SYNOPSIS The product manager for coffee development at Kraft Canada must decide whether to introduce the company's new line of single-serve coffee pods or to await results from the product's launch in the United States. Key strategic decisions include choosing the target market to focus on and determining the value proposition to emphasize. Important questions are also raised in regard to how the new product should be branded, the flavors to offer, whether Kraft should use traditional distribution channels or direct-to-store delivery, and the forms of advertising and promotion to use. The case provides a basis for discussing consumer decision making and stresses the importance of providing a clear incremental benefit when introducing a new product in an established category. Key issues • Which channel of distribution would work best for single-serving coffee units: direct to consumers, the use of intermediaries, or both? Why?
CASE QUESTIONS 1. Should Kraft use both the Maxwell House and Nabob brands for coffee pods? Why or why not? 2. Which channel of distribution would work best for single-serving coffee units: direct to consumers, the use of intermediaries, or both? Why? 3. Presuming the primary problem with the launch had been the coffeemakers rather than consumer acceptance of the single-serving size, what steps should Kraft take to correct the problem? 4. An alternative strategy to selling coffee pods to consumers first would have been to market them to other businesses, such as hotels, restaurants, and convenience stores. Discuss the implications of using a dual- channel marketing approach.
Kraft Foods: The Coffee Pod Launch By Aleem Visram, under the supervision of Professor Robin Ritchie Introduction Geoff Herzog, product manager for coffee devel- opment at Kraft Foods Canada (Kraft), sat in his office after reviewing encouraging results for the single-serve coffee pod system in Europe. On a typical day, Herzog would have used the office cof- fee station for his morning cup of coffee, but today he had brewed his own cup using a single-serve coffee pod machine. It was July 6, 2004, and Herzog had just learned that Kraft Foods North America was planning an aggressive launch of cof- fee pods in the United States. He had less than a month to decide whether Kraft should proceed with a simultaneous launch in Canada, or await the U.S. results. If Herzog went ahead with the launch, he would have to make several decisions. First, since Kraft owned two major coffee brands in Canada, Maxwell House and Nabob, a suitable branding strategy would be needed. Herzog would also have to set a wholesale and a suggested retail price for the coffee pods, choose which flavors to offer, and decide whether Kraft should use traditional distribution channels or direct- to-store delivery (DSD). In addition, he would have to develop an effective advertising and promotion strategy on a relatively limited budget. Herzog knew that whatever recommendations he made, he would need to make a convincing case that his plan would help Kraft expand its share of the Canadian coffee market, while generating a satisfactory return on the company's marketing investment. Kraft Foods Inc. Founded as a cheese manufacturer in 1903, Kraft Foods Inc. (Kraft Foods) had evolved into North
America's largest food and beverage company and the number two player in the world. In 2004, Kraft Foods had operations in more than 155 countries. Although the company had previously been a division of Philip Morris Companies (since renamed Altria Group), it had become a public company in June 2001. Kraft operations consisted of Kraft Foods North America and Kraft Foods International, and its business was divided into five product cat- egories: beverages, convenience meals, cheese, grocery, and snacks. The Kraft brand portfolio was among the strongest of the global con- sumer packaged goods players, with more than 50 $100-million brands and five $1 billion brands. Along with its size and impressive brand portfolio, Kraft Foods boasted a strong distribution network and a well-earned reputation for developing inno- vative new products and food applications. The company's mission was to achieve leadership in the markets it served, which it pursued by foster- ing innovation, achieving high product quality and keeping a close eye on profit margins. Five operational objectives had been established to achieve these goals: 2. Enhance product demand among consum- ers by building relationships with trade partners. 3. Constantly adjust the product portfolio to align with consumer trends, especially in fast-growing channels and demographic groups. 4. Expand global scale by increasing business internationally, especially in the world's fastest-growing developing countries. 5. Build a leaner cost structure through better use of assets to generate savings for rein- vestment in brand building. Kraft Foods was the world leader in coffee sales with 15 percent of the global market. In Canada, Kraft's Maxwell House and Nabob brands enjoyed a combined 32 percent share, fol- lowed by Nestlé at 17 percent and Procter and Gamble with nine percent. Private labels accounted for nearly 23 percent of the market, with smaller companies making up the remaining 19 percent. The company's Maxwell House line was Cana- da's top retail brand of roast and ground coffee, while Nabob was the leader in Western Canada and number two nationally. Both were available in a variety of flavors, sizes and formats (see Exhibit 1). 1. Build superior brand value for consumers by delivering greater product benefits at the right price, compared to the competition.
