In 1990, John Sylvan and Peter Dragone entered the coffee brewing industry by launching their company Keurig built upon on the question of, “why do we brew coffee by the pot when we only drink it by the cup?” Within a few years after their start-up, they were able to secure multiple patents as well as acquiring $1 million from venture capitalists to improve upon their prototype. By 1998, Keurig, which is German for excellence, was finally able to launch their first industrial strength, single-serve machine delivering a perfect cup of coffee every time. Keurig was lucky to join the coffee market at the dawn of its explosion, when consumers’ wants and needs began to shy away from traditional coffee pot brewing and shifted more towards a single cup of premium, gourmet roasted coffee. As the coffee market continued to grow, it exhibited two trends. First being the “mainstreaming” of specialty coffees and secondly, only brewing one cup of it at a time. Keurig focused its efforts towards adapting to these changes by dramatically boosting innovation, technology, and their R&D department. Keurig changed the game in the single cup sector by introducing their patented K-Cup and partnering with Green Mountain Coffee Roasters (GMCR).
These were tiny plastic cups that contained the coffee grounds already within the filter and sealed with an aluminum lid. All the consumer then has to do is place the cup within the Keurig machine (without removing the aluminum), close the lid and press a button, and in less than a minute, a fresh cup of coffee awaits. From the time of its launch in 1998, Keurig offered only 8 varieties of GMCR coffee and by the early 2000’s consumers had the choice of over 200 varieties from 30 different brands. When it comes time that Keurig’s patents will expire, competition will skyrocket, so it is extremely important that they pay close attention to their competitors’ moves. After an in depth analysis of the entire coffee industry, its competitors, and major market players, I have determined three recommendations to go forward with: Recommendation 1: Expand internationally using a transnational strategy. Recommendation 2: Follow GMCR’s 2012 initiatives with increased innovation Recommendation 3: Pursue a recycling initiative or biodegradable K-Cups With the coffee drinking market growing as fast as it is along with the amount of competition that can present in the market, it is important that firms build their brands and are constantly improving what they have to offer.
Recommendation 1: Expand internationally using a transnational strategy. Current in the industry, the top market players have established themselves in the United States as well as in other various parts of the world such as Europe and Asia. In order to be a serious competitor, Keurig must consider the advantages to expanding internationally, not only for sales but for manufacturing purposes as well. That being said, it is extremely important that companies pay close attention to other cultures and certain characteristics that effect each community differently. Especially when you are attempting to enter somewhat of a segmented market. Keeping foreign cultures in mind, implementing a transnational strategy would be the most advantageous in terms of serving the needs of other countries. Keurig would impose a think global, act local strategy or “glocal”. The book describes this as a middle ground strategy for when there are relatively high needs for local responsiveness as well as appreciable benefits to be realized from standardization. Although coffee is somewhat the same all over, different cultures prefer different types or blends. It is crucial that a company understands a cultures preferred wants and needs before embarking abroad.
Although it may be difficult to implement, the benefits of sharing information and resources across boarders along with flexible coordination can far outweigh the negatives. Because coffee can become so standardized, it will not be extremely difficult or costly to differentiate between the lines. If Keurig wants to be able to compete with the other industry leaders, it is essential that they take the time to do careful research, then implement their strategy for expanding abroad. Recommendation 2: Follow GMCR’s 2012 initiatives with increased innovation With the expiration of Keurig’s patents coming to a near, it is crucial that Keurig be on the defensive end for a while and prepare themselves for any major market moves. In order to prepare themselves, Keurig must also have some tricks up their sleeve to keep their market share and diversification high because of the relatively low barriers to entry. There were two of GMCR’s 2012 initiatives that stood out as good plans for attack. The first one dealt with launching new coffee makers such as the Rivo Cappuccino and Latte System as well as new variety blends to accompany them. When their patent expires, launching a completely new product with new patents will pave the way for increased market share.
Keurig will be able to compete in a much broader market and can appeal to greater amounts of consumers. In addition to developing new variety packs, it is also essential that Keurig pursue more beverage options to appeal to a broader market. For instance, GMCR mention introducing a Wellness Brewed line to include healthy beverages containing vitamins and antioxidant ingredients. Keurig must continue growth between certain partnerships to keep up with certain trends in the market to be able to jump on new opportunities that present themselves and can be taken advantage of. Innovation is extremely key to remaining on top, and it is one of Keurig’s primary key success factors. Recommendation 3: Pursue a recycling initiative or biodegradable K-Cups Pursuing a green initiative, I believe will bring nothing but prosperity to Keurig. Being economically and socially responsible can yield high returns if done in the right way. With the coffee industry already in the global spotlight with Fair Trade agreements, it certainly would add credibility to a brand.
