Taking a Niche Player Big-Time

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The Decision

Keurig began selling a consumer model of its coffeemaker in September, marketing the machines to existing office customers. In October, the first full month that they were available, the company shipped about 5,000 home brewers, either directly on the Keurig website or through roasters and distributors, and Lazaris anticipated sales of 20,000 home brewers by year-end. To entice office customers, Keurig is offering them $50 off the price of a home brewer--which retails for $250. The company is also offering all home users $20 worth of free K-Cups (about 40 of them).

Lazaris admits that's a lot to spend on a coffeemaker--nearly four times more than a new single-serve machine released by Melitta in September, for example. Meanwhile, other large companies, including appliance maker Applica, in partnership with consumer products giant Procter & Gamble, are also expected to introduce single-serving systems. Lazaris says he actually welcomes their arrival. "These multibillion-dollar companies will spend a lot of money to educate the mass market," he says. "We hope to piggyback on this and provide an upscale alternative." At the same time, however, Keurig is working hard to introduce a new model that will cost about $150 and be produced in Asia. Keurig's also struggling to solve distribution problems. Currently, neither the machine nor the K-Cups are available at retailers and Lazaris says they are unlikely to be until the price of the machine comes down. "We're talking with a major retailer right now that says if we can get the product down to $149, it will fly off the shelves," says Lazaris. Once that happens, Lazaris hopes to get supermarkets, where the overwhelming majority of people buy their coffee, to start selling K-Cups. To do that, he'll be relying on help from Green Mountain and his other roasting partners, which already have their own stores or space on supermarket shelves.

Of course, ultimately, what Keurig really needs are more enthusiastic customers like Tardie. "Whenever people come to my house, I show off the machine like it's a new piece of furniture," she says. "My friends know that when they come to my house, they get the coffee show."

The Experts Weigh In

Daniel Cox

Coffee Enterprises Inc., Burlington, Vt.
President

Keurig has two big concerns: The price of the machine is well beyond the range of the average consumer and the only way to buy the K-Cups is through mail order--something very few customers are likely to do. It should go to a coffee-producing country like Honduras or Guatemala, make the machine in a free-trade zone, and pay more than the going rate but get the price down to $99. Keurig also needs to get the cost of the cup down because it's about four times more expensive than what the typical at-home user spends.

David Oreck

Oreck Corp., a New Orleans-based vacuum-cleaner manufacturer and retailer
Founder and Chairman

Small companies need to be very careful about taking giant steps. Keurig should spend more time expanding the commercial side of the market before branching out. Since there are some really big players in the coffee business, it makes more sense for Keurig to continue being a niche player. Pursuing retailers is definitely not the way to go--Keurig will lose control of pricing, and the retailers will want a significant margin. What's more, once it's on the shelf with a bunch of other products, it's going to need someone to explain to a customer why its product costs so much more, and that's hard to find at most retailers.

Sanjay Sood

The Anderson School at UCLA
Assistant Professor of Marketing

Clearly, Keurig will get something of a free ride from larger competitors like Melitta and P&G. The problem is that once consumers are educated, they have to find their way to Keurig's website, which without a significant advertising budget is pretty unlikely. Keurig might want to consider pairing with a strong upscale retailer that sells a lot of kitchen appliances, like a Macy's or a Bloomingdale's, and offer it incentives to educate consumers about the product. Whatever it does, it definitely needs to lower the price. It's in dreamland if it thinks it can go up against a big company like P&G with a more expensive product.

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