Keurig SWOT Analysis
For any business to become and remain competitive, it first must take stock of its strengths, weaknesses, opportunities, and threats. Carrying out a SWOT analysis delivers for companies, small and large, a whole range of valuable insights. Keurig is the seventh largest player in the food and beverage industry. A Keurig SWOT analysis would tremendously benefit the company’s management and investors. Such an analysis, when done right, helps inform every key strategic decision an organization makes. This article, hopefully, will increase your understanding of Keurig’s strengths and opportunities. The post will also identify the various threats and weaknesses Keurig must address to become more competitive and profitable.
Founding Keurig: From Hand-made K-Cups to High-quality Coffee Pods that Keep Competitors and Critics Busy
Sometimes, college roommates end up starting a business together. When those students are engineers or techies, great things often happen. That’s how the Keurig story started. John Sylvan and Peter Dragone met at Colby College in Maine. After graduation, each worked for a couple years, but they found themselves back together at some point. Sylvan was trying to solve a coffee-related problem he had earlier seen at his workplace. Back then, brewing coffee at the office took forever. Aside from that, the coffee often didn’t taste particularly great. Sylvan had long known he would do something about the problem.
Sylvan Quits his Job
Sylvan would then quit his 9 –5 to perfect his idea of a single-serving coffee pod. It was an idea he’d conceived in the 1980s. He would later ask his former classmate, Peter Dragon, to join him as a 50-percent partner. They worked hard throughout the 1990s, building prototypes and testing them. It’s hard to believe, but the two founders used to cut filter paper by hand and shape it into cones. They would then manually insert the cones into plastic cups. The work must have been sheer drudgery. Later on, the founders started hiring temporary workers to help hand-make the K-Cups. While not every struggling entrepreneur succeeds, Sylvan and Dragone did. But they first had to raise capital for their nascent company.
Raising Capital to Grow Keurig
Raising money from investors was hard for Dragone and Sylvan. The early Keurig models were not efficient, and demonstrations before investors would not always work as envisaged. According to Dragone, the founders got kicked out of many places severally. Raising cash for a business no one knows can be tough. Dragone was about to abandon their baby when an early investor agreed to give their dream a chance. The investor gave them $50,000. Afterward, MDT advisers forked over $1,000,000. Fast forward to 2018, and Dr Pepper Snapple succumbed to a Keurig bid of $19 billion. Today, Keurig is the single-serve coffee market giant that critics can’t ignore. Let’s now dive right in and dissect Keurig.
Keurig’s Internal Strengths
Keurig has various distinct strengths that give it certain advantages over its competitors. Keurig Green Mountain acquired Dr Pepper Snapple early 2018. Keurig, as a result, has become a considerably strong brand, combining the individual strengths of the two businesses. The company now sells coffee pods, K-Cups, teas, coffees, and beverage concentrates. The following are a few of the internal strengths Keurig can turn into increased market dominance.
Keurig: A well-known Brand that Dominates the Single-Serve Coffee Market
Keurig controls about 30 percent of the single-serve coffee market. That makes the company a dominant player. When John Sylvan and Peter Dragone founded Keurig, they intended to serve people who worked in offices. They never thought the general public would become such ardent supporters of their business. But what happened with their invention (K-Cup) astonished Keurig and everyone else. People in offices and homes started buying the K-Cups and Keurig’s brewing machines in growing numbers. In the end, the company found itself thrust into the market dominance it now enjoys.
Americans and Canadians love their coffee. Fully 40 percent of Canadians use Keurig’s single-serve coffee brewing machines. Additionally, 26 percent of North American consumers used a Keurig machine in 2018. Keurig’s coffee makers are the kind of products everyone wants after their neighbor acquires one. A significant number of Americans and Canadians will likely continue driving demand for Keurig’s pods and cups. In short, Keurig offers great products. Additionally, the coffee their products help consumers make tastes much better than traditionally brewed coffee.
