Marketing - buyer behaviour

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KRAFT FOODS: THE COFFEE POD LAUNCH (A) Aleem Visram prepared this case under the supervision of Professor Robin Ritchie solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managorial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copynight holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact lvey Publishing. Ivey Business School, Westem University, London, Ontario, Canada, N6G ON1; (t) 519.661.3208; (0) cases@ivey.ca; www.tveycases.com. Copynight - 2006. Richard lvey School of Business Foundation Version: 2014-05-27 INTRODUCTION Geoff Herzog, product manager for coffee development 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 coffee 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 coffee 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-tostore 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 categories: beverages, convenience meals, cheese, grocery and snacks. The Kraft brand portfolio was among the strongest of the global consumer 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 innovative new products and food applications. The company's mission was to achieve leadership in the markets it served, which it pursued by fostering innovation, achieving high product quality and keeping a close eye on profit margins. Five operational objectives had been established to achieve these goals: 1. Build superior brand value for consumers by delivering greater product benefits at the right price, compared to the competition. 2. Enhance product demand among consumers 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 reinvestment in brand building. Kraft Foods was the world leader in coffee sales with 15 per cent of the global harket. In Canada, Kraft's Maxwell House and Nabob brands cnjoyed a combined 32 per cent share, followed by Nestl at 17 per cent and Procter and Gamble with nine per cent. Private labels accounted for nearly 23 per cent of the market, with smaller companies making up the remaining 19 per cent. The company's Maxwell House line was Canada's top retail brand of roast and ground coffee, while Nabob was the leader in Westem Canada and number two nationally. Both were available in a variety of flavors, sizes and formats (see Exhibit 1). All beans used by Kraft were custom-roasted to deliver peak aroma, and had a fine grind to ensure a fresh, rich flavor. 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 Caff, 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 per cent of all coffee makers sold in Europe, and 5.8 per cent 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 per cent of the European home coffee brewer market. Significantly, as much as 30 per cent of total coffee pod sales were expected to be incremental 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 conventional 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 millimetres 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 sizc, and only accepted coffee pods compatible with these systems. In either case, the coffee produced was of similar quality to that available at cafs. Although the cost per cup with SSP machines ( $0.20 to $0.50 per cup) was higher than with 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 minutes 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 coffee 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 coffee 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 coffee, separate coffees could be brewed simply by using a different flavor pod for each cup. Bill VandenBygaart, 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 quality that single-serve pod machines provide." 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 cafes was further cannibalizing grocery sales, with consumers willing to pay a substantial premium for the convenience, customization and variety they offered. 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 that included espresso and cappuccino, flavored coffees and iced coffees - had dropped 12 per cent in dollar terms and 11 per cent by volume. Sales of instant coffee had increased two per cent by volume, but declined by two per cent 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, eroding margins and decreasing-profitability. Conversely, at about 15 to 20 per cent of total sales volume, higher priced premium coffee was a much smaller business that was enjoying double-digit sales growth. Herzog believed Coffee Consumption Behavior Canadians were among the world's leading drinkers of coffee, consuming some 3.5 million cups of coffee daily in 2003 - a number that had risen by an average of 4.5 per cent 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 per cent of Canadians drank at least one cup daily, while 83 per cent enjoyed coffee at least occasionally. Half of all Canadians drank at least some specialty coffee (espresso, cappuccino or flavored coffee); these individuals tended to be younger than the average coffee drinker, with higher education and higher incomes. The percentage of regular coffee drinkers varied considerably across the country, from a high of 70 per cent in Quebec, to 67 per cent in the Prairies and the West, 60 per cent in Ontario and 53 per cent 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 households 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 middleaged childless couples, who purchased more than 10 kilograms of coffee per year at an average price of $7 per kilogram. Nearly 38 per cent 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: 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 specially 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 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 Cafe, Senseo and Bunn. As a result, while other coffee pods were all interchangeable 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 varieties 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. 