With a large number of coffee drinkers already economically conscious, it would exponentially boost ratings if they were enforce a recycling initiative similar to what Nespresso did with their “ecolaboration” and encouraging consumers to recycle. Equally as important, if not more, would be the need for developing biodegradable K-Cups. It is very important to the world and its consumers to give back to the earth and not harm our environment. With the extremely high number of K-Cups produced, it would be extremely beneficial to find a way for those tiny little cups decompose into the ground. From the time Keurig was launched until 2006, over 1 billion K-Cups had been consumed. Within the next two years, another 2 billion had been consumed by 2008. That is an exceptionally large amount of K-Cups potentially harming the environment that could otherwise be helping to add to our nutrient rich soil. Industry Analysis
Exhibit 1: Dominant Economic Forces
Market size and growth rate:
The coffee market within the United States is steadily increasing from year to year. In 2012, the US alone consumed nearly one-third of all coffee worldwide. That equals out to roughly 400 million cups of coffee per day. During World War II, US coffee consumption accounted for nearly 80% of all coffee worldwide. Despite the drastic change in percentages, the coffee industry has never been as profitable as it is today because consumer value migration. In the early 90’s, P&G, Phillip Morris/Kraft, and Nestle held nearly 90% of the entire coffee market. When the market for specialty coffees began to take hold, within six years, that market had already grasped 22% of the total market share, leaving the big 3 in the dust without knowing how to properly react to the extensive growth. The big names were concerned with price and consistency while specialty coffee focused on origin, quality, processing and cultivation.
It was estimated that the total coffee market consumption was nearly 2.9 billion pounds or $30-$32 billion in 2012. Specialty coffee accounted for nearly 37% of volume share and over 50% value share meaning it was far more profitable than generic coffee. In 2010, there were 90 million coffee brewers within US households and in 2012 alone, approximately 24 million brewers were purchased. During this growth phase, single cup brews increased 52% while all other brews only increased 3%. Coffee pods and single cup brews have experienced dramatic growth and have begun taking over the entire coffee market share. From 2011-2017, it is expected that these will lead the evolution with a 74% off-trade growth. Number of Rivals:
Within the specialty coffee industry, there are only a handful of companies that compete at the level of Keurig and their single K-Cup technology. There are four main market players that have similar brewing technologies. The most successful competitor would have been Nestle with their Nespresso brewing machine released in 1976 that utilized pods for their espresso. Their technology has been around the longest but with the emergence of Keurig, they slowly began to be overshadowed. Keurig’s other three primary competitors included Mars’ Flavia beverage system which targeted offices, Kraft’s Tassimo system which offered an at home brew, and lastly there was the Senseo brewing system manufactured by Sara Lee. Scope of competitive rivalry:
The coffee industry has a massive international market that reaches all points around the world. The US has the next largest market compared to France. Americans consume 276 cups of coffee a year while the French consume 395. Nestle took advantage of this by expanding its technology to Europe to include both France and Switzerland as well as in Japan and China. Within the US, Keurig began to dominate by purchasing companies nationwide to increase its market share much quicker than rival companies were able to keep up with. Specialty coffee already had a strong foothold in New England. To expand their brand, Keurig partnered with Van Houtte to gain market share in Canada and later purchased Caribou Coffee (Midwest) as well as Tully’s coffee (Pacific Northwest). Number of Buyers:
The number of buyers within the Unites States is extremely vast. As mentioned earlier, nearly 90 million of American households had a coffee brewer of some sort. The scope of brewers reaches far beyond that and can be classified into smaller groups. Households: extremely prevalent within the industry with high purchase power Hotels: approximately 5 million coffeemakers are in hotel rooms in the US Businesses: most, if not all businesses have a coffeemaker onsite or in their break rooms. B2B: Wal-Mart, Starbucks, Office Depot, Staples, Bed, Bath & Beyond Pace of technological change:
The increase of technology and push for innovation plays a huge role in gaining market share. The evolution from a coffee pot to single cup brews has sparked a huge push to develop the perfect cup of coffee while at the same time making the process simpler. Coffee pods lead the way for the early 2000’s but when Keurig introduced their K-cups, other companies were eager to jump on board. Their patented technology included the coffee and the filter all into one simple cup. Keurig also released the My K-Cup, which allowed consumers to use their own coffee grounds to make a single cup roast. Upon Keurig’s patent expiration in 2012, other companies such as Breville and Cuisinart developed their own single cup brewers and even offering a My K-Cup as part of the package. Specific brewing techniques are important to customers in terms of getting the most out of your cup of coffee. Improving upon the injection brewing process is the key to perfecting the brew. Innovation is extremely crucial in order to meet customer demands as well as keeping up with their wants and needs. It is critical to have a strong research and development department to keep up with these changes. Standard Products:
