Chris stevens keurig net worth

CASE 8: 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.

Exhibit 1: Members of Keurig and GMCR Senior Management Teams

Keurig Senior Management Team

· Michelle Stacy, President

· John Whoriskey, Vice President, General Manager At Home Division

· Dave Manly, Vice President, General Manager Away From Home and Consumer Direct Divisions

· Kevin Sullivan, Vice President, Engineering

· Ian Tinkler, Vice President, Brewer Engineering

· Bob McCall, Vice President, Packaging, Equipment, and R&D

· Dick Sweeney, Co-Founder, Vice President, Contract Manufacturing and Quality Assurance

· Basil Karanikos, Vice President, Packaging Special Products

· Chris Stevens, Vice President, Corporate Relations and Customer Development

· Mark Wood, Vice President, New Business Development

· Mike Degnan, Vice President, General Counsel

· John Heller, Vice President, Finance

GMCR Senior Management Team

· Larry Blanford, President and CEO

· Howard Malovany, Vice President, Corporate General Counsel and Secretary

· R. Scott McCreary, President, Specialty Coffee Business Unit

· Frances Rathke, Chief Financial Officer

· Stephen J. Sabol, Vice President, Development

· Michelle Stacy, President, Keurig

Exhibit 2: Green Mountain Coffee Roasters Financial Performance ($ in thousands)

Fiscal Year

Net Sales

Gross Profit

Net Income

2005

161,536

 56,975

 8,956

2006

225,323

 82,034

 8,443

2007

341,651

131,121

12,843

2008

492,517

174,040

21,669

2009

786,135

245,391

54,439

2010

1,356,775

425,758

79,506

Note: Net income for 2005 and 2006 is after equity in losses of Keurig, Inc., net of tax benefit. GMCR acquired Keurig in June 2006.

Source: GMCR Annual Reports.

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. 1 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.

The Company and Its Products

Keurig had been founded to commercialize an innovative technology that allowed coffee lovers to brew one perfect cup of coffee at a time. 3 Beginning with the company’s inception in 1992, the word “keurig,” derived from the Dutch word for excellence, had been the guiding principle behind the company’s products and services. With its patented single serve brewing system, Keurig first entered the office coffee service, or Away From Home (AFH), marketplace in 1998. In 2003 Keurig became one of the first to enter the At Home (AH) marketplace with a single-cup brewer designed for use in the home.

Keurig’s single-portion brewer strategy was built on three key product features: a coffee brewer that perfectly controlled the amount, temperature, and pressure of water to provide a consistently superior-tasting cup of coffee; a unique, patented portion-pack system (marketed under the K-Cup® brand) containing ground coffee beans as well as filter paper; and a varied coffee selection to replicate the choices available in a gourmet coffeehouse.

©2012 by the Kellogg School of Management at Northwestern University. This case was developed with support from the December 2009 graduates of the Executive MBA Program (EMP-76). This case was prepared by Elizabeth L. Anderson under the supervision of Professor Eric T. Anderson. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 847.491.5400 or e-mail cases@kellogg.northwestern.edu . No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management.

This varied coffee selection was a key differentiator for Keurig and was achieved through licensing arrangements with a variety of gourmet coffee roasters. A selective but nonexclusive relationship with a coffee roaster enabled the roaster to pack its specialty coffees in the K-Cup® portion pack. Coffee roasters controlled the quality of their coffee and the number of varieties available through portion-pack production lines. A production line was owned or leased and operated by the coffee roaster. K-Cup®portion packs were produced by four North American roasters with more than seventy-five coffee varieties. Roaster partners included GMCR, Diedrich Coffee, Inc., Van Houtte, Inc., and Timothy’s Coffee of the World, Inc. The roaster paid Keurig a royalty for each K-Cup sold. 4 Other roaster partners were subsequently added, such as Tully’s in 2006.

At the time of Keurig’s entrance into the AH marketplace in 2003, the company was privately held, with three significant shareholders. MDT, an investment advisory firm that managed a U.S.-based profit-sharing plan, had served as Keurig’s lead venture capital investor since 1995 and led the company’s board of directors. GMCR held a 42 percent stake in Keurig, and Van Houtte owned 28 percent. As provided for in separate shareholder agreements with MDT, neither GMCR nor Van Houtte was allowed to have a seat on the board of directors, enabling Keurig to maintain a roaster-neutral company strategy.

