2012

KRAFT FOODS:
The coffee Pod Launch (A)

Dr. Leila Hamzaoui Essousi

Mediterranean School Of Business

Elaborated by: Amira Athimni Meriem Ben Yedder Myriam Belaifa Reem Nassar Rym Belhadj

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Outline

Synopsis ..................................................................................................................................... 2 I. a. b. c. Situation Analysis.............................................................................................................. 2 The market ....................................................................................................................... 2 The micro-environment ................................................................................................... 2 The Macro Environment: ................................................................................................ 3

II. Assignment Questions: ..................................................................................................... 4 1) As Geoff Herzog, evaluate the Canadian opportunity for coffee pods. .......................... 4 2) Should Kraft Canada proceed with a simultaneous launch? Why or why not? .............. 5 3) What do we know about the potential customers? Give a detailed answer. ................... 5 4) Provide a marketing plan (detailed marketing mix) based on your value proposition.... 6 III. Key marketing and expected results: .......................................................................... 8

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Synopsis

KRAFT Foods is the world leader in coffee sales with 15% of the global market. Geoff Herzog, product manager at Kraft Foods Canada, had just learned that Kraft Foods North America was planning an aggressive launch of coffee pods in the United States, following the recent success of the single-serve coffee pod in Europe. Kraft had already launched coffee brands: Maxwell House and Nabob, which had 32%of the market share in Canada. Now, Kraft Canada has to make a decision, whether to launch simultaneously with the US or wait to see their results first. If a product launch is made, a suitable branding, price and distribution strategy will also need to be determined.

I.

Situation Analysis

a. The market
Kraft foods evolved into North Americas largest food and Beverage Company, and are the number two player worldwide. In our case, we will focus on the coffee consumption market in Canada, putting in mind that the companys mission is to achieve leadership in the markets it serves, by fostering innovation, achieving high product quality and keeping a close eye on profit margins at the same time. The Canadian coffee market faces a fierce competition, since coffee is the second most popular daily beverage of Canadian adults. Different varieties of coffee are offered in the Canadian market: ground coffee, coffee beans, instant coffee and home prepared coffee. The single-serve coffee pod machine is the newest market for Kraft Foods in North America; the European market disclosed it, as the first major innovation to hit the coffee-brewing industry. In the other hand, it is expected by the end of 2010 that SSP machines would account for 10% of the European home coffee brewer market. This is a fact to take into consideration, and a push to expand this product in Canada.

b. The micro-environment
The bargaining power of suppliers The food and beverage industry is competitive in nature. The prices offered by Kraft are usually competitive to remain in the market. The suppliers in the industry do not hold much power to extract profits from Kraft Foods. The bargaining power of buyers The buyers preferences changes overtime and they are likely to switch to the seller who offers good quality at low price. Krafts retailers had played a major role in this case. They are responsible for stocking the product, refilling shelf space, maintaining inventories and display. The power of buyers is quite high as Kraft has to pay an excess of 200,000 $ for the distribution service.

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The threat of the entry of new competitors Based on the major brands available in Europe and the United States, there are 4 SSP competitors for Kraft in Canada. Accurately, Melitta One-to-One is already on the market and will be followed by the expected competitors almost within 6 months, which are Home Caf, Bunn My Caf and Senseo. There are already many competitors in the market, this resulted in limitation of chances for new entrants to set foot in, and enjoy their market share. In addition, SSP machine owners valued the flexibility of using different coffee brands in their brewers. Coffee quality is also critical, so the entire coffee experience is important. The existing companies have already spent so much on their brands, quality, and positioning, that it will be really difficult for the new entrants to entice switching among consumers. Rivalry among established competition Competition in the Canadian coffee market is intense. Competitors of Kraft are essentially Starbucks, Tim Hortons selling their brands of ground coffee and coffee beans in grocery outlets as well as in their own stores. They are cannibalizing grocery sales with brewed coffee from their restaurants and cafs. The main vehicle by which firms in the industry preserve market share is through brand loyalty and diversification. Generally, the products of these firms are highly elastic with consumers weighing the tradeoff between price and quality and between companies and products. However, consumers in this industry have minimal switching costs and there is no guarantee of brand loyalty. But one of the goals of Kraft is enhancing product demand among consumers by building relationships with trade partners. Therefore, the way this firm maintains market share is by providing brand quality at an affordable price. The threat of substitute products As the SSP machine is an innovative product in the Canadian market. There is no clear substitutable product; the coffee will remain the same. The difference will be only in how Canadians prefer to make their coffee; the traditional machine or the SSP machine. Putting in mind, that this new machine will help them as it is user friendly, it will allow them to gain time to make it, and every person in the home can drink the flavor that he/she desires. The only substitute of coffee is hot tea, and referring to the percentage of Canadians who consume the beverage on a typical day (Exhibit 3), it shows that coffee beverages represent 63% and hot tea 34%. This cannot be a threat to the consumption of coffee at all. The consumers compare the quality of products and their prices with that of others to decide which product to buy. The threat of substitutes is low in this case.

c. The Macro Environment:

Based on PESTEL analysis: Political factor: Canada is a democracy with a parliamentary government. It consists of three parts: federal, provincial and municipal. Canada has a stable political system so it cannot affect the Canadian coffee market. Economical factor: Canada has the 10th largest economy in the world and from its main industries, food products. So it enhances investments in this sector, especially coffee.