All beans used by Kraft were custom-roasted to deliver peak aroma, and had a fine grind to ensure a fresh, rich flavor. Single-Serve Coffee Pods The single-serve coffee pod (SSP) machine was the first major innovation to hit the coffee- brewing industry since the introduction of the drip coffee maker in the 1950s. First conceived of in 1978 by Italy's Illy Caffé, which targeted it to office users, the pod had been redesigned for consumer use by Kraft Foods, which introduced its home version in Switzerland in 1982. By 2003, Kraft Foods marketed consumer coffee pods in 10 European countries. Kraft Foods' most serious competitor in Europe was Senseo, a partnership between Dutch electronics and appliance maker Philips and the Douwe Egberts division of U.S.-based Sara Lee Corporation, the world's second-largest coffee roaster. Senseo had been launched in 2001, and some five million coffee makers and three billion pods were sold in the first three years. By 2003, single-serve coffee pod units accounted for nearly 15 percent of all coffee makers sold in Europe, and 5.8 percent of coffee sales by value. By 2008, annual European sales were forecast to exceed both 82 million coffee pod machines and $150 million worth of coffee pods. By 2010, it was expected that SSP machines would account for 10 percent of the European home coffee brewer market. Significantly, as much as 30 percent of total coffee pod sales were expected to be incre- m ental volume, drawn from individuals who would
normally have bought their coffee out-of-home, or not consumed coffee at all. The Technology Similar to machines used by coffee houses to make specialty coffee, SSP machines used pre-packaged single servings to make high-quality coffee in less than a minute. Instead of percolating water through the ground coffee via gravity like conven- tional coffee makers, SSP machines forced hot water through the coffee pod at high pressure. The pods were similar to teabags in that the ground coffee was encapsulated in perforated paper, but, unlike tea, the coffee was packed tightly to ensure sufficient flavor. Each pod measured 59 to 62 mil- limeters in diameter, and contained between seven and 10 grams of ground coffee (see Exhibit 2). Two types of SSP machines were available. So- called "open" systems used a standard-sized coffee pod that could be used interchangeably with pods from different manufacturers. Conversely, "closed" systems could only use a specific pod shape and size, and only accepted coffee pods compatible with these systems. In either case, the coffee produced was of similar quality to that available at cafés. Although the cost per cup with SSP machines ($0.20 to $0.50 per cup) was higher than with Exhibit 2 Operation of the Single-Serve Pod System Single-serve pod systems use pre-heated water and high pressure to quickly extract the coffee from pre-ground coffee pods in less than a minute, Step! Step 2 Step 3 Step 4 First the water reservoir in the back is filled. The water is pre-heated so that it is dispensed hot without waiting. Most reservoirs hold between eight and 10 cups of water before needing to be refilled. The coffee pod is then inserted into the machine and the desired size selected. Most brewers give consumers the choice of more than one size of cup. Two pods can be inserted for a stronger coffee. The machine then brews the coffee directly into your cup in less than a minute. Coffee pods can be used only once per coffee serving to ensure optimal taste and freshness are maintained. Once the brewing is finished, the pod is thrown out and another inserted. There is no flavor transfer between pods during usage
traditional drip coffee machines ($0.05 to $0.15 per cup), SSP systems provided several advantages. First, an SSP machine took less than a minute to make a cup of coffee, compared to nearly 10 min- utes from a traditional brewing machine. As well, SSP machines were easier to use than the drip machines since there was no need to measure the ground coffee or use a filter. They were also easier to clean, with no messy ground coffee left over to toss, no leftover coffee to pour down the sink and no pot to clean-users simply disposed of the cof- fee pod in a garbage or compost bin. The pod system was most advantageous when a person wanted to make coffee in small batches, or cater to several different tastes at the same time. For instance, if one person wanted a decaffeinated cof- fee after dinner, a single cup could be prepared without having to make an entire pot. Similarly, if family members each liked a different kind of cof- fee, separate coffees could be brewed simply by using a different flavor pod for each cup. Bill Van- denBygaart, director of coffee development for Kraft Canada, was confident about the value of the system to consumers: "We believe Canadians will see real value in the convenience, choice and qual- ity that single-serve pod machines provide." that included espresso and cappuccino, flavored coffees, and iced coffees-had dropped 