Keurig Case Study

Summary
As of 2003, over 20 million Americans consumed gourmet coffee on a daily basis.
The gourmet coffee industry was steadily growing, distancing itself from its lowest
point of consumption recorded the mid 1990s. With this rejuvenation, Kuerig Inc, a
coffee machine manufacturing company, which had recently gone through a
business ownership restructure, was set on becoming a leader in the singe-cup
coffee industry. Kuerig, Inc. had observed that consumers were paying in upwards of
$1.50 for a cup of gourmet coffee at various coffee chains through the US. This
indicated there was a viable market with consumer demand. In turn, Keurig, Inc.
began offering coffee in a single-cup proportion size to offices with notable success.
Single cup sales increased dramatically at the turn of the millennium with Keurig
enjoying a commanding 23% share in the OCS market for 2002/03. Following such
success Keurig, Inc. wanted to develop an at-home single cup coffee brewer, the
B100 for the residential market. In doing so, Keurig would target consumers in both
office environments and homes.
Problems
Keurig Inc. has several issues when wanting to enter the at-home market.
Primarily, the main concern is market cannibalism where profitability may be
taken from its away away-from-home (AFH) market. It is paramount that Keurigs
maintain their office coffee OCS segment without loosing this share to the at-home
market. They also only have on approximately six months to launch the product,
with limited budget for supply, production costs, packaging sizes and overall
expenses.
Secondly are Keurigs competitors. There are already an number of
established competitors in the AFH market most significantly, Cafection, Filterfish,
and Flavia who collectively have 61% OCS market share. Also of concern is Keurigs
need to be the first in the at-home market. Market rumors indicate there are a
number of competitors vying to capture the initial early adapter at-home market and
establish their brand amongst this audience.
Also of concern is how the new product will be distributed, should it follow the
traditional channels of suppler, wholesaler and retailer incurring a number of
logistical costs. Or, should Keurig, distribute this product bypassing retailers, saving
cost but also risking lack of brand awareness that retailer shelf space can provide.
Alternative Solutions
Keurig Inc. has several options:
1) launch the new model B100 using the existing packaging the K-cup.
2) Launch the new model B100 with developing a new packaging version the KeurigCup.
3) For the meantime Keurig Inc. can enter the at-home market utilizing its existing
channels. However, for future success it should invest in partnership with mass
retailers.

Recommendations
A good aletnative is for Keurig Inc. is to launch the B100 model but utilsie the
previous K-Cup. It is recommended this be offered at $249, which is competitively
priced but also allows for any future prices to be leveraged higher or lower, this will
be dependent on market feedback after inception. The price will also be large
enough to distance itself from depending on its costs to be taken for K-Cup sales.
Keurig is already established and well received with KADs, this will allow
them to leverage their reputation with the new audience whilst not loosing any costs
to sell to brewers as they already have a pricing foundation. Promising data
indicates that an estimated 60% KADs will be an influencing factor in selling the
B100 single cup system, equating between 1 and 1.5 cups per brewer/per day. At
this forecast and price, the B100 will be profitable. It is also of significance that
Keurig still maintain their relationship with that of the KAD market, all successes
thus far have been generated from this market and Keurig will need to reciprocate
KADs business to maintain brand equity.
Irrelevant from on the initial plan for distribution, a key factor to Keurigs athome success will be based on retailer relationships whilst being aware of K-Cup
pricing considerations. Market reseach indicates that the target market is willing to
pay $0.55 per K-Cup, using this price will allow Keurig and their respective roasters
to make a greater profit per K-Cup whilst stabilizing price for the KADs in OCS
markets.
Both a double-headed advertising and promotions campaign should be launch
for the B100 model. In store promotions at small applicance retailers such as mass
merchants, kitchen/homeware and department stores will be benefical to sales and
brand awarenss. Offering taste samples at POS with a 10 % one-off discount voucher
would gain greater consumer awareness whilst creating an incentive for purchase.
And although the B100 model would be sold at a discounted rate, increasing the
break-even cost, the offer need only be for a 30 day period shortly after the B100s
market place entry. This incentive will also be of benefit to for market research into
sale trends and consumer beahviour when Keurig has other products making their
initial market place entry. A loyalty program for those already using Keurig products
would be an ideal means of keeping their market share, even if this may be
considered cannibalizing their consumer base.
Conclusions
It is best for the B100 to make the fastest possibly entry into the at-home market,
ideally before all competitors. Roasters can keep two inventories, one for the athome maret and another for the OCS market. However there are weaknesses, the
most concerning being the decrease in KADs pricing strategy and potential market
cannibalization. If effective in getting to the market first, maintaining its KAD market
base while developing the at-home market and creating successful relationships
with all distribution channels, particularly retailers, Keurigs B100 shows sound
market potential and profitability.