Within the specialty coffee market there are two products used within conjunction. There is the brewing machine itself and then there is the pod or the cup. There is mild differentiation between products but vast differentiation between different blends or roasts and so on. In the end, what it comes down to is the techniques applied to the brewing processes. Though coffee is not the only thing a Keurig can brew. It can brew a wide variety of beverages such as tea, lemonade, cider, fruit brews, and cocoa, which many competitors cannot compete with. Vertical Integration:
By partnering with Green Mountain Coffee Roasters, Keurig was able to keep the manufacturing and selling process within the boundaries of their supply chain. Also by partnering with Van Houtte, they were able to acquire an already very successful vertically integrated company on top of being able to expand their market share into Canada. GMCR divided their operations into 3 different segments: Specialty Coffee business unit (SCBU), Keurig business unit (KBU), and Canadian business unit (CBU). Each of these carry out different responsibilities such as packaging processes or customer relations. For instance SCBU deals traditional packaging for supermarkets, convenience stores and distributors, while KBU focuses more on single serve packs for at home brewers. Keurig also has many licensing partnerships to carry and promote their product in their stores such as Wal-Mart and Starbucks. Exhibit 2: Five Forces Analysis
Rivalry: Weak to Moderate
Buyer demand is growing rapidly (-): the specialized coffee industry is growing as exponential rates, in some years even double digit increases Costs to switch are high (-): if a consumer owns a Keurig, then they are unable to switch to any other brand that does not utilize K-Cups Number of buyers are increasing (-): it is a growing market that is spreading rapidly and gaining nationwide attention Fairly high product differentiation (+/-): The brewers themselves are strongly differentiated as well as the diversity in the roasts themselves Threat of New Entrants: Strong
Entry barriers are low (+): once Keurig’s patents expired, it made it easier for companies to enter the market and mimic preexisting products Buyer demand is growing (+): specialty coffee drinks are growing dramatically Expanding market segments (+): companies are purchasing or partnering with other companies to increase the geographical market segment. In doing so they are also expanding their product lines buy adding new brews Threat of Substitutes: Moderate to Strong
Substitutes are readily available (+): consumers can choose to go to Starbucks or other coffee shops. Customers can also pursue another source of caffeine such as sodas, energy drinks, or 5-hour energy Substitutes have comparable features (+): Whether customers are pursuing a caffeine fix or looking for a good cup of coffee, they are each similar and readily available Relatively high switching costs (-): it would be much cheaper to put a K-Cup into the brewer than to go out to a coffee shop and purchase a specialty brew. Same idea applies for purchasing sodas or energy drinks Supplier Power: Very Strong
Differentiated product selection (+): the products available are specific to each company’s needs such as K-Cups or pods. Coffee blends are very specific as well and rely on the same product on a regular basis No good substitutes for suppliers without high switching costs (+): it can be extremely difficult to switch coffee producers. There are specific contracts in place that need to be fulfilled. Supplier industry is more concentrated (+): Keurig obtains its coffee from specific companies that their sole purpose is to provide coffee. The industry is also dominated by a few large companies Bargaining Power of Buyers: Weak
Buyer demand is growing (+): It is expected that the specialized coffee industry will continue to grow and bring high demand Buyer might not necessarily be able to postpone purchase (-): The primary purpose of purchasing coffee is for the caffeine intake and waking up. Certain customers integrate coffee into their daily routine and do not fare well without it High switching costs (-): difficult and expensive to purchase an alternative product. Buyers price sensitive (-): In Keurig’s case, this works to their benefit because purchasing a specialty cup of coffee is more expensive than purchasing K-Cups and customers are likely to revert to Keurig when money is tight Exhibit 3: Driving Forces
Entry or exit of major firms:
In 2012 when Sara Lee was forced to discontinue their Senseo coffee maker, that in turn opened up a great deal of market share for competing companies such as Keurig to take advantage of. Companies were able to thrive off their misfortune and gain market share and new customers. On the contrary, barriers to entry into the market are relatively low, meaning new competition can arise causing existing companies to have to shift their focus and execute counteracting strategies. Buyer preferences shift to standardized product:
With this situation I believe that Keurig has the upper hand whether buyers prefer a standardized product or a differentiated product. The same can apply for a situation in which buyers have to cut costs. Keurig offers both cheap, generic beverages and expensive, high end K-Cup choices. Keurig is the better alternative to purchasing an expensive specialty drink at a coffee shop. Regulatory or government policy change:
