management Keurig

Case Background and Problem Statement
A. Synopsis of the case situation – provide a brief summary of the history of Keurig.
B. Provide an executive summary of the issues and/or opportunities facing Keurig.

The History of Keurig
Named for the Dutch word for excellence, Keurig was
launched in 1990 by Peter Dragone and John Sylvan,
with the belief that coffee should always be served fresh,
whether at home or at the office, just as in a gourmet coffeehouse.
Dragone and Sylvan noticed that people were
leaving the office in search of a fresh cup of coffee and
asked themselves, “Why do we brew coffee by the pot
when we drink it by the cup?” From this question, the
revolutionary concept of Keurig K-Cup portion pack brewing
was born. In 1994 Keurig secured a patent and came
up with a prototype. Two venture capital firms kicked in
$1 million and gave Dragone and Sylvan one year to prepare
a model for mass production. When they missed that
deadline, the venture capitalists offered more money but
demanded that Nick Lazaris, a veteran executive who once
served as chief of staff to West Virginia Governor (now
Senator) Jay Rockefeller, be brought on. In 1998, after
eight years of development, Keurig released an industrialstrength,
single-serve machine that delivered a perfect cup
of coffee or tea every time.
Keurig was a technology company in the coffee industry.
Keurig brewers represented a fusion of technology and
design. To maintain and enhance its position as a leader
in the gourmet single-cup market, Keurig invested significant
resources and capital in engineering and research
and development. This led to a strong and growing portfolio
of market-leading, proprietary technology. Keurig’s
integrated engineering team drove fast and innovative product
development in all three areas that supported Keurig’s
single-cup system: brewers, portion packs, and high-speed
packaging lines that manufactured the portion packs.
Keurig’s integrated approach to new-product development
resulted in accelerated new product launches since 2004.
Keurig employed over 30 degreed engineers from varied
disciplines. The engineering team at Keurig included
mechanical, software, and nutritional science engineers, as
well as quality assurance and industrial engineers. In 2007
Keurig held 26 U.S. and 65 international patents covering
its portion packs, packaging line, and brewer technology,
andKeurig had additional patent applications in process.
Of these, 72 were utility patents and 19 were design patents.
Keurig viewed these patents as valuable but did not
view any single patent as critical to the company’s success.
In the United States, certain patents associated with their
original-generation K-Cup packs used in Keurig K-Cup
Brewers had expired in September 2012. Keurig had additional
pending patent applications associated with certain
elements of current K-Cup pack technology that, if issued
as patents, would have extended coverage over all or some
portion of K-Cup packs to 2023. Certain elements of the
Vue packs were covered by patents expiring in 2021 and by
patent applications that were still pending in 2013. These
pending applications may not issue, or if they issue, they
may not be enforceable or may be challenged, invalidated,
or circumvented by others. Keurig continued investing in
further innovation in portion packs and brewing technology
to enhance their patents or lead to new patents and took
steps believed appropriate to protect all such innovation.
Keurig had diligently protected their intellectual property
through the use of domestic and international patents
and trademark registrations and through enforcing their
rights in litigation. Keurig regularly monitored commercial
activity in the countries in which they operated to guard
against potential infringement. The Keurig system was
based on three fundamental elements:
1. A patented and proprietary portion-pack system
(K-Cup) using a specially designed filter, sealed in
a low-oxygen environment to ensure freshness (see
Exhibit 6).
2. 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).
3. 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.
Keurig’s patented system eliminated the need to measure
coffee or water—the two primary culprits for suboptimal
java. With the Keurig system, pressurized hot water
was filtered through a small plastic pod, called a K-Cup,
that combined both filter and coffee.
and 37 of these cases involved second-degree burns. The
CPSC also issued a recall of four million T-Discs because
of reports that they could burst while brewing. 13 Customers
who participated in the Tassimo recall were shipped a
replacement component that helped prevent the contents of
a defective T-Disc from spraying if it burst.
Companies like Breville and Cuisinart made versions of
the original Keurig coffee machine. They used the same coffee
pods, functioned the same way, and may even have had
features that the basic Keurig model lacked. For example, the
Breville version included the My K-Cup as part of the set.
Consumers had many options of single-cup brewing
systems to choose from in North America and internationally.
Competition in the single-cup brewing system market
was increasing as relatively low barriers to entry encouraged
new competitors to enter the market, particularly with
typically lower-cost brewers that brewed coffee packaged in
nonpatented pods. Many current and potential competitors
had substantially greater financial, marketing, and operating
resources than Keurig. According to Keurig, their primary
competitors were Flavia beverage systems (manufactured
by Mars), the Tassimo beverage system (manufactured and
marketed by Kraft), the Senseo brewing system (manufactured
and marketed by Philips and Sara Lee), and a number
of additional single-cup brewing systems and brands.
