Description
Background: Keurig has successfully sold its coffee brewing system to offices throughout the US and now wants to launch the product in the consumer market.The files I uploaded is the resource and the questions we need to answer.
Unformatted Attachment Preview
KEL021
February 28, 2005
ERIC T. ANDERSON
Keurig At Home:
Managing a New Product Launch
A Wednesday afternoon in February 2003 found Keurig Inc.’s president and CEO Nick
Lazaris heading south on Interstate 89 back toward his Wakefield, Massachusetts, office and
mulling over the day’s events in preparation for a briefing with his senior management team (see
Exhibit 1). He realized that the next two weeks would be critical to the success of the company’s
newest product initiative in the single-cup coffee market. Lazaris had just wrapped up a
presentation to the Green Mountain Coffee Roasters Inc. (GMCR) management team, one of the
company’s strategic partners and an investor in its business. While reviewing the company’s
progress toward the launch of its innovative coffee-brewing system into the at-home consumer
market, GMCR had asked Keurig to reconsider its decision to use a different version of the coffee
portion pack, known as a K-Cup, in the consumer market. In making its request, GMCR had
offered a number of compelling reasons for using the existing commercial portion pack in both
channels.
As he drove, Lazaris passed a new Starbucks and reflected on how gourmet coffeehouses had
helped pave the way for Keurig’s single-serve brewing system. The proliferation of soft drinks
since the 1960s had caused coffee to lose its place as a central component of social gatherings,
spurring a precipitous drop in coffee consumption to an all-time low of 6.1 pounds per capita in
the mid-1990s from a peak of 16.5 pounds per capita in the mid-1940s.1 The entrance of gourmet
coffeehouses had reinvigorated the market, developing a distinct subculture of coffee drinkers
and educating younger consumers about great traditional coffees as well as espresso and milkbased specialty beverages. As a result, by 2003 an estimated twenty million Americans were
drinking gourmet coffee on a daily basis.
Keurig’s launch of a single-cup brewing system in the office coffee service market in the late
1990s had benefited from coffee drinkers’ increasing sophistication. Office employees could
appreciate the greater variety, freshness, and convenience derived from the ability to brew a
single cup of coffee on demand. Office managers recognized the advantages garnered from less
coffee waste, increased employee productivity, and decreased hassle associated with tending the
coffee machine.
February 2003 found Keurig poised to launch its new model B100 system in the at-home
segment with hopes of repeating its success in a much larger but more competitive market. With
rumors of other single-cup competitors ready to enter the market, Lazaris knew Keurig needed to
1
Source: United States Department of Agriculture.
©2005 by the Kellogg School of Management, Northwestern University. This case was prepared by Elizabeth L. Anderson under the
supervision of Professor Eric T. Anderson. Cases are developed solely as the basis for class discussion. Cases are not intended to serve
as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request
permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of
the Kellogg School of Management.
This document is authorized for use only in Prof. Jinzhao DU’s Pricing Strategies and Tactics_2324 at The University of Hong Kong – Faculty of Business & Economics from Nov 2023 to May
2024.
KEURIG AT HOME
KEL021
move quickly in order to obtain its desired positioning in the emerging single-cup consumer
market. Revisiting the decision to proceed with a two-K-Cup strategy had the potential to derail
the company’s launch efforts and demanded rapid attention by Lazaris and the senior
management team. Reevaluation of the K-Cup decision would also force them to rethink other
elements of their product plans, including pricing and marketing. With less than six months until
the September launch, time was of the essence.
The Company and Its Products
Keurig Inc. had been founded to develop an innovative technique that would allow coffee
lovers to brew one perfect cup of coffee at a time. Beginning with the company’s inception in
1992, the word “Keurig,” from the Dutch word for excellence, had been the guiding principle
behind the development of its products and services. The company leveraged investments from
venture capital funds to transform its concept for a single-cup brewing system into a
commercially viable business with the development and patenting of a single-portion pack and a
revolutionary new coffee brewer. The first brewer targeting the office coffee service market, the
B2000, was launched in 1998. A licensing agreement allowed GMCR to pack its specialty coffees
in Keurig’s patented container, the K-Cup (see Exhibit 2). Eight varieties of coffee were
originally available for sale to offices. Keurig continued to expand its relationships with roasters
such as GMCR, using a selective but nonexclusive strategy. This ongoing effort had expanded the
number of roaster partnerships to five, resulting in the largest variety of coffees available with a
single-cup system in the market in 2003.
