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Case Analysis: Keurig Coffee

Tamica Ali

Dr. Arogamasy
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Introduction and History

Keurig, Inc. believed in the philosophy that coffee should be brewed one cup at of coffee
at time. The company was launched in 1990 by Peter Dragone and John Sylvan. The Keurig
system was based on three fundamental elements: A patented and proprietary portion-pack
system, specially designed, proprietary high-speed packaging lines that manufactured K-Cups at
the coffee roaster’s facilities using fresh-roasted and ground coffee (or tea), and Brewers that
precisely controlled the amount, temperature, and pressure of water to provide a consistently
superior cup of coffee or tea in less than a minute when used with K-Cups. In 1998 Keurig,
through a licensing agreement, joined forces with Green Mountain Coffee Roasters to package its
high-quality Arabica beans in Keurig’s patented container, the K-Cup. By 2003 Keurig’s had
licensing agreement with Diedrich Coffee, Timothy’s, and Van Houtte.

Vision statement

To offer a variety of ways to personalize the coffee brewing experience by customizing the
temperature and strength of brew, so that every customer can enjoy the perfect cup of coffee in
less than a minute, with virtually no mess to clean up.

Mission statement

To create an atmosphere of quality and corporate social responsibility while ensuring customer
satisfaction.

Strategy

The current strategy used by Keurig is a “multi-roaster strategy that relies on strong relationships
with selected gourmet coffee roasters who take a great deal of pride in the coffee consumption
experience that supports the meaning of their brand to consumers.”

Strategic Goals

• Increase market share in the single pod brewing market by gaining “half of the 90 million
American homes with brewers.”
• Increase market share by encouraging distributors to purchase the single brew systems
and then they in turn lease or give them away
• To be environmentally and socially responsible producing products that aligns with the
companies values as an environmentally conscious citizen.

Market Analysis

The per capita consumption of coffee in the US is approximately 424 servings and the
“The total coffee market in 2008 was estimated to be 1.8 billion pounds, or $19.3 billion.” This
includes the Away-From-Home Coffee Market and Office Coffee Service (OCS) with the
increases in the amount of people drinking coffee, Keurig had a solid opportunity to increase its
market share.

“The specialty coffee market was estimated to be worth $11 billion annually. 6 Specialty
coffee consumption had increased over 48 percent in the United States from 2001 to 2006.” With
the emergence of specialty coffee shops like Starbucks, the demand for a good cup of gourmet
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coffee has increased. Keurig coffee capitalized on this and created their single cup brewing
system that offers customers a customized cup of coffee instead of a one pot system. The single
Pod machine sales has seen marked increases even though coffee maker sales dropped by “3
percent drop in 2008 as compared to 2007,” the single pod machine sales accounted for 6 percent
of the 90 million brewers in U.S. homes.

The Away from home brewers market has approximately 2.6million coffee brewers, in
offices nationwide, with approximately 1700 distributors.

Competitive Analysis

Keurig’s main competitors are Senso, Flavia Beverage system for the office market, and
Tassimo Beverage system for the at home market. Other competitors include “Cuisinart’s Cup-
O-Matic SS-1, the number 1 rated by consumer reports and which sells for $200. It is described
as being quick because it produces coffee “about three minutes for the first cup, one minute
thereafter but model occasionally leaked extra water into the cup, diluting the coffee”(Keurig,
2009), and the Melitta Take2 ME2TM. It’s quick, brewed superbly, and costs just $25. The
competitions products out priced Keurig, with Cuisinart selling for $200 and had more favorable
reviews, Melitta selling for $25 and more highly recommended, while Keurig sold for $300 and
was heavily criticized for the length of time it took to brew the first cup in relation to its
competition.