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 Cafb Bunn Home Brewers had announced plans to launch the My Caf single-serve pod machine in Canada in November 2004. My Caf claimed to offer great-tasting coffee quickly, simply and consistently. The system worked with a large array of pods and teabags, featured a removable easy-fill reservoir and patented spray head design for maximum 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 manufacture its own coffee pods (see Exhibit 4). MARKETING STRATEGY 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 per cent of SSP machine owners to try the product, and for 60 per cent of those individuals to repeat purchase. Herzog was expected to at least break even by the end of 2006 . Target Market Although SSP machines had only recently been introduced to Canada, Herzog had access to market research on current Canadian coffee pod users. These individuals were typically coffee lovers between the ages of 25 and 54 , tended to be well 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 per cent lived in single-detached homes in urban areas, primarily in the population-rich provinces of Ontario, Quebec, British Columbia and Alberta. They were characterized by high levels of consumption, and their interests included exercising, entertaining at home, gourmet cooking, household decorating, gardening and taking exotic vacations. Maxwell House and Nabob buyers had similar profiles to SSP machine owners, except that they were typically oyer the age of 45 . They also tended to be a mix of maturing, established families and single professionals. 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 Caf 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 atso critical, since it defined the entire coffee experience. Coffee drinkers were looking for a frish, hot cup of coffee with peak flavor and aroma. Market Share Kraft expected that, of the roughly 12.5 million households in Canada, SSP machines would be adopted by six per cent by the end of 2004, and eight per cent by the end of 2006. Average household consumption of coffee pods among SSP machine owners varied from soven to 14 pods per week. To maintain Maxwell House and Nabob's share of the Canadian coffee market, Herwg estimated that Kraft would need to capture at least 35 per cent of the coffee pod segment. His actual goal was to obtain a 45 per cent market share by the end of 2006 . Herzog knew this would require significant 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. target and still break even. 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. 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 USS3.99. In contrast, Folgers charged USS3.99 for a pack of 16. This pricing would give retailers a 25 per cent 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 suspected that stores would only be willing to carry one or two brands of coffee pods. Canadian grocers typically enjoyed margins of 20 to 30 per cent, but Herzog believed margins of 35 per cent 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 selling price to recommend. Distribution Most of Kraft's products were delivered to retailers via warehouse distribution. Under this system, Kraft was responsible for delivering all merchandise to the customers' warehouses. From these warchouses, retailers then distributed the goods to individual stores. Retailers were responsible for stocking products, refilling shelf space, maintaining inventories and maintaining displays - services for which Kraft paid in excess of $200,000 for national listing fees. Such a system elimillted the need for Kraft to constantly monitor and track inventories, distribution and stock. The alternative was to use direct-to-store-delivery (DSD). Under this system, Kraft would be responsible for delivering merchandise to individual stores, holding inventories and restocking shelves. This method was currently used by Kraft for its Mr. Christie cookie products. A joint DSD program with Mr. Christie would enable Kraft to lower the overall cost for coffee pod distribution to approximately $150,000 by reducing supply chain expenses and minimizing inventory holding costs. DSD would also allow Kraft to control product displays, ensure superior product freshness, improve customer service, collect insights from retailers and sidestep warehouse capacity restraints. Finally, since 40 per cent of all coffee makers were sold in November and December, DSD would also provide Kraft with speed to market during this period. were sold in November and December, DSD would also provide Kraft with speed to market during this period. Despite these advantages, Herzog was not convinced that DSD made sense. There was a reasonable probability that Kraft would not be able to maintain a DSD approach if the coffee pod sales increased significantly in the future, as the company had both limited space in its distribution centre and a limited delivery truck fleet. Furthermore, with numerous retailers and thousands of stores spread across the country, he wondered whether Kraft had sufficient resources to adequately restock product shelves, update product displays and maintain inventory on a store-level basis. He also wondered how retailers would perceive the DSD system, instead of their preferred warehousing distribution system. ADVERTISING AND PROMOTION Herzog expected the makers of rival SSP machines to engage in heavy advertising and promotion to generate consumer awareness of SSP technology and to educate them on the benefits. If Kraft entered the segment, it would need to be serious about building awareness and trial of Maxwell House and or Nabob coffee pods. Herzog needed to select the promotional vehieles that would generate the greatest number of loyal customers. He had identified several possibilities: Print Advertising Print offered a broad range of options. After meeting with his advertising ageney, Herzog narrowed the choice to