Keurig: From David to Goliath: The Challenge of Gaining and Maintaining Marketpl

Question

Keurig: From David to Goliath: The Challenge of Gaining and Maintaining Marketplace Leadership

QUESTION

Weigh the challenges confronting Keurig. What are the greatest risks for Keurig? What recommendations can be made to support Keurig’s growth and profitability objectives?

Keurig: From David to Goliath: The Challenge of Gaining and Maintaining Marketplace Leadership

Eric T Anderson

On March 17, 2011, the vice president and general man­ager of Keurig Incorporated's At Home division, John Whoriskey, sat in his office in Reading, Massachusetts, reminiscing about the changes he had been a part of since joining the company in 2002. At that time Keurig was a privately held company with just over $20 million in revenues and a plan to enter the single serve coffee arena for home consumers, which Whoriskey himself had been hired to head up (see Exhibit 1). Nine years later Keurig was a wholly owned subsidiary of Green Mountain Coffee Roasters, Inc. (GMCR), a publicly traded company with 2010 net revenues of $1.36 billion (see Exhibit 2) and a market capitalization of between $8 and $9 billion.

In 2003 Whoriskey oversaw the introduction of Keurig's first At Home brewer, at the same time convincing the company's board of directors to take the risky approach of launching design and development of a next-generation brewer before the first brewer had reached the market­place. That decision turned out to be critical to Keurig, providing the basis for a suite of products that secured Keurig the four best-selling coffee makers, in dollars, in Q4 2010.' Its strategy had been to offer a wide variety of coffees compatible with its single serve brewing system. Now, the company had just concluded an agreement with Dunkin' Donuts that would make five flavors of its coffee available in K-Cup° portion packs compatible with Keurig brewers. Starbucks, a company synonymous with super-premium gourmet coffee, had also agreed to offer its coffee and Tazo tea for the Keurig' single-cup brewing system.

In the fourth quarter of 2010, approximately 25 percent of all coffee makers sold in the United States were Keurig branded machines, 2 and Keurig was recognized as among the leaders in the marketplace. Keurig now faced differ­ent challenges than in 2003 when it was a small, unknown marketplace entrant. Among them, Whoriskey considered what impact the impending expiration of key technology patents and the perceived environmental impact of the K-Cup® portion packs could have on the company's growth. Whoriskey wondered what Keurig's growth poten­tial was, and how the new arrangements with Starbucks and Dunkin' Donuts could be leveraged to achieve it.

Changes at Keurig

In June 2006 GMCR completed the acquisition of the remaining shares of Keurig, transitioning Keurig from a small, privately held company to a wholly owned subsidiary of a publicly traded company. In doing so, GMCR not only signaled its commitment to single serve brewing but also reaffirmed its support of Keurig's

Case 8: Keurig: From David to Goliath:The Challenge of Gaining and Maintaining Marketplace Leadership                                                          C-93

multibrand strategy, one of the company's key differen­tiating features and an important element of its success. This move enabled Keurig to leverage the resources of GMCR to further its growth in the single serve segment. The added financial backing of GMCR was critical to Keurig's ongoing product innovation and also allowed the company to aggressively protect its design and tech­nology investments.

Ownership by GMCR allowed Keurig to pursue a new avenue for expansion of its robust offering of cof­fee varieties with its single serve brewers. As an example, Keurig and Caribou Coffee announced an agreement in early 2007 that would make eight flavors of Caribou Coffee available in K-Cup® portion packs. This arrange­ment represented a new model for production and sales of K-Cup® portion packs.

Under the terms of the arrangement, Caribou Coffee will blend and sell its gourmet coffee beans to Keurig. Keurig will be responsible for packaging the coffee into K-Cups in accordance with Caribou Coffee's specifications. Under the license from Caribou Coffee, Keurig will also serve as the wholesale distributor and a direct retailer for all Caribou Coffee K-Cups."

Rather than requiring a roaster partner to operate its own production line, Keurig could benefit from the manufacturing capabilities of its parent to pursue rela­tionships without upfront capital or leasing costs.

At the same time, tension existed between GMCR and the other roasters over the longevity of GMCR's commitment to a multibrand strategy. This tension eased as GMCR embarked on a strategy of acquiring the wholesale businesses, including the K-Cup® portion-pack production lines, of each of the original roaster partners, beginning with Tully's in early 2009, followed by Timothy's in late 2009, and Diedrich's Coffee and Van Houtte in 2010. Driving these acquisitions was GMCR's desire to become a leader in the highly fragmented cof­fee industry. GMCR added complementary brands to its portfolio while expanding its geographic presence and manufacturing and distribution capabilities.

With GMCR's backing, Keurig's ongoing success enabled it to expand its marketing and distribution pres­ence. In the holiday 2007

Keurig was looking for similar success in this suit. However, the longevity of some of the existing patents still could pose a problem. Certain patents associated with the current generation of K-Cup® portion packs were set to expire in 2012 and 2017, while brewer patents had expiration dates out to 2023. Pending patent appli­cations associated with the current generation of K-Cup® portion packs, if issued, could extend those expiration dates to 2023 as well. Without patent protection, the door could be opened to competitors such as Sturm Foods, which would look to market a product to compete with the K-Cup® portion pack, thus eroding GMCR's own coffee sales as well as royalties from other roaster coffee sales using the Keurig technology.

Another issue facing Keurig lay in the patented K-Cup® portion pack itself. Key to the quality and fresh­ness of its coffee, the K-Cup® design included materials and a heat-sealing process that made recycling difficult. Keurig had introduced the My K-Cup® reusable filter assembly in 2006, a reusable filter designed to work with the Keurig single-cup brewing system. Although it was initially targeted for use by consumers wanting to use their own gourmet coffee instead of a prepackaged portion pack, it could also provide a solution to environ­mentally conscious users who were concerned with the disposal of the used K-Cup® portion packs, which con­tained plastic and other nonrecyclable materials. That solution did not address those consumers interested in the convenience of the traditional K-Cup® portion pack, however.

Keurig's competitors were facing the same chal­lenge. In December 2010 Bunn My Café had introduced a new brewer that used pods that could be composted. In Europe, Nespresso had introduced dedicated por­tion-pack collection points to facilitate capsule recycling, and in 2009 it committed to tripling its recycling capac­ity by 2013. A similar issue had arisen in the bottled water industry. The convenience of bottled water, together with consumers' desire for a healthier alternative to soda, had resulted in rapid growth in sales of bottled water. But concerns about the volume of empty plastic containers in landfills threatened the industry and caused sales to slow, leaving bottled water manufacturers scrambling to find solutions to their

Case 8: Keurig: From David to Goliath:The Challenge of Gaining and Maintaining Marketplace Leadership                                                          C-93

Explanation / Answer

Weigh the challenges confronting Keurig.

The challenges which faced Keurig when it was a small company entering the market in 2003 was to launch the first homebrewer and ensure its market launch before it was launched by any other competitors. Also to position the coffee brewer and creating a market for the brewer. They were also challenged top provide four coffee variants with the same brewer. Now Keurig was a market leader and almost 25% of coffee places in US market used their brewer. The company faced new challenges.

The key challenges facing Keurig are as follows:

What are the greatest risks for Keurig?

The key risks facing the organization are as follows:

The Recommendations for sustaining and supporting Keurigs Growth and profitability are as follows:

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