Keurig: Innovation in the Coffee
Ecosystem – Executive Summary
Villamor Asuncion, Siddhartha Gavirneni, Steve Kenning,
Mukund Kulashekaran, Anita Natarajan, Chris Vaughan
11/8/2010
Keurig is a single-serving portion pack coffee brewing system. It began producing brewers in
1998. At the time, the coffee market in the United States was a $15B industry. While overall coffee
consumption levels had been relatively flat over the last several years, the specialty coffee segment had
been growing rapidly. Due in large part to the rise of Starbucks in the 1990s, American consumers had
increasingly drawn to gourmet coffee and exhibited a high willingness to pay for such coffee. At the time
Keurig introduced its brewers, specialty coffee represented $4B of the $15B coffee market. Apart from
the specialty vs. commodity coffee delineation, the coffee market was also segmented based on where
coffee was consumed. Coffee consumption was primarily divided into three major categories: at-home,
office, and food service.
Keurig wished to capitalize on the growing market for specialty coffee by creating a brewing
system that would make a single serving of high-quality gourmet coffee quickly and consistently. This
was accomplished through the use of “K-Cups”: a unique coffee package that contained coffee grounds
and a filter, and preserved freshness by protecting the coffee from light, air, and moisture. Use of KCups, combined with a brewer that used the appropriate amount, pressure, and temperature of water,
ensured a consistently high-quality cup of coffee every time the system was used.
The company decided to launch its product by focusing on the office segment. This segment was
less competitive than other parts of the coffee market, and had a higher willingness to pay for coffee
systems. Keurig also had what it thought was a compelling value proposition: office workers were largely
dissatisfied with the traditional pots of coffee made in most offices, instead walking to nearby
coffeeshops. If Keurig could entice these workers back to the break room with single-serving gourmet
coffee, workers would be happier and productivity would increase. The combination of these factors
gave Keurig the strongest chance of succeeding with its new system in this niche. It was hoped that, if
Keurig could achieve scale here, it could work its way down the cost curve and enter more pricesensitive markets, like hotels and at-home consumer systems.
The office coffee system (OCS) ecosystem consisted of brewer manufacturers; K-Cup
manufacturers; roasters (who provided coffee grounds); distributors; office managers; and office
workers (the end users). Keurig approached this ecosystem by partnering with a roaster, Green
Mountain Coffee Roasters, to provide gourmet coffee grounds. It also sourced suppliers to create the
brewers and K-Cups. Keurig encountered several co-innovation risks and interdependency risks here, as
its suppliers initially struggled with Keurig in creating brewers and K-Cups to the necessary
specifications.
Page 2 of 3
Keurig worked to spread surplus to all of the players in the ecosystem in order to ensure the
successful adoption of its innovation. As its suppliers struggled to create the brewers and K-Cup
production lines, Keurig provided them with additional capital to make necessary design changes.
Additionally, Keurig overcame hesitations from office managers regarding the relatively high price of the
Keurig system by setting up free demonstrations in offices, creating a natural demand “pull” from office
workers who were immediately convinced of the usefulness of the system.
After Keurig had successfully entered the OCS market, it turned its focus to the at-home
segment. The primary concern here was to not upset the network of distributors (KADs) that Keurig had
built up in the office market. Since Keurig planned to sell the system directly to consumers, these
distributors were concerned Keurig would potentially draw business away from them. To alleviate these
concerns, Keurig made sure that the K-cup pricing was higher in the home segment than the office
segment. This would ensure corporate customers would not be lured away from their relationships with
the KADs.
Although Keurig succeeded in entering the office channel, Green Mountain Coffee Roasters soon
realized that the large potential Keurig had in the at-home market required a much more established
distribution network into the retail channel. As a result, it decided to purchase Keurig in order to speed
its entry into this market. At the same time, Green Mountain preserved the partnerships Keurig had with
other coffee roasters to protect one of the system’s key selling points: a wide variety of coffees from
which to choose. This investment paid off handsomely, as Keurig’s revenues increased tenfold in only
two years.
As Keurig looks to capitalize on the growth it has experienced over the last ten years, it will need
to consider which markets to focus its efforts on going forward (offices, at-home, restaurants, or hotels);
how it can benefit from the experience curve effect to ward of competitors; and how to leverage its
network of alliances (with brewers, roasters, and distributors) to maximize its market exposure.
Page 3 of 3