There could be an increase in price between trade agreements or extra tariffs imposed for importing coffee into the United States. This could cause Keurig to have to make drastic changes in their pricing or expenditures. Although they might not deal directly with importing the coffee, they would surely be impacted down the line and consequently have to bear the brunt of it with increased prices from suppliers. Product innovation:
There is always a high probability of a competitor coming out with a revolutionizing innovation that boosts them to the forefront of the market. Both Kraft and Nestle are capable of improving their products and making Keurig seem outdated. Keurig would in turn have to implement a sound strategy to counteract their move and boost their research and development teams. Exhibit 4: Key Success Factors
Technology and Innovation:
Held 26 US patents and 65 international patents in 2007 Patented proprietary portion-pack system using specially designed filter, sealed in a low-oxygen environment to ensure freshness (K-Cups) Specially designed proprietary high-speed packaging lines that manufactured K-Cups Brewers that precisely controlled the amount, temperature, and pressure of water to provide a consistently superior cup of coffee in less than a minute Eliminating the need to measure water and coffee grounds
Penetrating the medium and low income homes and not just appealing to high end Reliable pod machine, with easy to use refills, and a variety of coffee flavors that are easy to find. Leading to a 94% customer satisfaction rating Offering My K-Cup to use for personal coffee grounds
Encouraging distributors to give away or lease Keurig brewers to businesses in order to attain the real profits from the K-Cups Utilizes “razorblade model” that keeps customers continually having to replenish their K-Cups once they have purchased the brewer GMCR deriving 90% of consolidated net sales from Keurig appliances and K-Cups and receiving $.04 royalties from every K-Cup sold through partners Expanding Brand Name
Vertically integrating their business to keep it within the supply chain Partnered with Van Houtte, Starbucks, Dunkin Donuts, Newman’s Own, Gloria Jean’s, Coffee People, Caribou Coffee, and Tully’s coffee in order to increase market share Partnering with large corporations such as Starbucks, Home Depot, Wal-Mart, Staples, and Bed, Bath and Beyond to promote and stock their product on their shelves With these partnerships, Keurig was able to expand their customer base not only geographically but also by expanding their beverage variety to more than coffee and tea Exhibit 5: Competitor Overview
Despite stiff competition and rapid growth of single cup brewing, barriers to entry remained relatively low. Although, the high demand for Keurig’s K-cup technology began to vastly outnumber that of its competitors, many still pursued their techniques and innovative strategies. Sara Lee: Their brewing line was called the Senseo which was the first real competitor of Keurig. The Senseo utilized similar brewing techniques by being able to vary the amount of water passing over the coffee, which affected the flavor and strength of the brew. When Keurig introduced their Vue system in 2012, Sara Lee was unable to compete forced to shut down production due to unreliable performance and short product life span. Kraft Foods: Launched their product called the Tassimo, which utilized coffee pods called T-Discs that caught on extremely well in France. After spending nearly $10 million in promoting T-Discs, coffee pod volume grew 26% in 2005 and another 35% the following year in France. Unfortunately, due to lesser quality of coffee and limited user control features, sales were negatively affected.
On top of that, in 2012, approximately 835,000 coffeemakers in the US and another 900,000 in Canada as well as 4,000,000 T-Discs were recalled after reports of brewers spraying hot liquid and causing second degree burns to consumers. Mars: They developed a brewing system named Flavia. Their primary focus was creating a coffee maker that would be ideal for the workplace or in a business environment Nestle: Nestle has been in the coffee industry the longest out of the competitors. In 1976 the launched the Nespresso machine that was one of the first to encapsulate the single cup espresso. Their technology quickly caught on and within ten years had expanded their market to Switzerland, Japan, and Italy. In the early 90’s they introduced their household espresso machine in France. By 2000 they were experiencing double digit growth by focusing on the highest quality coffee. Their industry was skyrocketing and in 2006 exceeded revenue of 1 billion, quickly followed by 2 billion in 2008, then 3 billion in 2010. By 2012 they had over 8,300 employees across 60 countries, offering 30 machine models, which all lead to their 19% market share in espresso and premium coffees that paved the way for the rest of the premium coffee roasters. Exhibit 6:
The chart below demonstrates the breakdown of net sales between 2010 and 2012 of each of the products the Keurig sells. It is clear the vast majority of sales is due to sales of single serve packs growing on average nearly 1 million a year. Keurig has experiences substantial growth from year to year with the exception certain royalties. Their ability to rely on the sales of single serve packs acts as their distinctive competency.