Keurig’s Dependence on the U.S. Market Translates into Less Impactful Currency Fluctuations
Keurig sells almost all of its products in the U.S. and Canada. Its peers such as Coca-Cola, PepsiCo and others have huge operations in different locations on the planet. That gives Keurig an advantage over its main competitors. Keurig faces a significantly reduced exposure to currency fluctuations. The U.S. dollar has been getting stronger. That improvement can seriously erode profits due to currency translations. In the first three quarters of 2015, Dr Pepper faced a currency headwind of only 2 percent. Dr Pepper is a subsidiary of Keurig Green Mountain, Inc. As a result, Keurig’s sales grew 3 percent in the same period.
By comparison, overseas markets contributed 50 percent and 55 percent respectively to PepsiCo’s and Coca-Cola’s net sales. However, currency fluctuations hit these two Keurig competitors hard. Coca-Cola’s top line growth fell 7 percent while PepsiCo’s declined 11 percent. The numbers demonstrate the effect of currency fluctuations on business performance. Evidently, Keurig’s focus on the U.S. and Canada puts the company in an advantageous position relative to its competitors.
Strategic Acquisitions that Give Keurig a Diversified Product Portfolio
Early in 2018, Keurig Green Mountain, Inc. bought Dr Pepper Snapple. Before the acquisition, Keurig focused on selling its hugely popular coffee pods. But the company acquired Dr Pepper, a soft drinks company, at a staggering cost of $19 billion. That enabled the company to enter the soft drinks market. According to Forbes, Dr Pepper’s stock rose 22 percent soon after the deal’s conclusion. At the same time, Dunkin Donuts, Coca-Cola, and PepsiCo stocks tanked. Those stocks fell because the stocks market interpreted the Keurig-Dr Pepper deal as a threat to the dominance of PepsiCo and Coca-Cola. Keurig’s CEO, Bob Gamgort, said that the combined company was the “new challenger in the industry.”
The deal enabled Keurig to “combine hot and cold beverage portfolio at scale.” The transaction brought together more than 125 brands owned by, partnering with, licensed by, or allied to Keurig. Some of the brands Keurig controls include 7UP, Canada Dry, A&W, Dr Pepper, Mott’s, Big Red, and AllSport. Analysts expected the resultant business to generate annual sales of $11 billion in 2018. The M&A transaction, hopefully, will help cut costs by $ 600 million by 2021. Thanks to the deal, the company’s sales are likely to grow significantly. Consumers can now enjoy hot drinks such as coffee in the morning and cold drinks the rest of the time. And that will likely translate into improved sales and profits.
Additionally, Keurig partners with Coca-Cola. Coca-Cola owned 16 percent of Keurig Green Mountain as of May 2014. Both Dr Pepper and Coca-Cola can introduce various beverage offerings to consumers using Keurig’s machines. That would potentially increase sales for all involved.
Internal Weaknesses that Keurig Faces
Various internal factors could seriously impact Keurig’s business, especially in the U.S. and Canada. The company’s patent of individual K-Cups expired in 2012. Additionally, Keurig’s pod machines are long-lasting and get replaced less frequently. Aside from that, the company’s DRM technology may hurt more than it helps. Here are the weaknesses the company should address:
Expiry of Patent on Individual K-Cups (2012)
When Keurig developed the K-Cups, the company probably didn’t except the kind of response it got from the market. K-Cups became quite popular. They gained massive acceptance because they helped consumers do something they had up to that point been unable to do. Thanks to K-Cups, coffee lovers could now brew individual portions of fresh coffee fast and conveniently. Before K-Cups, people had no choice but to brew a whole pot of coffee. It wasn’t easy for individual coffee lovers to enjoy coffee at home or in the office without waste. That’s how 25 percent of all American households came to own a Keurig K-Cup machine. But with the expiry of the patent, competition is likely to get stiffer. A growing number of unlicensed pods have continued to enter the scene since the expiry of Keurig’s patent. As a result, Keurig might lose a significant chunk of its market dominance.