Internal Analysis

Despite the fact that Keurig did not invent the single cup system, they created
competitive advantage by increasing its value and quality and forming strategic alliances with key
companies. After obtaining the patent and launching the single serve product, Keurig partnered
with Green Mountain Coffee to manufacture and sell Keurig’s patented K-Cups. GMCR is
Keurig’s strategic partner and business investor but Keurig would later form alliances through
licensing agreements with Diedrich Coffee, Timothy’s, and Van Houtte, a vertically integrated
roaster and office coffee distributor in Canada and the United States. In 2002 Keurig sold stock
worth $10mil to Van Houte for a 28% ownership and which changed the dynamics of the
ownership structure as MDT, venture captitalist, had previously been the one major shareholder.
Coupled with its patented K-Cup, Keurig was able to offer a variety of coffees from gourmet
coffeehouses through its license and strategic alliances. In 1998, when Keurig launched their
commercial brewer, they offered eight varieties of coffee and in 2003 became the largest variety
of coffees for any single-cup system in the market. The Keurig K-Cups are produced by five
roasters packaging six total brands, thus making available over 75.

Financial Analysis

Through License agreements signed with GMCR, Dieridc Timothy, Van Houtte Coffee,
Keurig received Royalties of .04 per Kcup shipped, and over 1 billion KCup’s coffee and tea
consumed since launch of KCup in 1998. Green mountain coffee was one of Keurig’s largest
customers in 2008 accounting for 57% of KCup shipped and was instrumental in helping sales
growth at GMCR. The case stated “In fiscal 2008, GMCR net sales increased by $158.6 million,
or 46 percent, as compared to fiscal 2007 Net sales for the Keurig segment were $253.6 million in
fiscal 2008 (including $39.2 million of intercompany brewer sales and royalty revenue), an
increase of over 188 percent compared to fiscal 2007.”(Keurig Coffee, 2008) Net sale in 2008
increased by 158.6 mil or 46% since 2007. Refer to the chart containing important ratios.
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2008 2007 2006

Gross profit 35% 38% 36%
percentage

Return on assets 62% 48% 36%

Return on equity 16% 14% 10%
Total asset 18.6% 14.8% 12.5
turnover

Green Mountain coffee roasters had decreasing gross profit percentage over the years
2006 to 2008. Even though the company was experiencing increased gross profit over the three
years, the company’s sales did not increase at the same rate. The company’s earnings that were
generated from capital invested or its return on assets (ROA) almost doubled over the three years.
This is because sales doubled from 2006 to 2008. The amount of profit generated from the
money invested by shareholders—equity, increased marginally over the three years. The
company published their Return on Equity increasing returns over the last three years.

Sources of competitive advantage

• Vertical integration through Partnerships with Green Mountain Coffee, sell its coffee in
Keurig’s single-cup brewing system, Diedrich Coffee, Timothy’s, and Van Houtte.

• Licensing-agreement system enabled Keurig to offer the industry’s widest selection of

gourmet-brand coffees and teas in a proprietary single-cup format. The wide coffee
selection proved to be a key differentiator for Keurig’s brewing system.
• License agreements that created a source of Royalty revenue.

• Keurig worked with Keurig authorized distributors (KAD’s) to sell their systems to the
OCS market. The KAD’s purchased the brewers from Keurig at a price between and then
sell or rent the brewers to offices and sell the offices.

• Keurig offered several other North American K-Cup brands as of year-end 2006:
Diedrich, Gloria Jean’s, Coffee People, Timothy’s, Emeril’s, Van Houtte, Bigelow,
Tully’s, and Twinings.

• Improvements in IT system increased the efficiency of Keurig’s customer service agents

as they gained direct access to the customer’s order. This decreased issue resolution
times and lead to increased customer satisfaction.

• Keurig placed K-Cups and brewers side by side in outlets such as Bed Bath & Beyond,
Macy’s, and Target and placed over 16,000 KCups in fiscal 2008.

Recommendations
• Keurig must utilize a marketing strategy that creates a competitive advantage, thus taking
away market share from other companies and attracting those customers to gourmet
coffee and brewing systems.
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• Integrating all three attributes that customers want most into their product offering: a
reliable pod machine, easy-to-find refills and a variety of coffee flavors.

• Fix the problems with the POD: unreliable machines as well as the coffee.

• Become price competitive: Current price is $100 higher than closets competition and
$275 higher than others.

• Keurig could attempt to increase its market share on a national level as they currently
have about 6%.
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Work Cited

Moody, K. Eisner, A. (2009). Keurig Coffee, Case 29.