Keurig Inc Case Analysis

Launching a new successful product in the market is one of the most important operations for any company because it requires a lot of time, money, planning of the top managers for providing a better quality of services to their customers. Keurig Inc. is one of those examples companies who are willing to take risks during presenting and providing a new product line in the market. Because of the successful launching of other models of single cup brewing system in the 1990´s, company gained a successful market growth in the market. And also due to the success of the other models in the market, Keurig have more courage to launch another model of single cup brewing system to their coffee customers.

Actually the competition among company competitors is tight not locally but also abroad, but market share of Keurig´s coffee brewing system still remains high. But unfortunately like other businesses that face problems along the way, Keurig Inc. is also facing various dilemmas regarding the resources needed to launch B100. Moreover, to fulfil the goal of the business, this is to introduce a controlled distribution brewers and portion packs that would maximize the launch of the at-home model as well as protecting the away-from-home OCS channel.

So Keurig has to consider the two portion packs: the K-Cup and the Keurig Cup. But at the same time, GMCR the strategic partner and one of the major stakeholder of the Keurig was not agree and commented that it will only causes complication and will only doubling the number of portion that they will manufacture and warehouse. They also find problems regarding the manner of pricing the Keurig-Cup and B100 brewer for the at-home market. Due to the creation of these circumstances, the marketing team of Keurig has decided to use direct distribution or investing on traditional channels of distribution. Furthermore, four dilemmas of the Keurig have been resolved.

Introduction

Keuring Inc has been founded on such idea that coffee lovers must be able to brew and enjoy one perfect cup of coffee at a time. Due to the success of gourmet coffee houses like Starbucks, the coffee consumers have started to spend more money with an average of $ 1.50 or more for a cup of gourmet coffee (Carvens & Piercy, 2009). Due to this change in consumer behavior, Keurig got opportunity to offer gourmet coffees by a single-cup in offices in 1998. Keurig have noticed that from 1996 to 2000, gourmet coffee sales increased by 40% in US at home coffee market. These statistics convinced Keurig´s management to develop an at home, one-cup coffee brewer specifically for gourmet coffee lovers (Carvens & Piercy, 2009).

The company leveraged investments from venture capital funds to transform its concept for a single cup brewing system. The first brewing targeting the office coffee service market, the B2000 was launched in 1998. In 2002, the owner structure of Keurig changed through agreements with two of its roasters partners that are Van Houtte and GMCR, both acquired 70% stake in Keurig. Keurig’s single portion system hinged on the three key elements: 1. a coffee brewer that perfectly controlled the amount, temperature and pressure of water to provide a consistency superior tasting cup of coffee. A key differentiation for keurig’s brewing system was the broad coffee selection available through licensing arrangements with a variety of gourmet coffee roasters. Keurig’s market included two broad target customers: office users and households. Keurig worked with a total of 180 keurig authorized distribution (KADs) for sales through North America. Customer relations are handled by KADs. The K-cup evolved from an initial mock-up design based on a modified yogurt cup. K-cup were implement to air, moisture and light to ensure the contents stayed fresh for at least six months. Keurig viewed the at-home consumer market as a logical extension to its business strategy. The coffee makers represent one of the largest volume small appliances sold for home use (Carvens & Piercy, 2009).

This paper will address Green Mountain Coffee Rousters interests and concerns and provide recommendations and alternative solutions for problematic pricing and marketing dilemmas.

History

Mid 1940s: Peak of coffee consumption (16.5 pounds per capita)

1960s: Popularity of soft drinks causes coffee consumption to decline

Mid 1990s: All-time low of coffee consumption (6.1 pounds per capita)

1992: Keurig’s inception

Late 1990s: Gourmet coffeehouses reinvigorate the market

1998: Keurig introduces its single-cup brewing system (B2000 model); 8 varieties of coffee Offered

2000: 14.8% of brewer distributors offer a single-cup system for the Office Coffee Service OCS market.

2001: 44.8% of brewer distributors offer a single-cup system for the OCS market.

Filter fresh establishes relationship to market Keurig’s commercial brewer, thus creating a system with greater variety of coffees and teas

2002: (February) Ownership structure changes; three largest shareholders become Van Houtte, Inc. (28%), Green Mountain Coffee Roasters, Inc. (42%), and Memorial Drive Trust.

John Whoriskey joins Keurig as the GM of the at-home Division

Keurig’s roaster partners ship more than 125 million K-Cups

Total K-Cup shipment since the launch rises over 340 million

Keurig begins working on a line of teas (T-Cups); the first line is to be “Celestial

Seasonings” brand teas.

OCS market reaches $3.46 billion in total revenue.

Keurig’s total number of brewers shipped across North America reaches 33,000.

20 million Americans are drinking gourmet coffee on a daily basis.

(February) Keurig sets plans to launch B100 system in the at-home market.

Total single-cup brewer placement in the OCS market reaches 143,200.