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Social analysis: If we take a look at the average of Canadians coffee pod users, they are typically coffee lovers, between the ages of 25 and 54, well educated and have an average household income of 91,000$, which is upper than the Canadian average household income of 55,000$. Most of the consumers are married and 88% lived in single-detached homes in urban areas. Concentration of coffee pod users is essentially in the population-rich provinces. Their hobbies are: exercising, entertaining at home, gourmet cooking, household decorating, gardening and taking exotic vacations. Technological factor: As long as the technological factors are concerned, KRAFT Foods is always visible, either in advertising, TVs, consumer shows and direct mail with the use of internet. Environmental analysis: Canadas climate is dominated by extreme and long cold winters. There is no main issue in this case about environmental conditions in Canada. In the other hand, we can take into consideration the crude winter season, with its frigid weather as a reason to push more the consumption of coffee. Legal factors: No special legal factors are mentioned in this case

II.

Assignment Questions:

1) As Geoff Herzog, evaluate the Canadian opportunity for coffee pods.

There is a high growth potential of SSP coffee machines in Canada which will necessarily conduct to a high potential for coffee Pods. One to one, Senseo, Home Caf and bun my Caf, Krafts main competitors, were planning to launch their SSP machines in a time frame of six months approximately. So for sure it will create a new potential coffee market with a high demand and a different new consumer behavior. Besides, Canadians are known for their high consumption of coffee (3.5 M cup of coffee daily); it is their second most popular beverage consumed after water. So Canadians will likely keep up with this new innovative Coffee machine and its products, which is a product that target home users or even office users; it is designed to be practical and time saving. The two third of coffee consumed were prepared at home, this emphasize the fact that there is a high potential of market growth of SSP machines that will drive a high potential growth of coffee pods market too: 55% of coffee drinkers consume it at breakfast and 17% in the morning those 72% of coffee consumers will be sensitive to purchase a product that will save time and practical to use. In addition, the table will shows the estimated growth potential of SSP coffee machines and its results on the growth of SS pod consumption.

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% OF
YEARS
POTENTIAL SSP OWNER

TOTAL
OF SSP OWNER

PODS NEEDED (AVERAGE BETWEEN 7

AND 14 PODS)

TOTAL
CONSUMPTION OF PODS PER WEEK

TOTAL
CONSUMPTION OF PODS PER YEAR

(52WEEKS)

2004 2005 2006

6% 7% 8%

750000 875000 1000000

10 10 10 Total market share :

7500000 8750000 10000000 26250000

390000000 455000000 520000000 1365000000

Table 1: Potential market growth of SSP machine and Pods

Total of SSP owner = rate of potential growth IN SALES OF SSP MACHINE * total household

2) Should Kraft Canada proceed with a simultaneous launch? Why or why not?

Despite the fact that there is a budget constrain and a certain frame of time to reach a break even and also an uncertainty between market growth prevision and real Canadian behavior toward this new product, Kraft should proceed with a simultaneous launch of coffee pods. This quick launch will allow Kraft to gain a competitive advantage and to keep its strong position in the coffee market especially with Pods new market. It will enable Kraft to gain maximum of market share since the beginning, instead of fighting to have a part of the market once the product is launched by competitors. This decision will align with Kraft main objectives which are, first being the leadership in food market (coffee), keeping up with innovative products and adapting to consumers wants and needs with making also a profit to achieve a financial strength. Waiting may cause Kraft a withdrawal of its brand value and image, consumer may change Kraft usual coffee product and start to be loyal to the brand with the new coffee pods. Even if it is costly to launch a new product for its two main coffee brands, it will need a higher amount of financial resources to invest to rebuild their brand value.
3) What do we know about the potential customers? Give a detailed answer.

Potential customers description: -Well educated and high average income of $91,000 comparing to the Canadian average household income ($55,000). -Typical coffee lovers between the ages of 25 and 54. -3/4 were married -88% lived in single-detached homes in urban area (Ontario, Quebec, British Columbia and Alberta) -high level of consumption -their interests: exercising, entertaining at home, gourmet cooking, household decorating, gardening and taking exotic vacation.

Think Pink 4) Provide a marketing plan (detailed marketing mix) based on your value proposition.

Budget limit: $1 million Reach a breakeven in 2006 45% MARKET SHARE BY THE END OF 2006*

Constraints

Market share target by Kraft equal to 614 250 000 (table1) reach around 2 million households or more.