At Home Product Introduction

Keurig felt that being one of the first entrants in the product category was critical to its performance. The company’s launch of the B100 single-cup brewer in September 2003 coincided with Salton’s U.S. launch of the Melitta One:One brewer and Flavia’s SB100 brewer. Each brewer differentiated itself by its features, underlying brewing technology, and packaging of the coffee. Both the Keurig and Flavia brewers used a proprietary portion pack, while the Melitta brewer used a 44 mm pod. All three provided the ability to brew a single cup of coffee at a time (see Exhibit 3 ). The Keurig and Flavia systems (both brewer and coffee) were only available online, whereas the Melitta system was available online and in limited retail outlets.

Exhibit 3: Comparison of Early Single-Cup Brewing Systems

Features

Keurig B100

Melitta One:One

Flavia SB100

Senseo

Home Café HCC100

Manufacturer

Keurig

Salton

Filterfresh

Phillips

Black & Decker

Coffee packaging

Proprietary K-Cup

44 mm pod

Proprietary Filterpack

62 mm pod

62 mm pod

Brewing sizes

8 oz.

5 oz., 8 oz.

5 oz., 8 oz.

4 oz., 8 oz.

7 oz., 9 oz., 14 oz.

Water reservoir

64 oz.

28 oz.

96 oz.

50 oz.

34 oz.

Shortest time to first cup <

1 min

1 min

< 1 min

2+ min

1 min

Shortest time to second cup

Immediate

45 sec

40–45 sec

30 sec

10 sec

Number of flavors

75+

6

15

4

9

Suggested retail price

$249.99

$49.99

$99.99

$69.99

$59.95

Source: Singleservecoffee.com , company analysis.

A New Business Is Brewing

The AH single serve concept was well received by coffee lovers. Early press and user reviews showed that customers were happy with the ability to brew a single cup of coffee with no mess—no scooping of coffee or dealing with filters—in 60–90 seconds. Feedback among the users of the three initial entrants varied, however, with the selection of coffee varieties a common thread for discussion. Melitta One:One offered only five options and the Flavia system was only slightly better, with a choice of eleven flavors. In addition, both systems’ offerings were restricted to a proprietary roaster. Meanwhile Keurig offered a total of more than seventy-five options encompassing a variety of flavors from four different coffee roasters. It quickly became apparent that feedback on a brewing system was often driven by the user’s individual coffee preferences, so greater quality and variety of coffee positioned Keurig well in the marketplace. Users complained, however, that all three competitors lacked availability of the proprietary coffee packs in retail stores. Online ordering was the only option and required some advance planning to have a continuous supply of coffee.

Some new, larger players entered the single serve marketplace in 2004. In March of that year, Phillips and Sara Lee International launched the Senseo 7810 in the United States. The pod-based system brewed Sara Lee’s Douwe Egberts coffee brand and produced a distinct frothy layer on top of the brewed coffee. The U.S. introduction of the Senseo followed launches in the Netherlands, France, Germany, and Denmark between 2001 and 2003. More than 5 million machines and 2.5 billion pods had already been sold in those countries. 5 The brewer’s primarily plastic construction was still viewed as sturdy and overall it received positive reviews for its simplicity and ease of use.

In February 2004 Procter & Gamble announced that it had joined forces with four appliance marketers 6 to launch the Home Café single-cup brewing system in conjunction with a $50 million-plus marketing campaign. The Home Café pod system would brew Folgers and Millstone coffees. Black & Decker produced the first Home Café brewing system in May 2004, but users frequently complained about the machine leaking, the difficulty of properly placing the pod in its holder, and the volume of plastic used in the brewer construction. In late 2004 the Mr. Coffee Home Café brewer was added to the line and received more positive reviews.

Both the Senseo and Black & Decker Home Café systems were available online and in limited retail outlets, an improvement upon the limited distribution of early products. Across all products, however, reviews of the coffee varied from one extreme to the other, highlighting the challenge of being able to meet the taste requirements of a range of coffee drinkers, from the casual one-cup-a-day drinker to the gourmet coffee snob.

