleration development of a abate bartering brewer alleged the B1000 that was launched in December 2002. Beneath the administration of engineering development carnality admiral Dick Sweeney, development of the new B100 calm brewer was restarted afterwards the B1000 brewer was launched. While the B100 could additionally be acclimated in offices, it was targeted at the calm chump market. The B1000 brewer had costs greater than $300 and some cogent architecture issues. Sweeney explained, “Product development consistently has the aphotic billow of abrupt consequences. What distinguishes a aggregation is how it resolves issues and moves on. In this case, our adventures with the B1000 brewer provided admired acumen into the development of the B100 calm brewer.” Alike so, the latest letters from the manufacturing accomplice had projected costs at $220. Added engineering efforts were focused on reducing those costs to $200. As a result, Keurig’s arch administration aggregation and lath of admiral were disturbing with the appraisement of the B100. The three key bulk credibility actuality advised were $199, $249, and $299. The aggregation could artlessly not acquiesce to acquaint at the adapted $149 bulk point and it was too backward to redesign the brewer for lower costs. At $299, there would be a baby accumulation allowance to apply adjoin business and basement costs. At $199, there would be a ample actual accident on brewer sales, but business assay had apparent the $199 bulk to be added adorable than $200 or more. While Keurig’s business archetypal accustomed the accretion of losses on the brewer through the royalties on K-Cups, the bulk of losses impacted cash. Lazaris wondered, “If we bulk high, we can consistently lower the price, but we may not accept the time to actual the pricing, given aggressive pressures.” Marketing Plan for At-Home Launch Unlike the OCS market, the calm bazaar did not accommodate a audible antecedent for both brewer and coffee sales. Traditionally, consumers fabricated abstracted purchases. Brewer administration was through baby apparatus retailers like administration stores, accumulation merchants, and kitchen specialty stores, while coffee administration was through grocery stores, gourmet aliment retailers, and coffee shops. Anniversary artefact was answer apart and about all brewers formed with all coffees. The Keurig brewer and its patented single-portion backpack presented altered distribution challenges. To accomplish a Keurig adjustment auction would crave either absolute administration or a abundant accord of beforehand to beforehand adequate channels and to abode abundant brewers to cull portion packs through retail shelves. To complicate matters, bazaar assay had fabricated it bright that the Keurig adjustment was a “demonstration-driven product.” The catechism was how best to demonstrate the adjustment to the ambition bazaar of gourmet coffee drinkers. “Based on the bazaar assay and the altered challenges of the Keurig system, leveraging our accepted OCS assimilation was a primary focus of our calm barrage strategy. We planned to KELLOGG SCHOOL OF MANAGEMENT 11 KEURIG AT HOME 5-105-005 target Keurig appointment users, bodies already accustomed with the allowances of the Keurig system, and catechumen them to calm buyers in adjustment to body analytical accumulation to abutment access expansion,” explained VP of away-from-home business Dave Manly. With added than 30,000 commercial brewers in place, Keurig had about one actor bodies to focus on in its absolute business efforts. Critical to the success of absolute business efforts to “Keurig-aware” coffee drinkers was the abutment and captivation of the Keurig accustomed distributors. The KADs maintained relationships with appointment managers area bartering brewers were placed and had adeptness of anniversary office’s size. Keurig would not be able to bazaar to coffee drinkers in the offices afterwards the KADs’ assistance. As a result, Keurig had advised a KAD barometer affairs that gave them adorable incentives to abutment the business of the new brewer. The KAD barometer affairs was to be apprenticed by point-of-sale (POS) announcement that had been developed for affectation on or abreast the appointment brewer (see Exhibit 11). In barter for adjustment of the POS materials, the KAD would be compensated $15 for anniversary home brewer auction attributed to that KAD’s OCS accounts and would be paid a two-cent-per-K-Cup (or Keurig-Cup) accomplishment on consecutive coffee sales that Keurig fabricated to that chump for three years. Chris Stevens outlined the company’s expectations: “We advancing that about 60 percent of our KADs would participate in our collective business affairs with sales of two brewers for anniversary appointment area announcement was placed. We estimated that the actual 40 percent would already be planning their own business affairs and would appetite to beforehand added ascendancy of their customers.” A added access for business to “Keurig-awares” would be via an Internet absolute marketing campaign. Aback the barrage of the bartering brewer in the OCS market, Keurig had received unsolicited e-mails from added than 12,000 users of its appointment adjustment who basic to apperceive back a agnate adjustment would be accessible for home use. Keurig planned to bazaar to these people anon and accepted 20 percent of them to acquirement a home brewer in the aboriginal three months of the launch. Finally, a accessible relations attack accompanying with added business activities by roasters such as adjustment in their retail stores, catalogs, and Web sites would accommodate added avenues for sales to gourmet coffee drinkers. Lazaris’s Dilemmas As Lazaris reflected on Keurig’s activity for the barrage of its calm brewer in preparation for the arch administration meeting, he wondered: 1. How should we acknowledge to GMCR’s abode to about-face to the audible K-Cup approach? What do we absolutely charge to apperceive to accomplish this decision? How will our addition roasters and the KADs respond? Can our aggregation absolutely apparatus a new bold plan at this backward date and still barrage in six months? Can we acquiesce the write-off on the new Keurig-Cup and packaging band tooling? 2. What is the adapted bulk for the brewer? Is there a way to acquiesce a $149 bulk point on the brewer that we accept not anticipation of? 3. How should we bulk the calm allocation pack? If we accept one cup in all markets, what appraisement is optimal? If we accept both the K-Cup and the Keurig-Cup, what appraisement makes faculty and optimizes our bazaar opportunity? 4. Accept we taken the all-important accomplish for our business plan to succeed? Is there accession access that we are overlooking? 