Keurig Disrupted the Coffee Industry – Can it be Replicated?
What Keurig Did RightThe classic miscalculation for the players who came behind Keurig was catalyzed by a failure to recognize how Keurig obtained and then dramatically expanded their shelf space. Competitors and potential competitors oversimplified the significance of retail partnerships.
They knew their customer
It was critical to sell an elegant solution at retail, but the lifeblood of Keurig centered on K-Cup sales. POD suppliers underestimated the potential of POD sales and let Hardware (machine) suppliers drive the initiative. Brilliantly, Keurig gained distribution in food stores where target customers shopped twice a week.
Keurig started at inflated retails in the Macy's and above channel
This aspirational customer functioned as a silent salesman. At parties friends would gather in the kitchen, engage with the handle that fed K-Cups and watch in awe as their personal hot beverage of choice loaded in front of them.
Keurig stayed out of mass retail
Bed Bath & Beyond quietly captured 10% of their growing volume and they bill boarded the units and K-Cups on the walls of their stores. MAP Pricing (Minimum Advertised Pricing) was enforced.
They bought other roasters
They sold coffee to the masses with recognized regional Brand name significance and expanded margins as they slowly bought up many of the Roasters allowing them to make money on the blades (K-Cups) while giving the razor (the unit) away at low margin or cost.
Surprise and delight
They delighted the consumer with wonderful demos in store and they quickly replaced defective units free of charge, no questions asked, gaining a loyal fan base of Ambassadors.Keurig’s “right” decisions secured retailer loyalty and made them the driver of department growth in a sluggish environment. They grew their brand with high profile exposure in retailer advertisements and commercials. As explosive growth ended, merchants, anxious to anniversary large numbers looked in other areas to replicate growth. Sadly, most retailers recognized that the “next Keurig” was nowhere to be found. Anniversary of the volume numbers was not possible. As units in distribution passed 20M, and K-Cups sold reached 5B, Walmart became the driving partner. Walmart replaced Bed Bath & Beyond as the top retail partner but they maintained a $99.99 MAP Price even in Mass Distribution. Keurig still had power, but competitors sensed an opening and they rushed product to market. No product launch mirrored the success of Keurig. Several competitors sold units (razors) without regard for the cups (blades) or tried to sell cups upon patent expiration (driving down costs/margins) with little regard for Strategic launch and Partnership build. Keurig called the shots. Most knowledgeable coffee players assumed a major CPG Company like P&G or Kraft would buy the company at this stage. Roller coaster stock prices never delivered this perceived suitor. Most knowledgeable coffee players assumed a major CPG Company like P&G or Kraft would buy the company at this stage. Roller coaster stock prices never delivered this perceived suitor. Coke's infusion of capital, rapidly buying up 16% of the company ushered in "expertise" and powerful Brand recognition to the emerging Kold technology launch. A former Coke Executive was at the helm of Green Mountain (Keurig) and it was assumed that this expansion of expertise would drive distribution that mirrored the launch of the original Keurig machines. In reality a fleet and lean group drove Keurig's success. Sodas and sugary beverage sales were eroding as high profile players like Mayor Bloomberg battled to keep them at bay. While the average consumer still drank two 8 oz. sodas a day and juice drinks and sports drinks grew in significance, the reality was that sodas had fallen out of favor. A Kold unit made sense in theory but Industry insiders heard early rumblings of immediate 30% cost overruns on the highly touted Kold unit and extensive production delays. Keurig, a proactive company, had earlier rolled the dice on the ill conceived Keurig 2.0, in an effort to protect their expiring patents, drawing minimal sales and disappointing the loyal consumer base. An open source system would have resulted in margin contraction but consumer satisfaction. Kold became a focus area of more significance. A troubled Industry darling had become a $14B acquisition target for the right Strategic Growth partners who banked on stretching the technology play into Global channels. Sales in their last quarter resulted in 32% drop in unit sales and 9% decrease in K-Cup sales. In the year prior the stock had dropped 61%. In November of 2014 the stock traded at $150, the deal closed at $92 a share. It was wise to go private and emerge with an expanded Strategy. Smart money players like BDT Capital (minority in the deal) had been in acquisition mode on the Roaster side, buying Peet's and Caribou, and JAB Holding Companies had large International coffee business expertise and sales in Global Channels. Coke was fully supportive of the marriage. Keurig rode the roller coaster to nose bleed levels, something their competitors failed to do. Much is made of their "failures" but I'll remember them as a fast rising $25M company selling Commercial Coffeemakers which delighted Consumers. Creating a paradigm shift in the finicky US Consumer space, resulted in a $14B sale. Marrying technology to large category consumer products is wise. Surrounding a product launch with skilled strategists, Industry experts and turn around or launch junkies helps insure success.