Case Study
It is brewing: single-serve coffeemakers are hot
Brands such as Nespresso, Keurig, and Senseo are competing for the attention of dedicated coffee lovers who want to brew one very good cup of coffee at a time without taking a lot of time. Although each brand’s single-serve coffeemaker works a little differently, they are actually a system with two vital parts, similar to the combination of razor and blade. First is the “razor,” that is, a coffeemaker designed to heat the right amount of water to the precise temperature needed to bring out the most flavor from the “blade,” a premeasured capsule of coffee or espresso grounds.
Once consumers own the coffeemaker, they simply buy a supply of replacement capsules to enjoy their choice of fresh-brewed coffees, ready in a matter of seconds at the touch of a button. In addition, consumers usually have to buy espresso cups when they switch to single-serve machines, because traditional coffee mugs are too large for most of the new machines. In fact, thanks to so many consumers making the switch, stores report that espresso cups are outselling traditional coffee mugs.
Despite being significantly more expensive than traditional drip coffeemakers, these innovative single serve coffeemakers have taken the world by storm in the past decade. Global sales of all brands in this category are currently peaking at more than 28 percent per year, whereas sales of drip coffeemakers are growing at only 6 percent per year. Not surprisingly, this meteoric rise in sales has brought more brands into the market and expanded consumers’ alternatives year after year.
One of the top brands in single-serve coffee is Nespresso, owned by the Swiss food giant Nestlé. Nespresso markets its equipment and capsules through branded boutiques and upscale stores in 50 countries. It has a long history in this category, having sold more than 13 million single-serve coffeemakers during the past 25 years. Today, Nespresso brings up $3 billion in annual global sales from its line of single-serve machines and replacement coffee, espresso, and tea capsules. Nespresso is especially strong in Europe, although it has been targeting U.S. markets in recent years amid growing interest in single-serve coffeemakers. It prices its capsules at about 55 cents apiece, which works out to roughly $62 per pound of coffee – giving Nestlé a tasty profit margin each time a customer brews up a new cup.
Philips and its partner Douwe Egberts have scored a major marketing hit with their Senseo single-serve coffee systems in Europe, North America, and Brazil. Now Philips is building on that success. As customers switch to single-serve coffeemakers, some come to enjoy their espresso so much that they later upgrade to a more sophisticated espresso machine. To meet the growing demand for full-size espresso makers, Philips bought the Italian espresso machine company Saeco and is profiting from this stepping-stone effect.
The dominant brand in North America is Keurig. Owned by Vermont-based Green Mountain Coffee Roasters, Keurig has deals with Starbucks, Dunkin’ Donuts, Folgers, and other coffee brands to make capsules specifically for its machines. Having a 71 percent share of the $1 billion U.S. market for single-serve coffeemakers and pods has given Keurig a big financial boost. Since 2006, Keurig’s sales have increased more than 60 percent a year.
However, Keurig’s capsule patents are expiring and, as a result, it is facing more rivalry than in the past. Companies are launching their own capsules to fit Keurig machines and undercutting Keurig’s capsule pricing to capture sales. The same will happen to Nespresso as its patents expire. What will be ahead for these marketers as the single-serve phenomenon rolls on and more brands brew up machines and capsules for coffee drinkers all over the world?
Are single-serve coffeemakers discontinuous, dynamically continuous, or continuous? What are the implications for adoption and resistance of this innovation?
Single serve coffee maker is dynamically continuous innovation due to the possible change in the process and the consumer behavior. Customers can have their favorite brewed coffee due to this change process. Changing the consumer behavior to a certain extent is the good approach of the company to create an impact on the customer’s buying behavior as well. In the competitive market, coffee makers are looking to change the technology to change the customer experience. Innovative techniques are good for customers until the new technology. People seem loyal and satisfied due to this change and obviously accept the innovation. Customers will adopt the product if the innovation is made for the same product. However, if the firm changes the product, it may cause resistance. These are the main implications for adaptation and resistance. The most important thing is to make the innovation pertinent and make customer response (Hoyer, MacInnis and Pieters, 2018).
Is the decision to adopt single-serve coffee makers likely to follow the high-effort or low-effort hierarchy of effects? Explain your answer
The decision to adopt single serve coffee makers contains low-effort hierarchy effects. In the coffee market, customers are usually loyal and satisfied with brands, and they do not want to resist. Even, they are willing to pay high prices for coffee products. A Low-effort hierarchy effect is visible because customers intend to adopt the product without any trial or research. The single-serve coffee maker with low-effort hierarchy effects is the best way to expand the business in different regions. It is interesting to spread the product in the competitive market, which can be generally accepted. The firm came up with the pertinent rationale to sell coffee products to customers. Customers know the quality and find the product reliable. He does not want to waste his time investigating the quality and other factors. It goes in favor of the company because sales can be increased due to less resistance in the coffee market (Patton, 2011).
In which stage of the product life cycle would you place single-serve coffee makers? Why should competitors in this industry pay attention to the life cycle?
The product life cycle provides an opportunity to place single-serve coffee makers. The management of the company has to place it at the right time to make the difference. For Instance, the firm can place it between growth and maturity stage. At this stage, the firm can face tough competition in the coffee industry. On the other hand, the company contains a large customer base at this stage. It is beneficial to place a single-serve coffee maker to attract customers and retain them for a long run. Introducing new machines at this stage of the product life cycle is the best way to sustain the business. Competitors can navigate several options such as product differentiation. The competitors must come up with a competitive pricing strategy to get the customer’s attention. Differentiation can help the company to protect the product from imitation (Wallop, 2011).
How is diffusion likely to be affected by the expiration of patents and the introduction of lower-priced coffee capsules?
Expiration of patents and the introduction of lower-priced coffee capsules create an impact on the diffusion. In the competitive market, diffusion indicates the degree or level of adaptation. The lowest priced single-serve coffee makers are in the limelight in the market. The low price fosters a high degree of adaptation. The relationship between time and adaptation is obvious. For Instance, if patents are expiring due to high competition, a customer has to buy low priced products. Patent expiration time matters because people are expecting new offers or services to change the experience. The relationship between time and the patent expiration is strong, and the impact on the diffusion. If the competition is less, the degree of diffusion may be changed. The impact of the competitive forces on the degree of diffusion is quite visible. The firm management has to make effective strategies by keeping these factors in mind. The company should respond effectively at the time of the patent expiration (Strauss, 2011).
References
Hoyer, W.D., MacInnis, D.J. and Pieters, R. (2018) Consumer Behavior, Cengage Learning.
Patton, L. (2011) Green Mountain’s Expiring K-Cup Patents Attract Coffee Rivals, 18 November, [Online], Available: https://www.bloomberg.com/news/articles/
2011-11-18/green-mountain-s-expiring-k-cup-patents-attract-coffee-rivals [1 November 2018].
Strauss, M. (2011) Starbucks tries to build bridge from café to grocery store, 13 April, [Online], Available: https://www.theglobeandmail.com/globe-investor/starbucks-tries-to-build-bridge-from-cafe-to-grocery-store/article577847/ [1 November 2018].
Wallop, H. (2011) Espresso cups outsell mugs, 11 November, [Online], Available: https://www.telegraph.co.uk/
foodanddrink/foodanddrinknews/8884198/
Espresso-cups-outsell-mugs.html [1 November 2018].
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