More K-Cups Might Mean Fewer Full Coffee Pots
Keurig intended to enable people make single coffee servings rather than a whole coffee pot. But Keurig also sells brewers one can use to make full coffee pots. But most consumers likely see Keurig as the King of single coffee portions rather than full coffee pots. It’s possible that families today make less coffee per day than they used to before K-Cups. That means the convenience the company offers consumers could also be hurting industry-wide coffee sales. Keurig needs to encourage people to purchase new machines. Also, the company should start reminding consumers that they can use its brewers to make full coffee pots.
Keurig’s Long-Lasting Brewers, its Coffee Pod DRM Technology, and Relatively Expensive Pods Might Reduce Sales
There’s nothing wrong with selling quality products. After all, no one wants low-quality items that don’t last. However, if your products are high-quality items that last for years, you won’t have many repeat customers. A high number of U.S. households may use Keurig’s K-Cups, but brewer sales continue to fall. The DRM technology the company introduced in 2014 to shut out unlicensed pods isn’t helping the situation. The technology is somewhat ineffective, and it may hurt K-Cup sales significantly in the long run. To address the downward trajectory, the company should probably do away with its Keurig 2.0 line.
Also, Keurig’s high-quality K-Cups are relatively more expensive than most other options out there. That might make it easy for competitors to grow their sales and dramatically reduce Keurig’s market share. Besides, pod-brewed coffee is roughly six times more expensive than traditionally made coffee. That may crowd out a certain category of consumers, but people with decent incomes may continue buying Keurig’s goods. Of course, the company may lower prices to drive sales up. Unfortunately, there are no cast-iron guarantees that sales would increase. Perhaps the company shouldn’t lower prices. Instead, they should focus consumers’ attention somewhere else. The company should start constantly reminding consumers about what their brewers do for them. Brewers save people time (it’s seconds, though!) while offering convenience and choice.
Opportunities that Can Give Keurig a Revenue Turnaround
It’s hard to find a business that operates in an environment that lacks new opportunities. With declining brewer sales and stagnating K-Cup revenue, the future doesn’t look exactly rosy for Keurig. But that doesn’t mean the situation is hopeless. The company can leverage the partnerships it has with other successful companies such as Dr Pepper and Coca-Cola. There are a few opportunities the company can turn into increased sales and profits.
Keurig Can Lower Product Costs and Grow Home Brewer Sales
Keurig sells high-quality products, but lots of Americans may consider the prices relatively high. There are not enough Keurig brewers that sell at affordable prices. One expert thinks the company should consider lowering the cost to below $79 if they want to boost sales. The expert asserted that the only way to drive household penetration was to make brewers affordable. Keurig can cut brewer and K-Cup costs and combine that with aggressive marketing to push sales up. Keurig is a well-known brand. For that reason, it’s possible for the company to increase sales by lowering product costs.
North America Represents a Sizeable Unmet Market Potential
Many analysts regard the coffee market in North America as a maturing one. But according to Euromonitor International, unmet market potential still exists in the U.S. In Germany, Canada, and Switzerland, 15 percent of coffee lovers brew their coffee using pods. But only nine percent of coffee lovers in the U.S. pod-brew their coffee. That means Keurig can still grab the existing six percent potential in the U.S. Theoretically, there’s still a bit of room for Keurig’s pod consumption to grow.
Minimalism Continues to Gain Currency in the U.S.: Minimalists Likely to Buy Coffee Makers
A growing number of American’s are beginning to embrace minimalism. Traditionally, Americans want bigger, better things. They have always wanted bigger houses, cars, jobs, and businesses. But a new trend seems to be emerging. It’s minimalism. A minimalist wants few things to be happy. They’re trying to increase satisfaction and fulfillment by spending less and saving more. That’s why small homes are gaining popularity among American homeowners.
But how can minimalism help Keurig’s sales? Minimalists would rather make coffee at home than buy it at Starbucks. Such kind of people would be highly likely to buy a brewer, and a quality one at that. They would most likely choose a brand that lasts long as they wouldn’t need to keep replacing it. Sure, brewers aren’t cheap, and the per-cup price might be higher than at Starbucks. But making coffee at home would mean not spending money on expensive snacks every day.