magazines in six categories: women's interest, decorating, gardening, food, travel, and regional and city magazines. Based on magazine features, readership, customer profiles and costs, Herzog would need to identify a specific set of publications for advertising inserts. He also had to determine the number of advertisement inserts for each magazine (see Exhibit 5 ). TV Sponsorship Kraft's ad agency had also recommended a television sponsorship program in Toronto, Vancouver and the province of Quebec to build awareness. The Toronto and Vancouver initiatives would be conducted in partnership with CityTV, and would include coverage on popular local programs, such as Breakfast Television, CityLine, CityPulse News and CityOnline. Kraft's coffee pod logo would also appear on all-news channel CablePulse24 and the CityTV website. The cornerstone of the Toronto / Vancouver TV sponsorship program was contests and giveaways. CityTV would air a 30 -second promotional spot encouraging viewers to qualify for giveaways by watching CityPulse. During the telecast, viewers would be asked to e-mail the answer to a contest question, and CityTV would select one winner each night. To generate additional interest, CityTV would also offer smaller draw prizes via its website, and offer random product giveaways during its other programming. Total cost of the Toronto and Vancouver sponsorship programs was $52,300, for a total reach of more than 364,000 viewers (see Exhibit 6 ). The TV sponsorship plan for Quebec consisted of a low-key effort to generate awareness and educate viewers about the product. Coffee pods would be featured on two French-language programs on the TQS network: Cafeine (a moming talk/variety show), and La Roue Chanceuse (a French-language version of "Wheel of Fortune"). In exchange, Kraft would agree to provide coffee pod gift baskets and coffec pod machines, which the hosts of these shows would give away to viewers. machines, which the hosts of these shows would give away to viewers. 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 caf quality of Maxwell House and/or Nabob coffee pods, and the variety of flavor choices. Bunn My Cafe had contacted Kraft and suggested splitting the cost through a jointly operated booth. Regardless of whether he accepted this partnership, Herzog had the option of selecting a 1030 foot booth for $485,200 or a 1020 foot booth for $361,450. In addition, he would need to decide which trade shows would provide the most value and highest 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 ). Direct Marketing Herzog could also target existing Kraft customers through a direct mail campaign. Kraft had a database of more than one million subseribers, 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 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 hr SSP machine owners to try Kraft's coffee pods. Another possibility was on-shelf racks, which would ensure that the product would always be neatly and tidily presented. These racks were capable of holding specific point-of-sale merchandise to ensure customer visibility, 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 (see Exhibit 9). Together, these in-store displays and coupon offerings were forecast to increase product trial by an additional 250 per cent. 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 immediately, Kraft would also have a better opportunity to defend With the high growth potential of the single-serve coffee machines in Canada, pressure to go ahead with the launch was high. By launching immediately, Kraft would also have a better opportunity to defend against Procter and Gamble, whose Folgers brand was linked to the Home Caf 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 marketing 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. KRAFT FOODS: THE COFFEE POD LAUNCH (A) Aleem Visram prepared this case under the supervision of Professor Robin Ritchie solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managorial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copynight holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact lvey Publishing. Ivey Business School, Westem University, London, Ontario, Canada, N6G ON1; (t) 519.661.3208; (0) cases@ivey.ca; www.tveycases.com. Copynight - 2006. Richard lvey School of Business Foundation Version: 2014-05-27 INTRODUCTION Geoff Herzog, product manager for coffee development 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 coffee 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 coffee 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-tostore 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 categories: beverages, convenience meals, cheese, grocery and snacks. The Kraft brand portfolio was among the strongest of the global consumer 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 innovative new products and food applications. The company's mission was to achieve leadership in the markets it served, which it pursued by fostering innovation, achieving high product quality and keeping a close eye on profit margins. Five operational objectives had been established to achieve these goals: 1. Build superior brand value for consumers by delivering greater product benefits at the right price, compared to the competition. 2. Enhance product demand among consumers 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 reinvestment in brand building. Kraft Foods was the world leader in coffee sales with 15 per cent of the global harket. In Canada, Kraft's Maxwell House and Nabob brands cnjoyed a combined 32 per cent share, followed by Nestl at 17 per cent and Procter and Gamble with nine per cent. Private labels accounted for nearly 23 per cent of the market, with smaller companies making up the remaining 19 per cent. The company's Maxwell House line was Canada's top retail brand of roast and ground coffee, while Nabob was the leader in Westem Canada and number two nationally. Both were available in a variety of flavors, sizes and formats (see Exhibit 1). All beans used by Kraft were custom-roasted to deliver peak aroma, and had a fine grind to ensure a fresh, rich flavor. 