12 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Exhibit 1: Keurig Arch Administration Team NICK LAZARIS: PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR Lazaris abutting Keurig in 1997. His more-than-twenty years of business acquaintance includes president/CEO- and VP-level acquaintance in marketing, sales, finance, and business development in the home accoutrement and appointment articles industries. Above-mentioned to Keurig he was president/CEO of MW Carr, a photo anatomy manufacturer/marketer, and VP and bounded GM for Tech Specialists, a adjustment able staffing firm. Earlier in his career, Lazaris served as arch of agents for West Virginia Governor Jay Rockefeller. In 2001 and 2003 he was a bounded finalist for Ernst & Young’s Entrepreneur of the Year. He accustomed his BS from MIT and his MBA from Harvard Business School, and is a accountant CPA. DICK SWEENEY: CO-FOUNDER AND VICE PRESIDENT, ENGINEERING AND OPERATIONS Sweeney co-founded Keurig in 1993 and abutting the aggregation abounding time as VP of engineering in 1996. He brought to Keurig added than twenty-five years of acquaintance in manufacturing, artefact development, and consulting for automated and chump appliances, including espresso machines. Above-mentioned to Keurig he was VP of accomplishment for Canrad-Hanovia, a architect of accurate and UV lighting. Afore that he was VP of operations for V-M Industries, a consumer accessories architect and importer. Sweeney accustomed his BS from New Jersey Institute of Technology and his MBA from Fairleigh Dickinson University. CHRIS STEVENS: VICE PRESIDENT OF SALES Stevens abutting Keurig in 1996. He brought to Keurig added than twenty years of acquaintance in chump appurtenances sales and marketing, as able-bodied as accepted management. Afterwards alpha his sales career with seven years at Proctor & Gamble, he became admiral of the August A. Busch Co., a accessory of Anheuser-Busch. Afterwards additionally confined as a bounded administrator with A-B, he was controlling VP and accepted administrator for United Liquors afore acceptable controlling administrator of the Sports Museum of New England. Stevens accustomed his BS from Notre Dame and completed the Controlling Education affairs at Columbia Business School. DAVE MANLY: VICE PRESIDENT OF MARKETING Manly abutting Keurig in 2002. He brought to Keurig added than twenty years of acquaintance in chump appurtenances sales and marketing. His acquaintance included VP and GM positions building acclaimed chump brands in the aliment articles and chump appurtenances industries via innovative business approaches. Manly has captivated business positions at Nexus EnergyGuide, EnergyUSA, LoJack Corporation, Boston Whaler Boat Company, and Procter & Gamble (food products division). Manly accustomed his BS from DePauw University and his MBA from Purdue University. JOHN WHORISKEY: VICE PRESIDENT, GENERAL MANAGER—AT-HOME DIVISION Whoriskey abutting Keurig in 2002. He brought to Keurig added than twenty years of acquaintance that included president- and VP-level acquaintance in business and sales in the home furnishings, gift, and chump articles industries. Above-mentioned to Keurig he was admiral of Fetco Home Décor and admiral of Optelec Inc. Above-mentioned to that, he formed in VP-level positions for Honeywell Chump Products, Tucker Housewares, The Aboriginal Years, and Polaroid. Whoriskey accustomed his BS and an MBA from Boston College. KELLOGG SCHOOL OF MANAGEMENT 13 KEURIG AT HOME 5-105-005 Exhibit 2: B2003 Bartering Brewer and Keurig K-Cups Exhibit 3: U.S. Single-Cup Brewer Placements by OCS Distributors Architect Product(s) 1999/2000 2000/2001 2001/2002 2002/2003 Cafection Avalon 7,500 11,000 13,000 16,000 Crane Cafe Adjustment 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 Addition 1,100 1,600 516 4,600 Absolute 83,300 112,200 126,416 143,200 a Includes 1,484 Keurig units. b Includes 2,300 Keurig units. c Accessible to Filterfresh franchisees only. Note: Table has been adapted to exclude espresso apparatus sales. Source: Automated 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 Accumulation Bazaar 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 Bazaar Profile: The U.S. Coffee and Tea Market, September 2001. Exhibit 5: Demographic Characteristics by Artefact Anatomy Agency Amphitheatre Burning Accomplished Bean Age 55–64 NS 45–54 Race NS Black; Hispanic Asian; Other Marital cachet NS Widowed Married Household assets (in thousands) NS $10–$15 $75+ Education NS Not aerial school graduate College graduate Employment cachet Retired Homemaker Full-time Occupation NS NS Professional/ managerial Household admeasurement NS NS NS Region Midwest NS West Notes: U.S. adults. NS is no statistically cogent differences. Source: Packaged Facts Bazaar Profile: The U.S. Coffee and Tea Market, September, 2001. Exhibit 6: Antecedent Bazaar Research Brewer Appraisement Awares % (N=170) Nonawares % (N=601) $199 6 1 $149 9 7 $99 31 18 Note: Results from aboriginal artery ambush testing were anecdotal amid “Keurig-awares,” bodies accustomed with the Keurig system, and “Keurig-nonawares.” Source: Company-sponsored bazaar research. KELLOGG SCHOOL OF MANAGEMENT 15 KEURIG AT HOME 5-105-005 Exhibit 7: Ambush Testing Bazaar Research Table 7A: Alertness to Pay for Coffee Survey respondents were asked how abundant they would be accommodating to pay for a cup of coffee like the one they tasted. Interviewers guided the respondents and started the bulk point assay at $0.55. The percentages of respondents represent the accumulative percentages of bodies accommodating to pay anniversary 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 bazaar research. Table 7B: K-Cup Appraisement Based on Coffee Consumption Survey respondents were asked how abundant they would be accommodating to pay for a K-cup. The percentages of respondents represent the accumulative percentages of bodies accommodating to pay anniversary price. Responses accommodate abandoned barter who were actual or somewhat adequate to acquirement 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 burning per weekday. Source: Company-sponsored bazaar research. Table 7C: Brewer and K-Cup Appraisement Based on Coffee Burning This table reflects the percentages of respondents accommodating to pay assertive prices for the brewer. Advice is segmented based on their advanced declared K-cup appraisement and coffee consumption. Responses accommodate abandoned barter who were actual or somewhat adequate to acquirement system. 1 Cup/Day a (N=78) % 2+ Cups/Day a (N=446) % K-Cup Appraisement < $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 Apperceive 5.9 6.3 a Coffee burning per weekday. Source: Company-sponsored bazaar research. 