Before investing time, money, and resources into new product development, every company must fully understand the existing market competition. Analyzing competitors in depth will help a company determine future potential success of the new product segment. Though Keurig is the industry leader in coffeemakers and coffee portions, they too experience factors affecting supply and demand. In addition, Keurig often sees many attempts to compete with their product. However, it is important to note that even the competition has great potential. The critical points of researching the current market include knowledge of any issues that may affect long-term profitability as well as how the company can compete in the market. With successful research and analysis, the company can consider ways in which they can maximize their success and profit-making potential in their new market. Keurig Products
Founded in 1992 by John Sylvan and Peter Dragone, the Keurig leads today’s market with a single brew technology that revolutionized the way many people drank morning coffee (McGinn, 2014). The chosen name “Keurig” means a form of excellence and is a name Sylvan found in a Danish-English dictionary (McGinn, 2014). The company took years to develop with minimal success and changed hands in 2006 (McGinn, 2014). Green Mountain Coffee Roasters, Inc. purchased Keurig in 2006 and turned the company into a multi-billion dollar company (Keurig Green Mountain, Inc., 2014). In the 2010 fiscal year, Keurig sold more than $330 million worth of single-cup brewers and more than $800 million worth of the single K-Cups (McGinn, 2014). What began as an office-based machine is now available in more than 9,000 retail stores for the home (Keurig Green Mountain, Inc., 2014).
The Keurig is a single-portion machine that brews a consistent single cup of coffee every time the machine runs a cycle. Through patented technology, the Kuerig system includes three components unique to the company (Keurig Green Mountain, Inc., 2014). The three components include their unique single-cup brewer, the patented K-Cup, and one of the largest selections of gourmet teas, coffees, and hot cocoas (Keurig Green Mountain, Inc., 2014). First, the brewer combines the precise amount of water with temperature and water pressure for consistent flavor every brew time (Keurig Green Mountain, Inc., 2014). Second, the K-Cups combine roaster specifications with filters and barriers to produce the most flavorful and consistent cup of coffee with every brew (Keurig Green Mountain, Inc., 2014). Last, the Keurig system offers more than 170 varieties with blends from 12 brands (Keurig Green Mountain, Inc., 2014). Defining the Market
According to Mifflin (2014), the Keurig system offers something that many of the competitors do not. Keurig offers the ability to brew fresh cups and blends for less than ten cents per cup (Mifflin, 2014). The savings with this system is significant in that competitors cost around $.45 to $.50 each with similar types of single coffee pods and capsules (Mifflin, 2014). Because of this cost saving, yet advanced technology, Keurig’s target market includes both employees of the corporate world and households. The methods and strategies of their market include not focusing solely on the commercial office segment, but including the household as well as the home office segments. The Keurig plans included a successful rollout into the commercial and home office segments, which then can provide a springboard for the launch into the household segment. Keurig has many competitors but Starbucks seems to be the biggest threat. Starbucks is known for their gourmet coffee. Starbucks provides up scaled fresh vanilla bean coffee along with other wonderful brands. With this economic state Starbucks prices has caught up with them which caused the demand to decrease. Starbucks was forced to face reality and lower there price and even close a couple of stores along with reducing staff.
This proves that the cost of the coffee is elastic and if the price is too high then the demand will decrease. Even with success there are factors that affect demand such as availability, competition, developments and costs. Due to the increasing demand for the Keurig system, consumer prices continue to rise. Many consumers argue that a case of 15 K-Cups cost an inexpensive $9.99, while others argue that one can purchase a 31.5oz of Colombian ground coffee for the same price. To stay ahead of the competition and attempt to fight some of the arguments, Keurig also produced the My K-Cup product. The My K-Cup product allows the consumer to use the machine without purchasing standard K-Cups and instead use store-bought grounds to brew a single cup of coffee. In addition to the factors affecting demand are the factors affecting the supply. Neejan (2014) speaks of economics in general in that when the supply will increase if and when foreign producers enter the market. Just as well, Neejan (2104) speaks of technology in that with the improvement of technology, productivity will rise because production can become robotic. Neejan (2104) concludes that for the same amount of costs it is possible to supply more of the product, thus the supply curve will shift to the right.
This effect Keurig because if the supply decrease then the demand will increase. It the product is not present the consumers will shop where the supply is this means a lost in revenue. According to “Market Equilibrium” (N.A), “graphically, changes in the underlying factors that affect demand and supply will cause shifts in the position of the demand or supply curve at every price. Whenever this happens, the original equilibrium price will no longer equate demand with supply, and price will adjust to bring about a return to equilibrium.” This relates to Keurig given the scenario the outcome could be the same .Keurig has a lot of competition everything about the product Keurig has to be aligned. The competition lies with the store who can prepare the coffee and have it readily available. Also, the machine is not portable, and the competition could have an advantage for convenience when it comes to outside the home workers.
