Keurig
Coffee house taste by the cup
Harvard Business Case
Presentation Group: Sophia,
Tam, Trevor, Eva, Alice, Sean
(Group 2)
Spring 1998 – Keurig, Inc
Christopher
Stevens
Nicholas Lazaris
Vice President
President/CEO Sales and
Board Member Marketing
Richard
Sweeney
Vice President,
Operations and
Engineering
“coffee house taste by the cup”
“Revolutionary” product
• Keurig K-cup is a
premeasured coffee
portion pack containing
average 9.5 grams of
freshly roasted and
ground coffee and a
conical shaped filter
paper that holds the
coffee
• Keurig Brewer
Keurig System Demo
Videoclip
Market Segmentation
- America coffee
market: $15 billion
- Delays in launching
Office Food service
coffee establishme its two-pronged
services nts
campaign
Consumer market
The founding of Keurig
Ian Greenwood Peter Dragone
Product engineering Formal business
abilities training &
Food industry
experience
Creating a way to brew coffee much more precisely and consistently
“Keurig”- a Dutch word for “excellence” as the name of the new company
The founding of Keurig
Late 1992: presenting their ideas to experienced coffee-maker manufacturers with
strong distribution channels but failed to get their interest.
●
created a makeshift coffee-maker, refined the business plan
Late 1993: failed to seek financial backing from MDT Advisers, a financial
management company responsible for the $1billion pension fund.
●
scheduled several other meetings with manufacturers and premium roasters but still gained
not much trust.
Early 1994: Received a small investment from the Food Fund and sold two prototype
brewers to Dunkin’ Donut for $15,000.
Partnership with Green Mountain Coffee Roasters
1998 Profile
Revenues: $55.8 million
Assets: $24.6 mil
Employees: 321
Market value: $25.8mil
NASD symbol: GMCR
Growing net income
New Funding, New Management
• Late 1994: reopened a • Doubts about Ian’s
dialogue with MDT abilities to run the
Advisers company going forward
April 1995: MDT & Food Ian was asked to step
Fund became major aside as CEO in favor of
investors ($1mil, 45% Peter Dragone
stake in Keurig) June 1996 was fired
Early 1996: an additional after another change of
$1mil (58% stake) position.
More New Management
• Peter Dragone’s Keurig’s search for a
resignation (Late new CEO with the
summer 1996) Ostott Group, an
executive search firm
Nick Lazaris was chosen
to come on board as
Keurig’s CEO and
President (Feb 1997).
One More Shot…
• MDT became 75% owners of Keurig
• Outsource development of both brewer and
packaging
• License technology to outside roasters
• Result: Higher profits, but lower sales
Business Model
Gourmet Market Segment
• Office*
• Food Service*
• Home
• Office and food service were first targets because of
retail price and development costs
• Once people became used to drinking Keurig coffee at
the office, they would be more willing to buy a Keurig
coffee maker for their homes
Office Coffee Systems
•Overall cost savings
(no wastage, labor,
etc)
•Utilize existing OCS
distributers
•Sold on contract basis (free/cheap coffee maker – office
pays for coffee packs
•Requires close relationship with distributors
Food Service
• Supermarket, gas
stations, Lower
volume restaurants
• Higher prices for
products (gourmet
segment)
• $1.5 B market for
gourmet coffee
• No wastage
• Fewer, larger distributors
(than OCS)
Consumer Segment
• $2.20 B market
• Growing gourmet segment
• Secondary goal – R&D
advances needed
• Need different business
model than commercial
segments (no contract)
• No established marketing
channels
Competitors
• Filterfresh
– 29₵/cup
– 40,000 existing
units ($2500/ea)
• Café System 7
– 22₵/cup
– 17,000 units
($2500 ea)
• Flavia
– Part of M&M/Mars (most significant competitor, but didn’t have passion)
– 39₵/cup
– 2000 ($1200 ea)
Trouble Brewing: Keurig’s
Suppliers Disappoint
Packaging line Trouble
MTS VS Keurig
Rising
Rising Costs
Costs Ethical issue
Compromised in
Refused to deliver and exchange for immediate
asked for $180,000 more control over the machine
While negotiating with
Raised the bid from
MTS, trying to find new
$550,000 to $700,000
vendors
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Alternative Vendors
Pros Cons Bid Time
Delay
•Well-respected •Lacked an internal $575,000 2 months
1 Pilgrim • Large producer machine shop
•Interested
•Experienced •Financial instability $500,000 3 months
•Large production •1500 miles away
facility
Quantum •Operated its own
2 Industries machine shop
•Capability •Lacked interest $525,000 4 months
•Reputation
Amalgamated •Cutting edge
3 equipment
Technologies
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Brewer Trouble
Vandelay
Brewer’s low quality
Trying to squeeze additional money
Bid price increased from $789 to
$825
Keurig : searching for a new vendor
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Alternative Vendor
VS
Pros: Pros:
•Technology •Capability similar to
•Maquiladora plant in Mexico the Lakeland
•Capability of 10,000/year •Own sheet metal
fabrication shop
Cons:
Too low percent to get Cons:
Lakeland’s attention Financial difficulty
Bid: $680 Bid: <$700
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