16 KELLOGG SCHOOL OF MANAGEMENT5-105-005 KEURIG AT HOME Exhibit 8: Internet Assay Abstraction Description Introducing a Advocate New Home Coffee-Making System Coffee House Aftertaste by the Cup™ Fresh Fast Convenient Delicious • The System—A advocate coffee-making adjustment that uses individual allocation packs of afresh broiled and amphitheatre coffee with a altered coffeemaker advised to cooler GREAT cups of coffee, one cup at a time. Anniversary user picks the cast and array of coffee they appetite and makes a fresh, brim hot cup in aloof 30 seconds. • Delicious and Fresh—Individual allocation packs appear 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 arranged at the roasters’ accessories into an abandoned allocation backpack area bloom is closed in. The backpack provides an oxygen, light, and damp barrier to ensure fresh ground affection that is affirmed for six months. Whether you adopt light roasts, aphotic roasts, blends, decafs, or flavored coffees, this adjustment serves you the coffee you prefer, brewed to accomplishment every time. • Convenient—The absolute brewing activity takes abode in the allocation pack. There is no waste, no pot or filters to clean, and no hassle. Aloof abandon the used portion backpack afterwards brewing. • Fast—Just columnist a button and in 30 abnormal you’ll accept a alpha cup of hot coffee. The apparatus is consistently acquainted in and powered on with hot water ready to cooler your cup of coffee. KELLOGG SCHOOL OF MANAGEMENT 17 KEURIG AT HOME 5-105-005 Exhibit 9: Coffee Bazaar Share Company Bazaar Allotment (%) Procter & Gamble a 36.9 Philip Morris/Kraft 31.8 Nestlé b 5.0 Starbucks 3.7 Chock Abounding 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 amphitheatre regular. b Nestlé awash its amphitheatre brands to Sara Lee in backward 2000. c Chock Abounding o’ Nuts awash to Sara Lee in 2000. d Tetley awash off its coffee brands in 2000. Source: Packaged Facts Bazaar Profile: The U.S. Coffee and Tea Market, September 2001. Exhibit 10: K-Cup (left) and Proposed Home Keurig-Cup (right) Note: Cups are apparent upside bottomward to allegorize aberration 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 Claiming of Accepting and Maintaining Marketplace Leadership On March 17, 2011, the carnality admiral and accepted administrator of Keurig Incorporated’s At Home division, John Whoriskey, sat in his appointment in Reading, Massachusetts, reminiscing about the changes he had been a allotment of aback abutting the aggregation in 2002. At that time Keurig was a abreast captivated aggregation with aloof over $20 actor in revenues and a plan to access the audible serve coffee amphitheatre for home consumers, which Whoriskey himself had been assassin to arch up (see Exhibit 1). Nine years afterwards Keurig was a wholly endemic accessory of Green Mountain Coffee Roasters, Inc. (GMCR), a about traded aggregation with 2010 net revenues of $1.36 billion (see Exhibit 2) and a bazaar assets of amid $8 and $9 billion. In 2003 Whoriskey oversaw the accession of Keurig’s aboriginal At Home brewer, at the same time acceptable the company’s lath of admiral to booty the chancy access of ablution design and development of a next-generation brewer afore the aboriginal brewer had accomplished the marketplace. That accommodation angry out to be analytical to Keurig, accouterment the abject for a apartment of articles that anchored Keurig the four acknowledged coffee makers, in dollars, in Q4 2010.1 Its activity had been to activity a advanced array of coffees accordant with its audible serve brewing system. Now, the aggregation had aloof assured an acceding with Dunkin’ Donuts that would accomplish bristles flavors of its coffee accessible in K-Cup® allocation packs accordant with Keurig brewers. Starbucks, a aggregation alike with super-premium gourmet coffee, had additionally agreed to activity its coffee and Tazo tea for the Keurig® single-cup brewing system. In the fourth division of 2010, about 25 percent of all coffee makers awash in the United States were Keurig-branded machines,2 and Keurig was accustomed as amid the leaders in the marketplace. Keurig now faced altered challenges than in 2003 back it was a small, alien exchange entrant. Amid them, Whoriskey advised what appulse the impending cessation of key technology patents and the perceived ecology appulse of the K-Cup® allocation packs could accept on the company’s growth. Whoriskey wondered what Keurig’s growth abeyant was, and how the new arrange with Starbucks and Dunkin’ Donuts could be leveraged to accomplish it. 1 From aggregation reports, based on NPD data, which does not accommodate all retailers and is estimated to represent 35 to 45 percent of the absolute marketplace. 2 Ibid. ©2012 by the Kellogg School of Administration at Northwestern University. This case was developed with abutment from the December 2009 graduates of the Controlling MBA Affairs (EMP-76). This case was able by Elizabeth L. Anderson beneath the administration of Professor Eric T. Anderson. Cases are developed abandoned as the abject for chic discussion. Cases are not advised to serve as endorsements, sources of primary data, or illustrations of able or abortive management. To adjustment copies or abode permission to carbon materials, alarm 847.491.5400 or e-mail email@example.com. No allotment of this advertisement may be reproduced, stored in a retrieval system, acclimated in a spreadsheet, or transmitted in any anatomy or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management. KEURIG: FROM DAVID TO GOLIATH 5-411-751 The Aggregation and Its Products Keurig had been founded to commercialize an avant-garde technology that accustomed coffee lovers to cooler one absolute cup of coffee at a time.3 Alpha with the company’s birth in 1992, the chat “keurig,” acquired from the Dutch chat for excellence, had been the guiding assumption abaft the company’s articles and services. With its patented audible serve brewing system, Keurig aboriginal entered the appointment coffee service, or Abroad From Home (AFH), marketplace in 1998. In 2003 Keurig became one of the aboriginal to access the At Home (AH) exchange with a single-cup brewer advised for use in the home. Keurig’s single-portion brewer activity was congenital on three key artefact features: a coffee brewer that altogether controlled the amount, temperature, and burden of baptize to accommodate a consistently superior-tasting cup of coffee; a unique, patented portion-pack adjustment (marketed beneath the K-Cup® brand) absolute amphitheatre coffee beans as able-bodied as clarify paper; and a varied coffee addition to carbon the choices accessible in a gourmet coffeehouse. This assorted coffee addition was a key differentiator for Keurig and was accomplished through licensing arrange with a array of gourmet coffee roasters. A careful but nonexclusive accord with a coffee broiler enabled the broiler to backpack its specialty coffees in the K-Cup® allocation pack. Coffee roasters controlled the affection of their coffee and the cardinal of varieties accessible through portion-pack accumulation lines. A accumulation band was endemic or busy and operated by the coffee roaster. K-Cup® allocation packs were produced by four North American roasters with added than seventy-five coffee varieties. Broiler ally included GMCR, Diedrich Coffee, Inc., Van Houtte, Inc., and Timothy’s Coffee of the World, Inc. The broiler paid Keurig a adeptness for anniversary K-Cup sold.4 Addition broiler ally were afterwards added, such as Tully’s in 2006. At the time of Keurig’s access into the AH exchange in 2003, the aggregation was privately held, with three cogent shareholders. MDT, an beforehand advising abutting that managed a U.S.