Kraft’s Tassimo system was made primarily for at-home
use, while Mar’s Flavia system targeted offices.
Keurig maintained a sizable quality-control team to
assist engineering in establishing quality standards, to communicate
standards to all manufacturing partners, roasters,
and suppliers, and to audit compliance with Keurig’s
established standards. This emphasis on quality products,
easy-to-use features, and innovative technologies earned
Keurig high marks in customer satisfaction, with 94 percent
customer satisfaction from tracked brewer purchasers.
A licensing agreement enabled Green Mountain Coffee
Roasters to package its high-quality Arabica beans
inKeurig’s K-Cups. GMCR started distributing the new
single-cupKeurig Premium Coffee System to office
coffee service (OCS) and food-service providers in 1998.
GMCR and Keurig sold the system through select distribution
channels. The system featured the single-cup
Keurig brewer and eight varieties of Green Mountain coffee,
including blends, flavored, decafs, and estate coffees.
Keurig’s K-Cup packaging guaranteed that each cup of
coffee was as fresh as “the first cup of every pot.” Keurig’s
strategy to gain market share in the office market was to
sell machines to distributors and encourage them to give
the machines away or lease them for a small fee. The economics
of the strategy worked for distributors because the
real profit was in selling K-Cups. If an office went through
30 or 40 K-Cups per day, a distributor recouped the cost of
the machine in less than six months of K-Cup sales.
When Keurig launched its first single-cup brewer for the
office market in 1998, it partnered with Green Mountain
Coffee to manufacture and sell Keurig’s patented K-Cups.
Although Green Mountain Coffee was the first roaster to
sell its coffee in Keurig’s single-cup brewing system, by
2003 GMCR was competing for Keurig’s sales with three
other North American roasters: Diedrich Coffee, Timothy’s,
and Van Houtte, a vertically integrated roaster and
office coffee distributor in Canada and the U.S. Since 2003,
Keurig had licensed several additional coffee roasters to
package gourmet coffee and teas into K-Cups, all of whom
paid royalties to Keurig based on the number of K-Cups
shipped. For each K-Cup shipped, roasters paid Keurig
a royalty of approximately $.04. This unique licensing
arrangement enabled Keurig to offer the industry’s widest
selection of gourmet branded coffees and teas in a proprietary
single-cup format. This wide coffee selection proved to
be a key differentiator for Keurig’s brewing system. Consumers
could choose from 30 brands and over 200 varieties
of K-Cup packs. As of March 2012, between 10.8 and
12.2 million Keurig brewers were estimated to be in use in
the U.S. 14 As of 2006, more than 1 billion cups of Keurig
Brewed coffee and tea had been consumed since Keurig
launched in 1998. 15 Green Mountain Coffee continued to
be the leading K-Cup roaster, representing 57 percent of
K-Cups shipped in fiscal 2008. 16 As of 2008, more than 2
billion K-Cups had been shipped since 1998. 17
In 1998 GMCR held a minority investment of less than
5 percent in Keurig, Inc. This partnership with Keurig,
Inc., developed into an important growth driver in fiscal
2000, as the unique Keurig one-cup brewing system gained
momentum in the marketplace. K-Cup sales made up 15.7
percent of total sales at GMCR in fiscal 2000. GMCR’s
partnership with Keurig, Inc., continued to be an important
growth driver in fiscal 2001, with K-Cup sales comprising
20.4 percent of total revenue for GMCR. Keurig’s ownership
structure changed in 2002 as a result of agreements with
GMCR and Van Houtte.Keurig sold stock to Van Houtte,
raising $10 million to seed Keurig’s at-home business launch.
The investment secured Van Houtte a 28 percent ownership
position in Keurig. Simultaneously, GMCR invested
$15 million, by acquiring and executing stock options,
to purchase 42 percent of Keurig. These strategic moves
resulted in GMCR and Van Houtte joining Memorial Drive
Trust (MDT) as the top three shareholders of Keurig. MDT,
an investment advisory firm, had been the primary venture
investor in Keurig since 1995 and led Keurig’s board of
directors. Separate shareholder agreements with MDT, however,
restricted both GMCR and Van Houtte from holding
a seat on Keurig’s board of directors. In June 2006 GMCR
completed its acquisition of Keurig for $104.3 million.
Expanding Keurig’s Family of Brands
In addition to Green Mountain Coffee and GMCR’s
affiliated Newman’s Own Organics and Celestial Seasonings
tea brands, which were packaged and sold by Green
Mountain Coffee, Keurig’s other North American K-Cup
brands offered as of year-end 2006 had included Diedrich,
Gloria Jean’s, Coffee People, Timothy’s, Emeril’s, Van
Houtte, Bigelow, Tully’s, and Twinings.