Issues and Opportunities That Affect its Competitiveness and Long-Term Profitability
Price elasticity of demand is an important factor for any firm’s profitability. It measures the responsiveness of consumers to a change in the product’s price (Colander, 2013). If consumers are very responsive to a change in price demand is elastic, while demand is inelastic if consumers are relatively unresponsive to a change in price (Colander, 2103). The more inelastic the demand is, the higher prices companies can charge for the product with higher profits. A key factor in determining the price elasticity of demand is the availability of substitutes. Some available substitutes include Mr. Coffee, Bunn, and Bloomfield Because of multiple substitutes, technological innovation is critical. Through technological innovation, Keurig can differentiate its product from substitute products. By differentiating with new technology, Keurig can reduce the price elasticity of demand and make demand inelastic. Doing so allows for an increase in profits and works in direct relation to the creation of the K-Cup technology. With the cost effectiveness and reliability of the Kuerig, issues can arise that will affect the long-term profitability of the product. For example, in 2009 alone, the Kuerig coffee maker sold well over 2,000,000 units, equaling to significant labor costs associated with the product (CITATION). The amount of physical labor required to build the units, coupled with the multiple variations of models, proves high capital costs within manufacturing.
For example, in initial years temporary workers constructed the K-Cups (CITATION). After Green Mountain Brewing Coffee Brewers acquired the company, a top priority became hiring full time employees to produce K-Cups at a much faster rate (CITATION). Additional issues with the Keurig product include the waste of K-Cups and an increase in competition. According to one consumer, the K-Cup is producing a significant amount of waste for landfills (Gordon, 2014). The products are not biodegradable or recyclable and any means of trying to do so comes with a price from Keurig (Gordon, 2014). Though the company is addressing some of the economic concerns, many consumers feel that the company focuses more on profits than sustainability (Gordon, 2014). Also, as new Keurig systems enter the market with an attempt to address specific issues, consumer prices only continue to rise. Simple and basic competitive systems such as the Mr. Coffee brewing system range around $75 to $100 (CITATION). However, competitive Keurig models can cost as much as $250.00 (CITATION). When considering future challenges of Keurig, there is an issue of cost in comparison with competitive models, but also with the concept that kitchen appliances come and go as a fad product (McGinn, 2014). The real strength of the Keurig system in terms of revenues is in fact not the brewing system, but instead the continued sales of the K-Cup (McGinn, 2014). Factors Affecting Variable and Fixed Costs
Variable costs are those costs that change as the output changes (Colander, 2013). In contrast, fixed costs are those costs that remain constant and are not affected by production volume. As the total cost of brewing a Keurig cup of coffee can range from ten to fifty cents, this cost is a fixed cost that remains constant in total. This cost is not affected by volume of production, but vary on a unit basis. The base unit saves ten cents by one brewing their own grounds (Mifflin, 2014). As consumers consider costs, one can calculate that with brewing 200 cups per day, the consumer will save $20 per day, $140 per week, totaling $7,280 per year. By using individual blends, Keurig provides a significant savings to the consumer. Labor costs are variable depending on a number of factors, including the number of brewers and number of K-Cups. Labor costs may increase to meet supply and demand of the units. To offset some of the labor costs, Keurig introduced the My K-Cup to the market, therefore decreasing the labor costs for standard K-Cups on the market. Controlling some of the labor cost will have to be born at the market and choosing to use your own blend as shown above will save a significant a lot in return to offset labor cost (THIS REDUCES CONSUMER COSTS, NOT THEIR LABOR COSTS). Supply and demand comes into play when you sent wages, just as it does when companies determining the price of products. If there is a shortage of workers unfortunately, wages will have to go up to attract a good worker, but if there is not the shortage wages, labor will be reasonable, and the cost of productivity will go down. (twist, 2010) (THIS SITE DOES NOT LOAD PROPERLY AND RELATES TO THE HOUSING MARKET) Recommendations on Maximizing Profit-Making Potential
Perfect competition refers to markets that do not have participants large enough to have the market power to set the price of a homogenous product (Colander, 2013). There is always room for growth and changes to increase the profit making potential for companies and still stay competitive in the market. In order to compete successfully and remain profitable, a company must have a competitive strategy. A critical step in the strategy is having a lower cost producer, meaning that the company will produce or manufacture their product for the lowest possible cost without losing any of its value. This type of strategy will provide the company with a cost advantage that is comparable or relative to its competitors. The results of Keruig utilizing these recommendations will provide the Keurig with two options. First, they can undercut their competitors, thus resulting in the increase of their share on the market. Second, they can continue selling their products at a price that is similar to their competitors, which would result in them having a higher profit margin. Keurig does not need to limit or sacrifice the quality of their product which may lead to a decrease in sales. Rather, Keurig can reduce their costs with a few options. Keurig can purchase more efficient production equipment, purchase other fixed or capital assets to increase efficiency, or do away with one or more of their cost producing activities. In addition, Keurig can source less expensive raw material suppliers, reduce employee overtime costs, or reduce the amount of waste in their products. Conclusion
Colander, D. C. (2013). Microeconomics (9th ed.). New York, NY: McGraw-Hill.
Gordon, A. (2014). Opinion: Keurig needs to brew up solutions for wasteful K-Cups. Retrieved
Keurig Green Mountain, Inc.. (2014). Corporate profile. Keurig. Retrieved from
McGinn, D. (2014). The buzz machine. Boston.com. Retrieved from http://www.boston.com/
Mifflin, M. (2014). Single serve brewer buying tips and Keurig brewer features. About.com. Retrieved from http://housewares.about.com/od/coffeemakers/qt/Keurig-Brewers-and-Single-Serve-Buying-Tips.htm Neejan, S. (2014) What are the factors affecting demand and supply? Answers. Retrieved from http://www.answers.com/Q/What_are_the_factors_affecting_demand_and_supply