Kuerig Coffee Systems and the Single-Serve Coffee Market Case Study

Excerpt from Case Study :

Coffee Roasting Companies

Coffee Roaster Companies

The single-serve coffee market is the fastest growing of the coffee industry. The case is dated 2004 and in the interim eight years, the industry has changed dramatically -- customers now favors single-serve flavored coffees, the single-serve coffee brewers have acquired a cool cache, and no pre-brewed, pre-prepared, pre-packaged stigma remains. This paper is based on a review of the Harvard Business Review Case Study: Keurig.

How attractive is the Keurig system to each of the following participants in the Office Coffee market?

The typical office coffee distributor. Following consumer channels, office coffee distribution is Keurig's second largest base, with 1,937 installed units. Total coffee consumption by place is about 17% at work. However, within the work environment, the percentage of coffee consumed at work is 62%. The benefits of single-serve coffee to distributors who supply business offices are numerous. Workers are predominantly staying in the office to drink their coffee, and one can assume that most coffee is not brought from home in a thermos. Convenience in handling is the top benefit for distributors of single-serve coffee to office environments -- and for consumers, as well.

b. The coffee roaster (Green Mountain). The Green Mountain Coffee Roasters model is sufficiently robust to attract Starbucks attention. Green Mountain has dominated the single-serve segment for years, and in the spring of 2011, Starbucks agreed to package its coffees in single-serve style for brewing in Keurig's machines. The patent on Keurig's machines is soon to expire, leaving an impressive opportunity for Starbucks to sell the Keurig brewers or to manufacture their own machines. Sales of Green Mountain products rose to $42.9 million in 1997, up from $33.4 million in 1996.

c. Keurig. The Keurig system has gained market share consistently since its invention in 1997. A number of coffee roasters are now involved in production of the K-cup, and competitors are taking notes. Further, product placement has expanded remarkably. K-cups of all flavors can be found in drug stores, convenience stores, grocery stores, shoppers clubs, gourmet food outlets, and specialty coffee stores. Consumers can also purchase K-cups and Keurig products online to receive their products by mail. The popularity of Keurig products in these venues can create interest in other venues as well, resulting in increased market share driven by high customer interest.

d. A typical office manager. A typical office manager will find Keurig's brewing machines to be easy to use and maintain, and the selection of single-serve coffees available for use in the machines is amazingly broad. Ordering and handling the coffee is easy, and an office manager can increase his or her popularity with employees, bosses, and clients by conducting a simple poll of favorite coffee roasters and coffee flavors offered by those roasters. A ready supply of various flavors of single-serve coffee is a low maintenance activity for an office manager. In addition, there is very little waste with the Keurig system, unlike conventional coffee pots and brewing systems that use ground coffee beans in a filter.

e. The coffee drinking employee. This consumer is the basis of the target market for single-serve coffee distributed to business offices. What this segment requires is a quick and delicious cup of coffee with no muss or fuss. A top requirement is reliability -- no one wants to travel to the coffee machine in the building and find that it is out of coffee. With the Keurig brewers, this is not likely to happen -- and malfunctions of the machines are rare. An employee who drinks single-serve coffee at work is very likely to appreciate the convenience and variety sufficient to purchase a single-serve brewer for home use. The Keurig system is very attractive to this consumer, and his or her business is an easy channel for Keurig to increase market share.

2. What advice do you have for Nick Lazaris concerning his dealings with MTS, the current vendor for the packaging line, and the other potential vendors? Be specific: What price goal would you have for the negotiation and what would your negotiating strategy be? The venture capitalists and the vendors don't necessarily understand coffee the way that Nick Lazaris does. Coffee aficionados prefer certain brands of coffee and are typically reluctant to switch. Starbucks is the testament of that principle in our time. The venture capitalists wanted Lazaris to launch and brand their own coffee. But Keurig understood the power of the premium roasters -- "prestige, channels, manpower and marketing experience" (HBR Keurig Case, 2004, p. 5). Licensing was clearly the better way to go, despite the valuation model used by the venture capital firms where multiples of sales were the predominant indicators. My advice to Nick Lazaris would be to trust his instincts and not let the venture capital firms pull him too far off-line.

Manufacturing Technology Systems (MTS) did not get the contract at the level of their initial bid, but they struck a deal in order to get the business. Now it appears that MTS is attempting to recoup the gap money by essentially holding the completed machines hostage. This approach does not breed confidence and Lazaris could well expect more of this type of shenanigans from MTS during future manufacturing runs. Further, Lazaris offered to go to arbitration to settle the production cost issue, but Mike Moore of MTS refused. Moore was being obstinate at a time when delivery of the first unit was already delayed. Further, once negotiations were underway to remedy the disagreement, Moore continued to delay and obstruct the proceedings and discussions. My advice to Nick Lazaris, regarding his commitment to MTS, is that Mike Moore -- who, as CEO, may or may not reflect the ethics others in the company, but he is in a position of control, so it is rational to assume that he will continue to play similar tricks to get what he believes is due to MTS. Mike Moore is not a man of his word and has shown he cannot be trusted.

3. What advice do you have concerning the selection of the vendor for the brewing machine?

Pilla, the contract manufacturer in Poughkeepsie, New York, is the right size operation to give undivided attention to the manufacture of Keurig's brewers. Pilla is lean, eager, and hungry -- and with their leveraged situation, they are likely to look favorably on a contract that produces income over the long-term. At $700 per unit, Pilla's bid is within the acceptable range. My recommendation to Lazaris is to contract with Pilla at the unit price they quoted. The rationale for this recommendation is two-fold: One, Keurig not only wants Pilla's manufacturing ability, the company wants Pilla to be excited about the contract -- despite the fact that they bid on the low end -- and Keurig wants Pilla to be motivated to produce quality units. The standards to which Pilla will manufacture the units are likely to be high -- they have very much riding on this one "basket of eggs." Two, Pilla appears to be optimally set up to manufacture the units. The size of the plant and the fact that Pilla has its own sheet metal fabrication shop are both advantages that can help Keurig to get and keep the manufacture of the units on track.

4. What actions should Keurig take to penetrate the Office Coffee Service market? Be specific: How should they price the brewing machine to the OCS distributors? How rapidly should they plan to grow and what should they do to avoid constraints on this growth plan?

The strategy that Keurig has lined out for distributors has been shown to be effective in the past. The strategy includes trial placement of the brewers and free samples of coffee during the decision-making period. In addition, the distributors offer several different options for offices to procure the brewers. Keurig could consider a buy-back program for their brewers. This arrangement would convey certainty in the quality of the equipment and consumer satisfaction with the coffee products. It is fairly unlikely that once a machine has been in place for a substantive amount of time that office managers would return the machines and force themselves to conduct a search for brewing equipment and coffee supplies. Keurig products have demonstrated appeal to consumers and the company makes money on the products. With a buy-back program in place for the brewers, as new designs for brewers result in improved equipment, it is not unreasonable to assume that office managers will be interested in replacing older machines with newer equipment -- if they can be assured of retaining access to a consistently favored coffee product. To that end, Keurig could offer distributors a sliding scale of support for purchasing new brewer equipment to place in office coffee supply locations. As distributors place more machines, Keurig could discount a percentage of the sales. Distributors would pay for the entire cost of the machine, say, for the first 20 machines installed, then they would receive a…

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