12 percent in dollar terms and 11 percent by volume. Sales of instant coffee had increased two percent by vol- ume, but declined by two percent in dollar terms, due to lower retail prices. This reflected the higher quality and availability of specialty coffee from coffee shops and cafes. The home-prepared coffee category in Canada was also becoming increasingly polarized between premium and mainstream brands. The popularity of large-size containers of discount coffee had led to price wars between manufacturers of these brands in most mainstream retail channels, erod- ing margins and decreasing profitability. Con- versely, at about 15 to 20 percent of total sales vol- ume, higher priced premium coffee was a much smaller business that was enjoying double-digit sales growth. Herzog believed there was an oppor- tunity for higher-end products to capture an even larger portion of the category over time, with higher price points and greater profitability. The Canadian Coffee Market Because grocery stores carried a growing selection of coffee brands, flavors and formats, competition in the Canadian coffee market was intense. The past decade had also seen specialty retailers, such as Starbucks and Tim Hortons, enter the market in a serious way, selling their brands of ground coffee and coffee beans in grocery outlets as well as in their own stores. Brewed coffee from these restaurants and cafés was further cannibalizing grocery sales, with consumers willing to pay a substantial premium for the convenience, customization and variety they offered. Retail sales of instant, ground and whole bean coffee in Canada topped $600 million in 2003, of which $425 million was sold by grocery, mass retail, and club stores. Sales of specialty coffees—a category Coffee Consumption Behavior Canadians were among the world's leading drink- ers of coffee, consuming some 3.5 million cups of coffee daily in 2003—a number that had risen by an average of 4.5 percent over each of the previous five years. After water, coffee was easily the most popular daily beverage of Canadian adults (see Exhibit 3), with an average consumption of 2.6 cups per day among coffee drinkers. Roughly 63 percent of Canadians drank at least one cup daily, while 83 percent enjoyed coffee at least occasion- ally. Half of all Canadians drank at least some spe- cialty coffee (espresso, cappuccino, or flavored coffee); these individuals tended to be younger than the average coffee drinker, with higher educa- tion and higher incomes. The percentage of regular coffee drinkers varied considerably across the country, from a high of 70 percent in Quebec, to 67 percent in the Prairies and the West, 60 percent in Ontario, and 53 percent in the Atlantic region. By volume, more than two-thirds of the coffee consumed in Canada was prepared at home. Four
out of five Canadian households made at least one store trip to buy coffee: These coffee-buying house- holds averaged seven such trips per year, bought 0.7 kilograms of coffee on each trip, and spent $9 per kilogram. Coffee sales were greatest among middle- to upper-income Canadians, particularly 25 to 40 year-olds and middle-aged childless cou- ples, who purchased more than 10 kilograms of coffee per year at an average price of $7 per kilo- gram. Nearly 38 percent of all coffee in Canada was purchased in bulk or on promotion. Competitive Landscape Based on the major brands available in Europe and the United States, Herzog had identified four likely SSP competitors for Kraft in Canada: Home Café The Home Café system was the result of a partner- ship between Procter and Gamble, and two leading makers of small appliances: Applica Inc. (owner of Black & Decker) and Jardine Corporation (owner of Mr. Coffee, Rival, and Sunbeam). Home Café used a specialized pressure-brewing technology to deliver single servings of fresh coffee in less than a minute while bringing out the full flavor of the cof- fee bean. The machine could brew three different cup sizes, and featured a removable cup platform to prevent spilling as well as an easy-clean removable drip tray. The water reservoir was also removable and could be rotated for fast and accurate filling. In the United States, Home Café machines came with a free bag of Folgers coffee pods. It was widely expected that the system would be introduced to Canada in September 2004 through Walmart. Reliable sources had told Herzog that Home Café would launch with four different flavors of coffee pods under Procter and Gamble's Folgers brand: Classic Roast, Classic Decaf, 100% Colom- bian, and French Vanilla. The pods were expected to be available in packages of 16 and retail for $4.99 (see Exhibit 4). Senseo One-to-One Germany's Melitta Group had joined with Salton, makers of the George Foreman Grill, to create the Melitta One-to-One SSP machine. The system was capable of brewing coffee in two sizes using a spe- cially filtered system designed to deliver coffee-bar quality at home. The spout of the coffee machine could also