In January 2007 Keurig, Inc., and Caribou Coffee, the
second-largest publicly traded gourmet coffee company
in the United States in terms of number of retail stores,
announced a partnership to market Caribou’s gourmet coffees
inKeurig K-Cups. “We are proud to welcome Caribou
to the Keurig family,” stated Nick Lazaris, then president
ofKeurig. “Caribou is an exceptionally strong brand with
a loyal following among gourmet coffee lovers. Our office
and home Keurig users will be delighted with Caribou in
K-Cups.” 18 Under license from Caribou Coffee, Keurig
served as the wholesale distributor and a direct retailer
for Caribou Coffee K-Cups. In addition, many Keurig
premium retail partners added Caribou Coffee K-Cups
to the selection of K-Cups already carried in over 7,000
stores coast to coast. For the office coffee channel, Caribou
Coffee K-Cups were offered through Keurig’s authorized
distributors for marketing to offices where Keurig brewers
were installed. Caribou marketed both Caribou Coffee
K-Cups and Keurig brewers in many of its coffeehouses.
As Keurig gained momentum across the United States,
the diversity of the K-Cup brand portfolio increased in
importance because regional preferences could not be
underestimated as national penetration progressed. The
addition of Caribou Coffee, a strong midwestern brand,
helped build K-Cup sales and introduce Green Mountain
Coffee to areas beyond its core market.
In September 2008 GMCR announced an asset purchase
agreement to acquire the Tully’s coffee brand and
wholesale business. Tully’s was a well-respected specialty
coffee roaster, with Pacific Northwest roots and heritage.
The Tully’s wholesale business division distributed coffee
to over 5,000 supermarkets, located primarily in the western
states, and also sold coffee in K-Cup portion packs. The
Tully’s acquisition was designed to provide GMCR with
a complementary West Coast brand and business platform
to facilitate future geographic growth and brand expansion.
In December 2010 GMCR acquired all of the outstanding
capital stock of LJVH Holdings, Inc., a specialty coffee
roaster headquartered in Montreal, Quebec, for $907.8 million,
net of cash acquired. The acquisition was financed with cash
on hand and a $1,450.0 million credit facility. The Van Houtte
acquisition was accounted for under the acquisition method
of accounting. The total purchase price of $907.8 million, net
of cash acquired, was allocated to Van Houtte’s net tangible
assets and identifiable intangible assets based on their estimated
fair values as of December 17, 2010.
With many single-serve beverage brands across multiple
beverage categories, GMCR offered more than 225
individual varieties, allowing consumers to enjoy and
explore a wide range of beverages. In addition to a variety
of brands of coffee and tea, GMCR also produced and sold
hot apple cider, iced teas, iced coffees, iced fruit brews,
hot cocoa, and other dairy-based beverages in single-serve
packs. GMCR continued expanding consumer choice in
theKeurig Single Cup Brewing system by entering into a
number of business relationships, enabling them to offer
strong national and regional coffee brands such as Folgers
and Millstone (owned by The J.M. Smucker Company),
Dunkin’ Brands, Inc., Starbucks coffee and Tazo tea, Eight
O’Clock coffee, Tetley tea, Good Earth tea, and Snapple
teas in single-serve packs for use with Keurig Single Cup
Brewers. GMCR also continued to examine opportunities
for business relationships with other strong national
or regional brands, including the potential for adding premium
store-brand or cobranded single-serve packs to create
additional single-serve products to help augment consumer
demand for the Keurig Single Cup Brewing systems. For
example, in November 2012, the company announced it
was the exclusive manufacturer of Costco Kirkland Signature
brand K-Cup packs for the Keurig Single Cup Brewing
system. GMCR believed these product offerings fueled
excitement for current Keurig owners and users, raised system
awareness, attracted new consumers to the system, and
promoted expanded use of the system. These relationships
were established with careful consideration of potential
economics and with the expectation that these relationships
would lead to increased Keurig Single Cup Brewing system
awareness and household adoption through the participating
brand’s advertising and merchandising activities. 19
GMCR identified four vectors as part of a growth strategy
forKeurig.
• New brewer technologies
• New beverage categories
• New brands
• New channels
GMCR also focused on continued innovation, both in
single-serve brewing systems and other single-serve beverages.
Some of GMCR’s 2012 initiatives included:
• An expansion of the Keurig Single Cup Brewing
system to include KeurigVue brewers and related
Vue packs;
• A launch of the KeurigRivo Cappuccino and Latte
System and Rivo pack espresso blend varieties in
partnership with Luigi LavazzaS.p.A. (Lavazza); and
• An introduction of GMCR’s Wellness Brewed
collection which included coffees, teas, and “Vitamin
Burst” fruit brew beverages that contained added
ingredients like antioxidant vitamins.