SWOT Analysis Keurig at-home B100 single cup

Strengths

Weaknesses

Already established brand

awareness/reputation
with
KADs
allowing
greater

customer
recognition/acceptance
in
the at-home market.
New company ownership
with greater experience and
funding available.
Roasters not required to
keep
separate
cup
inventories.
Roasters production levels
will
increase
with
the
potential demand due to the
new market of KADs andInternal
athome consumers.

Pricing monopoly decrease

with KADs
Market cannibalization

External

Opportunities

Threats

If first to at-home market

Keurig has greater chance to
create more effective and
cheaper brewers.
If first to market, Keurig has
greater
opportunity
to
capture market share and
awareness boosting brand
equity.
Key retailer partnerships
once product to establish
product.
Retail market entry made
easier if first to at-home
market.

Fluctuations in price and

shortages of available coffee
due to environmental effects
Low
pricing
strategies
employed by competitors
once
they
establish
themselves in the at-home
market.
Greater
consumer
awareness
in
corporate
social responsibility and fair
trade coffee.
Theft of K-Cups to use at
home

Break
Even Analysis - $149 Brewer Pricing
Parameter Values:
Unit Sales Price
Annual Projected Coffee Sales

$149.00
$175.516

Fixed Costs:
Unit Costs
Breakeven Quantity

$700,000.00
$220.00
6,699

Quantity Cost Revenue

Profit
0
5000
6000
6699
10000
15000
20000
25400
30000
40000
70000
100000

Cost
$7,000,000.00
$1,800,000.00
$2,020,000.00
2,173,780.00
$2,900,000.00
$4,000,000.00
$5,100,000.00
$6,288,000.00
$7,300,000.00
$9,500,000.00
$16,100,000.00
$22,700,000.00

Revenue
0
$1,622,500.00
$1,947,000.00
$2,173,825.50
$3,245,000.00
$4,867,500.00
$6,490,000.00
$8,242,300.00
$9,735,000.00
$12,980,000.00
$22,715,000.00
$32,450,000.00

Profit
($700,000.00)
($177,500.00)
($73,000.00)
$45.50
$345,000.00
$867,500.00
$1,390,000.00
$1,954,300.00
$2,435,000.00
$3,480,000.00
$6,615,000.00
$9,750,000.00

Break Even Analysis - $199 Brewer Pricing

Parameter Values:
Unit Sales Price
Annual Projected Coffee Sales
Fixed Costs:
Unit Costs
Breakeven Quantity

$199.00
$175.511
$700,000.00
$200.00
4,012

Quantity Cost Revenue

Profit

Cost
$7,000,000.00
$1,500,000.00
$1,502,400.00
$1,700,000.00
$2,700,000.00
$4,700,000.00
$8,700,000.00

Revenue

0
4000
4012
5000
10000
20000
40000
70000

$14,700,000.00

$26,215,000.00

100000

$20,700,000.00

$37,450,000.00

0
$1,498,000.00
$1,502,494.00
$1,872,500.00
$3,745,000.00
$7,490,000.00
$14,980,000.00

Profit
($700,000.00)
($200,000.00)
$94.00
$172,500.00
$1,045,000.00
$2,790,000.00
$6280,000.00
$11,515,000.0
0
$16,750,000.0
0

Figure 1. 2002/03 US Single-Cup Brewer Placements by OCS

Distributors.

7%

3%

2%
2%
1%

10%

Cafection
8%

Crane
Filterfish
Flavia
Kuerig

22%
20%

Newco
Progema
Unibrew
Zanussi
Other

26%