be changed to make hot or iced tea. One- to-One machines were already available across Canada, and came with a six-flavor javapod sampler. Melitta was the only SSP system to use 9.7 gram javapods, rather than the seven gram coffee pod sizes used by Home Café, Senseo and Bunn. As a result, while other coffee pods were all inter- changeable across manufacturers, they could not be used in the Melitta One-to-One (and vice versa). Rumors were rampant, however, that Melitta was planning to switch to standard-sized coffee pods. Melitta javapods were sealed in oxygen-free foil packs to preserve flavor, and retailed for $4.99 for a package of 16 (see Exhibit 4). Three different vari- eties were available: 100% Arabica Medium Roast, 100% Colombian, and Light Roast. Pods were available from the same retailers where the Melitta One-to-One System was sold: Zellers, the Bay, Home Outfitters, and Canadian Tire. Senseo was a partnership between Philips Electron- ics and Sara Lee Corporation, the world's second largest coffee roaster. The Senseo machine used balanced portions of coffee and water, mild pres- sure and a special spray head to produce an opti- mally balanced filtering process and a rich froth on top of each cup. The quick and easy one-touch system brewed a cup of coffee in 30 seconds, with auto shut-off after one hour. The machine was available in four colors and had dishwasher-safe removable parts for easy cleaning. As an added incentive, customers who registered their Senseo machine were sent a free bag of coffee pods and $2 off their next pod purchase. Senseo was expected to launch in Canada in early 2005. Senseo coffee pods were marketed using Sara Lee's Douwe Egberts brand, using the slogan "one
Marketing Strategy taste and you will know the extraordinary differ- ence.” They used premium quality beans that had been carefully roasted and blended, and offered four flavors, including mild, medium, dark, and decaffeinated roast. Senseo pods came in packages of 18 for a retail price of $4.99 (see Exhibit 4). Bunn My Café With an annual budget of only $1 million for a potential launch, Herzog faced tight constraints on his ability to introduce Kraft coffee pods in Canada. If he proceeded with the launch, he would need to identify a cost-effective way to convince consumers that Kraft's pods delivered better value than competitors' pods. The goal was for 80 percent of SSP machine owners to try the product, and for 60 percent of those individuals to repeat purchase. Herzog was expected to at least break even by the end of 2006. Bunn Home Brewers had announced plans to launch the My Café single-serve pod machine in Canada in November 2004. My Café claimed to offer great-tasting coffee quickly, simply and con- sistently. The system worked with a large array of pods and teabags, featured a removable easy-fill reservoir and patented spray head design for maxi- mum flavor extraction, and could brew a cup of coffee in 30 seconds. The brew control had nine settings to alter coffee strength, and was made with dishwasher-safe parts. Bunn did not plan to manu- facture its own coffee pods (see Exhibit 4). Target Market Although SSP machines had only recently been introduced to Canada, Herzog had access to mar- ket research on current Canadian coffee pod users. These individuals were typically coffee lovers between the ages of 25 and 54, tended to be well
was to obtain a 45 percent market share by the end of 2006. Herzog knew this would require signifi- cant advertising and promotion to generate the necessary awareness and sales. He was uncertain whether he would be able to achieve his target and still break even. educated, and had an average household income of $91,000 (the Canadian average household income was $55,000). Nearly three-quarters were married, and 88 percent lived in single-detached homes in urban areas, primarily in the population rich provinces of Ontario, Quebec, British Colum- bia, and Alberta. They were characterized by high levels of consumption, and their interests included exercising, entertaining at home, gourmet cook- ing, household decorating, gardening, and taking exotic vacations. Maxwell House and Nabob buyers had similar profiles to SSP machine owners, except that they were typically over the age of 45. They also tended to be a mix of maturing, established families and single professionals Product If he went ahead with the launch, Herzog would also need to decide on a flavor selection for Maxwell House and/or Nabob coffee pods. He felt that a variety of pod offerings would be critical for building market share and category growth. Kraft's manufacturing facility also had the ability to offer the product in a re-sealable bag with zip closure, which would help keep the product fresh. Buyer Behavior Although most SSP machines used standard- sized coffee pods, experience in Europe had shown that consumers usually purchased pods of the same brand as the machine they bought (i.e. Folgers pods with Home Café machines, Senseo pods