Kraft Indecision of 2004

Problem
Geoff Herzog, the product manager for coffee development at Kraft Canada, is in a moment of
indecision on whether to go with the encouraging results for the single-serve coffee pod system in
European markets and proceed with a product launch in Canada timed with a North American launch, or
to wait for the results of the single-serve coffee pod system in North American markets before
proceeding with a product launch in Canada. Additionally, if Herzog is to proceed with a launch in the
Canada, he will need a marketing plan showing break even by the end of 2006 on the product launch, a
plan which must include branding strategy, pricing strategy, flavor offering, choice in distribution, and an
advertising and promotions strategy. All in all, the ‘Kraft Indecision of 2004’ that Herzog faced was a
direct result of the problem of a lack of a marketing plan for the Kraft Coffee Pod in Canada.

Situation Analysis

Context
Economic
 Very good results of single-serve coffee pod (SSP) machine in Europe
 Starbucks and Tim Hortons entered the market in a serious way in Canada
 Drop in volume and dollar sales for specialty and instant coffees in Canada
 Declining margins and eroding profits due to the popularity of large-sized discount
coffee which has lead to price war in Canada

Technological
 SSP machines, open and closed systems
 Espresso machines

Social/Cultural
 Canada is leading the world in consumption of coffee
 After water, coffee is the most popular beverage in Canada
 63% drink at least one cup daily

Customers
There are two different types of customers for the Kraft Coffee Pod. Retailers are the direct customer
and the end-consumer of the product is customers at the retail stores. Market research on Canadian
coffee pod users shows them as coffee-lovers who are between 25-54 in terms of age, who are well-
educated and have an average income of just below $100,000. Additionally, most of them are married,
live in single-detached homes in urban areas that are population rich, and they enjoy high-levels of
consumption. The buyers of Kraft’s two brands in Canada currently, Maxwell House and Nabob, see
final users as being over the age of 45, and a mix of maturing, established families and single
professionals.

Company
Kraft Foods was the largest food and beverage provider in North America and second in the world. Kraft
owned many successful brands, had a strong distribution network, and was well known for innovative
products. They aimed to lead in the markets they are involved in by encouraging innovation, focusing
on high product quality, and watching profit margins. Kraft was the world’s leader in coffee sales in
2004. In Canada, Kraft had 32% market share through Maxwell House and Nabob Brands.

Collaborators
Kraft collaborators would include the retailers whom they must have a good relationship with, especially
if a direct-to-store delivery system for distribution were implemented. Also Maxwell House and Nabob
are collaborators since they are owned by Kraft, Kraft can benefit from the successes and learn from
their weaknesses.

Competitors
In Canada, Nestle has 17% market share, making it the largest competitor in the Canadian market
followed by Proctor and Gamble with 9% market share. After that private labels combines contributed
to 23% of the market share in Canada, and the rest of the competition in the industry came from smaller
companies. The direct products competing with the Kraft Coffee Pod were Melitta and Salton’s one-to-
one SSP machine, Proctor and Gambles Home Café, Philips Electronics and Sara Lee Corporations Senso
machine, and Bunn Home Brewers My Café single serve pod machine. Other competitors for the Kraft
Coffee pod would be Starbucks and Tom Hortons, suppliers of teas, soft drinks, and alternative
beverages which can serve as substitutes to coffee, and coffee shops and restaurants who provide a
service with the coffee.

Alternatives

Reactive
Herzog has the option to await the results of a North American Kraft Coffee Pod launch to determine
whether or not it would be a good idea to launch in Canadian markets. This option is not advisable
because Canada is one of the world’s leading coffee drinker countries and it would be difficult to capture
market share and establish competitive advantage, especially with the possibility of Proctor and Gamble
capturing more of the market from a spill over effect caused by its Folgers brand linked to the Home
Café system. On the other hand, this option would for-go the risk associated with the expansion
strategy into Canadian markets, as well as learning from the North American product launch to
determine which type of customers are most worth targeting marketing efforts at to insure known
success.
Recommendation

Proactive Expansion
Kraft Canada should proceed with the product launch in the Canadian market simultaneously with the
North American product launch because it needs to capture a larger market share position and
aggressively act towards the potential of Proctor and Gambles ability to capture more of the market
from a spill over effect caused by its Folgers brand and Home Café system. Forgoing the opportunity to
capture a larger market position in the Canadian market would be inadvisable considering some of the
trends and statistics regarding the consumption of coffee in Canada. Also the primary reason for not
launching in Canada is there is no marketing plan in place for such a launch including branding strategy,
pricing strategy, flavor offering, distribution, and promotion strategy. Outside of this concern of no
marketing plan, the only issue would be the small budget to build awareness and articulate the product
benefits and value over the competition.

Implementation
Proactive Expansion
Branding Strategy

Target Market:
Coffee lovers, between the ages of 25-54, who are well educated, high income, married, and live in
population rich urban areas characterized by high levels of consumption. Also these people have
interests in exercising, entertaining at home, gourmet cooking, household decorating, gardening, and
taking exotic vacations.

Pricing Strategy:
Utilize a penetration pricing strategy, giving ability to raise the price to decrease demand in case the
direct-to-store delivery can not keep up with a significant increase in sales. Kraft is known for providing
a better quality product at the right price compared to the competition.

Product Strategy:
Offer 6 or more flavors of coffee to compete with the Melitta one-to-one SSP machine who offers 6
flavors, catering to the customer demand for variety. Also the single-serve coffee pods are easy to use,
easy to clean, take less than 1 minute to make, makes 1 cup at a time, and allows for catering to
individual tastes as opposed to making one pot of the same type of coffee with the traditional drip
system, which might take 10 minutes. This means groups of people with different tastes can enjoy their
own type of coffee.

Place Strategy:
Use direct-to-store delivery to lean the supply chain and establish lasting relationships with retailers
who can provide benefits of better product display and promotion display in stores. This would lower
costs and ensure freshness of product. Further a penetration strategy with the option to raise prices to
lower demand can alleviate concerns of not being able to keep up with delivery if there is a surge of
sales.

Promotion Strategy:
Merchandising as the primary marketing effort, with off shelf display bins, on-shelf racks, and shelf-
strips as well as coupons, costing a combined total of $83,800, which would be less than the $1 million
cap for marketing expenses. This might mean that the remaining funds could be used for a limited
direct mail campaign targeted at important users, even after the results of the launch, in order to have
better information to cut costs of the effort, as such a campaign which would cost $50,000 under
current estimates.