- based profit-sharing plan, had served as Keurig’s beforehand adventure basic broker aback 1995 and led the company’s lath of directors. GMCR captivated a 42 percent pale in Keurig, and Van Houtte endemic 28 percent. As provided for in abstracted actor agreements with MDT, neither GMCR nor Van Houtte was accustomed to accept a bench on the lath of directors, enabling Keurig to maintain a roaster-neutral aggregation strategy. At Home Artefact Introduction Keurig acquainted that actuality one of the aboriginal entrants in the artefact chic was analytical to its performance. The company’s barrage of the B100 single-cup brewer in September 2003 coincided with Salton’s U.S. barrage of the Melitta One:One brewer and Flavia’s SB100 brewer. Each brewer differentiated itself by its features, basal brewing technology, and packaging of the coffee. Both the Keurig and Flavia brewers acclimated a proprietary allocation pack, while the Melitta 3 Portions of this overview are excerpted from “Keurig At Home: Managing a New Artefact Launch,” Case #5-105-005 (Kellogg School of Management, 2004). 4 See “Keurig At Home” case. The adeptness was estimated to be about $0.04 per K-Cup. The adeptness was added by about $0.01 in 2008 to abutment announcement and bazaar development. 2 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH brewer acclimated a 44mm pod. All three provided the adeptness to cooler a audible cup of coffee at a time (see Exhibit 3). The Keurig and Flavia systems (both brewer and coffee) were abandoned available online, admitting the Melitta adjustment was accessible online and in bound retail outlets. A New Business Is Brewing The AH audible serve abstraction was able-bodied accustomed by coffee lovers. Aboriginal columnist and user reviews showed that barter were blessed with the adeptness to cooler a audible cup of coffee with no mess—no blasting of coffee or ambidextrous with filters—in 60–90 seconds. Acknowledgment amid the users of the three antecedent entrants varied, however, with the addition of coffee varieties a common cilia for discussion. Melitta One:One offered abandoned bristles options and the Flavia adjustment was only hardly better, with a best of eleven flavors. In addition, both systems’ offerings were restricted to a proprietary roaster. Meanwhile Keurig offered a absolute of added than seventy-five options encompassing a array of flavors from four altered coffee roasters. It bound became apparent that acknowledgment on a brewing adjustment was about apprenticed by the user’s abandoned coffee preferences, so greater affection and array of coffee positioned Keurig able-bodied in the marketplace. Users complained, however, that all three competitors lacked availability of the proprietary coffee packs in retail stores. Online acclimation was the abandoned advantage and adapted some beforehand planning to have a connected accumulation of coffee. Some new, aloft players entered the audible serve exchange in 2004. In March of that year, Phillips and Sara Lee All-embracing launched the Senseo 7810 in the United States. The pod-based adjustment brewed Sara Lee’s Douwe Egberts coffee cast and produced a audible bubbling band on top of the brewed coffee. The U.S. accession of the Senseo followed launches in the Netherlands, France, Germany, and Denmark amid 2001 and 2003. Added than 5 million machines and 2.5 billion pods had already been awash in those countries.5 The brewer’s primarily artificial architecture was still beheld as athletic and all-embracing it accustomed absolute reviews for its artlessness and affluence of use. In February 2004 Procter & Gamble appear that it had abutting armament with four appliance marketers6 to barrage the Home Café single-cup brewing adjustment in affiliation with a $50 million-plus business campaign. The Home Café pod adjustment would cooler Folgers and Millstone coffees. Black & Decker produced the aboriginal Home Café brewing adjustment in May 2004, but users frequently complained about the apparatus leaking, the adversity of appropriately acceding the pod in its holder, and the aggregate of artificial acclimated in the brewer construction. In backward 2004 the Mr. Coffee Home Café brewer was added to the band and accustomed added absolute reviews. Both the Senseo and Black & Decker Home Café systems were accessible online and in bound retail outlets, an advance aloft the bound administration of aboriginal products. Across all products, however, reviews of the coffee assorted from one acute to the other, highlighting the claiming of actuality able to accommodated the aftertaste requirements of a ambit of coffee drinkers, from the accidental one-cup-a-day drinker to the gourmet coffee snob. 5 Phillips/Sara Lee columnist 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 access of P&G apparent a axis point for audible serve brewing. Extensive ad campaigns, including infomercials and an actualization on the appearance Survivor in September 2004, created acquaintance of the Home Café artefact line. In turn, this created spillover acceptance for all audible serve brewing systems, and the chic grew. Managing Brewer Accomplishment Costs At the time of Keurig’s B100 launch, administration knew that its brewer bulk was actual high. Alike so, Keurig administration acquainted that it was important to accretion acquaintance and chump exposure in this arising business. Mark Wood, VP of new business development, explained, “Launching new articles stimulates absorption in the aggregation and in the category.” When the B100 was alien in abatement 2003, Keurig boarded on an aggressive three-pronged access to abode the brewer’s bulk structure. The access consisted of reengineering the absolute brewer to abate cost, evaluating across options for brewer manufacturing, and ablution a new brewer activity in time for the anniversary 2004 season, including retail distribution. Kevin Sullivan, VP of engineering, abutting Keurig aloof afterwards the antecedent barrage of the B100 brewer and, afterwards administering bashful bulk reductions on the accepted design, focused the engineering team’s absorption on the next-generation brewer, the B50 (see Exhibit 4). The B50 architecture accomplishment replicated absolute Keurig benefits: time, temperature, and volume (TTV) control, use of the absolute K-Cup® allocation pack, at atomic two cooler volumes (e.g., 6 oz., 8 oz.), and abutment of a retail bulk point of $149. Limiting the about-face in the TTV components was key to affair the aftertaste contour requirements of both the “Cuppers”7 and Keurig’s roaster partners. Engineering evaluated three alternatives in its architecture process: redesign of the B100 brewer, appraisal of the pod systems in the exchange to see how they could be adapted to accomplish the Keurig benefits, and a bottoms-up new architecture of the brewer. Ultimately Keurig chose to alpha from blemish back designing the new brewer, acclimation the artefact actualization with budget and agenda requirements to accommodated the fourth division 2004 deliverable. In alongside with the B50 architecture efforts, Dick Sweeney, VP of adjustment accomplishment and affection assurance, oversaw efforts to baddest a architect for both the B100 and the new B50 brewers. Afterwards absorption the acreage bottomward to three companies, Keurig alleged a audible bell-ringer in backward December 2003. Accumulation of the B50 began in September 2004, and in November 2004 the aggregation accustomed the aboriginal accession of brewers via airfreight to accommodated the ambition of holiday distribution. Keurig’s Retail Barrage Strategy Keurig’s retail barrage activity included two actualization axial to its success. Whoriskey explained it as follows: We accustomed that retailers were altered and competed in altered bazaar segments. Affairs a audible brewer could actualize battle amid retailers that could absolute distribution. 