KeurigCoffee house taste by the

cup

Harvard Business CasePresentation Group:

Sophia, Tam, Trevor, Eva, Alice, Sean (Group 2)

Nicholas LazarisPresident/CEO Board Member

Christopher StevensVice PresidentSales and Marketing

Richard SweeneyVice President,Operations and Engineering

Spring 1998 – Keurig, Inc

“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

Food service establishme

nts

Consumer market

Office coffee

services

- America coffee market: $15 billion

- Delays in launching its two-pronged campaign

The founding of Keurig

Ian Greenwood Peter Dragone

Product engineering abilities

Formal business 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 KeurigLate 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 ProfileRevenues: $55.8 millionAssets: $24.6 milEmployees: 321Market value: $25.8milNASD symbol: GMCRGrowing net income

New Funding, New Management• Late 1994: reopened a

dialogue with MDT Advisers

April 1995: MDT & Food Fund became major investors ($1mil, 45% stake in Keurig)

Early 1996: an additional $1mil (58% stake)

• Doubts about Ian’s abilities to run the company going forward

Ian was asked to step aside as CEO in favor of Peter Dragone

June 1996 was fired after another change of position.

More New Management• Peter Dragone’s

resignation (Late summer 1996)

Keurig’s search for a new CEO with the 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

19

Packaging line Trouble

MTS VS Keurig

Refused to deliver and asked for $180,000 more

Compromised in exchange for immediate control over the machine

Raised the bid from $550,000 to $700,000

While negotiating with MTS, trying to find new vendors

Rising Costs

Rising Costs Ethical issue

20

Alternative Vendors Pros Cons Bid Time

Delay

Pilgrim

•Well-respected• Large producer •Interested

•Lacked an internal machine shop

$575,000 2 months

Quantum

Industries

•Experienced •Large production facility•Operated its own machine shop

•Financial instability•1500 miles away

$500,000 3 months

Amalgamated

Technologies

•Capability•Reputation•Cutting edge equipment

•Lacked interest $525,000 4 months

1

2

3

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VandelayBrewer’s low quality Trying to squeeze additional moneyBid price increased from $789 to

$825

Brewer Trouble

Keurig : searching for a new vendor

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Alternative Vendor

Pros:•Technology•Maquiladora plant in Mexico•Capability of 10,000/year

Cons:Too low percent to get Lakeland’s attentionBid: $680

Pros:•Capability similar to the Lakeland•Own sheet metal fabrication shop

Cons:Financial difficultyBid: <$700

VS