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 breakeven 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 at-home 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 Already KADs 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 will production with levels the increase established allowing brand with greater

Weaknesses Pricing monopoly decrease

awareness/reputation

with KADs Market cannibalization

potential demand due to the new market of KADs and athome consumers.

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

Threats Fluctuations in price and

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

themselves in the at-home

market.

home

Break Even Analysis - $149 Brewer Pricing

Parameter Values: Unit Sales Price Annual Projected Coffee Sales Fixed Costs: Unit Costs Breakeven Quantity 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 $149.00 $175.516 $700,000.00 $220.00 6,699 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 Quantity Cost Revenue Profit 0 4000 4012 5000 10000 Cost $7,000,000.00 $1,500,000.00 $1,502,400.00 $1,700,000.00 $2,700,000.00 $199.00 $175.511 $700,000.00 $200.00 4,012 Revenue 0 $1,498,000.00 $1,502,494.00 $1,872,500.00 $3,745,000.00 Profit ($700,000.00) ($200,000.00) $94.00 $172,500.00 $1,045,000.00

20000 40000 70000 100000

$4,700,000.00 $8,700,000.00 $14,700,000.00 $20,700,000.00

$7,490,000.00 $14,980,000.00 $26,215,000.00 $37,450,000.00

$2,790,000.00 $6280,000.00 $11,515,000.00 $16,750,000.00

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

2% 2% 1%

6%

3%

10% 8%

Cafection Crane Filterfish Flavia

22% 20%

Kuerig Newco Progema Unibrew Zanussi 26% Other