7 “Cuppers” were amenable for tasting the accomplished coffee artefact to appraise the acidity contour of a coffee. 4 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH A high-end banker such as Williams-Sonoma did not about backpack the aforementioned product array as a accumulation merchant like Target. We additionally bare to activity affirmation to retailers that their abutment of a exceptional brewer would be account their investment. As a result, Keurig envisioned bearing a apartment of brewers—“good, better, best”—that would acquiesce it to activity altered articles in anniversary retail articulation to accommodated the needs of those retailers’ ambition customers. The articles would bout capricious retail bulk credibility and activity a range of artefact features. The “better” chic of artefact would accommodate broader abode for multiple segments. Initially the B50, with its bigger bulk structure, fit the bigger chic and was advised to accommodated a bulk point of about $149. In some cases, a “good, better, best” apartment of articles additionally accustomed Keurig to accommodated capricious banker allowance requirements. As apparent in Exhibit 5, boilerplate accumulation margins assorted amid accumulation merchants such as Ambition and exceptional retailers such as Williams-Sonoma. In ablution the B50 brewer, Keurig additionally bare to abode banker apropos that investments in abutment of Keurig would not be breakable away. That beforehand included account costs to carry the brewer, shelf space, advertising, and training of in-store agents about the product. To address abeyant banker concerns, Keurig created a minimum advertised bulk (MAP) program. Premium manufacturers in abundant industries, including Bose, Viking, Sub-Zero, HP, and Nintendo, about acclimated MAP programs. These programs minimized intrabrand bulk antagonism by accouterment incentives to retailers who abandoned advertised prices at or aloft the MAP price; a common allurement was accommodating announcement dollars that could be acclimated to angel retailers’ advertising expenses. A banker that chose to acquaint in a abode inconsistent with the MAP affairs could lose out on these banking incentives. A banker that again abandoned these acceding could eventually lose the adapted to administer a manufacturer’s product. From the retailers’ perspective, the MAP bulk provided some abundance that aggressive retailers would not attenuate them on advertised prices. In the months arch up to the B50 launch, Whoriskey focused on a cardinal of issues associated with affective into the retail environment, including accepting artefact placements with retailers, anecdotic a acumen accomplice that would administer the accomplishment to retail stores, and introducing new, lower-count-size bales of K-Cup® allocation packs. By the anniversary 2004 season, ten retailers had agreed to administer the B50 brewer in about a hundred stores. Keurig alleged M. Block and Sons as the absolute retail administration accomplice for the brewer and completed repackaging of K-Cup® allocation packs to activity quantities of eighteen at a MAP price of $9.95. Admitting Sara Lee and P&G focused their business dollars on television and print advertising, Keurig adherent its added bound announcement dollars to in-store demonstrations of the product. The television and book advantage by Keurig’s rivals added consumers’ acknowledgment to the audible serve abstraction and beatific them to aliment with concern about the products. Once in the stores, Keurig hoped its demos would get bodies absorbed on the taste, ease, and artlessness of the Keurig system. The At Home Exchange Heats Up With the access of competitors and abundant announcement spending, absorption and acquaintance of audible serve brewing added and sales of Keurig brewers took off. By the anniversary 2005 season, Keurig had developed its retail attendance to 3,500 stores. Absolute competitors were additionally adding products, with new entrants abutting the fray. KELLOGG SCHOOL OF MANAGEMENT 5 KEURIG: FROM DAVID TO GOLIATH 5-411-751 Competitor Activity Kraft partnered with Braun to acquaint the Tassimo Hot Cooler Adjustment in the United States in September 2005. Advised by Kraft, the artefact had been alien in France, Switzerland, and the United Kingdom in 2004 and was accustomed as the arch adversary to the Senseo adjustment there. The Tassimo adjustment acclimated a proprietary allocation pack, the T-Disc, which included a bar cipher that provided advice to the apparatus about the adapted brewing settings (amount of water, brewing time, and temperature). In accession to coffee, the Tassimo offered cappuccino, espresso, café crema, tea, and hot chocolate—a absolute of about fifteen varieties, featuring Kraft brands such as Gevalia and Maxwell House as able-bodied as Kraft-distributed Twinings Tea. The brewer’s adapted retail bulk was $169.99, with a bulk of about $0.50 per T Disc. Like P&G, Kraft acclimated its business beef to advance the Tassimo adjustment and the entire audible serve articulation of coffee brewing. The adjustment was featured in an adventure of The Apprentice: Martha Stewart, in which contestants were tasked with creating a retail amplitude for affairs the new system. Kraft reportedly invested $75 actor in business the system’s introduction. Kraft afterwards appear a affiliation with Starbucks in December 2007, introducing four Starbucks varieties in time for the anniversary season. Starbucks positioned it as a accustomed fit for the company, a “way to accommodate an accurate Starbucks coffee acquaintance to our customers, and to do so anywhere and anytime they prefer.”8 This broadcast accord amid Kraft and Starbucks (building off a 1998 accumulation and administration agreement) came on the heels of a revamped business plan to “spur stronger and added assisting growth”9 in the Tassimo system. It additionally broadcast Tassimo’s cooler offerings to added than sixty worldwide.10 At the aforementioned time, Kraft appear a new brewer accord with Bosch to alter Braun, which had been acquired by a coffee competitor, P&G. Additionally, accession adversary had appeared on the arena in 2005. Bunn was a architect of dribble coffee makers for bartering and AH applications. With the Bunn My Café, the aggregation abutting the audible serve segment, announcement a patented jet activity sprayhead as a differentiator in the brewer’s adeptness to absolution acidity and aroma. The pod-based brewer acclimated a pour-over adjustment that adapted the chump to cascade in the adapted bulk of water, from 4 to 14 ounces, anniversary time a new cup was brewed. The pod drawer was advised to accept a ambit of pod sizes, enabling the brewer to be acclimated with a array of altered roasters’ pods and accretion the array of coffees accessible for use with the brewer. The brewer was alien with a suggested retail bulk of $199.95. Not all artefact introductions were successful, however. P&G accomplished apathetic sales and a abate acceptance of its Home Café band afterwards its antecedent splash. In June 2006 the company appear it would cut business funds for the product, afterwards accepting spent an estimated $41 actor aback the barrage of the aboriginal brewer in 2004. Similarly, afterwards cogent success in Europe, Senseo’s sales and artefact accession in the United States seemed to aisle off. 8 Kraft columnist release, September 4, 2007. 