Website: http://www.keuriggreenmountain.com/
Industry: Produces and sells coffeemakers, specialty coffee, and related products (teas, hot cocoa, among others).
BACKGROUND and HISTORY
Green Mountain Coffee Roasters was created in 1981 in Vermont, as a small specialty coffee roaster, which expanded rapidly in the next 20 years. The company acquired the brewing-machine maker Keurig in 2006. It was a publicly traded company from 1993 to December 2015, when investors led by JAB Holding Company acquired GMCR for the amount of $13.9 billion (Yahoo Finance).
GMCR describes itself as a “personal beverage system company revolutionizing the beverage experience through the power of innovative technology” (Keurig Green Mountain, Inc.). Their portfolio is comprised of 80 brands and more than 575 beverage types, among which the Keurig hot beverage system is the star (Keurig Green Mountain, Inc.).
In the latest years, GMCR has entered into meaningful partnerships delivering successful products such as K-cup, as well as coffee packages such Dunkin Donuts and Starbucks coffee. As recent as 2016, GMCR has met failure with its cold-drink carbonation machine (branded ‘Kold’) after “only eight months of sales and a flood of customer complaints” (Page, 2016).
The Chief Executive Officer is Brian Kelley, and in 2015 GMCR’s Net Sales were $4.5 billion, while its Net Income was $565.8 million (Keurig Green Mountain, Inc.).
ANALYSIS VIA PORTER’S FIVE FORCES MODEL
Strengths
Major brand, recognized family name
Broad portfolio of premium products
Keurig: major cup brewing machine
Important partnerships with brands such as Starbucks Coffee and Dunkin’ Donuts
Diversified distribution channels
Weaknesses
Seasonality: concentration of sales at the beginning and end of year, during winter
Diminishing margins
Constant struggle with suppliers
Opportunities
Expansion to international markets
Expansion to other markets, such as cold beverages
Expansion to Business-to-business (B2B) market
Trans-Pacific Strategic Economic Partnership Agreement (TPFTA) opening new markets
Threats
Competition from big players such as Nestlé
Patent expiry
Shifting consumer tastes (being a gourmet product) may lead to substitute goods
Suppliers have leverage
STRATEGY USED
Porter (1998) describes the three generic strategies to outperform other industries as overall cost leadership, differentiation and focus. GMCR is clearly not in the overall cost leadership strategy, as it is an approach more suitable to industries where non-competitive pricing is a deal-breaker, such as commodities. Since GMCR already has a large installed base of Keurig machines, its customers are bound to buy products compatible with that device, rather than purchase a separate system (such as Nespresso’s) just to make a little economy. GMCR is not in the focus strategy either, which premise demands a particular group of customers or geographic market. The company is a consumer-oriented business, with a vast and expanding consumer base. Hence, GMCR adopts differentiation as its Porter generic strategy.
GMCR attempts to obtain its competitive advantage using its broad base of Keurig machines as leverage (Dess, McNamara, & Eisner, 2015). The Keurig machine is ubiquitous. Thus, GMCR offers a wild variety of products – nearing 600 types of beverage – to capture as much demand as possible for specific drinks. GMCR also uses partnerships with Starbucks Coffee, Dunkin’ Donuts, Newman’s Own, and similar brands in ‘portion packs’ to differentiate the Keurig brand from the competition.
They have been successful: since GMCR 2015 Net Sales were $4.5 billion and Net Income was $565.8 million, their profit margin was a hefty 12.57%, for selling coffee and related products – lest we forget that coffee is perceived as a commodity product in traders’ markets. However, much of its advantage came from the Keurig patent, which expired in September 2012 (IP Asset Maximizer Blog, 2015). This may signal a dramatic change in their differentiation strategy as patents affect the life cycle of the specific industry GMCR is in: a dead patent may push the industry into cost-cutting competition.