The vast majority of American’s adopting minimalism are millennials. Millennial are every business’ future customers. One survey found that most millennials (78 percent) would be happy to pay for experiences. Keurig can design marketing tactics that present their quality coffee makers as great brewing experiences. Perhaps they should also innovate and develop smaller, smarter machines.
Here are the Threats Keurig Faces
Every company faces threats, unless it’s a monopoly. Some may view Keurig as a monopoly dominating the single-serve coffee industry. However, Keurig isn’t, strictly speaking, a monopoly. Competition, an improving U.S. economy, potentially expensive law suits, and environmental battles are some of the threats Keurig faces.
Determined Competitors, Some of Whom Have “Cracked” Keurig’s DRM Code
Keurig Green Mountain grew into a giant by making and selling quality brewers and K-Cups. Fortune favored the company, and it grew fast. But its competitors have been working hard. The effect of competition on Keurig’s business could be significant. Keurig still controls a significant market share in the coffee pod market, but competitors keep inching closer.
Starbucks is among Keurig’s most important business partners. Keurig has a multiyear agreement with Starbucks. Starbucks has its own coffee brewing system, Verismo. Verismo works pretty much like Keurig’s popular K-Cup system. Verismo helps make full-size cups of coffee, lattes, and espresso. Besides, Starbucks also sells K-Cups. While Keurig produces the cups for Starbucks, the margins are pretty small. Keurig would be much better off making the cups for its own coffee.
TreeHouse Foods and Mother Parkers are also notable Keurig’s competitors. Keurig’s DRM code was supposed to protect the company’s market share. However, the strategy doesn’t seem to be working as Keurig had envisaged. According to TechDirt (2014), TreeHouse and Mother Parkers claimed to have discovered how to crack Keurig’s DRM code. TreeHouse CEO, Sam Reed, boasted that his company needed just a year to replicate Keurig’s next generation K-Cups. At the same time, Mother Parkers announced that its pods were compatible with Keurig’s pod technology. Club Coffee, a Canadian company, also found a way to crack Keurig’s DRM code in 2014. The company’s CEO, John Pigot, exclaimed, “We cracked the Code.” No one knows how many other competitors are working hard to defeat Keurig’s strategy.
TreeHouse Foods deals in baked goods, condiments, beverages, beverage enhancers, healthy snacks, and meals. It operates in America and Canada.
Mother Packers, a family business, is among the biggest tea and coffee suppliers in the U.S. and Canada. The company won the Supplier of the Year Award in 2015. In 2014, Mother Packers bagged the Foodservice Supplier Award from ITWAL. Recently, the company hired Fred Schaeffer as the company’s president. Schaeffer might just be the outside help Mother Packers needs to grow to the next level. TreeHouse Foods, Mother Parkers, and other private-label brands may not seriously impact Keurig’s numbers at the moment. And Keurig is still a highly profitable business. However, in the future, Keurig could face potentially destructive competition headwinds.
Coca-Cola and PepsiCo are enormous businesses that also want a piece of the coffee market pie. With a global presence, highly efficient distribution systems and huge budgets, Coca-Cola and PepsiCo should worry Keurig. These beverage behemoths know that the future of carbonated drinks looks bleak. Certainly, Coca-Cola and PepsiCo need a hedge against slumping soda sales. Unsurprisingly, both companies have started investing heavily in the coffee and tea categories. And that development might appreciably affect Keurig’s revenue.
Nespresso is another competitor who has been fighting for a bigger U.S. market share. Nespresso may be much smaller than Keurig in the U.S. and Canada, but it’s a dominant player outside of those markets. But Americans have traditionally liked their coffees large. Unfortunately, Nespresso offers tiny cups of quality espresso. To grow its U.S. market share, Nespresso would have to school Americans on the benefits of drinking espresso. But that doesn’t mean Nespresso shouldn’t worry Keurig.
Other important competitors include Dunkin Donuts, Kraft Foods, Nescafe, Eight O’ Clock Coffee, and Maxwell House.