In February 2002 the ownership structure of Keurig changed through agreements with two of
its roaster partners. Keurig sold stock to Van Houtte Inc. to raise nearly $10 million to support the
launch of the at-home business. This investment provided Van Houtte with nearly a 28 percent
ownership stake in Keurig. At the same time, GMCR acquired and executed options to purchase a
large number of Keurig shares from existing shareholders, enabling Keurig to consolidate to a
smaller number of significant shareholders. GMCR obtained a 42 percent stake in Keurig. With
these moves, Van Houtte and GMCR joined Memorial Drive Trust (MDT) as the three largest
shareholders of Keurig. MDT, an investment advisory firm that managed a U.S.-based profitsharing plan, had served as the lead venture investor in Keurig since 1995 and led Keurig’s board
of directors. As provided for in separate shareholder agreements with MDT, neither GMCR nor
Van Houtte was allowed to have a seat on the board of directors. Lazaris reinforced the
company’s position with respect to these roaster shareholders in a letter to its authorized
distributors and other roaster partners:
We do not plan to allow any roaster or other commercial business partner to sit on our
board of directors. Our core strategy remains unchanged: we are committed to a
multiroaster strategy that relies on strong relationships with selected gourmet coffee
roasters who take a great deal of pride in the coffee consumption experience that
supports the meaning of their brand to consumers.2
2
Internal memo dated February 5, 2002.
2
KELLOGG SCHOOL OF MANAGEMENT
This document is authorized for use only in Prof. Jinzhao DU’s Pricing Strategies and Tactics_2324 at The University of Hong Kong – Faculty of Business & Economics from Nov 2023 to May
2024.
KEL021
KEURIG AT HOME
Single-Cup Brewing Technology
Keurig’s single-portion system hinged on three key elements: a coffee brewer that perfectly
controlled the amount, temperature, and pressure of water to provide a consistently superiortasting cup of coffee; a unique portion-pack system containing ground coffee beans as well as
filter paper; and a varied coffee selection to replicate the choices available in a gourmet
coffeehouse.
The Keurig commercial-market brewer included an “always-on” feature, enabling it to brew a
cup of coffee in less than one minute at any time of day. Plumbed to a water line, the
automatically refillable water reservoir maintained up to twelve cups of water at brewing
temperature. After the customer inserted a K-Cup in a drawer, positioned the eight-ounce cup to
receive the brewed coffee, and pressed the “brew” button, the brewer would pierce the K-Cup,
inject pressurized hot water, and brew the coffee. The K-Cup, evolved from an initial mock-up
design based on a modified yogurt cup, contained a built-in cone-shaped filter and the exact
amount and grind of coffee to fresh-brew a single eight-ounce cup. K-Cups were impermeable to
air, moisture, and light to ensure the contents stayed fresh for at least six months.
A key differentiator for Keurig’s brewing system was the broad coffee selection available
through licensing arrangements with a variety of gourmet coffee roasters. Coffee roasters
controlled the quality of their coffee and the number of varieties available through K-Cup
production lines. A production line might be owned by the coffee roaster or leased from Keurig.
K-Cups were produced by five roasters with six brands and more than seventy-five coffee
varieties.3 Roaster partners included Green Mountain Coffee Roasters, Diedrich Coffee, Van
Houtte, Timothy’s World Coffee, and Ueshima Coffee Company. For each K-Cup sold, the
roaster paid Keurig a royalty of approximately $.04.