with Senseo machines, and Javapods with Melitta One-to-One machines). At the same time, focus group research suggested that SSP machine owners valued the flexibility of using different coffee brands in their brewers. Coffee quality was also critical, since it defined the entire coffee experience. Coffee drinkers were looking for a fresh, hot cup of coffee with peak flavor and aroma. Price In the United States, Kraft planned to sell pods under the Maxwell House label at a lower price point than rival brands, retailing a pack of 18 pods for US$3.99. In contrast, Folgers charged US$3.99 for a pack of 16. This pricing would give retailers a 25 percent margin on Maxwell House and, at $0.22 per cup, revenue that was more than four times the $0.05 per cup from canned ground coffee. Herzog was not sure whether to follow the U.S. lead on pricing. On one hand, a low price would serve to drive sales volume and establish Kraft as a market leader, but this strategy risked eroding brand image. Another consideration was the highly concentrated nature of the Canadian grocery sector and the relative power of retailers. Given the failure rate of new products, Herzog sus- pected that stores would only be willing to carry one or two brands of coffee pods. Canadian grocers typically enjoyed margins of 20 to 30 percent, but Herzog believed margins of 35 percent would be needed as an incentive to list Kraft's coffee pods. With an average production cost of $0.02 per pod, he was unsure of the best wholesale and retail sell- ing price to recommend. Market Share Kraft expected that, of the roughly 12.5 million households in Canada, SSP machines would be adopted by six percent by the end of 2004, and eight percent by the end of 2006. Average house- hold consumption of coffee pods among SSP machine owners varied from seven to 14 pods per week. To maintain Maxwell House and Nabob's share of the Canadian coffee market, Herzog esti- mated that Kraft would need to capture at least 35 percent of the coffee pod segment. His actual goal
Distribution Advertising and Promotion Most of Kraft's products were delivered to retailers Herzog expected the makers of rival SSP machines via warehouse distribution. Under this system, to engage in heavy advertising and promotion to Kraft was responsible for delivering all merchan- generate consumer awareness of SSP technology dise to the customers' warehouses. From these and to educate them on the benefits. If Kraft warehouses, retailers then distributed the goods to entered the segment, it would need to be serious individual stores. Retailers were responsible for about building awareness and trial of Maxwell stocking products, refilling shelf space, maintain- House and/or Nabob coffee pods. Herzog needed ing inventories and maintaining displays-services to select the promotional vehicles that would for which Kraft paid in excess of $200,000 for generate the greatest number of loyal customers. national listing fees. Such a system eliminated the He had identified several possibilities: need for Kraft to constantly monitor and track inventories, distribution and stock. The alternative was to use direct-to-store- Print Advertising delivery (DSD). Under this system, Kraft would be Print offered a broad range of options. After meet- responsible for delivering merchandise to individ ing with his advertising agency, Herzog narrowed ual stores, holding inventories and restocking the choice to magazines in six categories: women's shelves. This method was currently used by Kraft interest, decorating, gardening, food, travel, and for its Mr. Christie cookie products. A joint DSD regional and city magazines. Based on magazine program with Mr. Christie would enable Kraft to features, readership, customer profiles and costs, lower the overall cost for coffee pod distribution to Herzog would need to identify a specific set of pub- approximately $150,000 by reducing supply chain lications for advertising inserts. He also had to expenses and minimizing inventory holding costs. determine the number of advertisement inserts for DSD would also allow Kraft to control product dis each magazine (see Exhibit 5). plays, ensure superior product freshness, improve customer service, collect insights from retailers, and TV Sponsorship sidestep warehouse capacity restraints. Finally, since 40 percent of all coffee makers were sold in Novem Kraft's ad agency had also recommended a televi- ber and December, DSD would also provide Kraftsion sponsorship program in Toronto, Vancouver, with speed to market during this period. and the province of Quebec to build awareness. Despite these advantages, Herzog was not con- The Toronto and Vancouver initiatives would vinced that DSD made sense. There was a reason- be conducted in partnership with CityTV, and able probability that Kraft would not be able to would include coverage on popular local programs, maintain a DSD approach if the coffee pod sales such as Breakfast Television, CityLine, CityPulse increased significantly