Even so, the entrance of P&G marked a turning point for single serve brewing. Extensive ad campaigns, including infomercials and an appearance on the show Survivor in September 2004, created awareness of the Home Café product line. In turn, this created spillover recognition for all single serve brewing systems, and the category grew.

Managing Brewer Manufacturing Costs

At the time of Keurig’s B100 launch, management knew that its brewer price was very high. Even so, Keurig management felt that it was important to gain experience and consumer exposure in this emerging business. Mark Wood, VP of new business development, explained, “Launching new products stimulates interest in the company and in the category.”

When the B100 was introduced in fall 2003, Keurig embarked on an ambitious three-pronged approach to address the brewer’s cost structure. The approach consisted of reengineering the existing brewer to reduce cost, evaluating overseas options for brewer manufacturing, and launching a new brewer project in time for the holiday 2004 season, including retail distribution. Kevin Sullivan, VP of engineering, joined Keurig just after the initial launch of the B100 brewer and, after overseeing modest cost reductions on the current design, focused the engineering team’s attention on the next-generation brewer, the B50 (see Exhibit 4 ).

The B50 design effort replicated existing Keurig benefits: time, temperature, and volume (TTV) control, use of the existing K-Cup® portion pack, at least two brew volumes (e.g., 6 oz., 8 oz.), and support of a retail price point of $149. Limiting the variance in the TTV components was key to meeting the taste profile requirements of both the “Cuppers” 7 and Keurig’s roaster partners. Engineering evaluated three alternatives in its design process: redesign of the B100 brewer, evaluation of the pod systems in the marketplace to see how they could be modified to achieve the Keurig benefits, and a bottoms-up new design of the brewer. Ultimately Keurig chose to start from scratch when designing the new brewer, balancing the product features with budget and schedule requirements to meet the fourth quarter 2004 deliverable.

In parallel with the B50 design efforts, Dick Sweeney, VP of contract manufacturing and quality assurance, oversaw efforts to select a manufacturer for both the B100 and the new B50 brewers. After narrowing the field down to three companies, Keurig selected a single vendor in late December 2003. Production of the B50 began in September 2004, and in November 2004 the company received the first shipment of brewers via airfreight to meet the goal of holiday distribution.

Keurig’s Retail Launch Strategy

Keurig’s retail launch strategy included two features central to its success. Whoriskey explained it as follows:

· We recognized that retailers were different and competed in different market segments. Selling a single brewer could create conflict among retailers that could limit distribution.

A high-end retailer such as Williams-Sonoma did not typically carry the same product assortment as a mass merchant like Target. We also needed to offer assurance to retailers that their support of a premium brewer would be worth their investment.

As a result, Keurig envisioned producing a suite of brewers—“good, better, best”—that would allow it to offer different products in each retail segment to meet the needs of those retailers’ target customers. The products would match varying retail price points and offer a range of product features. The “better” category of product would provide broader appeal for multiple segments. Initially the B50, with its improved cost structure, fit the better category and was designed to meet a price point of around $149. In some cases, a “good, better, best” suite of products also allowed Keurig to meet varying retailer margin requirements. As shown in Exhibit 5 , average profit margins varied between mass merchants such as Target and premium retailers such as Williams-Sonoma.

Exhibit 5: Retailer Annual Gross Margins (%)

Retailer

2006

2007

2008

2009

2010

Amazon.com

22.9

22.6

22.3

22.6

22.3

Bed Bath & Beyond

42.8

41.5

39.9

41.0

41.4

Kohl’s

36.4

36.5

36.9

37.8

38.2

Macy’s

39.9

40.4

39.7

40.5

40.7

Target

30.3

30.2

29.8

30.5

30.5

Williams-Sonoma

39.9

38.9

33.8

35.6

39.2

Source: RetailSails data.

In launching the B50 brewer, Keurig also needed to address retailer concerns that investments in support of Keurig would not be eroded away. That investment included inventory costs to carry the brewer, shelf space, advertising, and training of in-store staff about the product. To address potential retailer concerns, Keurig created a minimum advertised price (MAP) program.