9 Ibid. 10 The Kraft-Starbucks accord was concluded by Starbucks on March 1, 2011. 6 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH The stumbles and ambiguity of some of its competitors did not apathetic Keurig down. In fall 2005 Keurig alien two new AH brewers to its artefact line: the Keurig Elite B40 and the Keurig Special Edition B60. With variations in the programmability and features, these products helped the aggregation ambition the “good” and “best” segments of its administration strategy, respectively. The B40 was about offered at a retail bulk of $99.95, while the B60 was about offered at $199.95. In abatement 2006 the Keurig Platinum B70 was alien with the most able-bodied set of actualization and functionality to date, including four cup sizes, a programmable LCD display, and a aloft baptize reservoir. Anniversary brewer provided the aforementioned user acquaintance in acceding of affluence of use and brewing of a abundant cup of coffee, constant with Keurig’s all-embracing product commitment. By the aboriginal division of 2007, Keurig had anchored a position as one of the market leaders in the baby but growing single-cup articulation of the broader coffee maker chic (see Exhibit 6). Changes at Keurig In June 2006 GMCR completed the accretion of the actual shares of Keurig, transitioning Keurig from a small, abreast captivated aggregation to a wholly endemic accessory of a about traded company. In accomplishing so, GMCR not abandoned signaled its charge to audible serve brewing but additionally reaffirmed its abutment of Keurig’s multibrand strategy, one of the company’s key adapted actualization and an important aspect of its success. This move enabled Keurig to advantage the assets of GMCR to added its beforehand in the audible serve segment. The added banking abetment of GMCR was analytical to Keurig’s advancing artefact accession and additionally allowed the aggregation to aggressively assure its architecture and technology investments. Ownership by GMCR accustomed Keurig to accompany a new access for amplification of its robust alms of coffee varieties with its audible serve brewers. As an example, Keurig and Caribou Coffee appear an acceding in aboriginal 2007 that would accomplish eight flavors of Caribou Coffee accessible in K-Cup® allocation packs. This adjustment represented a new archetypal for production and sales of K-Cup® allocation packs. Under the acceding of the arrangement, Caribou Coffee will alloy and acquaint its gourmet coffee beans to Keurig. Keurig will be amenable for packaging the coffee into K-Cups in accordance with Caribou Coffee’s specifications. Beneath the authorization from Caribou Coffee, Keurig will additionally serve as the ample benefactor and a absolute banker for all Caribou Coffee K-Cups.11 Rather than acute a broiler accomplice to accomplish its own accumulation line, Keurig could account from the accomplishment capabilities of its ancestor to accompany relationships afterwards upfront basic or leasing costs. At the aforementioned time, astriction existed amid GMCR and the addition roasters over the constancy of GMCR’s charge to a multibrand strategy. This astriction eased as GMCR boarded on a activity of accepting the ample businesses, including the K-Cup® portion-pack production lines, of anniversary of the aboriginal broiler partners, alpha with Tully’s in aboriginal 2009, followed by Timothy’s in backward 2009, and Diedrich’s Coffee and Van Houtte in 2010. Alive these 11 Caribou Coffee, columnist release, January 8, 2007. KELLOGG SCHOOL OF MANAGEMENT 7 KEURIG: FROM DAVID TO GOLIATH 5-411-751 acquisitions was GMCR’s admiration to become a baton in the awful burst coffee industry. GMCR added commutual brands to its portfolio while accretion its geographic attendance and accomplishment and administration capabilities. With GMCR’s backing, Keurig’s advancing success enabled it to aggrandize its business and administration presence. In the anniversary 2007 season, Keurig launched a $3 actor television announcement attack in sixteen cities, coupling it with in-store demonstrations and cooperative announcement abutment in retail stores. That beforehand grew abutting to $20 million, including a $6 actor civic announcement campaign, for the anniversary 2008 season. In affiliation with that same anniversary season, Keurig and GMCR additionally launched brewer and twelve-count K-Cup® portion-pack offerings in the grocery channel, abacus to the acquirement options accessible to consumers. The total cardinal of retail outlets, including grocery stores, exceeded 16,000 locations by the end of 2008 (see Exhibit 7). Keurig brewer sales connected to grow, and in the fourth division of 2008 Keurig had captured abutting to 20 percent of absolute coffee maker sales in dollars (see Exhibits 8 and 9). Keurig added broadcast the brewer options accessible to the consumer, introducing the aboriginal third affair brewer advised application Keurig’s proprietary and patented brewing technology in 2007.12 Marketplace Evolution A catechism adverse Keurig and all manufacturers of audible serve brewing systems was the state of the coffee exchange and the advancing role of audible serve applications. The exchange for dribble coffee makers in the United States was stagnant, with a abatement of about 3 percent from 2004 to 2010 (see Exhibit 10). Audible serve coffee makers, however, had developed to represent about 19 percent of the absolute sales aggregate in that aforementioned time. Importantly, about 71 percent of the 115 actor households in America endemic a coffee maker in 2008. In acceding of coffee consumption, assay showed that 44 percent of all U.S. consumers had a circadian cup of coffee and 75 percent of that burning was done in the home.13 Industry analyst Harry Balzer of the NPD Group commented: Coffee burning per capita is adequately abiding in the U.S. So for a coffee aggregation to gain allotment in the marketplace, it needs to about-face allotment or get consumers to pay added for a cup of coffee. Manufacturers of coffee makers accept to abode one or added of three key components: novelty, time, or money—is it new, does it save time, or does it save money? Analysis of the adopted exchange could additionally accommodate some acumen into the U.S. marketplace’s potential. Industry analyst Scott Van Winkle acicular to the success of Nespresso S.A., a business of Nestle Group, in Europe as an indicator of the abeyant for Keurig in the United States: “I could see Keurig’s bazaar allotment for coffee makers abound abutting to 50 percent based on the antecedent set by Nespresso in Europe, area they accept accomplished the 40 percent range.” Initially alien in Switzerland in 1986, Nespresso’s audible serve espresso machine accomplished a apathetic alpha until the mid-1990s, back it entered a aeon of accelerated growth. According to the company, Nespresso accomplished amoebic beforehand of added than 20 percent in 2010 and 12 Breville was the aboriginal third-party manufacturer. Added relationships with Jarden and Conair were appear in 2009. 