Marketing plan:
Pricing: The pricing strategy should take into consideration the needed margin of retailers to make them buy Kraft coffee pods; it should also have a competitive price compared to its competitors (Folgers) and the adequate price that reflect quality to the consumers. $4.04 for a pack of 18 pods offer margin of 35% to the retailers It is competitive because it is lower than Folgers price (0.225 per pod lower than 0.25 per pod) At the same time, it is not a very low price so it will be perceived as premium product.

Distribution: Despite the disadvantages listed, direct-to-store-delivery system (DSD) will be needed to guarantee freshness of the product, speed to market during the launch period of pods and will lower the overall distribution cost by $150 000. Also it will allow a full control over the product displays and inventory rotation, thus, DDS will ensure that Krafts product are well presented to the customer as well as freshness will be guaranteed. Product: Size should be adapted to the 7 grams coffee pod that could be used in Home Caf, Senseo and Bunn My caf SS coffee maker. Freshness and high quality of the product is very important for the target segment. Kraft should offer a variety of pod for Maxwell House and Nabob without causing a cannibalization of its two brands. Maxwell House Pod should have four different flavors: mild, medium, dark and decaffeinated and with Nabob pod multiple flavored caf aromas (vanilla, chocolate, caramel) Regarding to the sales growth in the future, Kraft can expand the variety offered for its two brands.

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Advertising and Promotion: Print advertising: According to the information in Exhibit 5 A and B, Herzog should select the following Magazines Print Ad: English language (A) Magazine WISH STYLE AT HOME CANADIAN GARDENING FOOD & DRINK EN ROUTE VANCOUVER MAGAZINE TORONTO LIFE OTTAWA CITY

Category Women's interest Decorating Gardening Food Travel Regional/City

Readership 1100 1600 2572 1631 836 351 603 603 TOTAL

Total Cost $ 14900 9300 9000 14100 42000 15 500 13 000 4 000 121800 Total Cost $ 5700 5700 14 100 9 200 9 300 44000

Category Decorating Gardening Women's interest

Print Ad : French Language (B): Magazine Readership DCOR CHEZ-SOI n/a FLEURS,PLANTES,JARDIN n/a CLIN D'IL 833 COUP DE POUCE 1213 CHATELAINE n/a TOTAL

Total cost A and B = $165800

TABLE 2: the selected magazine total cost to reach the target market:

This tool will make Krafts coffee brands visible to it target consumers with a cost of $165,800. It will allow Krafts to target the needed consumer profile (high income, well-educated households) in English and French speaking market. Besides, it may allow Kraft to reach its customer before the competitors product launching event. TV sponsoring: Total cost: $53,300 this will allow Kraft to reach more than 364,000 viewers.

This option will allow Kraft to reach a huge number of audiences, introduce the new product and thanks to the giveaway method will establish a brand loyalty to the product.

Consumer Shows:

Trade shows will offer a great opportunity for customers to get a demonstration of how easy the product is to use and samples of the product. This will have an impact on the consumer purchasing behavior because it will allow him to live the whole experience of making coffee through this new product and will remember the brand when he will buy pod.

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10 x 20 foot booth costs $361,450 ($180,725 if Kraft accepted to join Bunn my caf) Fall and spring trade shows costs $147,377 (reach 1.4 million attendees) Total cost=$508,827 ($328,102 if Kraft accepted to join Bunn my caf).

Direct marketing:

It will cost $80,000 and will reach more than one million subscribers. Regarding to the fact that it is a narrow market that Kraft wants to target with its new products, direct marketing (direct mail, email, and giveaway) will offer the company the opportunity to reach the high income, well-educated households and may have the possibility of having a feedback on their product. Merchandising: $83,800

In store merchandising, will allow Kraft to benefit from it existing consumer base, it is certainly another way to reach the target customer. So it will gain the targeted market share before its competitors. As a result the Total cost of launching SSP will be equal to $838,427. This marketing plan will allow Kraft to cope with the fierce competition (3 brands will launch their SS machines and Pods that year) without exceeding its $1 million limit budget. All this expenses of advertising and promoting will strengthen their brand equity and maintain their leader position in the Canadian coffee market.

III.

Key marketing and expected results:

The main key marketing issue is how Kraft will be able to manage all the aspect of it launching strategy without harming their brand value or their leading position in coffee market. Besides, switching to direct-to-store-delivery (DSD) system is necessary, at least first, to cope with its strategy but it may face a rejection by its main retailers and will be not efficient in case of an important increase in sales. Thus, Kraft will benefit from its previous experience with DSD system (Mr. Christie cookies) and will design it regarding to the issue sited above. In the other hand, consumer will tend to be loyal to a specific pod brand, which will be most of the time the brand of their SSP machines. This will represent a high risk that will prevent the company to reach breakeven by 2006 and may also decrease their shares of its other product. Yet, this issue could be overcome by the effective participation at consumers shows(trade shows, demonstration), giveaway and coupon offered on their products so the costumer get used to the Maxwell or Nabod Pod.