Kraft Foods Presentation

The product manager for coffee development at Kraft Canada must decide whether to introduce the company's new line of single-serve coffee pods or await results from the United States. Key strategic decisions include which target market to focus on and what value proposition to signal. Important questions are also raised as to how the new product should be branded, which flavors to offer, whether Kraft should use traditional distribution channels or direct-to-store delivery, and what forms of advertising and promotion to use. The case provides a basis for discussing consumer decision making, and stresses the importance of providing a clear incremental benefit when introducing a new product in an established category. Decision Statement: Should Kraft have waited to launch the coffee pod in Canada until the company received results from the U. S.? Since they did a simultaneous launch, how can Kraft foods alter their marketing strategy to increase sales of the coffee pod? Kraft Foods: Kraft Foods was originally began as a cheese manufacturer in 1903 & has since evolved into North America’s largest food and beverage company – Had previously been a division of Phillip Morris Companies but became a public company in June 2001 – Operations consist of Kraft Foods North America and Kraft Foods international – Business is divided into five product categories: beverages, convenience meals, cheese, grocery, and snacks. One of the strongest brand portfolios of global consumer packaged goods players {text:list-item} {text:list-item} – Strong distribution network and a well-earned reputation for developing innovative new products and food applications Mission: 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. World leader in coffee sales with 15% of the global market; In Canada, Kraft’s Maxwell House and Nabob brands account for 32% market share. The Launch of the Coffee Pod In July of 2004, Geoff Herzog (product manager for coffee development at Kraft Foods Canada) found out that Kraft Foods North America was preparing an aggressive launch of coffee pods in the US. Herzog had less than a month to decide whether Kraft should proceed with a simultaneous launch in Canada, or await the U. S. results Herzog decided to go ahead with the launch ? This is where we believe the problem arose Created the Tassimo In order to Launch in Canada, Herzog had several decisions to make: Kraft owned two major brands in Canada, Maxwell House and Nabob, so the company would have to create a suitable branding strategy. Setting wholesale and retail prices for coffee pod Choose which flavors to offer Decide whether to use traditional distribution channels or direct-to-store delivery Develop an effective advertising and promotional strategy on a relatively limited budget Herzog would also need to present a convincing case that his plan and recommendations would in fact help Kraft expand its share of the Canadian coffee market, while also generating a satisfactory return on the company’s marketing investment. Marketing Strategy With an annual budget of only $1 million for the launch, Herzog faced tight constraints on his ability to introduce Kraft coffee pods in Canada. He would need to identify a cost-effective way to convince consumers that Kraft pods delivered better value the competitors’ pods Goal: 80% of SSP machine owners to try the product; and 60% of those individuals to repeat purchase Herzog was expected to at least break even by the end of 2006 Target Market: Individuals between 25-54, tended to be well educated and had a household income of $ 91,000 (Canadian household income was around $55,000) Three-quarters were married and 88% lived in single-detached homes in urban areas, primarily in the population rich provinces of Ontario, Quebec, British Columbia, and Alberta. Consumers 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 had similar profiles to SSP machine owners, except that individuals were typically over the age of 45 Buyer Behavior: Consumers typically purchased pods of the same brand as the machine they bought On the other hand, focus group research suggested that SSP machine owners valued flexibility of using different coffee brands in their brewers. Coffee quality was critical since it defined the entire coffee experience Market Share: Kraft expected that, of the 12. million households in Canada, SSP machines would be adopted by approx. 6% by the end of 2004 and 8% by the end of 2006. To maintain Maxwell House and Nabob’s share of the Canadian coffee market, Herzog estimated that Kraft would need to capture at least 35% of the coffee pod segment Product: By proceeding with the launch, Herzog needed to decide on a flavor selection 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 resealable bag with zip closure, keeping the product fresher Price: The price of the coffee pod itself ranges from $130-$200. Kraft planned to sell pods under Maxwell House label at a lower point than rival brands, retailing a pack of 18 pods for US$3. 99. Folgers charges $3. 99 for a pack of 16 This pricing would give retailers a 25% margin on Maxwell House, and at $0. 2 per cup, revenue that was more than four times the $0. 05 per cup from ground coffee Issues arose when deciding to follow the U. S. lead on pricing: On one hand, low prices could serve to drive sales volume and establish Kraft as market leader, but this strategy risks eroding brand image. Given the failure rate of new products in Canada, Herzog suspected that store would be willing to carry one or two brands of coffee pods Herzog was unsure of the best wholesale nd retail selling price to recommend Distribution: Most products were d elivered to retailers via warehouse distribution; which essentially made Kraft responsible for delivering all merchandise to the customers’ warehouses. From there, 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. Their system eliminates the need for Kraft to constantly monitor and track inventories, distribution, and stock The alternative was to use direct-to-store-delivery (DSD). This system would require Kraft to be responsible for delivering merchandise to individual stores, holding inventories, and restocking shelves Kraft used this method for its Mr. Christie cookie products; by creating a joint DSD program with Mr. Christie, it would enable Kraft to lower 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 insight from retailers, and sidestep warehouse capacity restraints. 40% of all coffee makers were sold in November and December, DSD would also provide Kraft with speed to market during this period Herzog was not convinced that DSD was the way to go. He didn’t feel the company would be able to maintain the DSD approach if coffee sales increased significantly in the future due to limited space in its distribution center and a limited delivery truck fleet Company SWOT analysis Strengths: North America’s largest food and beverage company and number two player in the world Operations in more than 155 countries One of the strongest brand portfolios among global consumer packaged goods players 50- $100-million brands; 5- $1-billion brands Strong reputation for developing innovative new products and food applications 32% market share in Canadian coffee market The company’s Maxwell House line was Canada’s top retail brand of roast and ground coffee; while Nabob was the leader in Western Canada and number two nationally. Resealable bags for fresher coffee Weaknesses: Limited budget for launch of coffee pod Entered the Canadian market years after Senseo had already established themselves as the leader in coffee pod production; selling three billion pods in the first three years. Price of coffee pod system Lack of proper advertising and promotions Opportunities: The company is already a leading producer of coffee in Canada, so they have a greater opportunity to appeal to loyal Kraft brand consumers with their product If the company would choose to target a market different than their competitors, they could gain strength on other markets such as college students. Switch to DSD distribution Threats: Entering the Canadian market before receiving results from North American launch Canadian grocers enjoy margins of 20 to 30 percent, but Herzog believed margins of 35 percent would be needed as an incentive to list Kraft’s coffee pods Use of warehouse distribution