Kraft Case The success of the single-serve coffee pod system in Europe has influenced Kraft Foods North

America to introduce coffee pods to the market in the United States. Geoff Herzog is a product manager for coffee development at Kraft Foods Canada and has to decide whether or not to introduce the coffee pods in Canada as well. There are a few things that will go into the decision to go ahead with the launch; Herzog will need to come up with a wholesale and retail price and create a branding strategy that is suitable with Krafts two brands, Maxwell House and Nabob. The different flavors offered and the distribution of the project will also need to be figured out. Herzog will also need to create an advertising and promotional plan within a fairly small budget. Before making a decision, Herzog has a lot of information to analyze. (A full situational analysis can be found in Appendix A). Kraft Foods Inc. is a large company that is very successful. Starting out as a cheese company, they have expanded their business, currently having five different product categories. The size of the company is an advantage when entering into new products because a failure will not hurt business as much as it would for a less financially stable company. Kraft also has company objectives geared towards growth and constant changes to their offerings to always satisfy customers. This type of outlook suits the decision to launch the SSP in Canada. While Krafts size can be an advantage, it can also hurt the launch if it doesnt get the proper attention. As far as Krafts current offerings, the company leads the world in coffee sales, and has the top two brands in Canada. Maxwell House and Nabob own 32 percent of Canadian coffee sales. These brands are highly recognized by Canadians across the country and can be used as a strong foundation when introducing the pods. These brands can also make the launch difficult because Herzog will have to mold the branding

strategy around the current brand images of Maxwell House and Nabob. If the pods are not a success, the perceptions of the two brands could be damaged. Kraft distributes its two coffee brands across the entire country of Canada, with Nabob being more popular in the west and Maxwell House having a strong hold in the East. Both brands are positioned as high-quality coffee and both come in a variety of flavors and types. The country wide recognition will help Kraft with the launching of the new pods, but this a new product so a new marketing plan will need to be developed to better suit the differences that the pods offer. This may be difficult as Herzog has been given a small budget of $1 million to launch the product. If he decides to introduce the pods, he will need to find cost effective ways to market and promote them. This could hinder the success of the launch, especially since other competitors are using more resources to be the leaders of this product category. As far as external factors go, Canada is a great country to launch any coffee product. Coffee is the second most popular beverage among Canadians, with only water being drank more. The target market is big, as many Canadians of all ages drink coffee on a consistent basis. The target for SSP machines usually have higher incomes and can afford to spend more per cup of coffee, as the pods are much more expensive than just purchasing coffee in bulk. Krafts target market for their coffee is already very similar to this target for SSP machines, making it an easy switchover. However, putting too much focus on this new product can be harmful because it is not expected to have a huge share of the coffee market, coming in somewhere around 8 percent by the end of 2006. Kraft is also not the only company that would be entering this business. Other competitors such as Proctor & Gamble and Sara Lee have already entered into partnerships with SSP machine brands and their coffee pods will be sold with the respective machines. This is a threat to Kraft as they are a little behind in the process, but there is an

opportunity to partner with Bunn, who is launching a SSP machine in November 2004 and has not partnered with any company yet. If Kraft does decide to launch, they do have the top two brands, giving them some advantage over the competitors. The SSP technology is new and something that Canadians are not used to. Although it has been successful in Europe, the SSP machine has not proven that it can be successful in North America. There is an opportunity because it makes a cup of coffee in less than one minute and still delivers the same great taste that consumers are used to. However, there is a fairly high switching cost for consumers to switch to SSP machines from buying coffee in bulk since they will have to buy a machine before using the pods. Most Canadians do buy their coffee in bulk by purchasing large tins, so it may be tough to convince them to change their ways. Herzog has three main choices: He can decide to launch the new pods in Canada right away, he can wait and see how successful they are in the United States, or he can throw away the idea all together. If he decides to just throw away the idea, Herzog will play it safe and ensure that there is no failure. However, Kraft will lose some of its market share and the popularity of the pods could flood over to the standard roast and ground coffee. If Herzog decides to wait for the results of the U.S. launch, Kraft would be lagging behind their competitors, but it could ensure the success of the pods. If he decides to launch the pods, there are a few things that will have to go into that decision. He will have to decide the price of the pods, what flavors to offer, how to distribute the product, and how to advertise and promote. The immediate launch will ensure Kraft keeps up with their competitors, but the chance that the pods fail is a big risk. Weighing all these pros and cons, I would suggest that Kraft launches the pods immediately. Kraft Foods Inc. is financially stable enough to handle the possible failure of the pods. They have a lot to gain if the pods are successful because it would ensure their dominance in the

Canadian coffee market once again. Even with a small budget, there are ways to develop a successful marketing plan. Right now Herzog wants to sell a pack of 18 pods for a retail price of $3.99. He wants the retailers to have a 35 percent margin, leaving the manufacturing price at $2.59. At $0.02 a pod, a case of 18 pods will cost Kraft $0.36, creating a contribution per unit of $2.23. To be successful, Herzog needs to advertise and promote the pods so the maximum amount of consumers can gain awareness. The print ads are not viable because they do not have a big enough option. I would suggest using television and the consumer shows. They will reach large audiences through both and the trade shows will offer trialability of the product. Using the small booth and going to each show would cost Kraft $254,414. The television promotions will cost another $52,300. As far as distribution goes, Herzog could save some money and use DSD distribution, costing Kraft $150,000. This brings fixed costs to a total of $456,714. This means to break even, Kraft will need to sell approximately 204,805 cases to break even. This means a total of 3,686,490 pods will need to be sold. With an average of 875,000 Canadian households purchasing coffee pods in the next three years, the total market will be a conservative 318,500,000 pods per year. (Calculations in Appendix B) Kraft should have no problem breaking even in 3 years and should be able to grab a nice share of the market as well. I would suggest offering multiple flavors such as traditional, decaf, and vanilla. While launching the pods right away has some risks, Kraft will be able to keep up with their competitors and hopefully maintain the market share that they enjoy with Maxwell House and Nabob. Doing breakeven analysis, it would seem that it is very possible for Kraft to make some profit off of these coffee pods.