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 Caff, 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 per cent of all coffee makers sold in Europe, and 5.8 per cent 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 per cent of the European home coffee brewer market. Significantly, as much as 30 per cent of total coffee pod sales were expected to be incremental 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 conventional 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 millimetres 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 sizc, and only accepted coffee pods compatible with these systems. In either case, the coffee produced was of similar quality to that available at cafs. Although the cost per cup with SSP machines ( $0.20 to $0.50 per cup) was higher than with 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 minutes 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 coffee 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 coffee 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 coffee, separate coffees could be brewed simply by using a different flavor pod for each cup. Bill VandenBygaart, 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 quality that single-serve pod machines provide." 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 cafes was further cannibalizing grocery sales, with consumers willing to pay a substantial premium for the convenience, customization and variety they offered. 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 that included espresso and cappuccino, flavored coffees and iced coffees - had dropped 12 per cent in dollar terms and 11 per cent by volume. Sales of instant coffee had increased two per cent by volume, but declined by two per cent 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, eroding margins and decreasing-profitability. Conversely, at about 15 to 20 per cent of total sales volume, higher priced premium coffee was a much smaller business that was enjoying double-digit sales growth. Herzog believed Coffee Consumption Behavior Canadians were among the world's leading drinkers of coffee, consuming some 3.5 million cups of coffee daily in 2003 - a number that had risen by an average of 4.5 per cent 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 per cent of Canadians drank at least one cup daily, while 83 per cent enjoyed coffee at least occasionally. Half of all Canadians drank at least some specialty coffee (espresso, cappuccino or flavored coffee); these individuals tended to be younger than the average coffee drinker, with higher education and higher incomes. The percentage of regular coffee drinkers varied considerably across the country, from a high of 70 per cent in Quebec, to 67 per cent in the Prairies and the West, 60 per cent in Ontario and 53 per cent 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 households 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 middleaged childless couples, who purchased more than 10 kilograms of coffee per year at an average price of $7 per kilogram. Nearly 38 per cent 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: 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 specially 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 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 Cafe, Senseo and Bunn. As a result, while other coffee pods were all interchangeable 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 varieties 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. 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 Cafb Bunn Home Brewers had announced plans to launch the My Caf single-serve pod machine in Canada in November 2004. My Caf claimed to offer great-tasting coffee quickly, simply and consistently. The system worked with a large array of pods and teabags, featured a removable easy-fill reservoir and patented spray head design for maximum 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 manufacture its own coffee pods (see Exhibit 4). MARKETING STRATEGY 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 per cent of SSP machine owners to try the product, and for 60 per cent of those individuals to repeat purchase. Herzog was expected to at least break even by the end of 2006 . Target Market Although SSP machines had only recently been introduced to Canada, Herzog had access to market research on current Canadian coffee pod users. These individuals were typically coffee lovers between the ages of 25 and 54 , tended to be well 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 per cent lived in single-detached homes in urban areas, primarily in the population-rich provinces of Ontario, Quebec, British Columbia and Alberta. They were characterized by high levels of consumption, and their interests included exercising, entertaining at home, gourmet cooking, household decorating, gardening and taking exotic vacations. Maxwell House and Nabob buyers had similar profiles to SSP machine owners, except that they were typically oyer the age of 45 . They also tended to be a mix of maturing, established families and single professionals. 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 Caf 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 atso critical, since it defined the entire coffee experience. Coffee drinkers were looking for a frish, hot cup of coffee with peak flavor and aroma. Market Share Kraft expected that, of the roughly 12.5 million households in Canada, SSP machines would be adopted by six per cent by the end of 2004, and eight per cent by the end of 2006. Average household consumption of coffee pods among SSP machine owners varied from soven to 14 pods per week. To maintain Maxwell House and Nabob's share of the Canadian coffee market, Herwg estimated that Kraft would need to capture at least 35 per cent of the coffee pod segment. His actual goal was to obtain a 45 per cent market share by the end of 2006 . Herzog knew this would require significant 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. target and still break even. 