Exhibit 7: Weighted Competitive Strength Assessment
The weighted competitive strength assessment demonstrates that Keurig and Nestle both have the strongest market positions compared to the inferior Kraft and Sara Lee. Keurig exemplifies its strengths in quality and innovation while Nestle has the upper hand in their developed brand name and advertising abilities. Kraft and Sara Lee have lower scores considering their failed attempts to compete at the top only to have their products discontinued or recalled which reflects their overall quality which is demonstrated in the group map below
Exhibit 8: Business Level Strategy
Keurig focuses their strategy around broad differentiation by offering customers something that competing rivals cannot. Keurig coffee makers have appeal to all coffee drinkers worldwide, especially in the Unites States, whether they are pursuing a premium roast or a basic cup of coffee. They appeal to the niche market of specialized gourmet coffee drinkers with the ability to reach the broader section of all coffee drinkers. They offer something attractively different while keeping quality at a premium. In doing so their customer loyalty continues to flourish with nearly all of them being repetitive buyers as well as a 94% customer satisfaction rating. Through all of their partnerships with other coffee companies they are now able to appeal to vast array of customers, and not just coffee drinkers. Their massive selection of K-Cups includes over 30 brands with over 200 varieties to choose from. Their partnerships have also put them to the forefront by being able to grasp a nationwide market share that appeals to everyone. When it comes to innovation, Keurig’s puts that as a top priority, which keeps them ahead of their imitative competitors, especially when it comes to the speed and simplicity of using their product.
Their ability to evolve their technology through innovation is their strongest sustainable competitive advantage. In addition, their continued increase in capital investments is why they have remained an industry leader as well as their large amount of patents they are able to retain. Keurig would not be nearly as successful without their well-built, in-depth research and development team. Keurig stands by their name of excellence. Lastly, their implemented growth strategies is what will keep them on top with continual improvements and innovations to all aspects of their brand. Of the 90 million households with coffee makers, Keurig has made it their goal to convert half of those coffee makers to Keurigs as well as strongly pursuing hotel rooms to implement their technology. GMCR has four vectors of their growth strategy for Keurig which include new brewer technologies, new beverage categories, new brands, and new channels. Keurig clearly demonstrates their strive for product superiority over the rest of the market. Exhibit 9: Resources and Competitive Capabilities
Keurig has developed a strong loyal customer base that spans beyond specialty coffee drinkers, and even beyond coffee drinkers for that matter, including tea and cocoa Acquirement and partnership with multiple established companies nationwide that strengthen their market share, customer base, and supply chain success Core Competencies
Strong differentiation from their competitors in terms of offering their superior K-Cups and premium roast coffee blends Their strong ability to improve upon their technology with their extremely advanced and well-rounded research and development department Distinctive Competencies
Keurig has become an industry leader in the single cup market by vastly differentiating their products from competitors through a series of patents that revolutionize the speed and simplicity of using their coffee makers. Exhibit 10: S.W.O.T.O. Analysis
Keurig is one of the leading innovators in the industry with one of the best research and development teams to back them that are constantly aiming to improve their brand Expanding the firms brand vertically and geographically to gain greater market share and appeal to consumers by broadening their beverage horizons and offering over 200 different varieties The idea that customers will continually run out of K-Cups and have to repurchase them and earning a $.04 royalty with every K-Cup sold through another brand Weaknesses
Keurig, unlike many of the other industry leaders, has not firmly established itself as a strong international brand. In order to stay at the top, a company must compete with its rivals on other playing fields. There is tremendous room for growth internationally, especially with the technology Keurig has to offer Opportunities
Total coffee machine sales are projected to increase by 20% from 2011-2016 The specialty coffee industry is experiencing rapid growth
New iced coffee drinks are becoming more popular in the market Threats
The idea that some of Keurig’s key patents will expire in 2012, meaning they are vulnerable to mimicking as well as potential flooding of new entrants due to the relatively low barriers to entry Increased tariffs or trade barriers
Implementing a green initiative to encourage recycling as well as developing biodegradable K-Cups to not hurt the environment Expanding internationally and increasing its market share Push to partner with hotels to include a Keurig coffee maker in every room