Keurig increases roaster partnership to five, thus providing the largest variety of coffees for a single-cup brewing system.

SWOT Analysis

3.1 Two-Cup Approach with Brewer

Strengths

Two-Cup approach will not threaten the KADs and the OCS market.

Specifically, increase pricing of Keurig-Cup controlled.

Increases the chances of managers’ participation in in-office promotions of the Keurig at-home system due to the differentiation would prevent theft of K-Cups provided for office consumption.

Weaknesses

Buyer confusion should be decreased because similarities between cups can cause confusion between the brewer.

Increased inventory for roasters.

Retail sectors have lack of demonstration due to which Keurig-Cups are not available for customers in retail stores.

Keurig has lack of resources which affect the sale of brewer and Keurig cup in retail outlets.

Opportunities

Continued growth in OCS market and more available resources for expanding distribution of at-home market into the retail sector.

Threats

Brewer pricing does not decrease and due to this reason competition starts with lower pricing strategy and Keurig suffers large losses in future.

Breakeven point is not met because of high brewer high pricing and making Keurig depends on Keurig-Cup sales to make up for losses from brewer sales and this situation for brewer to become the loss leader.

Probability of threatening the OCS market, which is Keurig’s cash cow.

SWOT

3.2 One-cup Approach with Brewer

Strengths

Keuring Inc can easily enter into at home market before competition.

Customer confusion will be decreased.

There is not need for roasters to keep two different cup inventories like one inventory for OCS market and one for at-home market.

Due to the increase in demand of at-home market including KADs and at-home consumers, probably Roasters´ production levels will be increase.

Weaknesses

Due to single cup with brewer, alienation of the OCS K-Cup channel will happen.

Pricing with the KADs will be out of control.

Opportunities

Keurig has opportunity to enter in the market quickly then they can come with smaller and cheaper brewers.

Keuring has opportunity to enter in the retail market in future due to the less overall costs.

Threats

Keurig can be suffer in the loss of market share due to not decrease the prices of Brewer and competition can be enter in the lower pricing strategy.

Lack of resources to market and sell brewers and cups through retail outlets at time of launch.

Lazaris´s Dileimmas

As an external consultant we think that the senior management should consider the following recommendations and suggestions for their current dilemmas.

1. How should we respond to GMCR’s request to switch to the single K-Cup approach? What do we really need to know to make this decision? How will other roasters and the KADs respond? Can our team really implement a new game plan at this late date and still launch in six months? Can we afford the write off on the new Keurig-Cup and packaging line tooling?

Choosing a single K-cup approach is not a viable decision at this part of the time because of the number of reasons. First of all Keurig corporation has already done the investment in the new packaging lines. They invested $60,000 in each licensed packaging line and $400,000 in their own packaging line up. The concern of GMCR about the K-cup is that customers will find it difficult to differentiate between two cups. But the chance of this mistake is very minimal because both products have different design and different colours. This reason is not much solid on which we can forgo the heavy investment in packaging tools.

KADs major concern is with the marketing policies of Keurig-cups. They thought that if company marketed them through direct marketing approach then their business will be in danger. They are worried if company launch same cups for both products than customers might buy the cups from other sources which gave negative effect on their business. Other roaster companies also had this concern. So the better solution of this problem is that company should introduce a separate cup for both brewers so that KADs and other roaster companies do not have any problem in the future.

Another main issue to implement this game plan is that for house hold customer’s coffee is sold separately on the grocery stores and Keurig has no access to these stores neither has the resources. So it has to rely on its current distributor system to launch a new product in market. KADs have good relationship with the offices and the joint marketing program is the best option for the company at this point. The network of the KADs is well established and the team is capable of selling this new product to the targeted customers. Otherwise company need a heavy investment to hire new sales force, shelf space to launch its patented coffee packs to the grocery store and also they need a infrastructure to make coffee brewer available to small appliances stores, mass merchants, and kitchen specialty stores.

As far as to afford the writing off the new Keurig-Cup and packaging line tools is concerned case did not provide any sufficient evidence. But as the cost has been occurred and also in our opinion it is the right choice to launch a new cup for new product it is not a wise decision to write off this investment.

2. What is the right price for the brewer? Is there a way to afford a $149 price point on the brewer that we have not thought of?

Market research shows that the customers primarily focuses on convenience, particularly quick brewing, ease of use and minimal clean up. The key factors that are rated highly in the demonstration included the time to clean up and time to prepare the coffee. From our surveys the customers found that our concept had strong appeal.

We use the product differentiation strategy to market our brewing system on the base of convenience and speed of brewing a cup of fresh coffee. The research studies shows us that the price range from $129 to $ 199. If our price exceed from $200 the item would becomes a luxury purchase.

We can take advantage of being one of the first entrants in the product category. The issue that we have to address is the pricing for the B100 home brewer. The pricing of the brewing will have the direct impact on the consumers to buy Keurig systems. According to different surveys highlighted in the case, 44 percent respondents were ready to pay $0.55 price for a cup of coffee and they were willing to pay $130 or more for the home brewer taking more than 2 cups a day. For a price of $149 the respondents’ rate is 99 percent.