The Art of Cupping
“Cupping” was a method of tasting the finished (or brewed) coffee product used by roasters
and many large retailers to evaluate the flavor profile of a coffee. Similar to wine tasting, cupping
involved swishing coffee around in the mouth to evaluate elements of the flavor profile. Expert
“cuppers” could taste as many as ten to twenty varieties a day and perform an analysis that
included taste, brightness (degree of acidity), fragrance and aroma, body, and finish. The process
began with the roasting and grinding of a small batch of beans. Once the ground beans were
placed in a cup, hot water was poured over them and the analysis process began. The cupping
process could be supplemented by state-of-the-art machinery to ensure product consistency.
In the world of gourmet coffees, roasters offered a variety of coffees tailored to the different
tastes of gourmet coffee drinkers. For each variety of coffee offered, cuppers had established an
expected flavor profile. The process by which that profile was achieved was closely controlled by
the cupper during the cupping process. However, those same controls could not always be
achieved in the traditional home brewing process. The desired flavor profile could be affected by
a number of factors beyond the control of the roaster or cupper: the amount of coffee or water
used by the consumer, variations in the temperature throughout brewing, or the amount of time
the coffee sat in the coffee pot prior to being consumed. Through close control of critical
3
Currently there were three leased-production lines and an additional eight roaster-owned lines. Three additional lines were planned.
KELLOGG SCHOOL OF MANAGEMENT
3
This document is authorized for use only in Prof. Jinzhao DU’s Pricing Strategies and Tactics_2324 at The University of Hong Kong – Faculty of Business & Economics from Nov 2023 to May
2024.
KEURIG AT HOME
KEL021
elements in the coffee brewing process, the Keurig system enabled that flavor profile to be
recreated on a consistent basis and ensured that the coffee drinker had the same taste experience
time after time.
Away-from-Home Market
Keurig’s market included two broad target customers: office users and households.4 Keurig
chose to focus first on the away-from-home commercial segment of office users in the hopes that
a successful rollout would provide a springboard for launch into the at-home segment. The
groundwork for launching into the away-from-home office coffee service (OCS) market was laid
by Starbucks and other specialty coffee purveyors. They had successfully educated consumers
about good-quality coffee and made it acceptable to pay $1.50 or more for a cup of coffee and
even more for coffee-based specialty beverages. This behavior opened the door for Keurig and
others to offer a single-cup system into offices, capitalizing on people’s desire to have the same
great taste in the office as they got at a coffeehouse.
In 2002 the OCS market reached $3.46 billion in total revenues.5 At the same time,
acceptance of the single-cup brewing technology was evident in surveys of OCS distributors. In
2000 only 14.8 percent of distributors had offered a single-cup system, but that figure had
increased to 44.8 percent in 2001.6 By 2003 total single-cup brewer placements had reached
143,200 (see Exhibit 3).
Since the launch of its first commercial brewer in 1998, Keurig had quickly moved to a
leading position in the sales of single-cup brewing systems. After five years in the market at the
end of 2002, Keurig had shipped more than 33,000 brewers in North America, equal to 1 percent
of all OCS brewers. In comparison to the competition, Lazaris was quick to point out the speed
with which Keurig had penetrated the market:
It took Filterfresh twenty years to ship 45,000 units in North America. And in its first five
years, Flavia shipped only 8,000 units in North America. In addition, our expansion into
Asia at the end of 2001 provided us an added opportunity for growth. In partnership with
the top Asian roaster, UCC, our initial sales in Japan and Korea had been more than
2,700 brewers.
A second measure of Keurig’s achievements in the OCS market was shipment of its patented
K-Cups. In 2002 Keurig’s roaster partners shipped more than 125 million K-Cups, bringing total
K-Cup shipments since launch to more than 340 million. Also in the works was the launch of an
offering of teas in T-Cups, with the first being the “Celestial Seasonings” teas.
4
From early trial activities, Keurig had determined its single-serve brewing system was not well aligned with the needs of food
service establishments serving a large volume of coffee.
5
Source: International Coffee Organization, London, UK.
6
Source: Automatic Merchandiser 2002 Coffee Service Market Report.