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. 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 USS3.99. In contrast, Folgers charged USS3.99 for a pack of 16. This pricing would give retailers a 25 per cent 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 suspected that stores would only be willing to carry one or two brands of coffee pods. Canadian grocers typically enjoyed margins of 20 to 30 per cent, but Herzog believed margins of 35 per cent 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 selling price to recommend. Distribution Most of Kraft's products were delivered to retailers via warehouse distribution. Under this system, Kraft was responsible for delivering all merchandise to the customers' warehouses. From these warchouses, retailers then distributed the goods to individual stores. Retailers were responsible for stocking products, refilling shelf space, maintaining inventories and maintaining displays - services for which Kraft paid in excess of $200,000 for national listing fees. Such a system elimillted the need for Kraft to constantly monitor and track inventories, distribution and stock. The alternative was to use direct-to-store-delivery (DSD). Under this system, Kraft would be responsible for delivering merchandise to individual stores, holding inventories and restocking shelves. This method was currently used by Kraft for its Mr. Christie cookie products. A joint DSD program with Mr. Christie would enable Kraft to lower the overall cost for coffee pod distribution to approximately $150,000 by reducing supply chain expenses and minimizing inventory holding costs. DSD would also allow Kraft to control product displays, ensure superior product freshness, improve customer service, collect insights from retailers and sidestep warehouse capacity restraints. Finally, since 40 per cent of all coffee makers were sold in November and December, DSD would also provide Kraft with speed to market during this period. were sold in November and December, DSD would also provide Kraft with speed to market during this period. Despite these advantages, Herzog was not convinced that DSD made sense. There was a reasonable probability that Kraft would not be able to maintain a DSD approach if the coffee pod sales increased significantly in the future, as the company had both limited space in its distribution centre and a limited delivery truck fleet. Furthermore, with numerous retailers and thousands of stores spread across the country, he wondered whether Kraft had sufficient resources to adequately restock product shelves, update product displays and maintain inventory on a store-level basis. He also wondered how retailers would perceive the DSD system, instead of their preferred warehousing distribution system. ADVERTISING AND PROMOTION Herzog expected the makers of rival SSP machines to engage in heavy advertising and promotion to generate consumer awareness of SSP technology and to educate them on the benefits. If Kraft entered the segment, it would need to be serious about building awareness and trial of Maxwell House and or Nabob coffee pods. Herzog needed to select the promotional vehieles that would generate the greatest number of loyal customers. He had identified several possibilities: Print Advertising Print offered a broad range of options. After meeting with his advertising ageney, Herzog narrowed the choice to magazines in six categories: women's interest, decorating, gardening, food, travel, and regional and city magazines. Based on magazine features, readership, customer profiles and costs, Herzog would need to identify a specific set of publications for advertising inserts. He also had to determine the number of advertisement inserts for each magazine (see Exhibit 5 ). TV Sponsorship Kraft's ad agency had also recommended a television sponsorship program in Toronto, Vancouver and the province of Quebec to build awareness. The Toronto and Vancouver initiatives would be conducted in partnership with CityTV, and would include coverage on popular local programs, such as Breakfast Television, CityLine, CityPulse News and CityOnline. Kraft's coffee pod logo would also appear on all-news channel CablePulse24 and the CityTV website. The cornerstone of the Toronto / Vancouver TV sponsorship program was contests and giveaways. CityTV would air a 30 -second promotional spot encouraging viewers to qualify for giveaways by watching CityPulse. During the telecast, viewers would be asked to e-mail the answer to a contest question, and CityTV would select one winner each night. To generate additional interest, CityTV would also offer smaller draw prizes via its website, and offer random product giveaways during its other programming. Total cost of the Toronto and Vancouver sponsorship programs was $52,300, for a total reach of more than 364,000 viewers (see Exhibit 6 ). The TV sponsorship plan for Quebec consisted of a low-key effort to generate awareness and educate viewers about the product. Coffee pods would be featured on two French-language programs on the TQS network: Cafeine (a moming talk/variety show), and La Roue Chanceuse (a French-language version of "Wheel of Fortune"). In exchange, Kraft would agree to provide coffee pod gift baskets and coffec pod machines, which the hosts of these shows would give away to viewers. machines, which the hosts of these shows would give away to viewers. 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 caf quality of Maxwell House and/or Nabob coffee pods, and the variety of flavor choices. Bunn My Cafe had contacted Kraft and suggested splitting the cost thr