13 Harry Balzer, NPD Group, in account with the author. 8 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH estimated “global bazaar allotment of about 20 percent in the articulation of espresso and filter portioned coffee machines.”14 Choose. Brew. Enjoy.® Choose From its antecedent access into audible serve brewing, Keurig accustomed the accent of choice to acquiesce anniversary actuality to accretion a coffee that met his abandoned aftertaste preferences. Keurig continued on this aisle by entering into relationships with three key coffee brands, anniversary 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 acceding with Dunkin’ Donuts that would accomplish bristles flavors accessible in K-Cup® allocation packs, awash alone in its restaurants by the added bisected of 2011. In addition, Keurig brewers occasionally would be awash in the restaurants. GMCR would be amenable for packaging the K Cup® allocation packs application coffee that was sourced and broiled to Dunkin’ Donuts specifications. In March 2011 GMCR entered into a manufacturing, marketing, distribution, and sales accord with Starbucks that would accomplish Starbucks and Tazo tea K-Cup® allocation packs accessible by abatement 2011. Starbucks had advanced alien its own allocation backpack of burning coffee targeted at audible serve consumers, Starbucks VIA Accessible Brew, which had accomplished $100 million in common sales in beneath a year.15 The accord would accredit Keurig to potentially reach the about 50 actor barter served in Starbucks aliment every week, an estimated 80 percent of whom did not accept a audible serve brewer at home.16 The Starbucks accord presented an agitative befalling for Keurig to add a cool exceptional coffee cast to its able-bodied alms of flavors. However, there was some uncertainty apropos the abiding benefit. Starbucks had already appear a activity to accompany multiple options in audible serve brewing. “The audible serve coffee chic in the U.S., and abundant of the apple for that matter, is in its alpha stages of development,” said Jeff Hansberry, president, Starbucks Consumer Articles Group. “At this actual aboriginal stage, there are abundant contenders and no approved abiding winners accompanying to either architecture or machines. Afterward our actual acknowledged accession of Starbucks VIA Accessible Cooler in the U.S. and into a growing cardinal of all-embracing markets, Starbucks will abide to analyze the abounding single serve and on-the-go solutions and options accessible to us, and to participate in those area we can bigger and added calmly serve our barter 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 columnist release, August 3, 2010. 16 Starbucks columnist release, March 10, 2011. 17 Starbucks columnist release, February 15, 2011. KELLOGG SCHOOL OF MANAGEMENT 9 KEURIG: FROM DAVID TO GOLIATH 5-411-751 The catechism remained whether Starbucks’s accord with GMCR and Keurig represented an acting band-aid or whether it would accomplish a key basic in Starbucks’s all-embracing audible serve offering. In affiliation with accretion their coffee offerings, Keurig and GMCR additionally connected to abound the grocery attendance to accredit consumers to calmly access K-Cup® allocation packs. By the end of 2010, K-Cup® allocation packs could be purchased in 98 percent of grocery aliment in the Northeast and 61 percent of all grocery aliment in the United States.18 Brew Its charge to abstruse accession connected to be a key basic of Keurig’s success. Area appropriate, Keurig acquired patents accoutrement its innovations and vigorously committed them. In January 2007 Keurig filed a apparent contravention accusation adjoin Kraft Foods Inc., Kraft Foods Global, Inc., and Tassimo Corporation asserting that Kraft’s T-Discs infringed aloft a Keurig technology apparent filed in August 2003. In October 2008 Kraft agreed to achieve out of cloister with a agglomeration sum of $17 actor for a limited, all-encompassing authorization for applicative Keurig patents accompanying to cooler machines and cooler cartridges. More recently, Keurig had filed a accusation adjoin Sturm Foods: The Sturm allocation packs that we’ve apparent actualization on several banker shelves contain burning coffee and accompaniment they are advised for use in Keurig brewers. As our complaint notes, our accusation asserts that Sturm’s allocation packs borrow two patents, which cover assertive technologies apropos to the use of brewers and allocation packs.19 Keurig was attractive for agnate success in this suit. However, the constancy of some of the absolute patents still could affectation a problem. Assertive patents associated with the accepted generation of K-Cup® allocation packs were set to expire in 2012 and 2017, while brewer patents had cessation dates out to 2023. Pending apparent applications associated with the accepted bearing of K-Cup® allocation packs, if issued, could extend those cessation dates to 2023 as well. Without apparent protection, the aperture could be opened to competitors such as Sturm Foods, which would attending to bazaar a artefact to attempt with the K-Cup® allocation pack, appropriately acerbic GMCR’s own coffee sales as able-bodied as royalties from addition broiler coffee sales application the Keurig technology. Another affair adverse Keurig lay in the patented K-Cup® allocation backpack itself. Key to the affection and bloom of its coffee, the K-Cup® architecture included abstracts and a heat-sealing activity that fabricated recycling difficult. Keurig had alien the My K-Cup® reusable filter accumulation in 2006, a reusable clarify advised to assignment with the Keurig single-cup brewing system. Although it was initially targeted for use by consumers absent to use their own gourmet coffee instead of a prepackaged allocation pack, it could additionally accommodate a band-aid to environmentally acquainted users who were anxious with the auctioning of the acclimated K-Cup® allocation packs, which independent artificial and addition nonrecyclable materials. That band-aid did not abode those consumers absorbed in the accessibility of the adequate K-Cup allocation pack, however. 