4
KELLOGG SCHOOL OF MANAGEMENT
This document is authorized for use only in Prof. Jinzhao DU’s Pricing Strategies and Tactics_2324 at The University of Hong Kong – Faculty of Business & Economics from Nov 2023 to May
2024.
KEL021
KEURIG AT HOME
Away-from-Home Channel of Distribution
The office coffee market was served by a network of approximately 1,700 distributors that
were responsible for placement and maintenance of office brewers and ongoing coffee supply.
Keurig worked with a total of 180 Keurig authorized distributors (KADs) for sales throughout
North America. A small number of KADs handled customers throughout the United States or
North America, while the majority covered smaller regions.
The purchasing decision was handled by office managers. “Office managers are all about
eliminating headaches. The variety of coffees, convenience of brewing, and negligible clean-up
of the Keurig system mean fewer employee complaints and greater productivity,” explained Chris
Stevens, away-from-home vice president of sales, who was responsible for managing Keurig’s
day-to-day relationship with its network of KADs. Customer relationships were managed by the
KADs and feedback on problems or desired new features was funneled through the KADs to
share with Keurig.
The KADs purchased commercial brewers from Keurig at a wholesale price that ranged from
$500 to $1,000. The brewer was placed in offices free of charge or with a low monthly rental in
exchange for ongoing coffee sales. Typically there was no formal contract between the KAD and
the office manager, although the KAD established expected volumes based on the number of
employees in the office. If volumes fell below expected levels, the KAD could remove the brewer
from the office or raise the price of the K-Cups. The KAD was also responsible for ongoing
repairs of the brewer.
The KAD provided a variety of coffees to offices, based on their individual consumption
profiles. KADs entered into direct relationships with one or more licensed roasters for the
purchase of K-Cups. Typically, KADs paid roasters $0.25 per K-Cup and sold K-Cups to office
managers for $0.40–$0.50. Roasters then paid Keurig a royalty 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 Service Inc. in the late 1980s. Filterfresh was a U.S. subsidiary of Canadianbased Van Houtte (a Keurig shareholder), a leading gourmet coffee roaster, marketer, and
distributor in North America. The Filterfresh commercial single-cup system was based on the
“French press” method of brewing. Ground coffee beans were loaded into a storage hopper in the
machine. Once a button was pressed for a cup of coffee, an amount of ground beans would be
measured from the hopper and mixed with hot water. The mixture would then be strained to
remove the grounds and a single cup of coffee resulted. No brewed coffee was left to sit and
become waste as was common in a traditional glass pot system, and a person enjoyed a freshly
brewed cup of coffee each time. Regular tending of the coffee system was required to remove
used coffee grounds and reload ground beans into the storage hopper. Filterfresh established its
relationship with Keurig in October 2001 to market Keurig’s commercial brewer and offer a
system that could provide a greater variety of single-cup coffees and teas.
KELLOGG SCHOOL OF MANAGEMENT
5
This document is authorized for use only in Prof. Jinzhao DU’s Pricing Strategies and Tactics_2324 at The University of Hong Kong – Faculty of Business & Economics from Nov 2023 to May
2024.
KEURIG AT HOME
KEL021
FLAVIA
Flavia was owned by Mars Inc. It introduced its first single-cup brewer to offices in Britain in
1985 and expanded to Europe and Japan before introducing its “Brew-by-Pack” system in the
United States and Canada in 1996. Similar to the Keurig brewer, the S350 commercial brewer
utilized a single-serving pack. Each Filterpack contained its own filter and the appropriate
measure of ingredients, which were foil-sealed, protecting them against air and moisture. A
selection of twenty-four coffee varieties was available with the system.
At-Home Market
Building on its success in the OCS market, Keurig viewed the at-home consumer market as a
logical extension to its business strategy. John Whoriskey joined Keurig as general manager and
vice president of the at-home division in 2002. He brought with him more than twenty years of
experience in consumer goods sales and marketing. “I fell in love with Keurig and its brewing
system,” he commented. “I don’t consider myself a gourmet coffee drinker, but I do like a good
cup of coffee. I would drive a mile out of my way to work to pick up a good cup of coffee. With a
Keurig brewer, we can offer convenience benefit with taste assurance, in the comfort of your own
home.”