Management was focused on executing on the above
stated growth strategy to drive Keurig Single Cup Brewer
adoption in North American households and offices to
generate ongoing demand for single-serve packs.
The company did not own a tea brand, but had licensing
agreements with Celestial Seasonings, Inc. (Celestial
Seasonings branded teas and Perfect Iced Tea), Good Earth
Corporation and Tetley USA, Inc. (Good Earth and Tetley
branded teas), R. C. Bigelow, Inc. (Bigelow branded teas),
Snapple Beverage Corp. (Snapple branded teas), Starbucks
Corporation (Tazo), and Associated British Foods plc
(Twinings of London) for manufacturing, distribution, and
sale of single-serve packs.
In addition to coffee and tea, GMCR also produced and
sold lemonade and hot apple cider under the Green Mountain
Naturals brand, iced fruit brews under the Vitamin
Burst brand, cocoa and other dairy-based beverages under
the Café Escapes brand, and cocoa under the Swiss Miss
brand in single-serve packs.
Available beverage brands included Bigelow, Caribou
Coffee, Celestial Seasonings, Dunkin’ Donuts, Eight
O’Clock, Emeril’s, Folgers Gourmet Selections, Gloria
Jean’s, Kahlua, Kirkland Signature, Lavazza, Millstone,
Newman’s Own Organics, Starbucks, Swiss Miss, Tazo,
Twinings of London, and Wolfgang Puck. Each of these
brands was the property of their respective owners and was
used by Keurig with permission.
GMCR’s Organizational Structure and the
Keurig Business unit
GMCR managed its operations through three business
segments, the Specialty Coffee business unit (SCBU), the
Keurig business unit (KBU), and the Canadian business
unit (CBU). The SCBU sourced, produced, and sold coffee,
hot cocoa, teas, and other beverages, prepared hot or
cold, in K-Cup and Vue packs and coffee in more traditional
packaging, including whole bean and ground coffee
selections in bags and ground coffee in fractional packs.
These varieties were sold to supermarkets, club stores, and
convenience stores; to restaurant, hospitality, and office
coffee distributors; and also directly to consumers in the
United States. In addition, the SCBU sold Keurig Single
Cup Brewing systems and other accessories to supermarkets
and directly to consumers.
The KBU targeted its premium patented singlecup
brewing systems for use both at home and away
from home in the United States. The KBU sold at-home
single-cup brewers, accessories, and coffee, tea, cocoa,
and other beverages in single-serve packs produced mainly
by the SCBU and the CBU primarily to retailers, department
stores, and mass merchandisers. The KBU sold
away-from-home single-cup brewers to distributors for use
in offices. The KBU also sold at-home brewers, a limited
number of away-from-home brewers, and single-serve
packs directly to consumers. The KBU earned royalty
income from K-Cup packs when shipped by its third-party
licensed roasters, except for shipments of K-Cup packs to
the KBU, for which the royalty is recognized as a reduction
to the carrying cost of the inventory and as a reduction
to cost of sales when sold through to third parties by KBU.
In addition, through the second quarter of fiscal 2011, the
KBU had earned royalty income from K-Cup packs when
shipped by the SCBU and the CBU.
The CBU sourced, produced, and sold coffees and teas
and other beverages in a variety of packaging formats, including
K-Cup packs, and coffee in more traditional packaging
such as bags, cans, and fractional packs, and under a variety
of brands. The varieties were sold primarily to supermarkets,
club stores, and, through office coffee services, to offices,
convenience stores, and restaurants throughout Canada. The
CBU began selling the Keurig K-Cup Single Cup Brewing
system, accessories, and coffee, tea, cocoa, and other beverages
in K-Cup packs to retailers, department stores, and
mass merchandisers in Canada for the at-home channels in
the first quarter of 2012. The CBU also manufactured brewing
equipment and was responsible for all of the company’s
coffee brand sales in the grocery channel in Canada. The
CBU segment included Filterfresh through October 3, 2011,
the date of its sale. On October 3, 2011, all the outstanding
shares of Van Houtte USA Holdings, Inc., also known as the
Van Houtte U.S. Coffee Service business or the Filterfresh
business, were sold to ARAMARK Refreshment Services,
LLC in exchange for $149.5 million in cash. Approximately
$4.4 million of cash was transferred to ARAMARK as part
of the sale, and $7.4 million was repaid to ARAMARK upon
finalization of the purchase price, resulting in a net cash
inflow related to the Filterfresh sale of $137.7 million. The
company recognized a gain on the sale of $26.3 million during
the 13 weeks ended December 24, 2011.
ENDNOTES
1. Business Wire. 2012. Green Mountain Coffee Roasters, Inc. appoints

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