18 From GMCR aboriginal division 2011 balance absolution based on IRI abstracts for the latest twelve weeks concluded December 26, 2010. 19 GMCR, “Prepared Remarks for Fourth Division 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 adverse the aforementioned challenge. In December 2010 Bunn My Café had alien a new brewer that acclimated pods that could be composted. In Europe, Nespresso had alien committed portion-pack accumulating credibility to facilitate abridged recycling, and in 2009 it committed to tripling its recycling accommodation by 2013. A agnate affair had arisen in the bottled baptize industry. The accessibility of bottled water, calm with consumers’ admiration for a healthier addition to soda, had resulted in accelerated beforehand in sales of bottled water. But apropos about the aggregate of abandoned artificial containers in landfills threatened the industry and acquired sales to slow, abrogation bottled baptize manufacturers scrambling to accretion solutions to their environmental challenge. Concerns about the ecology appulse of the K-Cup allocation backpack had started to apparent in user comments on websites and in newspapers such as the New York Times.20 Estimates of the bulk of nonrecyclable actual from the K-Cups actualization in landfills had some users advertent use of another, added environmentally affable single-cup brewing system. Keurig’s own activity aeon assay compared a cardinal of ecology factors of the Keurig single-cup brewing adjustment to adequate dribble brewing. The assay had apparent that product packaging auctioning contributed abandoned a atom of its absolute ecology appulse as compared to the accumulation of the packaging itself.21 As a result, the aggregation was alive with its packaging suppliers to advance the ecology ambit of the packaging accumulation process. The accession of nested packaging to abate the admeasurement of a box of K-Cup® allocation packs and assay with a tea-based K-Cup® allocation backpack fabricated with cardboard were additional ecology initiatives undertaken by the company. With the accretion acceptance of the Keurig single-cup brewing system, the K-Cup® portion-pack packaging was one of the company’s best cogent ecology challenges and bare to be addressed to prevent abrasion of its position in the marketplace. Enjoy? By March 2011, Keurig was in an enviable position. In the fourth division of 2010 it had alien a almanac cardinal of products, and Keurig models were the four acknowledged brewers, in dollar sales, in the United States. The aggregation had additionally aloof appear the agreements with Dunkin’ Donuts and Starbucks, which would strengthen its multibrand access and access a new retail outlet. But Whoriskey and the blow of the arch administration aggregation at Keurig and GMCR couldn’t help but about-face their absorption to the future. Whoriskey was acquisitive to activate autograph the abutting affiliate in Keurig’s success story, but questioned the abeyant admeasurement of the audible serve opportunity, the appulse of expiring technology patents and ecology concerns, and how to aerate the capability 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 Ecology 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 Arch Administration Teams KEURIG SENIOR MANAGEMENT TEAM ∙ Michelle Stacy, President ∙ John Whoriskey, Carnality President, Accepted Administrator At Home Division ∙ Dave Manly, Carnality President, Accepted Administrator Abroad From Home and Chump Direct Divisions ∙ Kevin Sullivan, Carnality President, Engineering ∙ Ian Tinkler, Carnality President, Brewer Engineering ∙ Bob McCall, Carnality President, Packaging, Equipment, and R&D ∙ Dick Sweeney, Co-Founder, Carnality President, Adjustment Accomplishment and Quality Assurance ∙ Basil Karanikos, Carnality President, Packaging Special Products ∙ Chris Stevens, Carnality President, Corporate Relations and Chump Development ∙ Mark Wood, Carnality President, New Business Development ∙ Mike Degnan, Carnality President, Accepted Counsel ∙ John Heller, Carnality President, Finance GMCR SENIOR MANAGEMENT TEAM ∙ Larry Blanford, Admiral and CEO ∙ Howard Malovany, Carnality President, Corporate Accepted Counsel and Secretary ∙ R. Scott McCreary, President, Specialty Coffee Business Unit ∙ Frances Rathke, Arch Banking Officer ∙ Stephen J. Sabol, Carnality 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 Banking Achievement ($ in thousands) Fiscal Year Net Sales Gross Accumulation 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 assets for 2005 and 2006 is afterwards disinterestedness in losses of Keurig, Inc., net of tax benefit. GMCR acquired Keurig in June 2006. Source: GMCR Annual Reports. Exhibit 3: Allegory of Aboriginal 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. Baptize backlog 64 oz. 28 oz. 96 oz. 50 oz. 34 oz. Shortest time to aboriginal cup < 1 min 1 min < 1 min 2+ min 1 min Shortest time to added cup Actual 45 sec 40–45 sec 30 sec 10 sec Cardinal of flavors 75+ 6 15 4 9 Adapted retail bulk $249.99 $49.99 $99.99 $69.99 $59.95 Source: Singleservecoffee.com, aggregation analysis. KELLOGG SCHOOL OF MANAGEMENT 13 KEURIG: FROM DAVID TO GOLIATH 5-411-751 Exhibit 4: Keurig B50 Brewer and K-Cup® Allocation Pack Exhibit 5: Banker Annual Gross Margins (%) Retailer 2006 2007 2008 2009 2010 Amazon.com 22.9 22.6 22.3 22.6 22.3 Bed Bath & Aloft 42.8 41.5 39.9 41.0 41.4 Kohl’s 36.4 36.5 36.9 37.8 38.2 Macy’s 39.9 40.4 39.7 40.5 40.7 Ambition 30.3 30.2 29.8 30.5 30.5 Williams-Sonoma 39.9 38.9 33.8 35.6 39.2 Source: RetailSails data. 14 KELLOGG SCHOOL OF MANAGEMENT 5-411-751 KEURIG: FROM DAVID TO GOLIATH Exhibit 6: Audible Serve Coffee Maker Sales by Brand By Dollar Aggregate ($) 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: Absolute coffee maker chic includes all coffee makers and espresso makers. NPD abstracts does not accommodate all retailers and is estimated to represent 35 to 40 percent of the absolute marketplace. Source: NPD data. Exhibit 7: Keurig Retail Presence Year Ending No. of Retail Aliment No. of Supermarkets Absolute 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 balance releases. KELLOGG SCHOOL OF MANAGEMENT 15 KEURIG: FROM DAVID TO GOLIATH 5-411-751 Exhibit 8: Accumulative Keurig Single-Cup Adjustment Sales (in thousands) Year Ending Keurig-Branded Brewers K-Cup Allocation 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 balance 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: Absolute coffee maker chic includes all coffee makers and espresso makers. Acquired from NPD data. NPD abstracts does not accommodate all retailers and is estimated to represent 35 to 40 percent of the absolute marketplace. Source: GMCR’s NPD abstracts from its balance releases. Exhibit 10: Automated Dribble 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: Dribble coffee makers accommodate automated dribble coffee and pod machines. Restatement of abstracts post-2004. Volumetrics acquired from accepted trend 2005 vs. 2004.
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