The at-home market represented an enormous opportunity for Keurig. Leading market
research firms estimated the total size of the retail coffee market at approximately $18.5 billion in
2000. At-home retail consumption was a $6.9 billion market, with at-home gourmet coffee
accounting for $3.1 billion (see Exhibit 4). Away-from-home gourmet coffee represented a $3.9
billion market and was typically sold by the cup at cafes such as Starbucks or in other food
service venues such as restaurants. At the same time, estimates showed 157 million Americans
drank coffee, with 60 percent predominantly drinking previously ground coffee and another 10
percent using freshly ground whole bean coffee.7 Profiles of coffee drinkers varied by product
type, with consumers of whole-bean coffee exhibiting an upscale profile (see Exhibit 5). In
addition, about eighteen million coffee makers were purchased annually in the United States,
representing about $450 million in retail sales. Coffee makers represented one of the largestvolume small appliances sold for home use.8
Previously the purview of upscale outlets—coffee/tea stores, gourmet/specialty stores,
kitchenware stores, and coffeehouses—gourmet coffees had increasingly been sold in mass-retail
outlets. At the same time, the growing popularity of whole-bean coffee had been driving the
launch of a variety of roasts, blends, and flavors. Starbucks, for example, showed growth of
whole-bean sales in excess of 100 percent in 2000.9
Coffee advertising centered on two major themes: good taste and positive stimulation.
Taglines such as Maxwell House’s “Good to the last drop” reflected the emphasis on the taste
experience. Positive stimulation focused on the benefits caused by drinking a particular cup of
coffee. As an example, the well-known tagline “The best part of waking up is Folgers in your
cup” suggested that the stress and challenges in your life could be overcome by taking that first
sip.
7
Simmons Market Research Bureau (2000).
Source: Keurig company information.
9
The U.S. Market for Freshly Brewed Coffee Beverages, Packaged Facts, March 2004.
8
6
KELLOGG SCHOOL OF MANAGEMENT
This document is authorized for use only in Prof. Jinzhao DU’s Pricing Strategies and Tactics_2324 at The University of Hong Kong – Faculty of Business & Economics from Nov 2023 to May
2024.
KEL021
KEURIG AT HOME
At-Home Single-Cup Market Research
Keurig commissioned a variety of market research studies on the at-home product concept
from 1999 to 2001 prior to moving ahead with any significant development efforts. “We wanted
to get an understanding of the acceptability of the single-cup approach, gain some insight into
pricing of the K-Cup and the brewer, and profile our prime consumer prospects,” explained
Lazaris. This research was executed in a variety of formats, including intercept surveys, Internetbased surveys, surveys of current 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 interested in speaking with regular gourmet coffee drinkers so
respondents were selected based on coffee brewing habits and coffee consumption.” To qualify
for the intercept survey, consumers had to drink gourmet coffee, which included coffee from
freshly ground whole beans, from gourmet coffee roasters, and from premium coffee cafes such
as Starbucks, Dunkin’ Donuts, Seattle’s Best, or Caribou Coffee. All participants had to drink at
least one cup of coffee per day.
While nearly 94 percent of respondents indicated that they were satisfied with the coffee they
drank at home, 88 percent expressed an interest in the product concept. Interest focused primarily
on convenience, particularly quick brewing, ease of use, and minimal clean-up, sources of the
most dissatisfaction with current home brewing systems. Based on explanation of the product
alone, more than three-quarters of respondents said they would be likely to purchase a system like
the one proposed. The product demonstration had a huge impact on this figure. More than 90
percent of respondents indicated that the demonstration increased their likelihood of buying the
product. Key factors rated highest in the demonstration included the time it took to prepare coffee
and the time it took to clean up.