Keurig Inc. management had three key price points being reviewed that were $199, $249, $299. But the market research shows the price for the brew to be $149; at that price the company could not afford to sell. At the price of $299, small profit can be generated which will help us in applying the different marketing and infrastructure costs. If we set the price $199, there would be a large loss on the brew sales, but we can cover it through the royalties on the K-cups.

If we analyze the pricing of the brewing system and look at our product which provides different and new technology as compared to the available brewing system, so we should target our product at the price of $249. From our research studies people analyze and compare this product with other coffee makers that are available in the market.

The reasons that why we need to price it more than the customer demand is mentioned below:

We can take the first movers advantage in providing fresh coffee at home.

We can make a competitive pressure in the market.

Our brewing system in based on new technology that provides convenience and speed of brewing a cup, ease of use and minimal clean up time.

The research studies shoes us that pricing more than $200, make it a luxury product and more consideration is required to sale it. This is made through advertising and telling the target customers about it differentiated feathers.

Keurig Inc. has already build its name in the office coffee market, the employees know about the taste and the freshness in the coffee.

The profit generated from the brewing system will help us in making new brewing system with lower cost and launch new product variety in at home coffee market.

Meanwhile we can also earn form the direct marketing of the K-Cups with brewing system with their special promotional deals.

3. How should we price the at-home portion pack? If we have one cup in all markets, what pricing is optimal? If we have both the K-Cup and the Keurig-Cup? What pricing makes senses and optimizes our market opportunity?

The decision about the one cup or two cup approach has a direct impact on the keurig’s portion pack pricing strategy. The core strategy is to market the K-cups directly to the customer through the retail markets and the production lines had been completed. The differentiation between office and home K-cups are required due to many reasons, first is the distribution style of K-Cups and second the company wants to makes a direct relationship with customers.

On benefit of the controlled distribution strategy will help us in controlling the pricing of the products, specially the Keurig Cup. From the different research studies, we analyze that the customers want that the price of Keurig cup should be $0.55 or $0.50. If we price our product less than $0.50 more customers will pay but there will be less profit. We are targeting our brewing system as a luxury product. The customers that make the purchase should also think about the price of Keurig cup.

So we target our Keurig cup at the price of $0.50, and try to sell our Keurig cups directly to the customers through retails stores and internet, fax or phone. The pricing of the Keurig cup is nearly equal to the office K-cup pricing. The customers that will purchase the brewing system think that the Keurig cups are not costly than the coffee available from the market.

The management should make different strategies for the office and at home customers because they need to define their KADs that they are not directly targeting to the home customers. The home market is becoming more competitive than the office coffee market. So the distribution channels for the home coffee market should be different from the office market. The reason is that if we distribute from retail store we can target and advertising our customers more easily.

The market opportunities will grow rapidly if we operate both markets separately. In near future from the advertising of Keurig products in the markets the KADs can also attract near clients. The pricing of office is negotiable because of the market conditions. The prices of K-cups are already in the range of the clients depending on their use of K-cups. But the price of Keurig cups should be fixed in the market.

To optimize the market conditions Keurig should build its name in the name as providing fresh coffee at home as well as at offices. The company should introduces new product varieties and introduce new brewing system. Keurig needs to advertise its products on the basis of as differentiation.

4. Have we taken the necessary steps for our marketing plan to succeed? Is there another avenue that we are overlooking?

Marketing plan for the launch of new At-home coffee brewer has couple off main issues. The first and the main issue is the pricing of the brewer. As the marketing research studies shows that customer is willing to pay a price from $129 to $199. But with all its efforts company is able to produce a brewer at the cost of $200. So it is big issue what price should charge form the customers? In our opinion as the company is going to be first mover in the single cup brewer market it should charge the premium price from its customers. Another reason is that company does not have any choice because they cannot reduce the cost.

Company also need to put more focus on the advertisement of the products. As this product is for house hold customers it requires a big advertisement campaign. Company design a point of sale marketing which is a good idea but in our opinion the advertisement on the TV channels and also in the magazines is also required so that more people aware of the products.

Company also consider promoting the product in markets through special counters as the product is demonstration driven. Marketing research studies shows that people become more familiar with the product when its working is demonstrated to them. So company should arrange special counters in super markets to demonstrate the working of the brewers to the people so become more familiar with the product.

Keurig would not able to market the coffee drinkers in the offices without the assistance of KADs. So the management should decide terms with KADs that they will market the offices and the company will market the home customers directly. The referral program was a good plan to enhance the sales of the company. The point of sale (POS) advertising will help the KAD and Keurig to introduce its product and brewer to the targeted customers.

The company should also use its roasters public relations for the introduction of the new brewing system and other special marketing campaigns for selling its brewing systems as well as K-cups and Keurig cups.