SPECIFIC STRATEGIES
Related Diversification (Dess, McNamara, & Eisner, 2015, pp. 206–214)
As GMCR tried to enter the market with its Kold machine and brand, it attempted to leverage on its core competency to achieve economies of scope. GMCR has been a leader in the hot-beverage brewing market, so it is a natural move to attempt to enter into the cold-beverage market. The new machine could have used the production and distribution facilities of the Keurig to leverage its way into the market. Likewise, the use of licenses and partnership with strong brands (such as Starbucks Coffee) is an attempt to diversify, but with the use of its market power – the joint efforts of two major brands can foster consumer interest in the product.
Entrepreneurial Strategy (Dess, McNamara, & Eisner, 2015, pp. 292–311)
The Keurig brand was not created by GMCR; it was acquired (Yahoo Finance). GMCR was a specialty coffee maker, and the acquisition of Keurig was a major incentive for company growth. This is a prime example of recognizing entrepreneurial opportunity: GMCR did not make the Keurig but was able to profit immensely from it. GMCR already had access to the capital markets (it was a public company at the time of the acquisition) and to the distribution venues, and the Keurig machine and cups used both, to the advantage of the company. The Keurig system fit tremendously well with its line of products and created a whole new industry, which is now copied by food industry giants.
Even though their Kold product failed, GMCR could learn from its mistakes and attempt to gain market share with this Related Diversification strategy. For instance, GMCR could try to use non-carbonated products, such as iced or cold teas, or ‘thicker’ beverages such as shakes. The point is that GMCR is well placed in this industry to rely only on its Keurig hot-beverage machine. One failure does not mean that the strategy is faulty – evidence indicates that the product was defective (Page, 2016).
Another strategy GMCR may attempt is to globalize its customer base. However, instead of trying the markets of Europe, it could try to enter markets in the Southern hemisphere to minimize the seasonality problem it faces in North America. Most of its sales are concentrated in the winter, and this season occurs from June to August in the Southern portion of the globe.
Lastly, GMCR may consider a gradual phase-out of diversification (as a generic Porter strategy) and move into overall cost leadership. With the invasion of the generic K-cup brands, since the patent exhaustion, the industry will tend to become price sensitive. GMCR has ‘deep pockets’ and a strong brand: if it had cost leadership, it could annihilate the increasing competition.
OPINION
I think the GMCR case was very interesting and allowed me to learn the importance of patents and the barrier they cause to competitors. Moreover, I could see that differentiation strategies can be successful in adding value to commodity products. Lastly, I learned that even healthy businesses with good strategy may fail, if they have a bad product such as the Kold machine.
References
Dess, G. G., McNamara, G., & Eisner, A. B. (2015). Strategic Management: Creating
Competitive Advantages (8th ed.). New York City, NY: McGraw-Hill Education.
Dess, G. G., McNamara, G., & Eisner, A. B. (2015). Strategic Management: Text and Cases
(8th ed.). New York City, NY: McGraw-Hill Education.
IP Asset Maximizer Blog. (2015, July 09). Failure to Generate REAL Patent Protection:
Keurig's Story (Part 1) - IP Asset Maximizer Blog. Retrieved June 11, 2016, from
http://ipassetmaximizerblog.com/failure-generate-real-patent-protection-keurigs-story-part-1/
Keurig Green Mountain, Inc. (n.d.). Home | Keurig Green Mountain, Inc. Retrieved June 11,
2016, from http://www.keuriggreenmountain.com/
Page, V. (2016, June 09). Keurig KOLD Goes Off the Market | Investopedia. Retrieved June
11, 2016, from http://www.investopedia.com/articles/insights/060916/keurig-kold-
goes-market.asp?partner=YahooSA
Porter, M. E. (1998). Competitive Strategy. New York, NY: Free Press.
Yahoo Finance (Ed.). (n.d.). Keurig Green Mountain, Inc. Retrieved June 11, 2016, from
http://finance.yahoo.com/q?s=GMCR