Keurig had gained some initial insight into brewer pricing from previous market research (see
Exhibit 6). It now wanted to explore product pricing with consumers who considered the system
(brewer and K-Cups) and also experienced a product demonstration. Among intercept
respondents, the self-reported daily consumption rate of coffee was an average of two to three
cups. When asked about their willingness to pay for a cup of coffee like the one they tasted, 44
percent indicated they would pay $0.55 (see Exhibit 7). Later in the survey, respondents were
asked about their willingness to pay for both K-Cups and the brewer. More than 30 percent of
respondents who were interested in the system were willing to pay $0.50 or more for a K-Cup.
Before obtaining input on brewer pricing, respondents were told that high-quality coffee makers
sold in the range of $69 to $149. Approximately one-fourth of the respondents were willing to
pay more than $130 for the brewer. Consumers who drank more coffee were more willing to pay
for both the K-Cup and the brewer.
An Internet-based survey used as its basis a Keurig system summary (see Exhibit 8) that was
shown to people who drank coffee on a daily basis. It found that the concept had strong appeal,
with 67 percent of respondents expressing interest. The main differentiating factor revolved
around the speed of brewing a cup of coffee. Of second highest importance was the convenience
of no preparation or clean-up. As part of the study, a price point of $149.99 was tested. The 9
percent of respondents who indicated that they “definitely would buy” or “probably would buy”
the coffee system at this price were classified as “core customers.” These respondents tended to
be younger and most were male. Follow-up survey questions revealed that the average price core
customers were willing to pay for the coffee system was $125.
KELLOGG SCHOOL OF MANAGEMENT
7
This document is authorized for use only in Prof. Jinzhao DU’s Pricing Strategies and Tactics_2324 at The University of Hong Kong – Faculty of Business & Economics from Nov 2023 to May
2024.
KEURIG AT HOME
KEL021
For the home use test, a commercial model brewer was placed in the homes of gourmet
coffee drinkers. The testers were then required to purchase K-Cups at a retail price of $0.50 via
fax, e-mail, or phone for their own individual coffee consumption. Subsequent interviews and
focus groups found that users consistently referenced great-tasting coffee with a system that was
fast and convenient. Additional attributes of the product highlighted included taste consistency,
coffee variety, and cleanliness of preparation. Of particular note was the fact that coffee
consumption at home increased with the presence of the Keurig brewer. On average, 2.25 cups of
coffee were consumed per day at home. Not only were participants drinking more coffee in the
morning, but they were purchasing less coffee outside the home. An acceptable price range for
the brewer was determined to be in the $129–$199 range, with a price exceeding $200 triggering
a reaction that the item would become a luxury purchase for which more consideration would be
required. K-Cup pricing, however, did not appear to be an issue.
At-Home Single-Cup Competition
A key element of Keurig’s strategy in the at-home market was being one of the first entrants
in the product category. In establishing itself as a pioneer in the upscale single-cup brewing
category, Keurig envisioned that subsequent press coverage would naturally include a reference
to the Keurig system as a single-cup pioneer and enhance its visibility in the upscale market.
In the traditional consumer coffee market, Procter & Gamble (P&G) and Kraft were the
market share leaders with distribution largely through grocery stores (see Exhibit 9). In
advertising expenditures, the two companies represented 84 percent of total expenditures of $163
million.10 In the coffee maker appliance market, appliance brands targeted either upscale or mass
market retailers. In the upscale segment, Cuisinart, Krups, Braun, DeLonghi, and Bunn had
strong distribution. In the mass channel, through which about 70 percent of all coffee makers
were sold, Mr. Coffee, Black & Decker, Sunbeam, and Hamilton Beach had strong positions.
Market indicators had led Keurig to believe that a number of these large established
consumer products companies were preparing to enter the emerging single-cup market. In
addition to the growth of the single-cup system in the away-from-home market, recent trends in
Europe were showing the adaptation of traditional espresso pod systems for American-style
coffee brewing. In each case, including Keurig, the systems were proprietary, with individual
brewers working only with compatible coffee pod systems.