in the future, as the com News, and CityOnline. Kraft's coffee pod logo pany had both limited space in its distribution would also appear on all-news channel Cable- center and a limited delivery truck fleet. Further- Pulse24 and the City TV website. more, with numerous retailers and thousands of the cornerstone of the Toronto/Vancouver stores spread across the country, he wondered TV sponsorship program was contests and give- whether Kraft had sufficient resources to ade aways. CityTV would air a 30-second promotional quately restock product shelves, update product spot encouraging viewers to qualify for giveaways displays and maintain inventory on a store-level by watching CityPulse. During the telecast, viewers basis. He also wondered how retailers would per would be asked to e-mail the answer to a contest ceive the DSD system, instead of their preferred question, and City TV would select one winner each warehousing distribution system. night. To generate additional interest, CityTV
reach to the prospective target market. If Kraft attended all the fall and spring trade shows, they would be able to reach more than 1.4 million attendees for a total cost of $147,377 (see Exhibit 8). Consumer Shows A third option was to introduce the product at high-traffic home and garden shows across the country. This promotion would entail an elaborate exhibit, featuring hands-on, shopping channel-style demonstrations, taste tests and a projection screen TV (see Exhibit 7). The message would emphasize the café quality of Maxwell House and/or Nabob coffee pods, and the variety of flavor choices. Bunn My Café had contacted Kraft and suggested splitting the cost through a jointly operated booth. Regard- less of whether he accepted this partnership, Herzog had the option of selecting a 10 x 30 foot booth for $485,200 or a 10 x 20 foot booth for $361,450. In addition, he would need to decide which trade shows would provide the most value and highest Direct Marketing Herzog could also target existing Kraft customers through a direct mail campaign. Kraft had a data- base of more than one million subscribers, who voluntarily subscribed to receive its quarterly What's Cooking magazine. Herzog estimated that the cost of a direct mail insert, profiling the coffee pod product, would be $50,000. An alternative was to target Kraft customers through an e-mail campaign. Customers that fit the profile of single-serve coffee machine purchasers
(see Exhibit 9). Together, these in-store displays and coupon offerings were forecast to increase product trial by an additional 250 percent. could be sent an e-mail inviting them to visit a website and register to win a free year's supply of coffee pods. When customers visited the website, they would be given information about the SSP machines and the benefits of Maxwell House and/or Nabob coffee pods. Total cost for the website, e-mail campaign, and giveaway was estimated at $30,000. Merchandising Finally, Herzog was contemplating a variety of in- store merchandising. Kraft had previous experience with three different kinds of display systems. Off- shelf display bins could hold 24 packs of coffee pods and consisted of a stand, a colorful reader card to attract attention, and space for coupons. Herzog felt that a "buy one, get one free” coupon would provide sufficient incentive for SSP machine owners to try Kraft's coffee pods. Another possibil- ity was on-shelf racks, which would ensure that the product would always be neatly and tidily pre- sented. These racks were capable of holding specific point-of-sale merchandise to ensure customer vis- ibility, and would be held down using magnets so that they could be easily moved. An additional option was to use metal shelf strips, which held a coupon attachment and up to 12 bags of coffee pods, and could attach easily to any retail shelf. The display bins, on-shelf racks and shelf-strips would cost a total of $70,000 and the coupons $13,800 Conclusion With the high growth potential of the single-serve coffee machines in Canada, pressure to go ahead with the launch was high. By launching immedi- ately, Kraft would also have a better opportunity to defend against Procter & Gamble, whose Folgers brand was linked to the Home Café SSP system. If Folgers gained a dominant position in the coffee pod market, there was a reasonable chance that its success could also spill over into the standard roast and ground coffee business. Conversely, there was a chance that coffee pods would not be well received in North America; by waiting for the results of the U.S. launch, Herzog could minimize risk. Waiting would also enable Kraft to determine which customers were buying the SSP machines, enabling them to target market- ing efforts more effectively. In any case, if Herzog decided to launch the Maxwell House and Nabob Coffee Pods, he would need to create a marketing plan that could break even by the end of 2006. With that firmly in mind, Herzog took a final sip of his coffee and went to work. Ле