A Growing Number of Consumers Who Care for the Environment
The company is among the leaders in America’s single-serve coffee industry. And that’s where problems start. Each year, Keurig produces and sells billions of K-Cups. These plastics are not environmentally friendly. All those little pods finally find themselves in landfills.
Murray Carpenter wrote a book in 2014 that shed light on the impact of Keurig’s K-Cups on the environment. The book, Caffeinated, describes in sobering detail America’s coffee addiction. But one sensational claim made by Carpenter’s book brought Keurig’s contribution to environmental degradation into sharp focus. Carpenter asserted that in 2011 alone, the number of K-Cups Keurig produced could encircle the Earth more than six times. And in 2016, a Washington Post Journalist, Roberto A. Ferdman, made a comment that indicated that the K-Cups problem had continued to worsen. Ferdman stated that Keurig’s “K-cup trash could wrap around the Earth more than 10 times.”
Consumers everywhere are beginning to care about how businesses treat the environment. Some consumers choose not to take their business to companies that don’t seem to care about the environment. No precise impact numbers are available. But it is possible Keurig has lost and continues to lose sales to growing environmental concerns.
Fortunately, Keurig has promised to fix the K-Cup issues of concern by 2020. The company hopes to have developed environmentally friendly K-Cups by then.
An Improving U.S. Economy: Consumers Increasingly Buying Their Coffee from Restaurants
Coffee machines are efficient and can save coffee lovers money. But when the economy starts to improve, people aren’t always too much concerned about saving money. One food and beverage industry analyst, Eric Penicka, made an interesting observation in 2015. Penicka told Food Navigator USA that, “With the improved economy……the window of opportunity for pods is closing….” Penicka further stated that pod sales growth would “stall in the next five years.”
According to a recent Global CFO Council survey (ended Sept, 2018), the U.S. economy is improving. The council includes CFOs (Chief Financial Officers) managing 113 of some of the world’s largest companies. CNBC manages the Council and conducts surveys every three months. The purpose of these surveys is to get information about where the world’s economy is heading. For the U.S. economy, things are looking up. The President’s economic adviser, Larry Kudlow, recently said that the U.S. “is the hottest economy…today.” With fatter wallets, Americans are once again buying their coffee from restaurants and other such places. An improved economy should be a blessing for every business. However, a recession and not an economic boom is what would possibly help Keurig’s brewer and K-Cup sales.
Law Suits Could See Keurig Spending Huge Amounts of Money in the Near Future
In late 2014, Keurig introduced a coffee maker (Keurig 2.0) that didn’t accept coffee pods from its competitors. The machine only recognized licensed pods from Keurig and pods sold by Keurig-affiliated brands. That stirred controversy and fierce criticism, with competitors and consumers angrily voicing their concerns. As a result, the holiday sales the company sought to protect got hit hard. The decline in sales during that period was attributable to the introduction of the new coffee maker. In 2015, Keurig brewer sales fell 23 percent while pod sales grew by just 1 percent.
Aside from that, the company faced more than 25 anti-trust lawsuits in 2015. If the courts rule in favor of the plaintiffs, Keurig might end up spending a lot of money to settle. Some of the company’s adversaries were coffee manufacturers. The plaintiffs saw Keurig 2.0 as an attempt to unfairly edge their (competitors’) pods out of the market. The situation was bad. One competitor said that they “were under siege.” Keurig also saw tons of bad reviews on Amazon.
Final Thoughts on Keurig SWOT Analysis
Keurig stands on solid ground. It’s a strong brand that dominates the K-Cups and coffee pods market. But that doesn’t mean no one is doing anything about the company’s single-serve coffee market dominance. Nor does it mean there are no internal issues to fix. Its competitors are busy, and the company must urgently address the ever-growing K-Cup heaps in landfills. After acquiring Dr Pepper, the combined company is a stronger, highly competitive business. With a diversified product portfolio and effective marketing strategies, Keurig can make it hard for its competitors to devour it.