Salton, with 2002 sales of $922 million, was a leading domestic designer, marketer, and
distributor of a broad range of branded, small appliances. Under its licensed brand name, Melitta,
it had formally announced plans for a May 2003 launch of a new brewing system: One:One. The
One:One brewer would brew coffee utilizing Javapods, small round packets of filter paper in
which the grounds were sealed. Salton’s expected retail brewer pricing was $49 with pod pricing
of about $0.25 per pod.
Sara Lee, a U.S.-based consumer packaged products company with sales of $17.6 billion in
2002, had been active primarily in the European coffee market, but, through a series of
acquisitions completed in 2000, had become a stronger force in the U.S. market. Its two bestknown brands were Chock Full o’ Nuts and Hills Brothers. Sara Lee had stated that the Senseo-
10
Packaged Facts Market Profile: The U.S. Coffee and Tea Market, September 2001.
8
KELLOGG SCHOOL OF MANAGEMENT
This document is authorized for use only in Prof. Jinzhao DU’s Pricing Strategies and Tactics_2324 at The University of Hong Kong – Faculty of Business & Economics from Nov 2023 to May
2024.
KEL021
KEURIG AT HOME
Crema pod system might be in the U.S. market in the second half of 2003. Previously introduced
in Europe, the Senseo Coffee Pod System used coffee pods of a different size than the Salton
Javapods. The Sara Lee pods were bulk-packed in a bag made with a very thin layer of aluminum
to preserve freshness. Sara Lee had placed almost two million Senseo pod systems in Europe
since the product’s introduction. The company’s experience in the consumer market gave it the
potential to be a formidable competitor. Senseo’s European pricing suggested a U.S. retail price
of about $70 and a pod price of about $0.20 (with two pods required to deliver an eight-ounce
serving).
There were also rumors that P&G had partnered with an appliance marketer to launch its own
proprietary pod system. It was expected that P&G would focus on mass channel distribution of
both its pod brewers and pods, given P&G’s strength in the grocery channel. P&G’s pricing and
distribution were expected to be similar to Salton’s and Sara Lee’s.
Nespresso, developed by Nestlé, was a European capsule-based single-cup espresso brewing
system. It offered similar benefits to the Keurig system including taste, variety, and convenience.
Since its introduction in 1987, more than 500,000 units had been sold, largely in Europe, using
direct fulfillment via phone, fax, and Internet. Keurig wondered whether Nestlé would decide to
enter the American-style single-cup coffee market, based on its experience with single-cup
espresso.
Is the Cup Half-Full or Half-Empty?
Keurig did not have the resources to launch its B100 brewing system through the retail
channel. However, it felt it could develop a direct marketing approach using an e-commerceenabled Web site to sell both the brewer and K-Cups in conjunction with leveraging the
distribution capabilities of roasters and KADs. In pursuing this strategy, Keurig had encountered
a number of channel issues that could jeopardize its established business in the away-from-home
OCS market. Chris Stevens explained the challenge of balancing the needs of the OCS channel
with the development of the new at-home business:
Feedback from our KADs indicated that they would interpret our entry into the at-home
market with a direct sales approach as a first step towards a direct approach in the OCS
market in the long term. Concern about this would diminish the KADs’ marketing efforts
in both the OCS and at-home markets, resulting in erosion of our installed base and
revenue stream from our core OCS segment and a less effective launch in the at-home
market. At the same time, we were worried about loss of pricing control with KADs
underpricing Keurig and the roasters because they had no brewer investment to recover.
In addition, there was concern that the office managers would not support our at-home
marketing efforts for fear of theft of K-Cups for use in the home brewer.
Given these issues, Keurig’s goal had been to introduce a controlled distribution of brewers
and portion packs that would maximize the launch of the at-home business while protecting the
away-from-home OCS channel. Key in this strategy had been the introduction of a second portion
pack as the basis for production differentiation—a new Keurig-Cup for the at-home market—and
that decision had driven its development efforts to date. The K-Cup would work only in the
commercial brewer, while the Keurig-Cup worked only in the at-home brewer (see Exhibit 10).
Further distinction was made with
